As filed with the Securities and Exchange Commission on June 4, 2003.



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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 20-F

|[_] | Registration
      statement pursuant to Section 12(b) or 12(g) of the Securities Exchange
      Act of 1934                             
|--- | -----------------------------------------------------------------------------------------------------------------------------------------
|or 
|[X] | Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the fiscal year ended March 31, 2003
|or 
|[_] | Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934                                     

Commission file number: 1-8819

BT GROUP plc

(Exact Name of Registrant as Specified in its Charter)

ENGLAND AND WALES

(Jurisdiction of Incorporation or Organization)

BT CENTRE, 81 NEWGATE STREET, LONDON EC1A 7AJ, ENGLAND

(Address of Principal Executive Offices)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

|Title
      of Each Class        | Name
      of Each Exchange On Which Registered
|-------------------------------- | -----------------------------------------------
|                                 |                                                
|American
      Depositary Shares | New
      York Stock Exchange                  
|Ordinary
      Shares of 5p each | New
      York Stock Exchange*                 

|* | Not
      for trading, but only in connection with the registration of American Depositary
      Shares representing theseshares,
      pursuant to the requirements of the Securities and Exchange Commission.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Securities
  registered pursuant to Section 12(g) of the Act:None

Securities
  for which there is a reporting obligation pursuant to Section 15(d) of the Act:None



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Indicate the number of outstanding shares of each of the issuers classes of capital or common stock as of the close of the period covered by the annual
report:

8,670,849,554
  Ordinary Shares, of 5p each



---

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:

|Yes   X |  | No
|------- |  | --

Indicate
  by check mark which financial statement item the registrant has elected to follow:

|Item
      17 |  | Item
      18   X
|------------- |  | -----------------



---



---



All references in this Form 20-F to us, we or the Company, are to BT Group plc. For an Index to the Exhibits to this
annual report see page 7. The Companys Annual Report and Form 20-F for the financial year ended March 31, 2003 (the Annual Report 2003) contained in the Company's Report on Form 6-K dated June 4, 2003, is incorporated herein by
reference and filed as Exhibit 12.(a)1 to this annual report.

PART I

ITEM 1.IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not
  applicable

ITEM 2.OFFER STATISTICS AND EXPECTED TIMETABLE

Not
  applicable

ITEM 3.KEY INFORMATION

3.A    Selected Financial Data

The
  information set forth under the headings Five year financial summary
  on pages 26 and 27 and Additional information for shareholders  Exchange
  rates on page 147 of the Annual Report 2003 contained in the Company's
  Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

3.B    Capitalization and Indebtedness

Not
  applicable

3.C    Reasons for the Offer and Use of Proceeds

Not
  applicable

3.D    Risk Factors

The information set forth under the heading Risk factors on page 140 of the Annual Report 2003 contained in the Company's Report on Form 6-K
dated June 4, 2003 is incorporated herein by reference.

ITEM 4.INFORMATION ON THE COMPANY

4.A    History and Development of the Company

The
  information set forth under the headings:

| |  | Additional
      information for shareholders  Background on pages 142 and 143;
| | - | ----------------------------------------------------------------------------------
| |  | Business
      review  Introduction on page 8;                                 
| |  | Business
      review  Restructuring on page 9;                                
| |  | Business
      review  Demerger of mmO2 on page 9;                             
| |  | Business
      review  Acquisitions and disposals on pages 9 and 10;           
| |  | Business
      review  Concert on page 10; and                                 
| |  | Financial
      review  Capital expenditure on page 44                         

1

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of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

4.B     Business
  Overview

The
  information set forth under the headings:

| |  | Business
      review on pages 8 to 23;                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------
| |  | Our
      commitment to society on pages 24 and 25;                                                                        
| |  | Financial
      review  Geographical information on pages 46 and 47;                                                      
| |  | Financial
      Statistics on page 138;                                                                                    
| |  | Operational
      statistics on page 139;                                                                                  
| |  | Notes
      to the financial statements  People employed on page 117; and                                                 
| |  | Additional
      information for shareholders  Cautionary statement regarding forward-looking
      statements on page 142

of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

4.C    Organizational Structure

The information set forth under the headings: Business review  Introduction on page 8 and Subsidiary undertakings, joint ventures and associates on page 135 of the Annual Report 2003 contained
in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

4.D    Property, Plant and Equipment

The information set forth under the headings Business review  Property on page 10 and Financial review  Profit on sale of property fixed assets on pages 39 and 40 of the Annual Report
2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

ITEM 5.OPERATING AND FINANCIAL REVIEW AND PROSPECTS

5.A     Operating
  Results

The
  information set forth under the heading Financial review on pages
  28 to 49 and Additional information for shareholders  Cautionary
  statement regarding forward-looking statements on page 142 of the Annual
  Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003
  is incorporated herein by reference.

5.B     Liquidity
  and Capital Resources

The
  information set forth under the headings:

| |  | Financial
      review on pages 28 to 49;                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------
| |  | Additional
      information for shareholders  Cautionary statement regarding forward-looking
      statements on page 142;
| |  | Notes
      to the financial statements  Loans and other borrowings on pages
      108 and 109;                            

2

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| |  | Notes
      to the financial statements  Financial commitments, contingent liabilities
      and subsequent events on page 111; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------
| |  | Notes
      to the financial statements  Financial instruments and risk management
      on pages 121 to 125                       

of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

5.C     Research
  and Development, Patents and Licenses

The information set forth under the headings Business review  Research and development and IT support on pages 16 and 17 and Financial statistics on page 138 of the Annual Report 2003
contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

5.D     Trend
  Information

The information set forth under the headings Financial review on pages 28 to 49 and Additional information for shareholders  Cautionary statement regarding forward-looking statements on page 142 of the Annual Report 2003 contained
in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

ITEM 6.DIRECTORS,
  SENIOR MANAGEMENT AND EMPLOYEES

6.A     Directors
  and Senior Management

The information set forth under the heading Board of directors and Operating Committee on pages 50 and 51 of the Annual Report 2003 contained in
the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

6.B     Compensation

The
  information set forth under the headings:

| |  | Report
      on directors' remuneration on pages 58 to 72;                  
| | - | ------------------------------------------------------------------------------
| |  | Notes
      to the financial statements  Pension costs on pages 112 to 116;
| |  | Notes
      to the financial statements  Directors on page 116             

of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

6.C     Board
  Practices

The
  information set forth under the headings:

| |  | Board
      of directors and Operating Committee on pages 50 and 51;
| | - | ----------------------------------------------------------------------
| |  | Report
      of the directors  Directors on page 52;               
| |  | Corporate
      governance on pages 53 to 57;                       
| |  | Report
      on directors' remuneration on pages 58 to 72; and      
| |  | Statement
      of directors responsibility on page 73             

of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

3

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6.D     Employees

The
  information set forth under the headings:

|Business review  Lines of business on page 10;                     
|----------------------------------------------------------------------
|Business review  Our people on pages 17 and 18;                    
|Notes to the financial statements  People employed on page 117; and
|Operational statistics on page 139                                  

of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

6.E     Share
  Ownership

The information set forth under the headings Report on directors' remuneration on pages 58 to 72 and Notes to the financial statements  Employee share schemes on pages 117 to 120 of the Annual Report 2003 contained in the
Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

ITEM 7.MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

7.A     Major
  Shareholders

The information set forth under the headings Report of the directors  Substantial shareholdings on page 52 and Additional information for shareholders  Analysis of shareholdings on page 144 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is
incorporated herein by reference.

7.B     Related
  Party Transactions

The information set forth under the headings Report of the directors  Interest of management in certain transactions on page 52, Report on directors remuneration on pages 58 to 72 and
Notes to the financial statements  Related party transactions on page 111 of the Annual
Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

7.C    Interests
  of Experts and Counsel

Not applicable

ITEM 8.FINANCIAL INFORMATION

8.A     Consolidated
  Statements and Other Financial Information

See
  Item 18 below.

In addition, the information set forth under the headings Business review  Legal proceedings on page 23 and Additional information for shareholders  Dividends on pages 144 and 145 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated
herein by reference.

8.B     Significant
  Changes

The information set forth under the headings Financial review  Capital resources on page 43 and Notes to the financial statements  Financial commitments, contingent liabilities and subsequent events on

4

---



page 111 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

ITEM 9.THE OFFER AND LISTING

9.A     Offer
  and Listing Details

The information set forth under the heading Additional information for shareholders  Share and ADS prices on page 143 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated
herein by reference.

9.B     Plan
  of Distribution

Not
  applicable

9.C     Markets

The information set forth under the heading Additional information for shareholders  Listings on page 143 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by
reference.

9.D    Selling
  Shareholders

Not
  applicable

9.E    Dilution

Not
  applicable

9.F     Expenses
  of the Issue

Not
  applicable

ITEM 10.ADDITIONAL INFORMATION

10.A     Share
  Capital

Not
  applicable

10.B     Memorandum
  and Articles of Association

The information set forth under the heading Additional information for shareholders  Background on pages 142 and 143 and Additional information for shareholders  Memorandum and Articles of Association on pages 147 to 150 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June
4, 2003 is incorporated herein by reference.

10.C     Material
  Contracts

The information set forth under the heading Additional information for shareholders  Material contracts on pages 150 to 152 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is
incorporated herein by reference.

5

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10.D    Exchange
  Controls

The information set forth under the heading Additional information for shareholders  Exchange controls and other limitations affecting security holders on page 154 of the Annual Report 2003 contained in the Company's Report on
Form 6-K dated June 4, 2003 is incorporated herein by reference.

10.E    Taxation

The information set forth under the heading Additional information for shareholders  Taxation (US Holders) on pages 152 to 154 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is
incorporated herein by reference.

10.F    Dividends
  and Paying Agents

Not
  applicable

10.G     Statement
  by Experts

Not
  applicable

10.H    Documents
  on Display

The information set forth under the heading Additional information for shareholders  Documents on display on page 154 of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated
herein by reference.

10.I    Subsidiary
  Information

Not
  applicable

ITEM 11.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The
  information set forth under the headings:

| |  | Financial
      review  Treasury policy on page 43;                                                         
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | Financial
      review  Foreign currency and interest rate exposure on pages
      43 and 44; and           
| |  | Notes
      to the financial statements  Financial instruments and risk management
      on pages 121 to 125

of the Annual Report 2003 contained in the Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

ITEM 12.DESCRIPTION
  OF SECURITIES OTHER THAN EQUITY SECURITIES

Not
  applicable

PART II

ITEM 13.DEFAULTS,
  DIVIDEND ARREARAGES AND DELINQUENCIES

None.

6

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ITEM 14.MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF  PROCEEDS

Not
  applicable

ITEM 15.CONTROLS AND PROCEDURES

The information set forth under the heading Corporate governance on pages 53 to 57 of the Annual Report 2003 contained in the Company's Report on
Form 6-K dated June 4, 2003 is incorporated herein by reference.

ITEM 16.[RESERVED]

PART III

ITEM 17.FINANCIAL
  STATEMENTS

Not
  applicable

ITEM 18.FINANCIAL
  STATEMENTS

The financial information concerning the Company set forth under the following headings on the following pages of the Annual Report 2003 contained in the
Company's Report on Form 6-K dated June 4, 2003 is incorporated herein by reference.

|                                                             |                                                 | 
|------------------------------------------------------------ | ----------------------------------------------- | 
|Heading:                                                     | Pages
      in Annual Report and Form 20-F 2003 | 
|                                                             |                                                 | 
|Report of
      the independent auditors                     | 74                                              | 
|Accounting
      policies                                    | 76-78                                           | 
|Consolidated
      financial statements                      | 75-126                                          | 
|United States
      generally accepted accounting principles | 127-134                                         | 
|Quarterly
      analysis of turnover and profit              | 136-137                                         | 

The Report of the independent auditors contained in the Company's Report on Form 6-K dated June 4, 2003 are incorporated herein by reference and filed as
Exhibit 12.(a)1 to this annual report.

ITEM 19.EXHIBITS

The
  following exhibits are filed as part of this annual report:

|1.  | The
      Memorandum and Articles of Incorporation incorporated by reference to the
      Companys RegistrationStatement
      on Form S-8 (File No. 333  14214) dated December 18, 2001 in which
      it was filed as Exhibit 1.1.                                                                                                                     
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1 | The
      Demerger Agreement with mmO2, incorporated into this annual report by reference
      to the RegistrationStatement
      on Form 20-F of mmO2 plc dated September 20, 2001, in which it was filed
      as Exhibit 4.1; for adescription
      of this contract, see page 151 of the Annual Report 2003, filed as Exhibit
      12.(a)1.         
|4.2 | The
      Separation Agreement with mmO2, incorporated into this annual report by
      reference to theRegistration
      Statement on Form 20-F of mmO2 plc dated September 20, 2001, in which it
      was filed asExhibit
      4.2; for a description of this contract see page 151 of the Annual Report
      2003, filed as Exhibit12.(a)1.         
|4.3 | The
      Property Sale & Leaseback arrangements, incorporated into this annual
      report by reference from theCompanys
      Annual Report on Form 20-F (File No. 1-8819) for the year ended March 31,
      2002 dated May31,
      2002; for a description of these contracts see page 151 of the Annual Report
      2003, filed as Exhibit12.(a)1.

7

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|4.4     | Concert
      Unwind arrangements, incorporated into this annual report by reference from
      the CompanysAnnual
      Report on Form 20-F (File No. 1-8819) for the year ended March 31, 2002
      dated May 31, 2002; fora
      description of these contracts see pages 151-152 of the Annual Report 2003,
      filed as Exhibit 12.(a)1.                                                                                                               
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.5     | Letter
      of appointment of Clayton Brendish, dated 4 July 2002, and a
      further letter dated 24 September 2002.                                                                                                                                                                                                                                                                                                                                          
|4.6     | Stock
      transfer form, dated 22 January 2003, in respect of the transfer of 24,836,365
      shares in Cegetel Groupe from Cegetel Holdings I BV to Societe d'Investissement
      pour la Telephonie.                                                                                                                                                                                                                                                       
|6.      | For
      a calculation of earnings (loss) per share, see note 15 to the Companys
      consolidated financialstatements,
      contained on page 98 of the Annual Report 2003, filed as Exhibit
      12.(a)1.                                                                                                                                                                                                                                                 
|8.      | For
      a list of the Companys principal subsidiary undertakings, see Subsidiary
      undertakings, joint venturesand
      associates on page 135 of the Annual Report 2003, filed as Exhibit
      12.(a)1.                                                                                                                                                                                                                                              
|12.(a)1 | The
      Company's responses to the requirements of Form 20-F have been incorporated
      into this annual reportby
      reference to the Company's Report on Form 6-K dated June 4, 2003 which contains
      the CompanysAnnual
      Report 2003. Pursuant to Rule 12b-23(a) of the Securities Exchange Act of
      1934, the informationincorporated
      into this annual report by reference to such Form 6-K is attached as an
      exhibit hereto.
|12.(a)2 | Certifications
      of Ben Verwaayen, Chief Executive of BT Group
      plc and Ian Livingston, Group Finance Director
      of BT Group plc, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                   
|12.(a)3 | Consent
      of PricewaterhouseCoopers LLP, independent auditors of BT Group plc.                                                                                                                                                                                                                                                                                                                                                                               

8

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|        | The
      following exhibits are attached hereto:                                                                                                                                                                                                                                                                                                                                                                                                                
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.5     | Letter
      of appointment of Clayton Brendish, dated 4 July 2002, and a
      further letter dated 24 September 2002.                                                                                                                                                                                                                                                                                                                                          
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|4.6     | Stock
      transfer form, dated 22 January 2003, in respect of the transfer of 24,836,365
      shares in Cegetel  Groupe
      from Cegetel Holdings I BV to Societe d'Investissement pour la Telephonie.                                                                                                                                                                                                                                                      
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|12.(a)1 | The
      Company's responses to the requirements of Form 20-F have been incorporated
      into this annual reportby
      reference to the Company's Report on Form 6-K dated June 4, 2003 which contains
      the CompanysAnnual
      Report 2003. Pursuant to Rule 12b-23(a) of the Securities Exchange Act of
      1934, the informationincorporated
      into this annual report by reference to such Form 6-K is attached as an
      exhibit hereto.
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|12.(a)2 | Certifications
      ofBen Verwaayen, Chief Executive of BT Group
      plc and Ian Livingston, Group Finance Director
      of BT Group plc, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                    
|        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|12.(a)3 | Consent
      of PricewaterhouseCoopers LLP, independent auditors of BT Group plc.                                                                                                                                                                                                                                                                                                                                                                               

---



SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
sign this annual report on its behalf.



| | BT
        GROUP plc
      By: /s/
        Ian Livingston
      Name:
        Ian Livingston 
        Title: Group Finance Director
      Date:
        June 4, 2003
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

---



CERTIFICATIONS

I, Bernardus Johannes Maria Verwaayen, certify that:

1.    I have reviewed this annual report on Form 20-F of BT Group plc;

2.    Based
  on my knowledge, this annual report does not contain any untrue statement of
  a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;

3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:

|a) | designed
      such disclosure controls and procedures to ensure that material information
      relatingto
      the registrant, including its consolidated subsidiaries, is made known to
      us by others withinthose
      entities, particularly during the period in which this annual report is
      being prepared;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                               
|b) | evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      as of a datewithin
      90 days prior to the filing date of this annual report (the "Evaluation
      Date"); and                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                               
|c) | presented
      in this annual report our conclusions about the effectiveness of the disclosurecontrols and
      procedures based on our evaluation as of the Evaluation Date;                                                                                                                                               

5.    The
  registrant's other certifying officers and I have disclosed, based on our most
  recent evaluation, to the registrant's auditors and the audit committee of registrant's
  board of directors (or persons performing the equivalent function):

|a) | all
      significant deficiencies in the design or operation of internal controls
      which couldadversely
      affect the registrant's ability to record, process, summarize and report
      financial dataand
      have identified for the registrant's auditors any material weaknesses in
      internal controls;and
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                
|b) | any
      fraud, whether or not material, that involves management or other employees
      who have a significant role in the registrant's internal controls; and                                                                                                                                                             

6.     The
  registrant's other certifying officers and I have indicated in this annual report
  whether or not there were significant changes in internal controls or in other
  factors that could significantly affect internal controls subsequent to the
  date of our most recent evaluation, including any corrective actions with regard
  to significant deficiencies and material weaknesses.

Date: May 21, 2003

By:/s/
  B. VerwaayenChief Executive

---



CERTIFICATIONS

I, Ian Paul Livingston, certify that:

1.    I have reviewed this annual report on Form 20-F of BT Group plc;

2.    Based
  on my knowledge, this annual report does not contain any untrue statement of
  a material fact or omit to state a material fact necessary to make the statements
  made, in light of the circumstances under which such statements were made, not
  misleading with respect to the period covered by this annual report;

3.    Based
  on my knowledge, the financial statements, and other financial information included
  in this annual report, fairly present in all material respects the financial
  condition, results of operations and cash flows of the registrant as of, and
  for, the periods presented in this annual report;

4.    The
  registrant's other certifying officers and I are responsible for establishing
  and maintaining disclosure controls and procedures (as defined in Exchange Act
  Rules 13a-14 and 15d-14) for the registrant and have:

|a) | designed
      such disclosure controls and procedures to ensure that material information
      relatingto
      the registrant, including its consolidated subsidiaries, is made known to
      us by others withinthose
      entities, particularly during the period in which this annual report is
      being prepared;
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                               
|b) | evaluated
      the effectiveness of the registrant's disclosure controls and procedures
      as of a datewithin
      90 days prior to the filing date of this annual report (the "Evaluation
      Date"); and                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                               
|c) | presented
      in this annual report our conclusions about the effectiveness of the disclosurecontrols and
      procedures based on our evaluation as of the Evaluation Date;                                                                                                                                               

5.    The
  registrant's other certifying officers and I have disclosed, based on our most
  recent evaluation, to the registrant's auditors and the audit committee of registrant's
  board of directors (or persons performing the equivalent function):

|a) | all
      significant deficiencies in the design or operation of internal controls
      which could adversely affect the registrant's ability to record, process,
      summarize and report financial data and have identified for the registrant's
      auditors any material weaknesses in internal controls; and
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                       
|b) | any
      fraud, whether or not material, that involves management or other employees
      who have a significant role in the registrant's internal controls; and                                                                                                                                                    

6.    The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 21, 2003

By:/s/
  I. Livingston 
        Group Finance Director

---





---

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

BT GROUP plc

Exhibits to

Form 20-F for year ended March 31, 2003

As filed with the Securities and Exchange Commission on June 4, 2003



---

|1.      | The
      Memorandum and Articles of Incorporation incorporated by reference to the
      Companys RegistrationStatement
      on Form S-8 (File No. 333  14214) dated December 18, 2001 in which
      it was filed as Exhibit1.1.                                                                                                                                                                                                                            
|------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.1     | The
      Demerger Agreement with mmO2, incorporated into this annual report by reference
      to the RegistrationStatement
      on Form 20-F of mmO2 plc dated September 20, 2001, in which it was filed
      as Exhibit 4.1; for adescription
      of this contract, see page 151 of the Annual Report 2003, filed as Exhibit
      12.(a)1.                                                                                                               
|4.2     | The
      Separation Agreement with mmO2, incorporated into this annual report by
      reference to theRegistration
      Statement on Form 20-F of mmO2 plc dated September 20, 2001, in which it
      was filed asExhibit
      4.2; for a description of this contract see page 151 of the Annual Report
      2003, filed as Exhibit12.(a)1.                                                                                                               
|4.3     | The
      Property Sale & Leaseback arrangements, incorporated into this annual
      report by reference from theCompanys
      Annual Report on Form 20-F (File No. 1-8819) for the year ended March 31,
      2002 dated May31,
      2002; for a description of these contracts see page 151 of the Annual Report
      2003, filed as Exhibit12.(a)1.                                                                                                      
|4.4     | Concert
      Unwind arrangements, incorporated into this annual report by reference from
      the CompanysAnnual
      Report on Form 20-F (File No. 1-8819) for the year ended March 31, 2002
      dated May 31, 2002; fora
      description of these contracts see pages 151-152 of the Annual Report 2003,
      filed as Exhibit 12.(a)1.                                                                                                               
|4.5     | Letter
      of appointment of Clayton Brendish, dated 4 July 2002, and a
      further letter dated 24 September 2002.                                                                                                                                                                                                                                                                                                                                          
|4.6     | Stock
      transfer form, dated 22 January 2003, in respect of the transfer of 24,836,365
      shares in Cegetel Groupe from Cegetel Holdings I BV to Societe d'Investissement
      pour la Telephonie.                                                                                                                                                                                                                                                       
|6.      | For
      a calculation of earnings (loss) per share, see note 15 to the Companys
      consolidated financialstatements,
      contained on page 98 of the Annual Report 2003, filed as Exhibit 12.(a)1.                                                                                                                                                                                                                                                       
|8.      | For
      a list of the Companys principal subsidiary undertakings, see Subsidiary
      undertakings, joint venturesand
      associates on page 135 of the Annual Report 2003, filed as Exhibit
      12.(a)1.                                                                                                                                                                                                                                              
|12.(a)1 | The
      Company's responses to the requirements of Form 20-F have been incorporated
      into this annual reportby
      reference to the Company's Report on Form 6-K dated June 4, 2003 which contains
      the CompanysAnnual
      Report 2003. Pursuant to Rule 12b-23(a) of the Securities Exchange Act of
      1934, the informationincorporated
      into this annual report by reference to such Form 6-K is attached as an
      exhibit hereto.
|12.(a)2 | Certifications
      of Ben Verwaayen, Chief Executive of BT Group
      plc andIan Livingston, Group Finance Director
      of BT Group plc, pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                    
|12.(a)3 | Consent
      of PricewaterhouseCoopers LLP, independent auditors of BT Group plc.                                                                                                                                                                                                                                                                                                                                                                               

---



EXHIBIT
  1

The Memorandum and Articles of Incorporation incorporated into this annual report by reference to the Companys Registration Statement on Form S-8 (File No. 333  14214) dated
December 18, 2001 in which it was filed as Exhibit 1.1.

---



EXHIBIT
  4.1

Demerger Agreement between British Telecommunications plc, mmO2 plc, BT Group plc and O2 Limited. This agreement is incorporated into this annual report by reference to the Registration
Statement on Form 20-F of mmO2 plc dated September 20, 2001, in which this agreement was filed as Exhibit 4.1. For a description of this contract, see page 151 of the Annual Report 2003, filed as Exhibit 12.(a)1 hereto.

---



EXHIBIT
  4.2

Separation Agreement between British Telecommunications plc, mmO2 plc, BT Group plc and O2 Limited. This agreement is incorporated into this annual report by reference to the Registration
Statement on Form 20-F of mmO2 plc dated September 20, 2001, in which this agreement was filed as Exhibit 4.2. For a description of this contract, see page 151 of the Annual Report 2003, filed as Exhibit 12.(a)1 hereto.

---



EXHIBIT
  4.3

The Property Sale & Leaseback arrangements, incorporated into this annual report by reference from the Companys Annual Report on Form 20-F (File No. 1-8819) for the year ended March 31, 2002 dated May 31, 2002; for a description of these contracts see page 151 of the Annual Report
2003, filed as Exhibit 12.(a)1.

---



EXHIBIT
  4.4

Concert Unwind
  arrangements, incorporated into this annual report by reference from the Companys
  Annual Report on Form 20-F (File No. 1-8819) for the year ended March 31, 2002
  dated May 31, 2002; for a description of these contracts see pages 151-152 of
  the Annual Report 2003, filed as Exhibit 12.(a)1.

---



EXHIBIT
  4.5



---



---





---





---



EXHIBIT
  4.6



---



EXHIBIT
  6

For a calculation of earnings (loss) per share, see note 15 to the Companys consolidated financial statements, contained on page 98 of the Annual Report 2003, filed as
Exhibit 12.(a)1.

---



EXHIBIT
  8

For a list of the Companys principal subsidiary undertakings, see Subsidiary undertakings, joint ventures and associates on page 135 of the Annual Report 2003, filed as
Exhibit 12.(a)1.

---



EXHIBIT
  12.(a)1

The Company's responses to the requirements of Form 20-F have been incorporated into this annual report by reference to the Company's Report on Form 6-K dated June 4, 2003 which contains
the Companys Annual Report 2003. Pursuant to Rule 12b-23(a) of the Securities Exchange Act of 1934, the information incorporated into this annual report by reference to such Form 6-K is attached as an exhibit hereto.

---



BT is one of Europes
leading providers of telecommunications services. Its principal activities
include local, national and international telecommunications services,
higher-value broadband and internet products and services, and IT solutions. In
the UK, BT serves over 20 million business and residential customers with more
than 29 million exchange lines, as well as providing network services to other
licensed operators.

|Contents                                               |    
|------------------------------------------------------ | ---
|Business review                                        | 8  
|Our commitment to society                              | 24 
|Five-year financial summary                            | 26 
|Financial review                                       | 28 
|Board of directors and Operating Committee             | 50 
|Report of the directors                                | 52 
|Corporate governance                                   | 53 
|Report on directors remuneration                      | 58 
|Statement of directors responsibility                 | 73 
|Report of the independent auditors                     | 74 
|Consolidated financial statements                      | 75 
|United States Generally Accepted Accounting Principles | 127
|Subsidiary undertakings, joint ventures and associates | 135
|Quarterly analysis of turnover and profit              | 136
|Financial statistics                                   | 138
|Operational statistics                                 | 139
|Risk factors                                           | 140
|Additional information for shareholders                | 141
|Glossary of terms and US equivalents                   | 156
|Cross reference to Form 20-F                           | 157
|Index                                                  | 160

BT Group plc is a public limited
company registered in England and Wales, with listings on the London and New
York stock exchanges.

This is the annual report
for the year ended 31 March 2003. It complies with UK regulations and is the
annual report on Form 20-F for the Securities and Exchange Commission to meet US
regulations.

This annual report has been sent
to shareholders who have elected to receive a copy. A separate annual review and
summary financial statement for the year ended 31 March 2003 has been issued to
all shareholders.

In this annual report,
references to BT Group, BT, the group, the company, we or
our are to BT Group plc (which includes the continuing activities of British
Telecommunications plc) and its subsidiaries and lines of business, or any of
them as the context may require.

References to
the financial year are to the year ended 31 March of each year, e.g. the
2003 financial year refers to the year ended 31 March 2003. Unless otherwise
stated, all non-financial statistics are at 31 March 2003.

Please see
cautionary statement regarding forward-looking statements on page 142.

BT Annual Report and
Form 20-F 20031

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BTs strategy is to
create value for shareholders through being the best provider of communications
services and solutions for everybody in the UK, and for corporate customers in
Europe, achieving global reach through partnership.

The fundamentals of our strategy
are:

|n | customer satisfaction                                                                          
|- | -----------------------------------------------------------------------------------------------
|n | financial discipline                                                                           
|n | broadband  at
      the heart of BT                                                           
|n | value-added solutions
      for multi-site organisations with Europeanoperations               
|n | a clear network
      strategy, with unified management of all UK networks                     
|n | a clear strategy
      for each customer group, including new services andbrand
      extension
|n | diverse, skilled
      and motivated people.                                                   

2 BT
Annual Report and Form 20-F 2003

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Business review

|   | The
      review is divided into the following sections:
|-- | --------------------------------------------------------
|8  | Introduction                                            
|8  | Group
      strategy                                    
|9  | Customer
      satisfaction                             
|9  | Broadband                                               
|9  | Reporting
      on BT Openworld                         
|9  | Restructuring                                           
|   | Demerger
      of mmO2                                  
|   | Acquisitions
      and disposals                        
|   | Property                                                
|   | Concert                                                 
|10 | Debt
      reduction programme                          
|10 | Dividend                                                
|10 | Pension
      fund                                      
|10 | Lines
      of business                                 
|11 | BT
      Retail                                         
|   | Core
      business                                     
|   | New-wave
      business                                 
|   | Internet
      access                                   
|   | Enhanced
      customer access                          
|13 | BT
      Wholesale                                      
|   | Core
      business                                     
|   | Changing
      market conditions                        
|   | Strategic
      intent                                  
|   | External
      new business revenues                    
|   | Broadband                                               
|   | 21st
      century network                              
|   | Efficiency                                              
|15 | BT
      Global Services                                
|   | Meeting
      customers needs                          
|   | Solutions
      and value-added services                
|   | Customer
      wins                                     
|   | Business
      realignment                              
|   | Global
      reach                                      
|16 | Other
      businesses                                  
|16 | Research
      and development and IT support           
|17 | Our
      people                                        
|18 | Regulation,
      competition and prices                
|   | Regulation
      in the UK                              
|   | Competition                                             
|   | Pricing
      regulation                                
|   | Non-UK
      regulation                                 
|   | Other
      significant changes and issues              
|23 | Relationship
      with the UK Government               
|23 | Legal
      proceedings                                 

Please see cautionary statement regarding forward-looking statements on page 142.All customer numbers are given as at 31 March 2003, unless stated otherwise.EBITDA = Earnings before interest, taxation, depreciation and amortisation. The definition, reconciliation and reasons for disclosing EBITDA are discussed in theFinancial review.

Introduction
BT Group plc is the listed holding company for an integrated group of businesses that provide voice and data services in the UK and elsewhere in Europe. British Telecommunications plc is a
wholly-owned subsidiary of BT Group plc and holds virtually all businesses and assets of the BT group. Our collective aim is to create shareholder value through service excellence, an effective brand, our large-scale networks and our existing
customer base, and also through developing and marketing new, higher-value broadband and internet products and services.

BT consists principally of three lines of business: BT Retail, BT Wholesale and BT Global Services (formerly BT Ignite).

In the year ended 31 March 2003 (the 2003 financial year), 94% of our revenues were derived from operations within the UK, where we are the largest full service
telecommunications operator, serving over 20 million customers. BT Retail and BT Wholesale operate almost entirely within the UK, addressing the consumer, major business, business and wholesale markets, and offer a broad spectrum of communications
products and services. Our aim is to increase profitable revenues from data and advanced broadband and internet services and to reduce further our dependence on revenues and profit generated by fixed-line voice services.

For a summary of turnover for our lines of business for the years ended 31 March 2001, 2002 and 2003, see the table on page 10.

Corporate identity
In early April 2003, we unveiled a new corporate identity to replace the piper logo and reflect our strategy. Because it represents BT as part of the multimedia age and communicates our global
reach, this change better reflects the range of activities that we encompass.

The new mark is the companys first visual identity change since 1991.

Governance
BTs policy is to achieve best practice in our standards of business integrity in all our operations, in line with our published statement of business practice The Way We Work. This includes a commitment to maintaining the highest standards of corporate governance throughout the group (see pages 53
to 57).

Corporate social responsibility
BT is committed to maximising its positive impact on society through leadership in CSR (corporate social responsibility). In our view, a well managed CSR programme supports the delivery of
strategy and is in the best interests of the business, customers, shareholders and the community (see pages 24 to 25).

Group
  strategyIn 2002 BT set out its three-year
  strategy to create value for shareholders by being the best provider of communications
  services and solutions for everybody in

8 BT Annual Report and Form 20-F 2003

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the UK, and for multi-site
  organisations with European operations, achieving global reach through partnership.

We have
  seven strategic priorities:

nto deliver the highest levels of customer satisfaction
  performance and reduce the number of dissatisfied customers each year

nto achieve organic profitable revenue
  growth, while carefully controlling capital expenditure

nto put broadband at the heart of BT, expand
  the market for broadband services and create a media-enabled network

nto provide solutions and other value-added services
  for multi-site organisations with European operations

nto place all UK networks under a single management
  structure and to limit investment in legacy voice and data platforms, while
  migrating operations to new platforms

nto move into broadband
  and mobility services for consumers; and also into advanced services, such as
  communications solutions and outsourcing for major business customers; and ICT
  (information and communications technology) for SME (small and medium enterprises)

nall
  delivered by diverse, skilled and motivated people.

Customer satisfaction
Reducing customer dissatisfaction by 25% a year is a key target in our drive to deliver the highest levels of customer satisfaction.

BT has an extensive programme of quantitative customer research run by external agencies to assist us to focus on the level and causes of customer
dissatisfaction.

This research shows we achieved a 37% reduction in customer dissatisfaction over the year, beating the target of 25%. All areas of the business improved
satisfaction levels, with particularly significant improvement among our international and wholesale customers. Although in most areas customer satisfaction is well ahead of our competitors, we will strive to make further significant improvements. A
programme has been put in place that focuses on key areas of customer dissatisfaction.

Broadband
Broadband is at the heart of our strategy and, during the year, we made progress in our drive to enhance the awareness, availability and attractiveness of broadband.

As at 16 May 2003, we had 936,000 ADSL (asymmetric digital subscriber line) connections and are on track to meet our target of one million connections by summer
2003. The speed at which this is happening is generating economies of scale that will help us continue to reduce costs and progress beyond the one million figure.

A series of technological breakthroughs can, for the first time, bring ADSL within potential reach of 90% of UK homes and small businesses within the next few
years.

In November 2002, as further evidence of our commitment to broadband, we announced the
appointment of BTs first Chief Broadband Officer, whose role is to direct and align the people and processes involved in the end-to-end delivery of broadband.

Reporting on BT Openworld
With effect from 1 January 2003, the former BT Openworld results have been reported within BT Retail. BT Openworlds internet access and portal services remain as a separately run
business. All other parts of the BT Openworld portfolio, including GamesDomain and Dotmusic, together with the customer service and network operations teams, have been integrated into BT Retail.

This reorganisation has already delivered cost savings and efficiency gains, mostly arising from the avoidance of duplication in administrative and other support
activities.

Restructuring
During the 2002 financial year, we substantially completed a radical restructuring programme, the key elements of which were:

nthe UKs largest-ever rights issue  1.98 billion new shares were issued to shareholders who took up their rights, raising £5.9 billion, net of
expenses

nthe
  demerger of the majority of BTs mobile businesses to create two separate
  listed companies  BT Group plc and mmO2plc

nthe disposal of significant non-core businesses and assets

nthe unwind of Concert, BTs joint venture with AT&T

nthe creation of customer-focused lines of business

na major programme of debt reduction.

Demerger of mmO2
On 19 November 2001, we completed
  the demerger of mmO2, comprising what were BTs wholly-owned
  mobile assets in Europe: O2 UK (formerly known as BT Cellnet), O2 Communications
  (Ireland) (formerly known as Esat Digifone), Telfort Mobiel, Viag Interkom,
  Manx Telecom and Genie. Shareholders received one share in mmO2 plc
  and one share in BT Group plc for each share they previously held in British
  Telecommunications plc. Trading in BT Group plc and mmO2 plc shares began on 19
  November 2001.

BT and mmO2, through arms length
negotiations, entered into a number of agreements to define the continuing relationship between the groups, including the agreement that, until November 2004, we will exclusively promote the mobile products
and services of O2 UK to the business market in the
UK.

The
  agreements that we would not offer mobile products and services to the consumer
  market in the UK solely under the BT brand, and that parts of mmO2
were able to use some of our trademarks and brands on a transitional basis, both lapsed on 31 March 2003.

Acquisitions
  and disposalsBetween the 1999 and 2002 financial
  years, BT made a number of significant acquisitions, including taking stakes
  in Japan Telecom and J-Phone Communications

BT Annual Report and Form 20-F 20039

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in Japan, and control of Viag
  Interkom in Germany, and Esat Telecom and Esat Digifone in the Republic of Ireland.
  During the 2002 financial year, reflecting the change in the groups strategy,
  we disposed of a number of businesses and assets, including Yell  our
  international directories and e-commerce business  and our stakes in Japan
  Telecom, J-Phone Communications and
  Airtel, the Spanish wireless operator. The consideration received enabled us
  to focus on our core businesses and to reduce net debt.

In January
  2003, we completed the sale of our 26% stake in Cegetel Groupe SA, the leading
  alternative fixed-line operator in France, to Vivendi Universal for £2.6
  billion in cash. After accounting for goodwill written back from reserves, BT
  realised a profit of approximately £1.5 billion before an exceptional
  interest charge of £0.3 billion on closing out fixed interest rate swaps.

In the 2003 financial year, we disposed of a number of non-core investments, including stakes in BSkyB, Mediaset, Blu and SmarTone.

No material acquisitions were made in the 2003 financial year.

Property
In December 2001, as part of
  our wider property outsourcing arrangement, we completed the sale and leaseback
  of the majority of our UK property portfolio to Telereal, a 50/50 joint venture
  partnership between Land Securities Trillium and the William Pears Group, for
  £2.4 billion in cash. Approximately 6,700 properties  offices, telephone
  exchanges, vehicle depots, warehouses, call centres and computer centres 
  equating to approximately 5.5 million square metres, were transferred. Under
  these arrangements, Telereal is responsible for providing accommodation and
  estate management services to BT.

We
  retained direct ownership of approximately 220 properties  including certain
  telephone exchanges, computer centres and high radio towers  totalling
  some 800,000 square metres. We also retained BT Centre, our headquarters building,
  Adastral Park, our major research facility near Ipswich, Madley and Goonhilly
  earth satellite stations and the BT Tower in Central London.

In the third quarter of the 2003 financial year, we provided £198 million against the costs of vacating and disposing of surplus London offices, as we
rationalise from 14 buildings to five.

Concert
On 1 April 2002, we completed the unwind of Concert, our international joint venture with AT&T, which involved the return of Concerts businesses, customer accounts and networks to
the two parent companies.

As
  a result of the unwind, we have largely taken back into our ownership those
  parts of Concert originally contributed by us to the joint venture, while AT&T
  has taken back into its ownership those parts it originally contributed. We
  have acquired substantially all of Concerts managed services network infrastructure
  in Europe, Africa, the Middle East and the Americas, and substantially all of
  the customer and supplier contracts that we originally contributed to Concert. Concert assets that have
  been returned to us are now managed by BT Global Services while Concert customers
  that have been returned to us are now managed partly by BT Global Services and
  partly by BT Retail.

Simultaneously with the completion of the termination of the Concert joint venture, AT&T acquired BTs share of our Canadian joint venture, through which
we held an indirect minority shareholding in AT&T Canada. As a result, BT no longer has any obligations in relation to AT&T Canada.

Debt reduction programme
Net debt has been reduced from £27.9 billion as at 31 March 2001 to £9.6 billion as at 31 March 2003. Key to the reduction in the 2003 financial year was the disposal of our stake
in Cegetel and operating cash flow improvements.

Dividend
In 2002, we returned to the dividend list with the payment of a final dividend for the 2002 financial year. An interim dividend of 2.25 pence per share for the 2003 financial year was paid in
February 2003, and a final dividend of 4.25 pence per share is proposed for payment in September 2003.

Pension fund
The latest triennial funding valuation of the groups defined benefit pension scheme, the BT Pension Scheme, was performed by the independent actuary as at 31 December 2002. The valuation
showed the assets of £22.8 billion to be sufficient to cover 92% of the liabilities, with a resulting deficit of £2.1 billion. With effect from April 2003, the regular company contributions have increased to 12.2% of employees
pensionable pay from 11.6%, and the annual deficiency payment has increased to £232 million from £200 million. The group remains committed to making good the funding deficit.

Lines of business
The following table sets out the group turnover for each of our lines of business in the 2003, 2002 and 2001 financial years.

|                              | Group
      turnover | 
|----------------------------- | -------------------- | 
|                              |                      | 
|                              | 2003                 | 
|Years ended 31 March          | £m                   | 
|                              |                     
|BT Retail                     | 13,301               | 
|BT Wholesale                  | 11,260               | 
|BT Global Services            | 5,251                | 
|Other                         | 41                   | 
|Intra-group                   | (11,126)             | 
|                              |                     
|Total continuing activities   | 18,727               | 
|Total discontinued activities |                     | 
|                              |                     
|Totals                        | 18,727               | 
|                              |                     

10 BT Annual Report and Form 20-F 2003

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|BT Retail               |          |  |          |  |          | 
|----------------------- | -------- |  | -------- |  | -------- | 
|Years ended, or as at,  |          |  |          |  |          | 
|31 March                | 2003     |  | 2002     |  | 2001     | 
|                        |         
|Group turnover          | £13,301m |  | £12,811m |  | £12,541m | 
|No. of employees (000) | 50.4     |  | 51.2     |  | 54.1     | 
|                        |         

BT Retail is the UKs largest
  communications service provider, by market share, to the residential and business
  markets. It trades under one of the UKs leading brands  BT 
  and is the prime channel to market in the UK for other businesses in the BT
  group. It supplies a wide range of communication products and services, including
  voice, data, internet and multimedia services, and offers a comprehensive range
  of managed and packaged communications solutions.

Its strategy is to improve the customer experience, control costs and increase cashflow, defend core revenues and build new revenue streams.

The core portfolio covers traditional telephony products such as calls, analogue/digital lines and private circuits. New revenue generation is focused on
broadband, mobility and ICT.

BT Retail has three main customer groups: consumer (residential customers), major business (corporate customers and the public sector) and business (usually
companies of up to 500 employees). It has approximately 19 million consumer customers and over one million business customers, including major business customers.

Core business
As at 31 March 2003, BT Retail had more than 29 million customer lines (exchange line connections), nine million of which were business lines and lines for other service providers, and the
remainder of which were for residential customers.

Fixed-network call revenues, including rental and connection charges, accounted for approximately 29% of our revenues in the 2003 financial year. The number of
business lines remained stable, although high-speed ISDN services grew by over 6%.

In the residential fixed-voice call market, BT Retails share remained stable over the year at around 73%, as it has been since June 2000. The number of
residential voice lines grew by 0.2%. Our market share of the business fixed voice sector for the 2003 financial year was 45%, compared with 49% for the 2002 financial year.

Consumer
Our residential business saw revenue growth, for the first time for a number of years, driven by stable market share, stable customer numbers and growth in national calls.

nDuring the 2003 financial year, the BT Together pricing packages, which offer a range of competitive call prices and
fixed-fee pricing options, continued to win customers. As at 31 March 2003, ten million customers had signed up for BT Together, accounting for 70% of residential customer call minutes. In April 2003, we announced that BT Together would be
streamlined with effect from 1 June 2003, per-minute charging for evening and weekend calls would be removed and the distinction between local and national calls abolished, in favour of a single UK rate.

nDuring the 2003 financial year, we reduced the costs of our payphones operation through removal of over 18,000 payphones
from sites where there is a suitable alternative. We remain committed to retaining payphones in locations, such as rural communities, where there is no suitable alternative.

nThe launch in December 2002 of our new directories operation provides customers with a one-stop directory enquiries and
information service on a single number  118 500. In addition to the number service, our acquisition in August 2002 of the business of Scoot.com, the business finder directory service, enables customers to access classified listings and other
enhanced information services.

Major business
nBT Retail helps its major business customers to manage their communications spend, using a free PC-based tool to analyse
customer bills  BT Billing Analyst. This assists in pinpointing areas of inefficiency, identifying unnecessary calls at premium or peak rates and combating fraud. A consulting service is being introduced which uses this information to
construct more efficient customer networks.

nThe deregulation of inbound 0800 numbers means that we can offer bespoke pricing to our largest call centre customers.

Business
In the business market, our strategy is to provide business customers with a simpler and tailored service, thereby creating greater certainty and predictability in their business. We continue
to defend and acquire telephony contracts through our BT Business Plan and BT Commitment portfolio against the carrier pre-select and wholesale line rental services.

nBetween October 2002 and March 2003, the number of business customers on the BT Commitment Reward discount package doubled
to over 60,000.

nIn
  January 2003, BT became the first UK telecommunications company to cap the cost
  of business calls by launching BT Business Plan which sets a ceiling of 10 pence
  on local and national calls  provided only that they last less than an
  hour. At the end of March 2003, BT Business Plan had attracted over 20,000 business
  customers. Over the same period, the awareness of the plan among business customers
  reached 33.5%.

New-wave
  businessIn total, BT Retail grew new-wave
  revenues from £582 million in the 2002 financial year to £850 million
  in the 2003 financial year, a 46% increase.

ConsumernThe
  launch during the year of BT Broadband is key to our approach to helping build
  the broadband market in the UK. For £27 per month, BT Broadband customers
  get instant connection to the internet, unlimited access with no time restrictions,
  the opportunity to use the phone and surf at the same

BT Annual Report and Form 20-F 200311

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time, speeds up to ten times
  faster than a normal connection, and access to a range of content and service
  providers, including a range of e-mail choices. Free connection special offers
  and reduced modem prices for customers ordering online helped to drive demand
  and, as at 31 March 2003, BT Broadband had 137,000 customers.

nBT
  Retail launched two new ventures in the second half of 2002, both designed to
  provide new revenue streams, and to promote the uptake of broadband. BT Click&Buy
  is an on-line payment service, particularly suited to small transactions. BT
  Home Computing is a complete package, covering choice of broadband-ready PC,
  installation by a BT engineer and ongoing support.

nWe announced a number of initiatives under the Home of Possibilities banner, which extend the
benefits of broadband further into the home. These include home networking products (which enable multiple devices to share a single broadband connection), home monitoring services (which provide customer alerts via text, voice or e-mail) and home
entertainment services.

nWe continued to bring the internet to the high street with a programme to increase the number of e-payphones from 500 to
20,000 by 2007. The new kiosks enable customers to surf the internet, send web-based and instant e-mails, and send text messages to mobile phones, as well as make payphone calls. During the 2003 financial year, we installed 1,200 new kiosks.

nDuring the year, BT Retail returned to the consumer mobile market with Mobile Sense, a service enabling customers to select
their own call charge package online. In February 2003, BT and T-Mobile (UK) formed a partnership with the aim of delivering a consumer-led mobile service in the summer of 2003.

nBT Openworld achievements during the 2003 financial year included the launch: in December 2002 of the Dotmusic on Demand
service, offering downloads of more than 150,000 music tracks; in partnership with ukbetting plc, Sportev Ltd and InTheBox Media, of Sportal on Demand, the UKs first broadband sports network; in March 2003 the BT Learning Centre, which aims to
enable parents and children to learn more effectively online. In addition, BT Openworld introduced a number of new, value-added services during the year, including anti-spam functionality and virus protection and was approved as an ADSL supplier for
Microsofts Xbox Live and Sonys PlayStation 2 online games services.

Major business
Our ICT objective is to grow our share of selected growth markets. These are the markets in which communication and network skills are significant, migration is from our core markets, our
brand has value and in which partnerships profitably supplement our capability.

nMajor outsourcing deals signed by BT Retail in conjunction with BT Global Services during the year include a £125
million deal with Abbey National to install and manage a consolidated company-wide integrated voice and data telecommunications solution; an £83 million five-year extension to a current contract with the National Australia Group to manage its information and communications technology services; a £168 million
agreement with the NHS Information Authority, to upgrade the existing NHSnet infrastructure to a broadband platform, linking more than 7,000 NHS sites in England; and a £136 million contract over ten years with Bradford & Bingley to
install wide and local area networks to connect more than 550 sites across the UK. In May 2003, BT was part of a consortium which was awarded a multi-million pound outsourcing agreement with Royal Mail to manage business and IT services.

nDuring the 2003 financial year, year-on-year growth of 8% was achieved in the outsourcing business; 58% in IP (internet
protocol) infrastructure; and 416% in broadband. New businesses revenues grew significantly during the 2003 financial year, e.g. revenues from mobility were £41 million. There was also significant revenue growth from BT Broadband, managed
desktop solutions and CRM (customer relationship management) activity.

n Under
  the theme of Connecting your world. Completely, we launched
  a suite of mobile solutions during the financial year, to support corporate
  customers in meeting their business requirements, not just in the office or
  the regular place of work, but also on the move. Mobile Office, for example,
  offers customers secure, managed connections to their corporate infrastructure,
  including internet and intranet, e-mail and back office systems.

nThe installation of 122 live BT Openzone-enabled areas in stations, airports, hotels and motorway service stations in the
2003 financial year helped BT maintain a competitive position in the UK market for public wireless LAN (local area network). BT Openzone offers the opportunity to conduct high-speed transactions while on the move. The target is to install 400
hotspots by summer 2003, and 4,000 by summer 2004.

nCRM developments included a strategic alliance with Eckoh Technologies, to provide speech recognition technology and the
first pay as you go contact centre service.

nCloser collaboration with strategic partner Siebel Systems Inc, on solutions for local government, should now make it
possible for citizens to deal with their local authority using a range of media  post, e-mail, internet, telephone or text message.

Business
nBT Openworld remained the leading ISP (internet service provider) for SMEs and, in an extremely competitive market,
increased market share to 31% in the 2003 financial year (source: Oftel  share of ISP market for one to 250 employee businesses). BT Openworld grew its broadband SME customer base by 215% to over 132,000 by the end of March 2003. More than
80,000 business customers now use a BT Openworld value-added service, such as the Internet Business Pack, which helps SMEs establish a professional online business presence. BT Openworlds broadband portfolio continues to develop. SMEs can
choose from a wide range of different products and

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value-added services, with access speeds varying from 512 Kbits to 2 Mbits and with functionality that enables up to ten PCs to share a single access link.

nBy March 2003, we were converting business customers to broadband at the rate of one line every minute (based on a 40 hour
working week).

nSales of IP telephone systems increased substantially. 30% of all the telephone systems now sold by BT Retail in the SME
market are either pure IP or a hybrid of IP and conventional systems. With the launch of the Versatility system in November 2002, BT Retail now offers convergent telephone systems suitable for all customers, regardless of size.

nTo complement the growth in sales of IP-based network infrastructure, we launched BT Business Software (a range of messaging
and collaboration tools) and Open Orchard (a new venture offering software applications and consultancy to mid-market customers).

nThe launch of Mobile Worker in August 2002 was BT Retails first offering as a service provider. It connected 3,500
handsets by the end of March 2003, and we also launched BT Business Mobile, a bespoke tariff for business customers.

Internet access
At 31 March 2003, BT Openworld had approximately 1.75 million UK consumer and business ISP customers, making it one of the leading internet access providers in the UK.

During the year, the rate of growth of internet penetration in the UK slowed and the narrowband (dial-up) market showed signs of maturity. Against this
background, BT Openworlds strategy is to create a profitable business and drive the growing broadband market.

BT Openworlds narrowband business continued to prove itself to be sustainable and viable.

BT Openworlds strategy is to increase its profit from this area, while simultaneously migrating narrowband customers onto broadband access services. This
strategy is designed to increase revenues and provide customers with a superior internet experience.

During the year, BT Openworld grew its broadband customer base by 171% to over 290,000 and it remains the leading ISP supplier for broadband ADSL services in the
UK.

Enhanced customer access
We continued to use new technology to develop more effective relationships with customers.

nWe remained on track in the development of next-generation multifunctional contact centres, an upgrading of the traditional
call centre. Eight of the planned 31 centres in the UK, all of which will be equipped with state-of-the-art CRM systems, were completed during the year. Increased efficiencies achieved cost reductions of £86 million  on track to reach
the target of £150 million annual savings by the end of the 2004 financial year. The restructuring was achieved without compulsory redundancy. Specialist broadband contact centres were set up in Newcastle and Exeter, and in March 2003 BT
Retail announced that we would be opening new contact centres in New Delhi and Bangalore.

nDuring the financial year, we embarked on a programme to transform and expand our online relationships with customers. At 31
March 2003, we had a total of almost four million online relationships, and over 300,000 customers receiving e-bills. We continued to extend the range of online services, particularly those made possible by broadband and mobile access. This
programme made a significant contribution to our cost reduction achievements in the 2003 financial year.

nOur integrated multi-channel transformation programme aims to change the way BT Retail serves major business customers. The
programme is focused on improving the customer experience and reducing the cost of sale through integrated web and desk-based access, and on increasing market reach and adding value through our strategic partners. Significant cost savings were
delivered by deploying online service support to 500 customers, handling 3,000 transactions per day by the end of March 2003. The new tele-channel opened 10,500 new leads, and closed contracts worth £84 million. Our indirect channel partners
made a significant contribution.

|BT Wholesale            |          |  |          |  |          | 
|----------------------- | -------- |  | -------- |  | -------- | 
|Years ended, or as at,  |          |  |          |  |          | 
|31 March                | 2003     |  | 2002     |  | 2001     | 
|                        |         
|Group turnover          | £11,260m |  | £12,256m |  | £11,728m | 
|No. of employees (000) | 27.6     |  | 29.8     |  | 30.0     | 
|                        |         

Core businessBT Wholesale provides network services and solutions within the UK, including ADSL, conveyance, transit, bulk delivery of private circuits, frame relay and ISDN (integrated services digital
network) connections. It serves more than 500 communication companies, fixed and mobile network operators, and service providers, including BT Retail and BT Global Services. It aims to build complete communications packages and works with its
customers to help them succeed in their businesses. BT Wholesale has 885 local and trunk processor units, 119 million kilometres of copper wire and six million kilometres of optical fibre.

Consistent with our strategy, BTs UK networks are now managed by BT Wholesale  this includes the UK PSTN (public switched telephone network), ATM
(asynchronous transfer mode) and IP networks. Together, they constitute the most extensive telecommunications network in the UK, capable of touching virtually every home and business.

The fact that all UK network capital expenditure decisions are now made by one team has enabled BT Wholesale to reduce the capital expenditure it controls by
realising synergies through more efficient network planning and responding quickly to worsening market conditions. This is the capital expenditure of BT Wholesale and of BT Global Services on the UK IP network, which together has been reduced from
£2,109 million in the 2002 financial year to £1,793 million in the 2003 financial year.

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Changing
  market conditionsIn 2003, the UK telecommunications
  market continued to experience its most significant slowdown in many years.
  BT Wholesales external turnover declined by 11%, and our internal turnover
  reduced by 7% in the 2003 financial year, reflecting the downward pressure on
  prices, a slowdown in volume growth and the unwind of Concert.

Strategic intent
BT Wholesale intends to be number one in broadband and data services in the UK. This intent is underpinned by six strategic imperatives: to lead the market in customer satisfaction; to grow
profitable revenues; to achieve best-in-class costs; to deliver commercially successful broadband; to create a 21st century network; and to create a high performing, customer-focused organisation.

External new business revenues
BT Wholesale is moving into new markets. The emphasis is changing from the regulated, capital-intensive products in our traditional portfolio, to internet connectivity, network facilities
management, mobility, equipment, and content and applications.

In total, BT Wholesale grew its new business revenues from £102 million in the 2002 financial year to £189 million in the 2003 financial year 
85% growth. Key contract wins in the 2003 financial year included a six-year, full network outsourcing contract with Redstone. Over the next 12 months, a series of key product and service launches are expected to continue this growth, focusing on
innovation and a flexible route to market.

This focus on new business goes hand in hand with maintenance of the traditional interconnect business, from which the majority of BT Wholesales external
revenues (£3,283 million traditional interconnect business revenues in the 2003 financial year) were derived.

Broadband
As at 31 March 2003, BT Wholesales installed base of ADSL lines was around 800,000, including lines for BT Broadbands 137,000 customers and BT Openworlds 290,000 customers,
representing growth of 380% over the previous year. Since January, we have been adding well over 20,000 connections per week and at 16 May 2003 total connections were 936,000. We are on target to reach one million connections in summer 2003.

There were a number of notable BT Wholesale achievements in the broadband arena during the year. All of these helped drive up demand for, and access to,
broadband.

nThe monthly rental charged to wholesale customers for a consumer broadband connection was reduced on 1 April 2002 from
£25 to £14.75. This reduction was quickly reflected in the retail prices charged by ISPs.

nWe ADSL-enabled a further 67 exchanges, bringing the total to 1,167, ensuring that 67%
of UK households are connected
  to ADSL-enabled exchange areas.

nWe developed and implemented a demand registration scheme. Under this scheme, people in areas where the local exchange has
not been upgraded for broadband ADSL can register their interest via a service provider. Over 800 exchanges have been given a trigger level, indicating the number of customers required to make enabling that exchange commercially viable  with
trigger levels for a further 759 exchanges already planned for the next financial year. At 31 March 2003, more than 320,000 people had registered an interest: 44 exchanges had been broadband enabled as a result of the scheme (with a further 247
having reached their trigger levels).

nWe
  continued to explore commercially viable ways to roll out broadband services
  to smaller communities. For example, we began trials of a new commercial model
  for broadband exchange activation, using lower-cost exchange technology and
  a sponsoring organisation  with a social, development or commercial interest
  in bringing broadband to the area  providing up-front funding. The Exchange
  Activate trial was run in eight sites across the UK. In April 2003, BT Wholesale
  announced that it would be proceeding with the full implementation of Exchange
  Activate from July 2003.

nWe began a trial of new broadband symmetric services for business customers based on SHDSL (symmetric high-speed digital
subscriber line). Products developed using SHDSL are capable of supporting a range of services for service providers and businesses, including e-mail, web-hosting, video conferencing, VPN (virtual private networks) and WAN (wide area network). The
trial is planned to run until mid-summer 2003 and in 100 exchanges within London, Manchester, Birmingham,Yorkshire, Merseyside and parts of Scotland.

21st century network
At the heart of BT Wholesales strategic intent to be the UKs number one in broadband and data is our commitment to create a world-leading, commercially-focused, market-driven UK
network, which fulfils customer requirements today and anticipates their future needs.

Our commitment to the quality and reliability of the PSTN and narrowband remains undiminished. Early choices will be made on appropriate next generation
technology to replace the oldest narrowband switches, but the plan is for a long-term migration.

BT Wholesale plans to build an advanced broadband network based on IP standards. This is a major change from traditional telecommunications network standards. It
will consist of very high-capacity routers connected together by an optical network capable of meeting many years of future customer demand for voice, video and data services. This will be designed to make BT simpler and more efficient to deal
with.

The
  objective is to build this network using stringent capital return criteria and
  taking an

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increasingly rigorous approach
  to investment in the narrowband network.

The
  21st century network aims to deliver long-term, structural cost reduction, as
  we progressively migrate onto a simpler, lower-cost network architecture. The
  aim is that the new network will be reliable and hands-off, with self-diagnostic
  and self-healing capabilities, which means that investment now should lead to
  significantly lower operational costs in the future.

Efficiency
BT Wholesales cost base strategy includes improved processes, better inventory control, and a relentless focus on productivity. This resulted in significant savings.

A major contribution to efficiency in the 2003 financial year was a reduction in the pay bill for BT Wholesale, as over 2,000 employees left the business on
leaver terms.

Savings have also been achieved as a result of improved automation and the adoption of new technology, for example the development of self-install processes for
our ADSL broadband product.

By concentrating on the efficient use of existing equipment, the requirement for capital expenditure has also been controlled. Tightening spare plant margins on
ISDN line cards, and more efficient deployment of transmission equipment, for example, have resulted in reduced costs, while maintaining standards for provision of service.

|BT
      Global Services      |         |  |         |  |         | 
|----------------------------- | ------- |  | ------- |  | ------- | 
|Years ended,
      or as at,  |         |  |         |  |         | 
|31 March                      | 2003    |  | 2002    |  | 2001    | 
|                              |        
|Group turnover                | £5,251m |  | £4,472m |  | £3,468m | 
|No. of employees
      (000) | 17.2    |  | 16.7    |  | 18.8    | 
|                              |        

BT Global Services (formerly BT Ignite and re-named in April 2003) is BTs managed services and solutions provider, serving multi-site organisations worldwide. Its core target market is
the top 10,000 global multi-site organisations with European operations. Building on the existing relationships BT has with large multi-site organisations in the UK and internationally, BT Global Services provides global reach and a complete range
of ICT solutions and services.

Meeting customers needs
We have a highly experienced and skilled workforce, serving our customers around the world. Almost 50% of BT Global Services people are employed outside the UK, ensuring a local
understanding and approach. We deliver global account and service management to our major corporate customers around the world.

BTs extensive global communications network and strong strategic partnerships enable us to serve customers in all key commercial centres of Europe, North
America and Asia Pacific. In Europe, this network links more than 250 towns and cities across 16 countries back into our ubiquitous UK network, and beyond into the Americas and Asia Pacific.

BT Global Services is a supplier of leading-edge global communications services, with a portfolio ranging from desktop and network equipment and software, transport and connectivity, managed
LAN, WAN and IP-VPN (internet protocol virtual private network) services, applications hosting, storage and security services, through to business transformation and change management for complex global requirements. Our award-winning, flagship MPLS
(multi-protocol label switching) product was launched in 2000. With 500 points of presence around the globe, it can be accessed from over 60 countries, and is recognised as a leading product in the marketplace. MPLS-based IP virtual private networks
are the next generation of data networks for corporate customers, supporting voice, data and video applications. These networks offer more flexibility and greater service performance. During the 2003 financial year, quarter-on-quarter order growth
for MPLS services averaged around 50%.

Solutions and value-added services
BT Global Services larger and more complex customer contracts are delivered through or managed by BT Global Solutions and Syntegra.

BT Global Solutions portfolio covers a number of key ICT-related areas, including: IP infrastructure, CRM, applications and hosting, and outsourcing.

BT Global Solutions has over 5,000 employees and delivers services for customers in 136 countries. Its sales order value was £3.6 billion in the 2003
financial year, up 33% on 2002.

Syntegra, BTs experts in business transformation and change management, employs around 5,000 people worldwide, with particular strengths in financial
services and government. Syntegra is a key player in the global trading systems market. In the 2003 financial year, Syntegra signed UK Government business worth more than £500 million.

Customer wins
In addition to contracts signed in conjunction with BT Retail and described on page 12, BT Global Services entered into a number of other significant customer contracts in 2003. Examples
include:

nIn November 2002, working closely with BT Retail, we signed a seven-year contract worth around €1 billion with Unilever, to manage and develop the companys global communications infrastructure. This is one of the largest
outsourcing contracts in UK corporate history and the majority of revenues will come from operations outside the UK. BT Global Services will supply Unilever with a range of voice, data and mobile services, as well as developing new technologies on
its behalf.

nIn January 2003, we were awarded the contract to restructure the communications platform of the Bavarian state in Germany.
The seven-year contract is the largest government contract BT has signed outside the UK and involves the fundamental restructuring and harmonisation of the Bavarian states entire communications platform.

nIn
  January 2003, we won a four-year contract with the Ministry of Public Administration
  in Spain, worth

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over €20 million, to provide
  fixed-voice, data and internet services. The ministry, which has more than 400
  sites throughout Spain, provides administrative support to government at the
  central, regional and local levels.

nIn
  April 2003, we signed a three-year contract with high street bank HBOS plc to
  manage its voice and data services.

n Syntegra signed deals worth in excess of £800 million, including a ten-year strategic partnership with Essex County Council  one of the biggest partnerships of its kind ever established by a county council.

Business realignment
On 1 April 2002, the management of BTs contracts with former Concert customers was transferred to BT Global Services and BT Retail.

During 2003, the Concert MPLS virtual private network platform, with its global presence in Europe, USA and Asia, was integrated with the BT Global Services
European platform, to enhance reach and coverage, on schedule and within budget.

BT Global Services also achieved greater integration of its European businesses through continued product harmonisation, network and customer service centre
consolidation and people realignment.

Global reach
In Europe, BT Global Services owns operations in: Belgium, France, Germany, Ireland, Netherlands, Spain, the Nordics and Central and Eastern Europe. We deliver services to customers in Italy
through our joint venture Albacom and I.Net (our applications hosting company). In the Americas and Asia Pacific, we deliver service to our customers through a combination of direct sales and services operations and strategic partners.

BT Global Services network-based services (Frame Relay, ATM, IP-VPN) extend to and across North and South America, and the Asia Pacific region. This means
that BT Global Services products are delivered seamlessly within and from Europe to our own locations in the Americas, and delivered locally through interconnect and supply agreements with regional carriers. In the Asia Pacific region, we
deliver services locally to customers via a network of partners in the key commercial centres of Japan, Hong Kong, Singapore and Australia, and provide reach across the region through other regional operators.

Global
  customer service is provided via service and network management centres around
  the world, 24 hours a day, seven days a week. As part of BT Global Services
  programme to deliver a standard operating environment across our operations,
  all network operations are in the process of being consolidated into a single
  network control centre in Brussels. This centre will manage BTs networks
  across 16 European countries, and through functions such as shared incident
  management and fault resolution, performance monitoring, and seamless customer
  service, help customers maximise
  the use of their infrastructure.

Other businesses
As at 31 March 2003, BT held
  stakes in a number of other businesses, including:

nstakes in four satellite entities  Eutelsat,
  Inmarsat, Intelsat and New Skies.

na 16.6% stake in L G Telecom, a mobile cellular telephone operator in the Republic of Korea.

nan 11.9% stake in StarHub, the enlarged fixed and mobile communications operator and pay-TV operator in Singapore, formed by the merger
in June 2002 between StarHub and Singapore Cable Vision (BTs stake was previously 18% in StarHub alone).

na 23% stake in Albacom, a fixed communications operator in Italy.

Research and development and IT support
BT Exact is BTs centre of excellence in IT and networking technologies, providing the specialist technical skills that BT needs to extend the reach of our broadband services, operate our
networks efficiently and deliver world-class customer service.

BT Exact also works with BT Retail, BT Wholesale and BT Global Services to address the more complex needs of our customers, extend our portfolio of products and
services and ensure that our customers gain full advantage from the opportunities created by new technologies.

Specialist technical services are also offered directly to telecommunications equipment manufacturers and suppliers of the software applications used in the core
of the worlds public communication networks. For example, BT Exact works with companies such as Alcatel, Juniper Networks, Lucent Technologies and Marconi to provide independent assessments of their products performance and suitability
for use in public communications networks.

All these aspects of BT Exacts business are based on expertise and insight created through our research programmes, which focus on the next-generation
internet, advanced data services, information and network security, software systems to support the management and integrity of networks worldwide, and the future impact of advanced communications on lifestyles, education and healthcare.

The work undertaken by BT Exact is part of an investment of £380 million in research and development that BT made in the 2003 financial year. This compares
with £362 million and £364 million invested in the 2002 and 2001 financial years, respectively.

The intellectual property created from this work is valuable and BT Exact is responsible for the exploitation, management and defence of the patents that result
from our research and development work, and has a policy of commercial exploitation of our technology through patent licensing (including a contract with ipValue to secure revenues from US and Canadian companies), and the incubation of new
technology companies.

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In February 2003, BT Exact announced a partnership with Coller Capital and New Venture Partners (NVP) to create an independent corporate venturing partnership  NVP Brightstar  in which BT has a minority stake. NVP Brightstar, which began operations in April 2003, has the exclusive rights to create new, start-up businesses with BT Exact, using our extensive and developing intellectual property
portfolio. NVP Brightstar purchased the majority of the existing portfolio of technology ventures developed by BT Exacts corporate incubator, Brightstar.

|Our
      people                       |       |  |       |  |       | 
|-------------------------------------- | ----- |  | ----- |  | ----- | 
|Number
      of employees in the group |       |  |       |  |       | 
|                                       | 2003  |  | 2002  |  | 2001  | 
|As at 31 March                         | 000  |  | 000  |  | 000  | 
|                                       |      
|UK                                     | 96.3  |  | 100.1 |  | 106.4 | 
|Non-UK                                 | 8.4   |  | 8.5   |  | 10.4  | 
|                                       |      
|Total continuing activities            | 104.7 |  | 108.6 |  | 116.8 | 
|Total discontinued activities          |      |  |      |  | 20.2  | 
|                                       |      
|Total employees                        | 104.7 |  | 108.6 |  | 137.0 | 
|                                       |      

At 31 March 2003, BT employed 104,700 people throughout the world, with 96,300 in the UK.

During the 2003 financial year, as part of the continuing programme of reshaping the group, 4,300 people left BT under our voluntary paid leaver package,
Newstart.

Well managed, motivated people are fundamental to our success. Our reputation as a progressive and innovative employer not only helps us recruit and retain an
excellent workforce, it also enhances our ability to serve our customers and generate revenues.

Training and development
During the year we spent around £70 million (excluding staff and other direct costs) on the training and development of our employees. We provide a range of training opportunities for
employees, including customer service and technical training, management development and professional training, as appropriate. We aim to deliver this as cost-effectively as possible by using the capabilities of broadband and progressively
increasing the emphasis on e-learning and self-teach opportunities.

Because a passion for our customers is fundamental to the way we do business, a number of training and development initiatives have focused on aspects of customer
satisfaction. One example of this is the My Customer programme, targeted at 50,000 people in BT Retail, to reinforce their engagement skills with customers.

In January 2003, BT was accredited as an Investor in People, for the fourth time.

Communications
We maintain and develop the awareness of our employees in relation to financial and economic factors that affect the performance of the company in a number of ways. Employees are kept informed
through a monthly internal newspaper and regular e-mail bulletins, as well as having access to the intranet.

Health and safety
We have undertaken a comprehensive review of our health and safety strategy and are committed to eradicating avoidable work-related illness and injury. We have specifically targeted those
business activities that carry the greatest risks and we are enhancing the information, instruction and training provided for our people to help improve performance. Good progress is being made against the stringent targets we set ourselves in 2001,
with a 21% reduction in workplace injuries and a 23% fall in cases of occupational ill health over two years.

A stake in the company
We encourage our employees to acquire shares in BT Group to enable them to share in our success, and offer a range of tax-beneficial employee share plans to help them make such
acquisitions.

For the 2003 financial year, £36 million was allocated to provide free shares to UK employees under the BT Employee Share Investment Plan (ESIP). Under the
terms of the scheme, the amount of profit set aside to buy free shares is linked to corporate performance measures determined by the Board. These shares are held in trust for a minimum of three years, and for five years in order to obtain the
beneficial tax treatment (employees outside the UK receive a cash payment equivalent to the value of the shares).

The partnership shares section of the ESIP gives employees an opportunity to purchase shares in the company through monthly deductions from their pre-tax
salaries.

In addition, employees have the opportunity to buy shares at a discount under the BT Group Employee Sharesave schemes. Share options are normally exercisable on
completion of a three- or five-year save-as-you-earn contract.

Pensions
Most of our employees are members of the BT Pension Scheme or the BT Retirement Plan, both of which are controlled by independent trustees. The BT Pension Scheme was closed to new members on
31 March 2001. The majority of employees who joined the company after that date are eligible to join the BT Retirement Plan.

Listening to our people
We run an annual employee attitude survey, and encourage managers and their teams to put in place action plans to address the issues that it highlights. The most recent phase of the survey was
conducted at the end of 2002 and showed extremely high levels of support for and commitment to the companys strategy.

Work/life balance
We want our people to give of their best for customers and BT, and we provide the scope, within operational requirements, for them to optimise their work/life balance. At 31 March 2003, we had
more than 6,000 people working part time, almost 600 job sharers and around 6,600 people working from home.

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Other options include alternative attendance patterns, maternity, paternity, adoptive and parental leave, career breaks and an increasingly flexible approach to assist individuals to prepare
for their retirement age.

Industrial relations
An estimated 75% of our UK employees belong to one of two main trade unions recognised by the company. We have a good record of industrial relations and constructive, occasionally robust
relationships, based on partnership and mutual respect, with both unions in the UK and works councils elsewhere across Europe.

Equal opportunities
We are an equal opportunities employer and are committed to developing a working culture that enables all employees to make their own distinctive contribution. We are an active member of many
equal opportunity and diversity organisations, and during the year were awarded the platinum standard by Opportunity Now for our work on gender equality and the gold standard by Race for Opportunity (RfO) for our work on race equality.

We were also recognised by the Employers Forum on Disability for our leadership in the employment of people with disabilities.

Our Chief Executive, Ben Verwaayen, is chairman of the National Employment Panels Steering Group on Lone Parents, which aims to create more opportunities
for lone parents to work.

Regulation, competition and prices
The commercial environment in the UK and in the countries in which BT operates or wishes to operate is increasingly competitive and dynamic. However, we remain subject to extensive regulation,
particularly in the UK, which can materially affect the way in which we carry out our business. We also use inputs from other regulated operators, largely outside the UK, and the availability and price of these inputs may change from time to time,
impacting on our business.

Regulation in the UK
The regulatory structure for UK telecommunications is set out principally in the Telecommunications Act 1984, which gives regulatory authority to the Secretary of State for Trade and Industry
and the Director General of Telecommunications who heads the Office of Telecommunications (Oftel). The Secretary of State and the Director General are each required to exercise their functions under the Act in the way which they consider is best
calculated to ensure, as far as reasonably practical, that all reasonable demand for telecommunication services, including certain community services, is met, and to secure the ability of licensed telecommunications operators to finance the
provision of the services which they are licensed to provide. In addition, they are required, among other things, to promote the interests of consumers, purchasers and other users in the prices, variety and quality of telecommunication services and
equipment, and to promote and maintain efficiency and effective competition among UK telecommunications operators.

With limited exceptions, a licence under the Telecommunications Act is required to run a telecommunication system in the UK. The Secretary of State is responsible for issuing licences after
consulting the Director General. The regulatory regime will change during 2003 and a new regulator, Ofcom, will take over  see sections The BT Licence, New European Union Directives and
Communications Bill and Ofcom for further information.

The BT Licence
BT currently operates in the UK under a number of licences, the most important of which is our licence to operate our fixed-line public telecommunications network (the
Licence). Subject to the implementation of the new European Union Directives (see below), the Licence remains in force indefinitely, but the Secretary of State may revoke the Licence on ten years notice. The Licence can
also be revoked at any time on various grounds, including non-compliance with an enforcement order from the Director General. In September 1999, the Licence was modified to meet the harmonisation requirements of the European Union Licensing
Directive.

The Licence contains terms and conditions designed principally to ensure the widespread provision of telecommunication services in the UK, to protect the
interests of consumers and to encourage the development of effective competition in telecommunication services and network provision within the UK.

Under the Licence, we have to fulfil reasonable requests for voice telephony, low-speed data and fax transmission services, and provide public call boxes in
accordance with published guidelines, throughout nearly all the UK, including rural areas (these being the principal elements of the Universal Service Obligation).

Under the Licence, we must allow other licensed operators to interconnect with our telecommunications systems on cost-oriented, transparent and non-discriminatory
terms.

We
  must comply with a variety of fair trading obligations, such as:

na prohibition on showing undue discrimination
  between customers or unfairly favouring any part of our own business as against
  competitors in relation to matters such as the price, terms and conditions or
  quality of our main services; and

na
  prohibition on the unfair cross-subsidy of certain of our activities.

We
  must publish audited financial statements for the regulated businesses
  and activities, in order to support the linkage of costs
  with interconnect prices and with a view to providing demonstrable evidence
  that we are neither behaving in a discriminatory fashion nor unfairly subsidising
  our activities. If it appears to the Director General that an unfair cross-subsidy
  exists between specified parts of our own business, we must take such steps
  as the Director General may direct to remedy the situation. The regulatory businesses
  for which separated accounts are currently produced are retail narrowband access,
  apparatus supply, network, retail systems, mobile, supplemental services and

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residual services. The Licence
  also contains provisions enabling the Director General to monitor our activities,
  including requirements for BT to supply him with information requested.

The
  Licence contains price control formulae, the overall effect of which requires
  us to reduce, or restricts the extent to which we can increase, the prices of
  many of our telephony services to the bulk of the residential market and also
  the prices for our interconnection services, wholesale line rental services
  and number portability services. In addition, the Licence contains certain specific
  restrictions on the terms on which we can trade. In particular, we are required
  to publish and adhere to standard prices and other terms for providing certain
  services and, in general, to apply uniformly a published scale of charges for
  installing residential exchange lines on premises to be served by a single line.

As a result of our international interests, a Licence condition prohibits us from doing anything, by act or omission, that would detract materially from our
ability to meet our Licence obligations to provide UK telecommunication services and to do so to any specified standards. BTs directors are required to submit an annual compliance certificate to the Director General.

The Director General may make modifications to a licence if the licensee does not object or the modification is deregulatory. Alternatively, proposed changes to
the Licence may be referred by the Director General to the Competition Commission. In either case, the Telecommunications Act requires public consultation before a licence can be modified. Licences may also be modified in order to implement European
Union directives into UK law.

New European Union Directives
The provision of telecommunications networks and services throughout the European Union was liberalised through the implementation of a number of Directives which came into force in January
1998. Following a review initiated by the European Commission in 1999, a new package of Directives for the regulation of electronic communications continuing the EUs policies of liberalisation and harmonisation was adopted by the EU in April
2002. These Directives must be implemented in all Member States by 25 July 2003. The new framework aims to be technologically neutral. Individual licences will be replaced by a general authorisation applying automatically to all providers of
electronic communications networks and services. Member States will no longer be permitted to require undertakings to obtain licences before operating in the sector, though providers of electronic communications networks and services may be required
to comply with a limited range of general conditions. Additional obligations, legally separate from the general conditions, will be imposed on individual providers designated by their National Regulatory Authority as having Universal Service
Obligations or significant market power in specified market sectors. The significant market power trigger will be aligned with the competition law concept of dominance, and any obligations imposed on
significant market power
grounds must be the minimum required to address identified competition problems. The new framework requires the availability of full rights of appeal, including appeal on the merits, against
regulatory decisions to a body with appropriate expertise. The new Directives also incorporate mechanisms designed to ensure consistency of regulation across the European Union.

Oftel is currently consulting on the proposed general conditions and Universal Service designations and obligations. Both these aspects of the new framework need
to be in place when all existing licences are due to cease to apply on 25 July 2003, the implementation date for the new Directives. Oftel is also consulting on market analyses required to identify whether significant market power exists in
specified market areas. However, as existing significant market power obligations can be carried forward until the analyses are completed, this aspect of the framework does not have to be in place by 25 July. Significant market power obligations
under the new framework may not, therefore, be implemented until later in 2003 and Oftel has indicated that because the process cannot be completed before 25 July, certain existing licence conditions relating to market areas subject to the analyses
will need to be carried over until at least the end of August. BT can, in any event, expect to continue to be regulated in the majority of the markets in which it is currently regulated.

The new general conditions and Universal Service Obligations are not expected to have a major impact on BT, although some beneficial rationalisation of these
aspects of the framework is anticipated to result. The introduction of the new definition of significant market power and the requirement for market analyses should lead to the eventual withdrawal of competition-related regulation, relying instead
on competition law in specified market sectors which are competitive or which become competitive in the future. In its current market analysis consultation documents, Oftel is proposing the removal or relaxation of such regulation in a number of
markets. Similar regulatory reviews are underway in all EU member states which will have an impact on the level of regulation BT, and its suppliers, are subject to in those countries.

The Communications Data Protection Directive, which is not part of the main Electronic Communication Directives, was adopted in June 2002 and must come into force
in Member States by 30 October 2003. This Directive may have cost implications for industry.

Communications
  Bill and OfcomThe UK Government has completed
  a review of telecommunications and broadcasting regulation. A new regulatory
  body has been established, called the Office of Communications (Ofcom), to amalgamate
  the roles of the five existing regulatory agencies: the Director General of
  Telecommunications; the Independent Television Commission; the Broadcasting
  Standards Commission; the Radio Authority and the Radiocommunications Agency.
  Ofcom is headed by a chairman (Lord Currie) and chief executive (Stephen

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Carter) and supported by executive
  and non-executive board members.

The
  reforms are in two parts. The first comprises the Office of Communications Act
  passed in March 2002, which enables the board, office and budgets of Ofcom to
  be established, but does not enable Ofcom to exercise any regulatory functions.
  The second comprises a Communications Bill. The draft Bill was published in
  May 2002 and the final Bill is expected to be passed by Parliament by 17 July
  2003. It will confer regulatory functions on Ofcom, which will be able to take
  up those functions when the Bill is brought into force. However, Ofcom is not
  expected to take up its regulatory functions until later in the year and the
  Bill provides for a transitional period between the Bill coming into force and
  the date when Ofcom takes up its formal powers. In this period, the existing
  regulators will carry out Ofcoms functions relating to networks and services,
  and spectrum.

The main changes for providers of electronic communications networks and services will be the possibility of fines being imposed for breach of regulatory
obligations, appeals on the merits against regulatory decisions and the creation of a new regulatory regime which will, among other things, implement the requirements of the new EU Directives for general authorisations, instead of individual
licences, and basing regulation of dominant players on analyses of relevant markets. Statutory instruments have been made to enable preliminary work to be undertaken to implement the Directives, and, in the event that the Bill is not passed before
25 July 2003, the deadline for implementation, the Government will ensure implementation by means of further statutory instruments which will, for a limited period, duplicate provisions in the Bill.

Competition
The competitive environment
The UK telecommunications market is fully open to entry and highly competitive. As a result, the UK Government and Oftel have indicated their expectation that it will be appropriate to move
away from sector-specific (including licence-based) regulation to greater reliance on the Competition Act as individual markets become sufficiently competitive. Furthermore, the new EU Directives  see New European Union
Directives  prohibit the imposition of competition based, sector-specific economic regulation in any market which is found to be effectively competitive.

In January 2000, Oftel published a strategy statement based on the principle that regulation should go no further than the minimum necessary to protect consumers.
The strategy is underpinned by a programme of competition reviews, which are intended to ensure that the regulatory framework responds to changed competitive conditions: where it is found that competition is delivering benefits to consumers in the
sectors reviewed, regulation will be reduced or withdrawn as appropriate. These reviews will need to be incorporated into the market reviews mandated by the new EU Directives, which will come into force by 25 July 2003 (see New European
Union Directives). Although it is some years since the Telecommunications Act abolished the monopoly of the former statutory corporation, British Telecommunications, in the running of telecommunication systems, obligations placed on BT, including
pricing regulation and the requirement to provide universal service (discussed below) are generally more onerous than for other licensees.

Competition Act
In addition to telecommunications industry regulation, BT is subject to general competition law.

By virtue of provisions in the Competition Act 1998, UK competition law is in line with European Community law in prohibiting anti-competitive agreements and
concerted practices and the abuse of a dominant market position. In the case of telecommunications, the Director General of Telecommunications has concurrent investigatory and enforcement powers with the Office of Fair Trading. They also have
significant investigative powers. Breach of the relevant prohibitions could lead to fines of up to 10% of relevant turnover in the UK for each year of infringement (up to a maximum of three years) and/or result in claims for damages in the civil
courts. There are also powers to order a company to cease an infringing activity. There is an independent mechanism for appeals to the Competition Appeals Tribunal against decisions under the Competition Act.

Oftel is continuing to investigate the terms and conditions of BTs telephone rental business under the Competition Act. Also, following the decision of the
Competition Appeals Tribunal in the Freeserve case in April 2003, Oftel has undertaken to re-issue a decision on BT Openworlds broadband activities.

Enterprise Act
The Enterprise Act 2002, which received Royal Assent on 7 November 2002, aims to give more independence to the competition authorities, to reform insolvency and bankruptcy laws and to tackle
trading practices that harm consumers.

The provisions of the Act are largely complementary to those of the Competition Act 1998, which will remain in force with some minor amendments  but it also
contains new provisions criminalising cartels and allowing for the disqualification, in appropriate cases, of company directors where companies commit breaches of competition law.

Pricing regulation
Fixed network
We are subject to price controls on our fixed network services in the UK at two levels: retail and network. Fixed network competitors are generally not subject to direct price controls,
although there are some controls on mobile network operators.

Retail price
  controlsWe are subject to two sets of
  UK retail price controls, one on certain public-switched telephony call charges
  and exchange line rentals, and one on certain private circuits. Each price control
  is based on a formula

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calculated by reference to
  the UK Retail Prices Index (RPI) and a factor, X.

For
  services covered by the controls, the weighted average of base prices cannot
  increase in each year beginning 1 August by more than the annual change in RPI
  minus X. The current retail price control for public-switched telephony, applying
  from August 2002 to July 2006 is RPI minus RPI (i.e. the value of X is RPI and
  prices cannot increase). It is measured on services used by the lowest 80% of
  our residential customers classified by bill size. From August 2002 the services
  covered by the control were extended to include BTs share of the revenue
  for calls to all four mobile networks, replacing the previous separate control
  on BT for calls to Vodafone and O2. The price control formula and
  our performance against the formula are set out in the table below.

Under the new controls, we have also given an assurance that increases in line rental for business customers will be no more than the annual change in RPI. Under
the price controls for private circuits that applied from August 1997 to July 2001, prices for domestic analogue and low-speed digital private circuits could not increase by more than the change in the RPI in any year. The application of the
analogue price cap has been extended until July 2005 and the low-speed digital private circuits cap was removed in July 2001.

Review of retail price controls
In July 2002, BT accepted Oftels proposals for changes to its licence to introduce new retail price controls of RPI minus RPI (i.e. no price increase) from 1 August 2002 until 31 July 2006. Under the changes:

nBT is required to provide a cost-based wholesale line rental product to other service providers at a regulated price and in
a way that does not discriminate between BTs retail business and service providers. This product (Wholesale Access) has been available from BT since 1 September 2002. Oftel has since issued a further consultation regarding enhancements to this
product and BT, Oftel and industry are discussing the proposed requirements.

nfor those services covered by the previous control, BTs prices to the lowest spending 80% of its customers would be
pegged at their current level and not allowed to rise with inflation, using an RPI minus RPI price control. The services covered by the control have been extended to include BTs share of the revenue for calls to all four mobile networks,
replacing the previous separate control
  (RPI minus 7%) on BT for calls to Vodafone and O2 UK.

nonce Oftel is satisfied that the new wholesale line rental product is fully implemented and starting to have an impact in
the retail market, the retail price control will be further revised to allow prices to increase at the rate of inflation.

nthere are some minor changes to the workings of the Light User Scheme designed specifically for people making fewer calls,
including provisions to extend the number of customers potentially qualifying if the standard exchange line rental rises significantly.

Network charge control
We operate under interconnection agreements with most other licensed operators. A new network charge control period began on 1 October 2001 and will last for four years from that date. It
requires us to set reasonable charges based on long-run incremental costs for our standard interconnection services. Depending on the degree of competition for these services, charges are cap controlled each year by RPI minus X (where X ranges from
7.5% to 13%) for services Oftel considers unlikely to become competitive in the near future; safeguard cap controlled (i.e. no increases above RPI during any relevant year of the overall control period) for services likely to become competitive; and
those services considered fully competitive are not subject to direct charge controls. The network charge controls that ended on 30 September 2001 capped charges for services unlikely to become competitive in the near future at RPI minus 8%. On 12
July 2002, a new condition was included in the Licence. The effect was to set charges for, and bring under regulatory control, BTs fixed portability services. Number portability allows customers to change the company providing their telephony
services without changing their telephone number. Fourteen non-conveyance Portability Standard Services were identified. The charge control runs from
1 August 2002 until 31 July 2006. The charges are controlled by a RPI minus X formula, with X set at 5%. BT must publish a notification to the Director General and other licensed operators if
it intends to amend existing charges or to offer new services.

Wholesale Access
  Charge ControlThe charges for the Wholesale
  Access services agreed by BT in July 2002 are subject to price control. The
  charges for the line rental (residential and businessproducts),
  line transfer and new line installations have been determined and are subject
  to a price control of RPI minus 2% effective from 1 September 2002 for four
  years. The control applies to the aggregate of all charges (rental, transfer
  and installation) as well as to line transfers separately. BT is also under
  an obligation to notify the Director General and service providers if it intends
  to amend existing charges; the notification is 90 days for determined charges
  and 28 days for all others.

|Price control
      formula (RPI-X)                 |        |  |                                 |  |        |  |        |  |        |  |        | 
|--------------------------------------------------- | ------ |  | ------------------------------- |  | ------ |  | ------ |  | ------ |  | ------ | 
|                                                    |        |  | Years
      commencing 1 August |  |        |  |        | 
|                                                    |        | 
|                                                    | 1997   |  | 1998                            |  | 1999   |  | 2000   |  | 2001   |  | 2002   | 
|                                                    |       
|% RPI movement for the
      relevant perioda       | 2.94   |  | 3.75                            |  | 1.35   |  | 3.32   |  | 1.93   |  | 2.33   | 
|X in price control formulab                         | 4.50   |  | 4.50                            |  | 4.50   |  | 4.50   |  | 4.50   |  | 2.33   | 
|% required reduction in
      base pricescd         | (1.56) |  | (0.73)                          |  | (3.15) |  | (1.09) |  | (2.45) |  |       | 
|% increase
      (reduction) in base prices overall | (1.56) |  | (0.73)                          |  | (3.24) |  | (1.20) |  | (2.50) |  | 0.14ef | 
|                                                    |       



|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 | Base and package
      price changes implemented up to 31 January 2003                                                                                           
|f | Regulation
      allows any unused allowance or excess reduction remaining at the end of
      the price control year (31 July) to be carried forward            

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Non-UK regulation
BT must comply with the regulatory regimes in the countries in which it operates or wishes to operate. The obligations placed on BT and its suppliers continue to be relevant to its business
models and have cost implications for its end user services. These rules are generally applied by national regulatory authorities operating under a governmental mandate. The impact of decisions of these bodies can have a material impact on our
business models from time to time.

European Union
See New European Union Directives.

Rest of the world
The vast majority of the markets in which BT operates around the world are regulated, and in the majority of these it has to obtain licences or other authorisations and comply with the
conditions of these. The degree to which these markets are liberalised varies widely: while many are fully open to competition, others place restrictions on market entrants, such as the extent to which foreign ownership is permitted, or on the
services which may be provided. The extent to which the national incumbent operator is effectively regulated also varies considerably. BTs ability to compete fully in some countries is therefore constrained.

Other significant changes and issues
Broadband regulation
There has been considerable dialogue with Oftel and the Department of Trade and Industry over the past financial year regarding the introduction of broadband services and how best to deal with
the issues arising from rapid roll-out. Much of this activity has centred around the creation of approaches designed to foster increased demand, to reduce the costs of providing broadband facilities, and to encourage creative partnerships with
others, both in the public and private sectors, and to bring the benefits of broadband to areas that might not be reached on a purely commercial basis. In addition to the standard licence and competition law obligations, BT ensures that the
particular obligations for wholesale service provider products are met. These include the need to treat BTs retail businesses and service providers equally and the provision of various interconnection points to BTs broadband
network.

Deregulation of inbound services
Inbound services were deregulated in July 2002 as the market for these services is now fully competitive. BT no longer has a regulatory obligation to supply voice inbound services (e.g. 0800, 0845, 0870, 09XX), to notify and publish prices, or adhere to them. We can therefore choose to offer
different prices and service levels to different customers. BT must, of course, still comply with competition law. The result of deregulation has been that prices have been reduced in this market.

Local loop unbundling
The Licence requires the provision of unbundled local loops to other operators to enable them to provide telecommunications services, including broadband ADSL services, to end customers. Local
loop unbundling, line sharing and sub-loop unbundling are also required by an EU Regulation. Local loop unbundling services have been phased in over the past few years. In March 2003, BT launched a line sharing service.

Carrier pre-selection
Carrier pre-selection (CPS), required by a condition in the Licence, allows customers to opt for certain classes of call to be carried by an alternative operator, selected in advance, without
having to dial additional access codes.

Leased lines
Oftel published a Direction in respect of Partial Private Circuits (PPCs) in December 2002. PPCs are a wholesale variant of certain private circuits at cost-based prices, which interconnecting
operators can use to form local tail-parts of end-to-end circuits offered to their retail customers. The Direction resulted from an investigation into the cost base of this relatively new wholesale product group (PPCs were initially launched in
August 2001). The Direction resulted in reductions averaging 15% to 20% in PPC charges compared with the initial 2001 PPC charge levels, along with a range of relatively minor amendments to the product specifications. A proportion of the price
reductions has been made on a retrospective basis, as the majority of private circuits leased by other operators had already switched to PPC prices and conditions following initial launch. Now that the Oftel investigation has concluded, BT is
looking forward to a period of stability as the use of the new product portfolio becomes established.

Universal Service
  Obligation (USO)The Communications Bill will
  implement the Universal Service Directive, one element of the new European Union
  Directives package (see New European Union Directives).
  Oftel consulted in March 2003 on conditions to apply to BT. Some additional
  obligations are proposed, such as guidelines that refer to a minimum data rate
  of 28.8 kbit/s which will have adverse cost implications for BT if implemented.
  Oftel continues to take the view that the USO is not an unfair burden on BT.
  Oftel is expected to carry out a formal review of the USO next year, looking
  at the scope and funding of the USO, and is currently

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consulting on the controls
  applying to removal and re-siting of payphones.

Flat-rate
  internet interconnection (FRIACO)Initially launched in 2000, this
  group of products is the normal means of providing interconnecting operators
  with a service to support flat-rate internet access packages via internet service
  providers to end users. Most FRIACO use involves interconnection at local exchange
  level, and the period of rapid growth in demand, following the initial FRIACO
  launch, has now developed into a more stable environment. The charges for both
  FRIACO services are subject to RPI minus X controls under the Network Charge
  Control regime and hence have been falling gradually. Oftel is currently consulting
  on whether there should be a further reduction in the price of one element of
  the service with effect from December 2001.

Relationship with the UK Government
The UK Government collectively is BTs largest customer, but the provision of services to any one department or agency of the UK Government does not comprise a material proportion of its
revenues. Except as described below, the commercial relationship between BT as a supplier and the UK Government as customer has been on a normal customer and supplier basis.

We can be required by law to do certain things and to provide certain services for the UK Government. The Licence obliges BT and other licensees, after
consultation with central and local government, to make, and if necessary implement, plans for the provision or restoration of services in emergencies. In addition, the Secretary of State has statutory powers to require us to take certain actions in
the interests of national security and international relations.

Legal proceedings
The company does not believe there are any pending legal proceedings which would have a material adverse effect on the financial position or 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 first hearing has been scheduled for 11 July 2003, in Rome. If the proceedings are successful, BT could be 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.

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Our commitment to society

Investors are paying increasing attention to the ways in which social, environmental and ethical issues are managed to both preserve and grow shareholder value.

For example, the Dow Jones sustainability indexes rank companies for their success in managing those factors for competitive advantage. During the 2003 financial
year, BT was ranked as the top telecommunications company in the Dow Jones Sustainability Index for the second year running.

We also won the Queens Award for Enterprise in recognition of our contribution to sustainable development.

A further manifestation of investor interest is the Association of British Insurers disclosure guidelines covering social, environmental and ethical risks
and opportunities.

BTs
  top-level response to those guidelines is provided in the section onCorporate
  governance,with
  further information provided here.

Other parts of this report cover business integrity, corporate governance and employee issues, such as diversity and health and safety. This section concentrates
on CSR (corporate social responsibility) governance, CSR risks, digital inclusion, environment, community and business opportunities.

More detailed disclosures on BTs implementation of social, ethical and environmental policies and procedures are available online in our independently
verified social and environmental report.

Corporate social responsibility governance
A Board committee  the Community Support Committee  oversees social investment expenditure and establishes the strategy for maximising our contribution to society. The committee,
chaired by Sir Christopher Bland, consists of representatives from BT businesses, two non-executive directors and two external independent members, who have a reputation for excellence in this field.

An internal committee, known as the Corporate Social Responsibility Steering Group, oversees the implementation of our CSR programme. This includes risk
assessment, performance management, public accountability, ISO14001 certification  the international standard for environmental management systems  and objective setting and control. The steering group, which makes regular reports to the
Board, is chaired by a member of the Operating Committee.

During 2003 the steering group agreed an action plan to ensure that BTs CSR activities help deliver the BT strategy and established a set of non-financial
key performance indicators to provide an overview of BTs social and environmental performance. The steering group also approved an accompanying set of targets for the 2004 financial year.

BT takes quality very seriously and is fully accredited to ISO9001.

To ensure that CSR is embedded into BTs commercial operations we have commenced a series of CSR health checks of our main commercial
initiatives.

These health checks identify specific social, economic and environmental impacts (both positive and negative) and particular CSR risks and opportunities. A report is then compiled, including
recommended actions.

In addition, social, ethical and environmental matters have been incorporated into the directors induction programme.

We have important relationships with a wide range of different stakeholders, including employees, customers and suppliers. We engage with these stakeholders in a
number of ways, including consumer liaison panels, an annual employee survey and a supplier relationship management programme.

We also employ a number of CSR experts who investigate long-term societal trends, identify potential issues that might affect the business and support BTs
commercial activities.

Finally, our social and environmental report has been brought into accordance with the 2002 Global Reporting Initiative guidelines and received a commendation in
the 2002 Association of Chartered Certified Accountants (ACCA) Sustainability Reporting Awards.

Social, environmental and ethical risks
Currently, we identify no social, environmental or ethical risks that would have a material impact on our business.

However, we have identified the issue of supply chain working conditions as posing a potential risk to our reputation. In order to address this potential risk, we
have introduced our Sourcing with Human Dignity programme  a collaborative undertaking seeking the active support of all our relevant suppliers.

By 31 March 2003, 16 key suppliers (79% of those targeted) had signed an agreement with BT giving their written support concerning ethical trading.

Over the past two years, 16 initial on-site assessments and seven re-visits have been undertaken in industry sectors where we believe the risk of falling short of
our Sourcing with Human Dignity standard is at its highest.

BTs certification to ISO14001 includes an environmental risk assessment process and the bulk storage of diesel fuel for use in back-up generators at
telephone exchanges has been identified as our only significant environmental risk.

Although there are a small number of BT sites where ground remediation is taking place, the cost is not material and so we declare no material contingent
environmental liability in our financial statements. In order to minimise any future liability in this area, we are undertaking an £18 million programme to cover tank testing, enhanced maintenance scheduling and remedial works.

Digital inclusion
The digital divide is a key public policy issue and we are working together with the UK Government and the voluntary sector to find effective ways to use communications technology to tackle
social exclusion.

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  to society

In particular, we launched a digital inclusion campaign to support the Governments aim to give all citizens online access within the next few years and demonstrate how communications can
help improve society.

A key element of the campaign is the Everybodyonline programme, which has been established in partnership with charity campaign group
Citizens Online and is initially focused in five deprived communities. The campaign aims to increase access to communications technology in underprivileged areas and to deepen the understanding of the causes and effects of the digital divide and how
they may be addressed nationally.

Through our age and disability action team, we are committed to providing older and disabled customers with access to a full range of products and services.

For
  people with hearing or speech impairments, our textphone offers easy access
  to BT TextDirect  the service that enables textphone users to dial direct
  to other text or voice users. In addition, our mm215 Videophone has improved
  communications for people who rely on non-verbal communication, such as British
  Sign Language. Building on the success of our Big Button phone, the range has
  been extended to include an analogue cordless version with a digital (DECT)
  version being planned.

We continue to offer services to protect the telephone lines of people who are vulnerable, free directory enquiries for those unable to use the printed directory,
as well as billing, service and product information in a variety of formats, such as Braille and large print.

We are committed to increasing the accessibility of our internet pages and currently offer an alternative text version of thewww.bt.comhomepage. Our age and disability website,www.bt.com/age_disability,highlights features of products and services that may be beneficial to older and disabled people and is
continually updated to ensure that it can be accessed by all customers, regardless of ability.

Environment
In the 2003 financial year we continued to focus on reducing our environmental impacts. We invested £845,000 in our energy conservation programme which, despite the roll-out of
broadband, enabled us to restrict our electricity consumption to a 4% increase. A combined heat and power supply contract provided 76% of our electricity needs, saving 274,000 tonnes of global warming CO2 emissions.

Also in the 2003 financial year, we recycled 24% of our total 89,878 tonnes of waste. We received £4.26 million income from our recycling activities, offset
against the £8.29 million we spent managing our waste contracts, recycling our waste and sending waste to landfill. The cost of sending our waste to landfill sites was £1.17 million. However, during the year we succeeded in reducing the
amount of waste sent to landfill by 1.1%.

In the 2003 financial year we reduced our operational fleet by 9.4% to 33,979 vehicles  still one of the largest in the UK  and reduced our fuel consumption by 11%.

Community
We commit a minimum of 0.5% of
  our UK pre-tax profits to direct activities in support of society. This has
  ranged from £10 million in 1987, peaking at £16 million in 2001
  and was £8.2 million (including £1.2 million to charities) in the
  2003 financial year. BT operations also provided a further £17.9 million
  in funding and support in kind over the past financial year.

The focus of our community programmes is on big issues where better communication can make a real difference to society.

For example, more than 8,300 schools and around two million young people engagements with the BT Education Programme  a drama-based campaign helping
children to improve their communication skills  have taken place. This activity is supported by our volunteering programme which, at 31 March 2003, had 4,000 registered volunteers working with schools.

BTs contribution to charitable causes uses a range of communications tools, including our telephone network, for disaster appeals and for telethons such as
Comic Relief, Children in Need and GMTVs Get Up and Give. Through our support, we enable the appeals to raise tens of millions of pounds each year.

We are working with ChildLine on a major new campaign to help ensure that all young people can be heard. At the heart of this campaign is our commitment to raise
funds to help ChildLine answer every one of the 4,000 children who call them every day.

During the second year of the BT Community Connections scheme (ending in July 2003) BT will award 1,700 internet-ready PCs to individuals and community
groups.

In addition, BT people gave £2 million directly to charities during the 2003 financial year through Give as you Earn, to which BT added a direct
contribution of £1 million.

Business opportunities
Following a detailed statistical analysis of customer opinion data going back up to 80 months and based on tens of thousands of interviews, we have been able to show that a 1% improvement in
the publics perception of our CSR activities results in a 0.1% increase in our retail customer satisfaction figures.

This is a critical correlation and shows how important it is not only to protect our reputation through appropriate risk management activities, but also to
enhance it through our community activities.

Long-term sustainability trends are creating market opportunities for us, such as the use of teleconferencing and flexible working to reduce the need to travel
and provide more flexible lifestyles.

Increasingly, BT has to address social and environmental matters when bidding for business. In the 2003 financial year, contracts to the value of more than
£300 million required us to demonstrate expertise in managing these issues.

BT Annual Report and Form 20-F 200325

Table
  of contents

---



Five-year financial summary

|Profit
      and loss account                                                                                         |          |  |          |  |          |  |          |  |          | 
|--------------------------------------------------------------------------------------------------------------------- | -------- |  | -------- |  | -------- |  | -------- |  | -------- | 
|                                                                                                                      | 1999     |  | 2000     |  | 2001     |  | 2002     |  | 2003     | 
|Years ended
        31 March                                                                                          | £m       |  | £m       |  | £m       |  | £m       |  | £m       | 
|                                                                                                                      |         
|Total turnover:                                                                                                       |          |  |          |  |          |  |          |  |          | 
|Continuing
      activities                                                                                           | 16,186   |  | 18,228   |  | 21,068   |  | 21,815   |  | 20,182   | 
|Discontinued
      activities                                                                                         | 2,037    |  | 3,675    |  | 8,598    |  | 2,827    |  |         | 
|                                                                                                                      | 18,223   |  | 21,903   |  | 29,666   |  | 24,642   |  | 20,182   | 
|Groups share of associates
      and joint ventures turnover                                                       | (1,270)  |  | (3,364)  |  | (9,937)  |  | (4,764)  |  | (1,455)  | 
|Trading between group and
      principal joint venture                                                               |         |  | 176      |  | 698      |  | 681      |  |         | 
|                                                                                                                      |         
|Group turnover:                                                                                                       |          |  |          |  |          |  |          |  |          | 
|Continuing
      activities                                                                                           | 15,197   |  | 16,125   |  | 17,141   |  | 18,447   |  | 18,727   | 
|Discontinued
      activities                                                                                         | 1,756    |  | 2,590    |  | 3,286    |  | 2,112    |  |         | 
|                                                                                                                      | 16,953   |  | 18,715   |  | 20,427   |  | 20,559   |  | 18,727   | 
|Other operating income                                                                                                | 157      |  | 216      |  | 359      |  | 362      |  | 215      | 
|Operating costsab                                                                                                     | (13,305) |  | (15,359) |  | (20,759) |  | (21,400) |  | (16,370) | 
|                                                                                                                      |         
|Group operating profit
      (loss):                                                                                  |          |  |          |  |          |  |          |  |          | 
|Before
      goodwill amortisation and exceptional items                                                              | 3,874    |  | 3,772    |  | 3,257    |  | 2,580    |  | 2,790    | 
|Goodwill
      amortisation and exceptional items                                                                     | (69)     |  | (200)    |  | (3,230)  |  | (3,059)  |  | (218)    | 
|                                                                                                                      | 3,805    |  | 3,572    |  | 27       |  | (479)    |  | 2,572    | 
|Groups share of operating
      profit (loss) of associates and joint venturesc                                      | (342)    |  | (400)    |  | (397)    |  | (1,381)  |  | 329      | 
|                                                                                                                      |         
|Total operating profit
      (loss):                                                                                  |          |  |          |  |          |  |          |  |          | 
|Continuing
      activities                                                                                           | 3,230    |  | 3,143    |  | 2,456    |  | (1,489)  |  | 2,901    | 
|Discontinued
      activities                                                                                         | 233      |  | 29       |  | (2,826)  |  | (371)    |  |         | 
|                                                                                                                      | 3,463    |  | 3,172    |  | (370)    |  | (1,860)  |  | 2,901    | 
|Profit on sale of fixed
      asset investments and group undertakingsd                                               | 1,107    |  | 126      |  | 619      |  | 4,389    |  | 1,691    | 
|Profit on sale of property
      fixed assets                                                                         | 11       |  | 26       |  | 34       |  | 1,089    |  | 11       | 
|Amounts written off investments                                                                                       |         |  |         |  |         |  | (535)    |  | (7)      | 
|Net interest payablee                                                                                                 | (286)    |  | (382)    |  | (1,314)  |  | (1,622)  |  | (1,439)  | 
|                                                                                                                      |         
|Profit (loss) on ordinary
      activities before taxation:                                                           |          |  |          |  |          |  |          |  |          | 
|Before
      goodwill amortisation and exceptional items                                                              | 3,274    |  | 3,100    |  | 2,072    |  | 1,113    |  | 1,829    | 
|Goodwill
      amortisation and exceptional items                                                                     | 1,021    |  | (158)    |  | (3,103)  |  | 348      |  | 1,328    | 
|                                                                                                                      | 4,295    |  | 2,942    |  | (1,031)  |  | 1,461    |  | 3,157    | 
|Tax on profit (loss) on
      ordinary activities                                                                     | (1,323)  |  | (957)    |  | (712)    |  | (443)    |  | (459)    | 
|                                                                                                                      |         
|Profit (loss) on ordinary
      activities after taxation                                                             | 2,972    |  | 1,985    |  | (1,743)  |  | 1,018    |  | 2,698    | 
|Minority interests                                                                                                    | (19)     |  | 10       |  | (127)    |  | (23)     |  | (12)     | 
|                                                                                                                      |         
|Profit (loss) for the financial
      year                                                                            | 2,953    |  | 1,995    |  | (1,870)  |  | 995      |  | 2,686    | 
|                                                                                                                      |         
|Average number of shares
      used in basic earnings per share (millions)                                            | 7,183    |  | 7,235    |  | 7,276    |  | 8,307    |  | 8,616    | 
|Basic earnings (loss) per
      share                                                                                 | 41.1p    |  | 27.6p    |  | (25.7)p  |  | 12.0p    |  | 31.2p    | 
|Diluted earnings (loss)
      per share                                                                               | 40.2p    |  | 26.9p    |  | (25.7)p  |  | 11.9p    |  | 31.0p    | 
|Basic earnings (loss) per
      share from continuing activities                                                      | 40.5p    |  | 29.2p    |  | 20.7p    |  | (34.8)p  |  | 31.2p    | 
|Diluted earnings (loss)
      per share from continuing activities                                                    | 39.5p    |  | 28.5p    |  | 20.4p    |  | (34.8)p  |  | 31.0p    | 
|Dividends per share                                                                                                   | 18.3p    |  | 19.6p    |  | 7.8p     |  | 2.0p     |  | 6.5p     | 
|Dividends per share, centsf                                                                                           | 38.5c    |  | 35.7c    |  | 14.0c    |  | 3.1c     |  | 10.3c    | 
|                                                                                                                      |         
|Basic earnings per share
      before goodwill amortisation and exceptional items                                     | 30.7p    |  | 29.8p    |  | 17.5p    |  | 6.1p     |  | 14.2p    | 
|Diluted earnings per share
      before goodwill amortisation and exceptional items                                   | 30.0p    |  | 29.1p    |  | 17.3p    |  | 6.0p     |  | 14.1p    | 
|Basic earnings per share
      before goodwill amortisation and exceptional items on continuing 
          activities | 30.3p    |  | 29.5p    |  | 19.3p    |  | 8.8p     |  | 14.2p    | 
|                                                                                                                      |         

|a | Operating
      costs include net exceptional costs                                                                        | 69    |  | 111 |  | 2,857 |  | 2,707 |  | 198   | 
|- | -------------------------------------------------------------------------------------------------------------------------- | ----- |  | --- |  | ----- |  | ----- |  | ----- | 
|b | Includes
      redundancy and early leaver costs                                                                           | 124   |  | 59  |  | 118   |  | 252   |  | 276   | 
|c | Groups
      share of operating profit (loss) of associates and joint ventures includes
      exceptional costs (release) |      |  |    |  | 332   |  | 1,294 |  | (150) | 
|d | Including
      gain on MCI shares sold in 1999                                                                            | 1,133 |  |    |  |      |  |      |  |      | 
|e | Net interest
      payable includes exceptional costs (credits)                                                            |      |  |    |  | (25)  |  | 162   |  | 293   | 
|f | Based on
      actual dividend paid and/or year end exchange rate on proposed dividends                                    |       |  |     |  |       |  |       |  |       | 

26 BT Annual Report and Form 20-F 2003

Table
  of contents

---



Five-year financial summary

Cash flow statement

|                                                                                | 1999    |  | 2000    |  | 2001     |  | 2002     |  | 2003     | 
|------------------------------------------------------------------------------- | ------- |  | ------- |  | -------- |  | -------- |  | -------- | 
|Years ended
        31 March                                                    | £m      |  | £m      |  | £m       |  | £m       |  | £m       | 
|                                                                                |        
|Net cash flow from operating
      activities                                   | 6,035   |  | 5,849   |  | 5,887    |  | 5,257    |  | 6,023    | 
|Dividends from associates
      and joint ventures                              | 2       |  | 5       |  | 10       |  | 2        |  | 6        | 
|Returns on investments
      and servicing of finance                           | (328)   |  | (163)   |  | (727)    |  | (1,695)  |  | (1,506)  | 
|Taxation paid                                                                   | (630)   |  | (1,311) |  | (669)    |  | (562)    |  | (434)    | 
|Capital expenditure and
      financial investment                              | 1,046   |  | (3,752) |  | (8,442)  |  | (1,354)  |  | (2,381)  | 
|Acquisitions and disposals                                                      | (1,967) |  | (6,405) |  | (13,754) |  | 5,785    |  | 2,842    | 
|Equity dividends paid                                                           | (1,186) |  | (1,364) |  | (1,432)  |  |         |  | (367)    | 
|                                                                                |        
|Cash inflow (outflow) before
      management of liquid resources and financing | 2,972   |  | (7,141) |  | (19,127) |  | 7,433    |  | 4,183    | 
|Management of liquid resources                                                  | (2,447) |  | 1,236   |  | (480)    |  | (1,864)  |  | (1,729)  | 
|Financing                                                                       | (458)   |  | 5,959   |  | 19,735   |  | (5,479)  |  | (2,473)  | 
|                                                                                |        
|Increase (decrease) in
      cash in the year                                   | 67      |  | 54      |  | 128      |  | 90       |  | (19)     | 
|                                                                                |        
|Decrease (increase) in
      net debt in the year                               | 3,146   |  | (6,582) |  | (18,942) |  | 13,930   |  | 4,225    | 
|                                                                                |        
|                                                                                |         |  |         |  |          |  |          |  |          | 
|Balance
      sheet                                                             |         |  |         |  |          |  |          |  |          | 
|                                                                                | 1999    |  | 2000    |  | 2001     |  | 2002     |  | 2003     | 
|At 31 March                                                                     | £m      |  | £m      |  | £m       |  | £m       |  | £m       | 
|                                                                                |        
|Intangible fixed assets                                                         | 742     |  | 5,777   |  | 18,380   |  | 252      |  | 218      | 
|Tangible fixed assets                                                           | 17,854  |  | 18,163  |  | 21,625   |  | 16,078   |  | 15,888   | 
|Fixed asset investments                                                         | 1,832   |  | 5,878   |  | 5,204    |  | 1,221    |  | 555      | 
|Net current assets (liabilities)                                                | (495)   |  | (7,115) |  | (11,143) |  | 732      |  | 1,876    | 
|                                                                                |        
|Total assets less current
      liabilities                                     | 19,933  |  | 22,703  |  | 34,066   |  | 18,283   |  | 18,537   | 
|Loans and other borrowings
      falling due after one year                     | (3,386) |  | (5,354) |  | (18,775) |  | (16,245) |  | (13,456) | 
|Provisions for liabilities
      and charges                                    | (3,286) |  | (3,011) |  | (2,738)  |  | (2,324)  |  | (2,376)  | 
|Minority interests                                                              | (216)   |  | (498)   |  | (499)    |  | (72)     |  | (63)     | 
|                                                                                |        
|Total assets less liabilities                                                   | 13,045  |  | 13,840  |  | 12,054   |  | (358)    |  | 2,642    | 
|                                                                                |        
|Called up share capital                                                         | 7,438   |  | 7,485   |  | 7,573    |  | 434      |  | 434      | 
|Share premium account                                                           |        |  |        |  |         |  | 2        |  | 2        | 
|Other reserves                                                                  | (3,841) |  | (3,345) |  | (2,848)  |  | 1,025    |  | 998      | 
|Profit and loss account                                                         | 9,448   |  | 9,700   |  | 7,329    |  | (1,819)  |  | 1,208    | 
|                                                                                |        
|Total equity shareholders
      funds (deficiency)                             | 13,045  |  | 13,840  |  | 12,054   |  | (358)    |  | 2,642    | 
|                                                                                |        
|Total assets                                                                    | 27,962  |  | 37,588  |  | 54,799   |  | 27,673   |  | 28,217   | 
|                                                                                |        
|                                                                                |         |  |         |  |          |  |          |  |          | 
|US GAAP                                                                         |         |  |         |  |          |  |          |  |          | 
|                                                                                | 1999    |  | 2000    |  | 2001     |  | 2002     |  | 2003     | 
|Years ended 31 March                                                            | £m      |  | £m      |  | £m       |  | £m       |  | £m       | 
|                                                                                |        
|Group operating profit
      (loss)                                             | 3,356   |  | 2,990   |  | (633)    |  | (337)    |  | 2,693    | 
|Income (loss) before taxes                                                      | 3,745   |  | 2,096   |  | (1,959)  |  | 1,025    |  | 3,653    | 
|Net income (loss):                                                              |         |  |         |  |          |  |          |  |          | 
|Continuing
      activities                                                     | 2,562   |  | 1,559   |  | 809      |  | (1,680)  |  | 4,134    | 
|Discontinued
      activities                                                   | 27      |  | (166)   |  | (3,166)  |  | 948      |  |         | 
|                                                                                | 2,589   |  | 1,393   |  | (2,357)  |  | (732)    |  | 4,134    | 
|                                                                                |        
|Average number of ADSs
      used in basic earnings per ADS (millions)          | 718     |  | 724     |  | 728      |  | 831      |  | 862      | 
|Basic earnings (loss) per
      ordinary share                                  | 36.0p   |  | 19.3p   |  | (32.4)p  |  | (8.8)p   |  | 48.0p    | 
|Diluted earnings (loss)
      per ordinary share                                | 35.2p   |  | 18.8p   |  | (32.4)p  |  | (8.8)p   |  | 47.7p    | 
|Basic earnings (loss) per
      ordinary share from continuing activities       | 35.7p   |  | 21.5p   |  | 11.1p    |  | (20.2)p  |  | 48.0p    | 
|Diluted earnings (loss)
      per ordinary share from continuing activities     | 34.9p   |  | 21.1p   |  | 11.0p    |  | (20.2)p  |  | 47.7p    | 
|Basic earnings (loss) per
      ordinary share from discontinued activities     | 0.3p    |  | (2.2)p  |  | (43.5)p  |  | 11.4p    |  |         | 
|Diluted earnings (loss)
      per ordinary share from discontinued activities   | 0.3p    |  | (2.3)p  |  | (43.5)p  |  | 11.3p    |  |         | 
|Basic earnings (loss) per
      ADS                                             | £3.60   |  | £1.93   |  | £(3.24)  |  | £(0.88)  |  | £4.80    | 
|Diluted earnings (loss)
      per ADS                                           | £3.52   |  | £1.88   |  | £(3.24)  |  | £(0.88)  |  | £4.77    | 
|                                                                                |        
|Total assets as at 31 March                                                     | 29,323  |  | 38,481  |  | 55,361   |  | 30,428   |  | 31,131   | 
|Ordinary shareholders
      equity (deficiency) as at 31 March                 | 13,674  |  | 13,634  |  | 10,231   |  | (4,247)  |  | (2,258)  | 
|                                                                                |        

BT Annual Report and Form 20-F 200327

Table
  of contents

---



Financial review

|   | The review is divided into
  the following sections:                  
|-- | ----------------------------------------------------------------------
|28 | Introduction                                                          
|30 | Group
      results                                                   
|30 | Line
      of business results                                        
|31 | BT
      Retail                                                       
|33 | BT
      Wholesale                                                    
|34 | BT
      Global Services                                              
|35 | Other
      operating income                                          
|35 | Operating
      costs                                                 
|37 | Group
      operating profit (loss)                                   
|37 | Associates
      and joint ventures                                   
|38 | Total
      operating profit (loss)                                   
|38 | Profit
      on sale of group undertakings and fixed asset investments
|39 | Profit
      on sale of property fixed assets                         
|40 | Interest
      charge                                                 
|40 | Profit
      (loss) before taxation                                   
|41 | Taxation                                                              
|41 | Earnings
      (loss) per share                                       
|41 | Dividends                                                             
|41 | Financing                                                             
|43 | Treasury
      policy                                                 
|43 | Capital
      resources                                               
|43 | Foreign
      currency and interest rate exposure                     
|44 | Capital
      expenditure                                             
|44 | Acquisitions                                                          
|44 | Demerger
      and capital reduction                                  
|45 | Balance
      sheet                                                   
|45 | Return
      on capital employed                                      
|45 | Pensions                                                              
|46 | Regulation
      and prices                                           
|46 | Competition
      and the UK economy                                  
|46 | Environment                                                           
|46 | Geographical
      information                                        
|47 | Regulatory
      financial information                                
|47 | Critical
      accounting policies                                    
|47 | New
      UK accounting standards                                     
|48 | Economic
      and Monetary Union (EMU)                               
|48 | US
      GAAP                                                         

Please see cautionary statement regarding forward-looking statements on page 142.

Introduction
The 2003 financial year was
  characterised by a focus on implementing and delivering the three-year strategy
  announced in April 2002 and further corporate transactions in the continued
  restructuring of the group and reduction of net debt. The corporate transactions
  included the unwind of the Concert joint venture on 1
  April 2002 and the disposal of our interest in Cegetel for £2.6 billion.

The
  2002 financial year was dominated by a series of corporate transactions designed
  to focus and transform the group and reduce its net debt position. Those corporate
  transactions included raising £5.9 billion through the rights issue in
  June 2001, selling our Japanese telecom and Spanish mobile investments for £4.8
  billion, selling the Yell directories business for approximately £2 billion,
  the demerger of mmO2and
  the sale and leaseback of properties for£2.4
  billion.

During the 2001 financial year the group underwent an organisational restructuring that resulted in the formation of the lines of business with activities being
grouped by market sector rather than geography. Significant acquisitions were also made for a total consideration of £11.9 billion, including Viag Interkom and Telfort.

As
  a result of the major restructuring of the group and the significant level of
  corporate transactions completed during the period under review, we believe
  it is difficult for investors to meaningfully compare the financial performance
  of the group between the financial years under review. In this Financial review
  the commentary is therefore focused principally on the trading results of the
  continuing activities of BT Group before goodwill amortisation and exceptional
  items. In comparing the continuing activities of the group, the results of our
  discontinued activities, namely our Japanese telecom and Spanish mobile investments,
  Yell and mmO2are excluded. Goodwill amortisation isexcluded
  because the annual charge has varied significantly during the period under review
  as a result of the corporate transactions noted above and the exceptional impairment
  charges. The exceptional items are excluded because they predominantly relate
  to the corporate transactions rather than the trading activities of the group.
  This is also consistent with the way that financial performance is measured
  by management and we believe allows a meaningful comparison to be made of the
  trading results of the group during the period under review.

The goodwill amortisation and exceptional items are therefore analysed and discussed separately from the line of business results in this Financial review because
they are considered to be a reflection of the corporate activity rather than the trading activity of the lines of business.

The following table shows the summarised profit and loss account which includes a reconciliation of the key performance measures before and after goodwill
amortisation and exceptional items and is discussed further in this Financial review. The operating results by line of business are discussed in addition to the overall group results as we believe the activities and markets they serve are distinct
and this analysis provides a greater degree of insight to investors.

28 BT
  Annual Report and Form 20-F 2003

Table
  of contents

---



|Financial
      review                                                                |                 |  |            |  |          |  |            |  |          | 
|------------------------------------------------------------------------------------- | --------------- |  | ---------- |  | -------- |  | ---------- |  | -------- | 
|                                                                                     
|Summarised
      profit and loss account                                              | 2003            |  |            |  | 2002     |  |            |  | 2001     | 
|                                                                                      |                 |  |            |  |          | 
|                                                                                      | Continuing      |  |            |  |          |  |            |  |          | 
|                                                                                      | activities      |  | Continuing |  |          |  | Continuing |  |          | 
|                                                                                      | and
      total |  | activities |  | Total*   |  | activities |  | Total*   | 
|                                                                                      | £m              |  | £m         |  | £m       |  | £m         |  | £m       | 
|                                                                                      |                
|Total turnover                                                                        | 20,182          |  | 21,815     |  | 24,642   |  | 21,068     |  | 29,666   | 
|Groups share of associates
      and joint ventures turnover                       | (1,455)         |  | (4,049)    |  | (4,764)  |  | (4,625)    |  | (9,937)  | 
|Trading between group and
      principal joint venture                               |                |  | 681        |  | 681      |  | 698        |  | 698      | 
|                                                                                      |                
|Group turnover                                                                        | 18,727          |  | 18,447     |  | 20,559   |  | 17,141     |  | 20,427   | 
|Other operating income                                                                | 215             |  | 361        |  | 362      |  | 346        |  | 359      | 
|Operating costs                                                                       | (16,370)        |  | (18,854)   |  | (21,400) |  | (14,500)   |  | (20,759) | 
|                                                                                      |                
|Group operating profit
      (loss):                                                  |                 |  |            |  |          |  |            |  |          | 
|Before
      goodwill amortisation and exceptional items                              | 2,790           |  | 2,771      |  | 2,580    |  | 3,082      |  | 3,257    | 
|Goodwill
      amortisation                                                           | (20)            |  | (121)      |  | (352)    |  | (88)       |  | (373)    | 
|Exceptional
      items                                                               | (198)           |  | (2,696)    |  | (2,707)  |  | (7)        |  | (2,857)  | 
|                                                                                      | 2,572           |  | (46)       |  | (479)    |  | 2,987      |  | 27       | 
|Groups share
      of operating profit (loss) of associates and
      joint ventures | 329             |  | (1,443)    |  | (1,381)  |  | (531)      |  | (397)    | 
|                                                                                      |                
|Total operating profit
      (loss):                                                  |                 |  |            |  |          |  |            |  |          | 
|Before
      goodwill amortisation and exceptional items                              | 2,971           |  | 2,663      |  | 2,546    |  | 2,925      |  | 3,377    | 
|Goodwill
      amortisation                                                           | (22)            |  | (162)      |  | (405)    |  | (166)      |  | (558)    | 
|Exceptional
      items                                                               | (48)            |  | (3,990)    |  | (4,001)  |  | (303)      |  | (3,189)  | 
|                                                                                      | 2,901           |  | (1,489)    |  | (1,860)  |  | 2,456      |  | (370)    | 
|Profit on sale of fixed
      asset investments and group
      undertakings          | 1,691           |  | 21         |  | 4,389    |  | 618        |  | 619      | 
|Profit on sale of property
      fixed assets                                         | 11              |  | 1,089      |  | 1,089    |  | 34         |  | 34       | 
|Amounts written off investments                                                       | (7)             |  | (535)      |  | (535)    |  |           |  |         | 
|Net interest payable                                                                  | (1,439)         |  | (1,579)    |  | (1,622)  |  | (1,171)    |  | (1,314)  | 
|                                                                                      |                
|Profit (loss) on ordinary
      activities before taxation:                           |                 |  |            |  |          |  |            |  |          | 
|Before
      goodwill amortisation and exceptional items                              | 1,829           |  | 1,273      |  | 1,113    |  | 1,763      |  | 2,072    | 
|Goodwill
      amortisation                                                           | (22)            |  | (162)      |  | (405)    |  | (166)      |  | (558)    | 
|Exceptional
      items                                                               | 1,350           |  | (3,604)    |  | 753      |  | 340        |  | (2,545)  | 
|                                                                                      | 3,157           |  | (2,493)    |  | 1,461    |  | 1,937      |  | (1,031)  | 
|                                                                                      |                 |  |            |  |          |  |            |  |          | 
|Taxation                                                                              | (459)           |  | (385)      |  | (443)    |  | (432)      |  | (712)    | 
|                                                                                      |                
|Profit (loss) after
      taxation                                                    | 2,698           |  | (2,878)    |  | 1,018    |  | 1,505      |  | (1,743)  | 
|Minority interests                                                                    | (12)            |  | (10)       |  | (23)     |  | 2          |  | (127)    | 
|                                                                                      |                
|Profit (loss) for the
      financial year                                            | 2,686           |  | (2,888)    |  | 995      |  | 1,507      |  | (1,870)  | 
|                                                                                      |                
|Basic earnings (loss) per
      share:                                                |                 |  |            |  |          |  |            |  |          | 
|Before
      goodwill amortisation and exceptional items                              | 14.2p           |  | 8.8p       |  | 6.1p     |  | 19.3p      |  | 17.5p    | 
|Goodwill
      amortisation                                                           | (0.3)p          |  | (2.0)p     |  | (5.0)p   |  | (2.4)p     |  | (7.7)p   | 
|Exceptional
      items                                                               | 17.3p           |  | (41.6)p    |  | 10.9p    |  | 3.8p       |  | (35.5)p  | 
|                                                                                      | 31.2p           |  | (34.8)p    |  | 12.0p    |  | 20.7p      |  | (25.7)p  | 
|                                                                                      |                
|* Including discontinued
      activities                                             |                 |  |            |  |          |  |            |  |          | 

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|Financial review               |                        |  |                                       |  |                               |  |                                       |  |         |  |         |  |      |  |      |  |      |  |      |                                                                                                                      |       |  |       |  |       |  |       |  |       | 
|------------------------------ | ---------------------- |  | ------------------------------------- |  | ----------------------------- |  | ------------------------------------- |  | ------- |  | ------- |  | ---- |  | ---- |  | ---- |  | ---- | -------------------------------------------------------------------------------------------------------------------- | ----- |  | ----- |  | ----- |  | ----- |  | ----- | 
|                               |                        |  |                                       |  |                               |  |                                       |  |         |  |         |  |      |  |      |  |      |  |      |                                                                                                                      |       |  |       |  |       |  |       |  |       | 
|Line
      of business summary |                        |  |                                       |  |                               |  |                                       |  |         |  |         |  |      |  |      |  |      |  |      | Group
        operating profit (loss)
      before
        goodwill amortisation
      and exceptional
        items |      
|                               |                        |  |                                       |  |                               |  |                                       |  |         |  |         |  |      |  |      |  |      |  |      |                                                                                                                      |       |  |       |  |      
|                               | Group
        turnover |  | Group
        operating profit (loss) |  | Goodwill
        amortisation |  | Exceptional
        charges (credits) |  |        
|                               |                        |  |                                       |  |                               |  |                                       |  |         | 
|                               |                       
|                               | 2003                   |  | 2002                                  |  | 2001                          |  | 2003                                  |  | 2002    |  | 2001    |  | 2003 |  | 2002 |  | 2001 |  | 2003 |                                                                                                                      | 2002  |  | 2001  |  | 2003  |  | 2002  |  | 2001  | 
|                               | £m                     |  | £m                                    |  | £m                            |  | £m                                    |  | £m      |  | £m      |  | £m   |  | £m   |  | £m   |  | £m   |                                                                                                                      | £m    |  | £m    |  | £m    |  | £m    |  | £m    | 
|                               |                       
|BT Retail                      | 13,301                 |  | 12,811                                |  | 12,541                        |  | 1,424                                 |  | 872     |  | 654     |  | 1    |  | 1    |  | 1    |  |     |                                                                                                                      | 111   |  |      |  | 1,425 |  | 984   |  | 655   | 
|BT Wholesale                   | 11,260                 |  | 12,256                                |  | 11,728                        |  | 1,924                                 |  | 2,163   |  | 2,538   |  |     |  |     |  |     |  |     |                                                                                                                      | 79    |  |      |  | 1,924 |  | 2,242 |  | 2,538 | 
|BT Global Services             | 5,251                  |  | 4,472                                 |  | 3,468                         |  | (446)                                 |  | (2,684) |  | (596)   |  | 19   |  | 120  |  | 87   |  |     |                                                                                                                      | 2,211 |  | 200   |  | (427) |  | (353) |  | (309) | 
|Other                          | 41                     |  | 70                                    |  | 138                           |  | (330)                                 |  | (397)   |  | 391     |  |     |  |     |  |     |  | 198  |                                                                                                                      | 295   |  | (193) |  | (132) |  | (102) |  | 198   | 
|Intra-group                    | (11,126)               |  | (11,162)                              |  | (10,734)                      |  |                                      |  |        |  |        |  |     |  |     |  |     |  |     |                                                                                                                      |      |  |      |  |      |  |      |  |      | 
|                               |                       
|Total continuing               |                        |  |                                       |  |                               |  |                                       |  |         |  |         |  |      |  |      |  |      |  |      |                                                                                                                      |       |  |       |  |       |  |       |  |       | 
|activities                     | 18,727                 |  | 18,447                                |  | 17,141                        |  | 2,572                                 |  | (46)    |  | 2,987   |  | 20   |  | 121  |  | 88   |  | 198  |                                                                                                                      | 2,696 |  | 7     |  | 2,790 |  | 2,771 |  | 3,082 | 
|Discontinued                   |                        |  |                                       |  |                               |  |                                       |  |         |  |         |  |      |  |      |  |      |  |      |                                                                                                                      |       |  |       |  |       |  |       |  |       | 
|activities                     |                       |  | 2,112                                 |  | 3,286                         |  |                                      |  | (433)   |  | (2,960) |  |     |  | 231  |  | 285  |  |     |                                                                                                                      | 11    |  | 2,850 |  |      |  | (191) |  | 175   | 
|                               |                       
|Group totals                   | 18,727                 |  | 20,559                                |  | 20,427                        |  | 2,572                                 |  | (479)   |  | 27      |  | 20   |  | 352  |  | 373  |  | 198  |                                                                                                                      | 2,707 |  | 2,857 |  | 2,790 |  | 2,580 |  | 3,257 | 
|                               |                       

Group results
All references in this section to the prior year results or performance against the prior year are in relation to the results from continuing activities.

Group turnover increased by 2% to £18,727 million in the 2003 financial year. The strength in the groups new wave businesses and a strong defence of
the groups market share in its existing businesses was offset by price deflation. This compared to growth of 8% in the 2002 financial year and reflected the difficult market conditions.

Group operating profit before goodwill amortisation and exceptional items at £2,790 million for the 2003 financial year was £19 million higher than
the prior year. The cost efficiencies achieved during the year were offset by a £90 million increase in leaver costs, the negative group operating profit effects of unwinding the Concert global venture and the Telereal property sale and
leaseback transaction. In total, these effects reduced group operating profits by over £400 million, although this was compensated for at the profit before tax level by a corresponding improvement in our share of the operating profits of
associates and joint ventures and net interest payable.

In the 2002 financial year the group operating profit before goodwill amortisation and exceptional items declined by 10% to £2,771 million.

BTs share of associates and joint ventures operating profits before goodwill amortisation and exceptional items was £181 million in the 2003 financial
year compared to a £108 million loss and a £157 million loss in the 2002 and 2001 financial years, respectively. The improvement in the 2003 financial year mainly reflected the benefit of the unwind of the Concert global venture.

Net interest payable before exceptional items was £1,146 million for the 2003 financial year, an improvement of £271 million against the 2002
financial year as a result of the reduction in the level of net debt. In the 2002 financial year net interest payable was £221 million higher than the 2001 financial year effecting the increased net debt.

The
  above factors resulted in the group achieving a profit before taxation, goodwill
  amortisation and exceptional items of £1,829 million in the 2003 financial
  year, an increase of 44%, reflecting the underlying operating performance of
  the group andlower net
  interest costs. In the 2002 financial year the profit before taxation, goodwill
  amortisation and exceptional items of £1,273 million was £490 million
  lower than the 2001 financial year.

The taxation charge for the 2003 financial year was £598 million on the profit before goodwill amortisation and exceptional items, an effective rate of
32.7% compared to 41.5% and 21.8% in the 2002 and 2001 financial years. The high effective rate in the 2002 financial year was mainly due to the impact of loss making subsidiaries outside the UK for which tax relief was not available. The low
effective rate in the 2001 financial year reflected tax relief on losses surrendered by discontinued activities.

Basic earnings per share before goodwill amortisation and exceptional items were 14.2 pence for the 2003 financial year, an increase of 61% from 8.8 pence in the
2002 financial year, and 19.3 pence in the 2001 financial year. The 2002 financial year reflected the higher operating costs and net interest payable.

Line of business results
In the following commentary, we discuss the operating results of the group for the 2003, 2002 and 2001 financial years in terms of the lines of business established during the 2001 financial
year. During the 2003 financial year BT Openworld was transferred under the management control of BT Retail and the results have been adjusted to reflect this change for all periods under review.

There is extensive trading between the lines of business and their profitability is dependent on the transfer price levels. The intra-group trading arrangements
are subject to review and have changed in certain circumstances. Where that is the case the comparative figures have been restated to reflect these changes.

The line of business results are presented and discussed before goodwill amortisation and exceptional items, for the reasons set out above, to provide a
meaningful comparison of the trading results between the financial years under review. Goodwill amortisation and exceptional items are discussed separately in a group context in the Financial review.

In
  addition to measuring financial performance of the lines of business based on
  the operating profit

30 BT Annual Report and Form 20-F 2003

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|Depreciation |  | Amortisation of
          intangible assets |  | EBITDA
        before
        exceptional items |  | Capital
        expenditure |  | Operating
        free cash flow
        before exceptional items |  |     
|------------ |  | ------------------------------------------- |  | ----------------------------------------------- |  | --------------------------- |  | ----------------------------------------------------------------- |  | ----
|             |  |                                             |  |                                                 |  |                             |  |                                                                   |  |     
|2003         |  | 2002                                        |  | 2001                                            |  | 2003                        |  | 2002                                                              |  | 2001
|£m           |  | £m                                          |  | £m                                              |  | £m                          |  | £m                                                                |  | £m  
|            
|209          |  | 216                                         |  | 219                                             |  |                            |  |                                                                  |  |    
|1,923        |  | 1,914                                       |  | 1,738                                           |  |                            |  |                                                                  |  |    
|601          |  | 496                                         |  | 359                                             |  | 4                           |  | 3                                                                 |  |    
|278          |  | 348                                         |  | 373                                             |  |                            |  |                                                                  |  | 3   
|            |  |                                            |  |                                                |  |                            |  |                                                                  |  |    
|            
|             |  |                                             |  |                                                 |  |                             |  |                                                                   |  |     
|3,011        |  | 2,974                                       |  | 2,689                                           |  | 4                           |  | 3                                                                 |  | 3   
|             |  |                                             |  |                                                 |  |                             |  |                                                                   |  |     
|            |  | 414                                         |  | 356                                             |  |                            |  | 11                                                                |  | 10  
|            
|3,011        |  | 3,388                                       |  | 3,045                                           |  | 4                           |  | 14                                                                |  | 13  
|            

before goodwill amortisation
  and exceptional items, management also measure the operating financial performance
  of the lines of business based upon the EBITDA before exceptional items. EBITDA
  is defined as the group operating profit (loss) before depreciation and amortisation.
  This may not be directly comparable to the EBITDA of other companies as they
  may define it differently. EBITDA excludes depreciation and amortisation, both
  being non cash items, from group operating profit and is a common measure, particularly
  in the telecommunications sector, used by investors and analysts in evaluating
  the operating financial performance of companies.

EBITDA
  before exceptional items is considered to be a good measure of the operating
  performance because it reflects the underlying operating cash costs, by eliminating
  depreciation and amortisation, and excludes non-recurring exceptional items
  that are predominantly related to corporate transactions. EBITDA is not a direct
  measure of the groups liquidity, which is shown by the groups cash
  flow statement and needs to be considered in the context of the groups
  financial commitments. A reconciliation of EBITDA before exceptional items to
  group operating profit by line of business is provided in the table across the
  page above. Trends in EBITDA are discussed for each line of business in the
  following commentary.

The following commentary on the line of business results also discusses their operating free cash flow before exceptional items, which is defined as EBITDA before
exceptional items less capital expenditure. This cash flow measure is used to monitor the contribution to the group free cash flow of the line of business management teams, who are set targets against this measure. It is not possible to directly
reconcile this measure to the cash flow from operating activities by line of business because of the groups centralised treasury and cash operations. We believe investors are interested in understanding the cash flow performance of the
individual lines of business and therefore operating free cash flow is the liquidity measure that we use at a line of business level. Operating free cash flow is not used as a liquidity measure at a consolidated group level where cash generation can
be directly measured by reference to the consolidated cash flow statement. Trends in operating free cash flow are discussed for each line of business in the following commentary.

The
  table across the page above shows the reconciliation of the group operating
  profits to EBITDA before exceptional items and operating free cash flow before
  exceptional items.

The following table shows the reconciliation of operating free cash flow before exceptional items to the groups cash inflow from operating activities.

|                                            | 2003  |  | 2002    |  | 2001    | 
|------------------------------------------- | ----- |  | ------- |  | ------- | 
|                                            | £m    |  | £m      |  | £m      | 
|                                            |      
|Operating free cash flow                    |       |  |         |  |         | 
|before
      exceptional                    |       |  |         |  |         | 
|items                                       | 3,360 |  | 2,074   |  | 1,329   | 
|Capital expenditure                         | 2,445 |  | 3,908   |  | 4,986   | 
|Changes in working capital,                 |       |  |         |  |         | 
|non cash
      movements                    |       |  |         |  |         | 
|and other
      items                       | 416   |  | (265)   |  | (571)   | 
|Exceptional items                           | (198) |  | (2,707) |  | (2,857) | 
|Impairment charges                          |      |  | 2,247   |  | 3,000   | 
|                                            |      
|Cash inflow from operating
      activities | 6,023 |  | 5,257   |  | 5,887   | 
|                                            |      



|BT
      Retail                                            | 2003   |  | 2002   |  | 2001   | 
|---------------------------------------------------------- | ------ |  | ------ |  | ------ | 
|                                                           | £m     |  | £m     |  | £m     | 
|                                                           |       
|Group turnover                                             | 13,301 |  | 12,811 |  | 12,541 | 
|Gross margin                                               | 3,874  |  | 3,460  |  | 3,476  | 
|Sales, general and administration
      costs*             | 2,240  |  | 2,260  |  | 2,602  | 
|Group operating profit*                                    | 1,425  |  | 984    |  | 655    | 
|EBITDA*                                                    | 1,634  |  | 1,200  |  | 874    | 
|Capital expenditure                                        | 115    |  | 153    |  | 167    | 
|Operating free cash flow*                                  | 1,519  |  | 1,047  |  | 707    | 
|                                                           |       
|* Before
      goodwill amortisation and exceptional items

In the 2003 and 2002 financial
  years, BT Retails results have shown the benefits of the strategic focus
  on defending core revenues and gross margins, cost reductions through a series
  of cost transformation programmes and growing top line revenue through new wave
  initiatives in the information, communications and technology (ICT), broadband
  and mobility markets. In the 2003 financial year, the results include those
  of the re-integrated Concert business relating to UK multinational customer
  accounts,

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Financial
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including the associated sales
  force and account management functions.

Within
  the residential voice market BT Retail maintained market share as it has done
  since June 2000, with share internally estimated at around 73%. In the business
  voice market, internal estimates put BT Retails market share at 45% compared
  to 49% and 53% in the 2002 and 2001 financial years.

BT
  Retails turnover increased by 4% in the 2003 financial year to £13,301
  million after rising by 2% in the 2002 financial year. The increase in the 2003
  financial year included revenues from the UK multinational customers re-integrated
  into BT Retail from the Concert global venture. As well as the benefit of the
  returning Concert business, BT Retail continued to defend core revenues and
  grew new wave revenues. Turnover for the three years is summarised as follows:

|BT Retail
      turnover                          | 2003   |  | 2002   |  | 2001   | 
|------------------------------------------------- | ------ |  | ------ |  | ------ | 
|                                                  | £m     |  | £m     |  | £m     | 
|                                                  |       
|Voice services                                    | 9,578  |  | 9,561  |  | 9,711  | 
|Intermediate products                             | 2,873  |  | 2,668  |  | 2,413  | 
|Total core                                        | 12,451 |  | 12,229 |  | 12,124 | 
|New wave                                          | 850    |  | 582    |  | 417    | 
|                                                  |       
|Total                                             | 13,301 |  | 12,811 |  | 12,541 | 
|                                                  |       
|Sales to other BT businesses
      included above | 1,968  |  | 2,087  |  | 1,820  | 
|                                                  |       

Voice services comprise calls made by customers on the BT fixed line network in the UK, analogue lines, equipment sales and rentals and other business voice products. Overall turnover from
voice services was maintained in the 2003 financial year after declining by 2% in the 2002 financial year.

Call revenues comprise all calls made by customers on the BT fixed line network in the UK, including outbound international calls, calls to mobile phones and
calls to the internet. These were 2% lower in the 2003 financial year and 5% lower in the 2002 financial year as a result of price and volume reductions.

BT Retails total call volumes declined by 5% in the 2003 financial year (2002  6% growth, 2001  8% growth) with geographic (local, national and
international) calls declining by 4% (2002  6%, 200110%). This decline in geographic call volumes has been offset by growth in fixed to mobile call volumes of 6% (2002  10%, 2001  32%). The rate of decline in geographic call
volumes has been stemmed due to initiatives in the residential market such as BT Together, Chataway weekends and the 1571 service. In the business voice market, volumes have declined in both the 2003 and 2002 financial years, driven by a combination
of customers switching out of traditional telephony and pressure from the implementation of Carrier Pre-Selection (CPS). Building on the success of the BT Together residential packages, BT Business Plan was launched in January 2003 to combat the effect of CPS, a competitive package which places a ceiling of 10
pence on national and local business calls, rewards loyalty and provides a single BT customer contact.

Non geographic call volumes switched from growth of 23% in the 2002 financial year to a decline of 6% in the 2003 financial year mainly reflecting the switch of internet calls from measured
call minute products to a mixture of flat rate based products and broadband products. This continued trend will dilute the correlation between revenues and call minutes.

Turnover
  from analogue exchange lines and other voice services (which includes operator
  services, directory enquiries, payphones and chargecards) of £4,896 million
  (2002  £4,778 million, 2001  £4,654 million) increased
  by 3% in both the 2003 and 2002 financial years.

Turnover from intermediate products in the 2003 financial year of £2,873 million (2002  £2,668 million, 2001  £2,413 million)
increased by 8% in the 2003 financial year and 11% in the 2002 financial year. This is despite the migration of customers from retail private circuits to partial private circuits. As a result of changes required by Oftel, partial private circuits
used by UK fixed network operators are no longer provided by BT Retail, but are provided as a BT Wholesale product. This reduced revenue by approximately £100 million in the 2003 financial year.

The total number of BT Retail lines have increased by 1% to 29.3 million at 31 March 2003 following an increase in the 2002 financial year, with high speed ISDN
lines being the main driver behind the growth.

New wave revenues grew by 46% to £850 million in the 2003 financial year compared to a growth of 40% to £582 million in the 2002 financial year. This
growth reflects the continued focus on the ICT, broadband and mobility products. The key contract wins in the 2003 financial year were Unilever, Bradford & Bingley, National Australia Group, Abbey National and Honeywell. Under the terms of the trading model with BT Global Services these ICT revenues are recognised as an internal sale by BT
Retail.

BT Broadband and BT Openworld broadband products performed strongly. BT Broadband, launched in September 2002, had 137,000 connections at 31 March 2003 and the BT
Openworld broadband product, launched in March 2002 had 292,000 connections at 31 March 2003 giving total BT Retail broadband connections of 429,000, 54% of BT Wholesales 800,000 ADSL connections.

Gross margin increased by 12% to £3,874 million in the 2003 financial year and was flat in the 2002 financial year. The improvements are driven by the
success of BT Together packages, improved product mix and lower wholesale prices which more than offset the impact of the decline in call volumes.

Gross
  margin is turnover less costs directly attributable to the provision of the
  products and services reflected in turnover in the period. Selling, general
  and administration costs are those costs that are ancillary to the business
  processes of providing products and services and are the general business operating
  costs. BT Retail analyse their costs in this manner for management purposes
  in common with

32 BT Annual Report and Form 20-F 2003

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Financial
  review

other retail organisations
  and they have set target savings for selling, general and administration costs.

Cost
  transformation programmes in the 2003 financial year generated savings in sales,
  general and administration costs which were offset by the additional costs associated
  with the Concert business. Excluding these Concert related costs there was a
  reduction of 7% to £2,240 million. These savings were driven by a reduction
  in people related expenses such as travel, accommodation and communications,
  lower service costs resulting from improvements in service quality, billing
  initiatives and similar cost reduction programmes. These cost savings were net
  of the costs of the investment in new wave activities. BT Retail comfortably
  exceeded its target of £200 million sales, general and administration
  cost savings in the core business in the 2003 financial year. In the 2002 financial
  year, the cost transformation programmes produced savings of £167 million
  (7%) in selling, general and administration costs, excluding goodwill amortisation
  and exceptional items.

The number of employees in BT Retail at 31 March 2003 and 31 March 2002 was 50,400 and 51,200 respectively. 800 employees joined BT Retail from the Concert global
venture.

The cost savings and improved gross margins contributed towards BT Retails strong EBITDA growth, before exceptional items, in the 2003 financial year of
£434 million (36%) to £1,634 million and by £326 million (37%) to £1,200 million in the 2002 financial year. These improvements have enabled BT Retail to contribute an operating free cash flow (EBITDA less capital
expenditure) before exceptional items of £1,519 million in the 2003 financial year and £1,047 million in the 2002 financial year, representing improvements of 45% and 48%, respectively. This improvement also reflects the reduction in
capital expenditure to £115 million in the 2003 financial year (2002  £153 million, 2001  £167 million).

In the 2002 financial year, BT Retail launched the next generation multifunctional contact centre programme, which rationalises the number of call centres from
104 sites to 30 over a two year period. The programme remains on track. The associated exceptional costs of £68 million, and the other exceptional costs of £43 million relating to the impairment of payphone assets and investments, are
discussed on pages 36 and 37.

|BT
      Wholesale                                         | 2003   |  | 2002   |  | 2001   | 
|---------------------------------------------------------- | ------ |  | ------ |  | ------ | 
|                                                           | £m     |  | £m     |  | £m     | 
|                                                           |       
|Group turnover                                             | 11,260 |  | 12,256 |  | 11,728 | 
|Group operating profit*                                    | 1,924  |  | 2,242  |  | 2,538  | 
|EBITDA*                                                    | 3,847  |  | 4,156  |  | 4,276  | 
|Capital expenditure                                        | 1,652  |  | 1,974  |  | 2,273  | 
|Operating free cash flow*                                  | 2,195  |  | 2,182  |  | 2,003  | 
|                                                           |       
|* Before
      goodwill amortisation and exceptional items |        |  |        |  |        | 

The majority of BT Wholesales
  revenues are for supplying network services to other BT lines of business (2003
   69%, 2002  68%, 2001  72%), mainly to BT Retail. External
  turnover is derived from providing wholesale products and solutions to other
  operators interconnecting with BTs UK fixed network, including mmO2
  since the demerger. Internal turnover and costs with mmO2 for prior
  years have been reclassified asexternal
  in this section to enable a meaningful year on year comparison.

In the 2003 financial year, turnover totalled £11,260 million, a decline of 8% following an increase of 5% to £12,256 million in the 2002 financial
year. The results for the 2002 financial year included total turnover of £770 million relating to the former Concert global venture, which was re-integrated from 1 April 2002. Excluding this Concert turnover in the 2002 financial year, the
underlying turnover declined by 2% in the 2003 financial year. This reduction in the 2003 financial year is primarily due to a 7% decrease in network unit prices and mix, and a 5% increase in network volumes. In the 2002 financial year network
volume growth of 8% was partly offset by the effect of price and product mix.

External turnover declined by 11% in the 2003 financial year to £3,472 million; although excluding sales to Concert in the 2002 financial year, the
underlying external turnover increased by 3%. In the 2002 financial year, external turnover grew by 19% to £3,911 million.

Within
  traditional products, the impact of price reductions  due to flat rate
  price packages, Network Charge Control (NCC) and Oftel price determinations
   coupled with unfavourable market conditions have stemmed the rate of
  growth in external turnover in the 2003 financial year. Turnover from retail
  private circuits at £309 million reduced by 14% in the 2003 financial
  year and in the 2002 financial year at £358 million increased by 3% when
  compared to the respective prior year. The decline in the 2003 financial year
  is due to the migration of customers from retail private circuits to lower priced
  partial private circuits, introduced in August 2001, which showed an increase
  in turnover of 89% to £106 million in the 2003 financial year. FRIACO
  generated turnover of £84 million in the 2003 financial year (2002 
  £68 million, 2001  £nil) and follows the move to flat rate
  packages by internet service providers. Conveyance and low margin transit revenues of £2,064 million have remained virtually flat in the 2003 financial year reflecting the ongoing slow down in the mobile market and TMT sector
that began in the final quarter of the 2002 financial year. This followed an increase of 17% in the 2002 financial year.

New
  business external turnover, including broadband and solutions products and services,
  at £189 million in the 2003 financial year showed strong growth of 85%.
  This continued the trend from the 2002 financial year when new business turnover,
  at £102 million, was 240% higher. The increase in the 2003 financial year
  principally reflects the gains being made in network facilities management and
  internet connectivity products, including ADSL lines. Wholesale ADSL lines had
  an installed base of 800,000 at 31 March 2003 representing growth of 380% over
  the previous year. At 16 May 2003 the installed base was 936,000 and with additions
  since January 2003 running at a rate of well over 20,000 connections

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per week are on target to reach
  one million connections in the summer of 2003.

In
  the 2003 financial year, internal turnover decreased by 7% to £7,788 million
  after a decrease of 1% to £8,345 million in the 2002 financial year. The
  unwind of the Concert global venture has resulted in a reduction of internal
  revenues in the 2003 financial year. Excluding the Concert related revenues
  in the 2002 financial year, the reduction in internal turnover in the 2003 financial
  year was 4%. This reduction was primarily due to a reduction in prices on sales
  to BT Retail, partly offset by the increased sales to other BT lines of business.

Despite network volume increases in the 2003 financial year, BT Wholesales operating costs, excluding depreciation and exceptional items, decreased by 10%
to £7,538 million, mainly due to the £905 million of Concert related costs in the 2002 financial year offset by an increase in leaver costs of £108 million. In the 2002 financial year, operating costs, excluding depreciation and
exceptional items, rose by 9% to £8,355 million. The principal reasons for these changes are discussed below.

Interconnect payments to other network operators decreased by 18% in the 2003 financial year to £3,143 million. The unwind of the Concert global venture
accounted for the majority of this reduction as interconnect payments to Concert were no longer made. In the 2002 financial year, these costs increased by 11% to £3,849 million compared to the prior year. These costs are mainly recharged to BT
Retail with no margin or reflect external transit revenues with a minimal margin.

Net staff costs in the 2003 financial year, at £815 million, increased by 19% after increasing by 15% to £686 million in the 2002 financial year. The
increase in the 2003 financial year reflects an increase in leaver costs compared to the prior year of £108 million. The increase in both years also reflects a change in the mix of capital and current work.

Payments to other BT lines of business declined by 12% in the 2003 financial year to £3,010 million after increasing by 6% to £3,429 million in the
2002 financial year. The reduction in the 2003 financial year was principally due to the unwind of the Concert global venture which reduced the cost of sales of BT Retail products, and a reduction in service costs. The increase in the 2002 financial
year was mainly due to an increase in payments to BT Retail for cost of sales of BT Retail products and services, and an increase in payments to BT Global Services for broadband services, offset by reductions in other group charges.

Depreciation costs were broadly flat in the 2003 financial year at £1,923 million, after an increase of 10% to £1,914 million in the 2002 financial
year. The increase in the 2002 financial year was due to a reduction in assumed asset lives as BT continues its programme of network investment offset by the effect of reduced capital expenditure.

In the 2002 financial year an exceptional bad debt charge of £79 million was recognised as a result of the severe liquidity problems in the TMT sector
during the latter part of the year.

EBITDA
  at £3,847 million in the 2003 financial year was 7% lower than in the
  2002 financial year following a reduction of 3% to £4,156 million, before
  exceptional items, in the 2002 financial year.

Operating profit at £1,924 million in the 2003 financial year was 14% lower after a reduction of 12% to £2,242 million, before exceptional items, in
the 2002 financial year. The operating profit margins, before exceptional items, achieved in each of the 2003, 2002 and 2001 financial years have been reducing at 17%, 18% and 22%, respectively.

Capital expenditure on plant and equipment at £1,652 million in the 2003 financial year was 16% lower than the 2002 financial year, following a decline in
the 2002 financial year of 13% to £1,974 million. This reflects continued cost control, tight governance and the alignment of capital spend with the development of the future network strategy.

During the 2003 financial year, BT Wholesale focused its cost reduction programme on managed cash costs (operating costs excluding payments to other network
operators and depreciation, plus capital expenditure). After adjusting for the unwind of Concert, managed cash costs at £6,047 million decreased by 1% despite the 5% increase in network volumes and extra leaver payments of £108 million
in the 2003 financial year. After allowing for price changes and volume effects, the managed cash cost savings were £237 million in the 2003 financial year, exceeding the full year target of £200 million. Managed cash costs are used to
measure the controllable operating and capital cash costs of the BT Wholesale business. Accordingly it excludes payments to other network operators and depreciation. Targets have been set for achieving managed cash cost savings and accordingly
performance against those targets is reported.

BT Wholesale maintained its strong cash generation performance with operating free cash flow (EBITDA less capital expenditure) of £2,195 million in the 2003
financial year. This follows an increase of 9% to £2,182 million, before exceptional items, in the 2002 financial year.

|BT
      Global Services                                   | 2003  |  | 2002  |  | 2001  | 
|---------------------------------------------------------- | ----- |  | ----- |  | ----- | 
|                                                           | £m    |  | £m    |  | £m    | 
|                                                           |      
|Group turnover                                             | 5,251 |  | 4,472 |  | 3,468 | 
|Group operating loss*                                      | (427) |  | (353) |  | (309) | 
|EBITDA*                                                    | 178   |  | 146   |  | 50    | 
|Capital expenditure                                        | 439   |  | 609   |  | 935   | 
|Operating free cash flow*                                  | (261) |  | (463) |  | (885) | 
|                                                           |      
|* Before goodwill
      amortisation and exceptional items |       |  |       |  |       | 

BT Global Services (formerly
  known as BT Ignite) is BTs business services and solutions business, serving
  customers worldwide. It is an ICT service provider, offering integrated data
  and value-added services to meet the European needs of global multi-site corporates
  and the global needs of European corporates. BT Global Services now includes
  the former Concert managed services network infrastructure in Europe, Africa,
  the Middle East and the Americas within its business supporting the frame relay,
  ATM IP and other data services. The Global Products and Global

34 BT Annual Report and Form 20-F 2003

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  review

Carrier divisions within BT
  Global Services reflect the majority of the results of the returning Concert
  businesses in the 2003 financial year.

In
  the 2003 financial year BT Global Services turnover was £5,251 million
  representing an increase of 17% compared to the prior year. The Global Carrier
  division reflected an increase of £744 million in the 2003 financial year
  to £1,007 million, principally due to the re-integration of the international
  carrier business of the former Concert global venture. Global Products turnover
  grew by 22% in the 2003 financial year to £1,883 million mainly due to
  the re-integration of Concert and the growth in IP VPN (Internet Protocol Virtual
  Private Network) products. Syntegra performed strongly in the difficult systems
  integration market with turnover of £623 million in the 2003 financial
  year, an increase of 2%. Solutions turnover grew by 11% in the 2003 financial
  year to £2,042 million and order intake in the second half of the year
  has been very strong, with total orders for the year of £3.6 billion,
  after a slow first half year.

In the 2002 financial year BT Global Services turnover was £4,472 million representing an increase of 29% driven mainly by Solutions, European
operations and UK IP revenues.

Continued cost reductions, both in network costs as well as selling, general and administration costs, helped generate improvements in EBITDA before exceptional
items in the 2003 financial year of 22% to £178 million, following an improvement of £96 million in the 2002 financial year. The re-integration of the former Concert business has had an adverse impact on the growth in EBITDA before
exceptional items. The 2003, 2002 and 2001 financial years include leaver costs of £65 million, £55 million and £8 million respectively. Headcount increased by 3% to 17,200 in the 2003 financial year as a result of the
re-integration of 1,900 employees from the former Concert business offset by leavers and reduced by 2,100 to 16,700 in the 2002 financial year. All major European operations achieved their target of becoming EBITDA positive during the 2003 financial
year.

In the 2002 financial year an exceptional charge of £2,211 million was recognised principally relating to the impairment of the goodwill and tangible fixed
assets of the European activities. This followed the announcement that activities were being streamlined to focus on multi-site corporate customers.

The group operating loss before goodwill amortisation and exceptional items increased by £74 million in the 2003 financial year to a loss of £427
million after increasing by £44 million to a loss of £353 million in the 2002 financial year. The loss in the 2003 financial year includes the adverse impact of the former Concert business.

Capital
  expenditure for the 2003 financial year was £439 million, a reduction
  of 28%, and £609 million in the 2002 financial year, a reduction of 35%.
  This demonstrates the focus on cash control and is reflected in the £202
  million improvement in operating free cash outflow (EBITDA less capital expenditure)
  before exceptional items to £261 million in the 2003 financial
  year. This represents a turnaround
  of £624 million since the 2001 financial year.

Other operating income
As part of the arrangements for the establishment of Concert, BT had been seconding staff and providing administrative and other services from its launch in early January 2000. The income from
these services totalled £nil in the 2003 financial year, £135 million in the 2002 financial year and £168 million in the 2001 financial year.

Operating costs
Total operating costs from continuing activities were reduced by 13% in the 2003 financial year to £16,370 million after increasing by 30% in the 2002 financial year. As a percentage of
group turnover from continuing activities, operating costs from continuing activities, excluding goodwill amortisation and exceptional items, increased from 84% in the 2001 financial year, to 87% in the 2002 financial year and reduced to 86% in the
2003 financial year. Operating costs in the 2003 financial year include the costs associated with the re-integrated activities of the former Concert global venture. Because these activities have been fully integrated into the lines of business it is
not possible to separately identify those specific costs associated with the activities of the former Concert global venture. In all three financial years, net exceptional costs from continuing activities were incurred. These amounted to £198
million, £2,696 million and £7 million in the 2003, 2002 and 2001 financial years, respectively. These exceptional costs are considered separately in the discussion which follows.

|Operating
      costs                                                           | 2003   |  | 2002   |  | 2001   | 
|------------------------------------------------------------------------------- | ------ |  | ------ |  | ------ | 
|                                                                                | £m     |  | £m     |  | £m     | 
|                                                                                |       
|Continuing activities:                                                          |        |  |        |  |        | 
|Staff costs                                                                     | 4,254  |  | 4,260  |  | 4,069  | 
|Own work capitalised                                                            | (583)  |  | (623)  |  | (642)  | 
|Depreciation                                                                    | 3,011  |  | 2,974  |  | 2,689  | 
|Goodwill and
      other intangibles amortisation                               | 24     |  | 124    |  | 91     | 
|Payments to telecommunications
      operators                                  | 3,846  |  | 4,289  |  | 3,736  | 
|Other operating
      costs                                                     | 5,620  |  | 5,134  |  | 4,550  | 
|                                                                                |       
|Total operating costs from
      continuing activities before exceptional costs | 16,172 |  | 16,158 |  | 14,493 | 
|Exceptional costs                                                               | 198    |  | 2,696  |  | 7      | 
|                                                                                |       
|Total operating costs from
      continuing activities                          | 16,370 |  | 18,854 |  | 14,500 | 
|Total operating costs from
      discontinued activities                        |       |  | 2,546  |  | 6,259  | 
|                                                                                |       
|Total operating costs                                                           | 16,370 |  | 21,400 |  | 20,759 | 
|                                                                                |       

Staff costs from
  continuing activities were broadly flat in the 2003 financial year at £4,254
  million after increasing by 5% in the 2002 financial year. In the 2003 financial
  year, the numbers employed in the

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continuing activities decreased
  by 3,900 to 104,700 at 31 March 2003 after decreasing by 8,200 in the 2002 financial
  year. The increased leaver costs and salary increases offset the impact of the
  lower head count in the 2003 financial year. Higher pension costs for enhanced
  benefits provided to leavers and the annual pay awards were the main reasons
  for the increase in staff costs in the 2002 financial year.

The
  allocation for the employee share ownership scheme, included within staff costs,
  was £36 million in the 2003 financial year. The allocation for the 2002
  and 2001 financial years was £25 million and £32 million, respectively.

Early leaver costs from continuing activities, before exceptional items, of £276 million were incurred in the 2003 financial year, compared with £186
million in the 2002 financial year and £111 million in the 2001 financial year. This reflects BTs continued focus on reducing headcount and improving operational efficiencies. This includes the cost of enhanced pension benefits provided
to leavers which amounted to £60 million, £46 million and £nil in the 2003, 2002 and 2001 financial years. In the 2002 and 2001 financial years this did not reflect the full cash cost because there was a pension fund accounting
surplus, which for accounting purposes includes any provision for pensions on the groups balance sheet, and in accordance with BTs accounting policies, the accounting surplus was utilised before making a charge to the profit and loss
account. The cost of enhanced pension benefits charged against the accounting surplus in the 2002 and 2001 financial years amounted to £140 million and £429 million, respectively. In the 2002 financial year the excess over the available
accounting surplus, amounting to £46 million, was charged to the profit and loss account. Under the NewStart programme launched in the fourth quarter of 2001, BT employees who leave in advance of normal retirement age receive a leaving payment
rather than a redundancy payment and the incremental pension benefits have been scaled down which has reduced the level of the cash cost associated with early leavers.

The depreciation charge from continuing activities increased by 1% in the 2003 financial year to £3,011 million after increasing by 11% in the 2002
financial year. The increase in the 2003 financial year is despite the reduction in property depreciation as a result of the property sale and leaseback in December 2001. The increase in the 2003 and 2002 financial years reflects a reduction in the
estimated asset lives, reflecting BTs continuing investment in its networks and broadband investment.

Goodwill
  amortisation in respect of subsidiaries and businesses acquired since 1 April
  1998, when BT adopted Financial Reporting Standard No. 10, and amortisation
  of other intangibles totalled £24 million in the 2003 financial year compared
  with £124 million in the 2002 financial year and £91 million in
  the 2001 financial year. The low charge in the 2003 financial year reflects
  the impact of the demerger of mmO2and the impairment of goodwill in the 2002
  and 2001 financial years which significantly reduced the carrying value of goodwill.
  Goodwill on acquisitions before 1 April 1998 was written off directly to reserves. Payments to other telecommunication operators from continuing activities reduced by 10% in the 2003 financial year to £3,846 million after increasing by 15% in the 2002 financial year.
The payments in the 2002 and 2001 financial years include those made to the Concert global venture for the delivery of BTs outgoing international calls, which accounts for most of the reduction in the 2003 financial year.

Other operating costs, which rose by 9% in the 2003 financial year to £5,620 million after increasing by 13% in the 2002 financial year, include the
maintenance and support of the networks, accommodation and marketing costs, the cost of sales of customer premises equipment and non pay related leaver costs. The increase in the 2003 financial year includes the property rental costs of around
£190 million following the sale and leaseback transaction in December 2001.

The exceptional items within operating costs for the 2003, 2002 and 2001 financial years are shown in the table below.

|Exceptional
      operating costs                      | 2003 |  | 2002  |  | 2001  | 
|------------------------------------------------------ | ---- |  | ----- |  | ----- | 
|                                                       | £m   |  | £m    |  | £m    | 
|                                                       |     
|Property rationalisation
      costs                   | 198  |  |      |  |      | 
|Impairment of goodwill
      and tangible fixed assets |     |  | 2,202 |  | 200   | 
|Concert unwind costs                                   |     |  | 172   |  |      | 
|BT Retail call centre rationalisation                  |     |  | 68    |  |      | 
|BT Wholesale bad debt expense                          |     |  | 79    |  |      | 
|mmO2 demerger
      costs                              |     |  | 98    |  |      | 
|Other                                                  |     |  | 77    |  | (193) | 
|                                                       |     
|Total attributable to continuing
      activities      | 198  |  | 2,696 |  | 7     | 
|Total attributable to discontinued
      activities    |     |  | 11    |  | 2,850 | 
|                                                       |     
|Total exceptional operating
      costs                | 198  |  | 2,707 |  | 2,857 | 
|                                                       |     

In the 2003 financial year a property rationalisation charge of £198 million was recognised in relation to the rationalisation of the groups London office portfolio. The
rationalisation involves the exit from a number of office properties.

The most significant item in the 2002 financial year was the impairment of goodwill and tangible fixed assets in the European activities of BT Global Services. In
the light of our announcement that BT Global Services was streamlining its activities to focus on multi-site corporate customers with European activities and the assimilation of BTs share of Concerts activities, an impairment review of
the investment in its European activities was performed. As a result, a goodwill impairment charge of £1,939 million and a tangible fixed asset impairment charge of £263 million was recognised. The goodwill in the European activities was
fully written down as a result of the charge.

36 BT Annual Report and Form 20-F 2003

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Other exceptional items in
  the 2002 financial year included:ncosts of £172 million associated with
  the unwind of the Concert global venture, discussed further on page 38ncharges of £68 million in relation to
  the BT Retail call centre rationalisation programme, reducing the number of
  call centres from 104 to 30 over two yearsnbad
  debt charges of £79 million, in BT Wholesale, as a result of severe liquidity
  problems in the TMT sector during the latter part of the yearncosts
  of £98 million associated with the demerger of mmO2
  nother charges of £77
  million including impairment of payphone assets

The
  most significant item in the 2001 financial year was the impairment of goodwill
  in Viag Interkom. The acquisition of the 55% interest in the company was completed
  for £8,770 million in February 2001 and goodwill of £4,992 million
  arose on this transaction. The impairment review resulted in an impairment in
  goodwill of £3,000 million, of which £200 million related to BTs
  continuing activities.

Other exceptional items within operating costs in the 2001 financial year included a credit of £193 million for the refund of rates on BTs
infrastructure following a successful legal action taken by BT in 2000 to challenge the rateable valuations on which it was charged for its network assets.

Group operating profit (loss)
In the 2003 financial year, group operating profit from continuing activities before goodwill amortisation and the exceptional items, described above, of £2,790 million was 1% higher
than in the 2002 financial year, which in turn was 10% lower than in the 2001 financial year.

Total group operating profit for the 2003 financial year was £2,572 million compared to a loss of £479 million in the 2002 financial year and a profit
of £27 million in the 2001 financial year, reflecting the losses generated by the discontinued activities and the exceptional costs of £2,707 million in the 2002 financial year.

Associates and joint ventures
The results of associates and joint ventures, split between continuing and discontinued activities, are shown below:

|                                                                                           | 2003  |  | 2002  |  | 2001  | 
|------------------------------------------------------------------------------------------ | ----- |  | ----- |  | ----- | 
|                                                                                           | £m    |  | £m    |  | £m    | 
|                                                                                           |      
|Share of turnover:                                                                         |       |  |       |  |       | 
|Continuing activities                                                                      | 1,455 |  | 4,049 |  | 4,625 | 
|Discontinued activities                                                                    |      |  | 715   |  | 5,312 | 
|                                                                                           |      
|Total                                                                                      | 1,455 |  | 4,764 |  | 9,937 | 
|                                                                                           |      
|Share of operating profit
      (loss) before goodwill amortisation and exceptional items: |       |  |       |  |       | 
|Continuing activities                                                                      | 181   |  | (108) |  | (157) | 
|Discontinued activities                                                                    |      |  | 74    |  | 277   | 
|                                                                                           |      
|Total                                                                                      | 181   |  | (34)  |  | 120   | 
|                                                                                           |      

During the period under review there has been a significant rationalisation of the groups investments in associates and joint ventures. On 1 April 2002 the unwind of the Concert global
venture was completed and on 22 January 2003 the sale of the groups stake in Cegetel was completed. As a result BTs share of its ventures turnover fell to £1,455 million in the 2003 financial year from £4,764 million in
the 2002 financial year. The disposals made in the 2002 and 2001 financial years resulted in BTs share of its ventures turnover falling to £4,764 million in the 2002 financial year from £9,937 million in the 2001 financial
year. In the 2003 financial year, £1,447 million of the total arose from ventures located outside the UK, compared with £4,618 million in the 2002 financial year and £9,677 million in the 2001 financial year.

The principal contributors to turnover in the 2003 financial year were Cegetel in France (£956 million) up to the date of disposal and LG Telecom in Korea
(£198 million). The principal contributors to turnover from continuing activities in the 2002 financial year were Concert (£2,158 million), Cegetel (£1,068 million) and LG Telecom (£240 million) and in the 2001 financial year
were Concert (£2,576 million), Cegetel (£860 million) and LG Telecom (£281 million).

The principal contributors to turnover from discontinued activities in the 2002 financial year were Japan Telecom and J-Phone (£559 million to June 2001)
and Airtel (£76 million to June 2001). The principal contributors to turnover from discontinued activities in the 2001 financial year were Japan Telecom and J-Phone (£4,542 million), and Airtel (£286 million).

The groups share of its ventures operating profits from continuing activities totalled £181 million in the 2003 financial year, before goodwill
amortisation and exceptional profits. The comparable losses amounted to £108 million and £157 million in the 2002 and 2001 financial years, respectively.

The principal contributor to the groups share of operating profits from continuing activities before goodwill amortisation and exceptional items in the 2003
financial year was Cegetel (£198 million). In the 2002 financial year the principal contributor to the loss was Concert (£225 million) offset by profits from Cegetel (£168 million). In the 2001 financial year Concert reported
profits of £19 million and Cegetel profits of £90 million, offset by losses in other ventures.

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

|                                                                           | 2003  |  | 2002  |  | 2001 | 
|-------------------------------------------------------------------------- | ----- |  | ----- |  | ---- | 
|                                                                           | £m    |  | £m    |  | £m   | 
|                                                                           |      
|Impairment of
      Concert                                                |      |  | 806   |  |     | 
|Concert unwind
      costs                                                 |      |  | 81    |  |     | 
|Impairment of
      investments and charge (release) of related exit costs | (150) |  | 234   |  |     | 
|Goodwill impairment                                                        |      |  | 173   |  | 200  | 
|Subscriber acquisition
      costs                                         |      |  |      |  | 96   | 
|                                                                           |      
|Total attributable
      to continuing activities                          | (150) |  | 1,294 |  | 296  | 
|Total attributable
      to discontinued activities                        |      |  |      |  | 36   | 
|                                                                           |      
|Total exceptional operating
      costs (credits)                          | (150) |  | 1,294 |  | 332  | 
|                                                                           |      

In the 2003 financial year BT completed the exit from its investment in Blu on more favourable terms than anticipated and accordingly exit cost provisions of £150 million were
released.

Concerts performance was a cause of concern in 2001 and in October 2001 BT and AT&T announced the unwind of Concert which was subsequently completed on
1 April 2002. On completion, the businesses, customer accounts and networks returned to the two parent companies with BT and AT&T each taking ownership of substantially those parts of Concert originally contributed by them. As part of the
settlement with AT&T for the unwind of the Concert global venture, BT received net cash of $72 million (£56 million). This net settlement includes the receipt of $350 million reflecting the allocation of the businesses and the payment of
$278 million to achieve the equal division of specified working capital and other liability balances.

BT and AT&T also terminated their Canadian joint venture agreement under which BT was committed to participate in AT&Ts future obligation to acquire
all of the publicly traded shares of AT&T Canada. AT&T has taken full ownership of BTs interest in the Canadian joint venture and in AT&T Canada, and has now assumed full responsibility for all future obligations of the joint
venture. BT has now ceased to have any interest in AT&T Canada, and has been released from its future expenditure commitment associated with AT&T Canada.

In the 2002 financial year BT wrote down the carrying value of its investments in both Concert and AT&T Canada. The exceptional impairment charge of
£1,153 million against these investments comprises Concert goodwill impairment of £260 million, Concert tangible fixed asset write-downs of £546 million and the write off of BTs £347 million interest in AT&T Canada
(included within amounts written off investments).

BT also recognised exceptional restructuring charges of £81 million for its share of redundancy and other unwind costs in Concert and BTs own unwind
costs of £172 million have been charged against group operating costs in the 2002 financial year.

In the 2002 financial year exceptional impairment charges and related exit costs totalling £407 million, principally relating to goodwill and asset impairments in Blu and SmarTone, were
recognised in the light of the rapidly changing global telecoms market conditions.

In the 2001 financial year there was an exceptional write off of previously capitalised costs in certain non-UK operations related to deferred subscriber
acquisition costs in the ventures. In addition goodwill in Asian ventures became impaired and an exceptional impairment charge of £200 million was recognised.

Goodwill amortisation in the 2003 financial year amounted to £2 million, compared to £53 million in the 2002 financial year and £185 million in
the 2001 financial year. This reduction reflects the disposals and the goodwill impairment charges referred to above.

Total operating profit (loss)
Total operating profit from continuing activities before goodwill amortisation and exceptional items for the 2003 financial year of £2,971 million was 12% higher than in the 2002
financial year which in turn was 9% lower than the previous financial year. The increase in the underlying total operating profit was due to the factors explained above.

Total operating profit for the 2003 financial year was £2,901 million, including BTs share of the operating results of its ventures. This compared to
a loss for the 2002 financial year of £1,860 million and the 2001 financial year of £370 million. This improved performance reflects the groups exit from certain loss making activities and the lower level of goodwill amortisation
and exceptional items.

Profit on sale of group undertakings and fixed asset investments
In the 2003 financial year a number of remaining non-core investments were sold. The consideration for the disposals totalled £3,028 million and the profit before taxation from disposals
totalled £1,691 million. This was principally in relation to the disposal of our 26% interest in Cegetel, a French telecommunications operator, on 22 January 2003. The total proceeds were £2,603 million, received in cash, and the profit
was £1,509 million before the recognition of an exceptional interest charge of £293 million on closing out fixed interest rate swaps following receipt of the sale proceeds.

38 BT Annual Report and Form 20-F 2003

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A major feature of the 2002 financial year was the successful disposal of many non-core businesses. The consideration for these disposals totalled £8.0 billion as shown in the table
below.

|Disposals                                      | Consideration£m |  | Profit
        (loss)
      before tax£m | 
|---------------------------------------------- | --------------- |  | ---------------------------------------- | 
|                                               |                 | 
|Year ended
      31 March 2002                 |                 | 
|                                               |                
|Japan Telecom and J-Phone
      Communications | 3,709           |  | 2,358                                    | 
|Yell                                           | 1,960           |  | 1,128                                    | 
|Airtel                                         | 1,084           |  | 844                                      | 
|Maxis Communications Berhard                   | 350             |  | (4)                                      | 
|Rogers Wireless Communications                 | 267             |  | (23)                                     | 
|BiB                                            | 241             |  | 120                                      | 
|Clear Communications                           | 119             |  | (126)                                    | 
|e-peopleserve                                  | 70              |  | 61                                       | 
|Other                                          | 173             |  | 31                                       | 
|                                               |                
|Total                                          | 7,973           |  | 4,389                                    | 
|                                               |                

BT completed the sale to Vodafone of its 20% economic interest in Japan Telecom and its 20% interest in J-Phone Communications on 1 June 2001 and subsequently its interest in J-Phone group
companies. The total proceeds of sale were £3,709 million received in cash, and the profit was £2,358 million.

The sale of Yell, BTs classified advertising directory businesses in the UK and the USA, was completed on 22 June 2001 for a consideration of £1,960
million, giving a profit of £1,128 million. In May 2001, the UK Office of Fair Trading announced that the price controls over the UK Yellow Pages advertising rates were to be tightened significantly. The price we achieved for the sale of Yell,
which was announced on 26 May 2001, reflected the impact of these controls on Yells prospects.

BT completed the sale of its 18% interest in Airtel, a major Spanish wireless operator, to Vodafone for £1,084 million on 29 June 2001. The profit of
£844 million on the sale compares with BTs investment in the company of £223 million, built up during the 1990s.

In November 2001, BT completed the sale of its 33% interest in Maxis Communications of Malaysia for £350 million, which broadly equated with its carrying
value. We completed the sale of our interest in Rogers Wireless to AT&T for £267 million on 29 June 2001 and recognised a loss of £23 million.

BTs
  interest in BiB was diluted in July 2000 when BSkyB gained control and in May
  2001 we agreed to exchange our residual interest in BiB for tranches of shares
  in BSkyB. We received the first tranche of 19 million BSkyB shares with an initial
  value of £128 million on 28 June 2001. We were required to hold 50% of
  this tranche until May 2002 and recognised a profit on these shares when they
  were sold in May 2002. We also received the second tranche of BSkyB shares with
  a similar value in November 2002, and they were sold at that time. The profit
  of £120 million recognised in the 2002 financial year relates to the BSkyB
  shares which we were permitted to sell on receipt. In the 2003 financial year
  a profit on disposal of BSkyB shares of £131 million was recognised.

In December 2001, BT completed the sale of its wholly owned subsidiary company, Clear Communications Limited, which operates a communications network in New
Zealand, for consideration of £119 million. A loss of £126 million has been recognised on this sale of which £45 million relates to goodwill taken directly to reserves before April 1998.

In February 2002, we completed the sale of our 50% interest in e-peopleserve, a major human resource outsourcing activity, to our joint-venture partner,
Accenture, for initial consideration of £50 million. BT is entitled to receive additional payments from an earn-out arrangement based on e-peopleserves revenues from customers other than BT and Accenture over the five years to 2007.
These additional earn-out payments will total between £27 million and approximately £167 million. A profit of £61 million on this transaction has been recognised in the 2002 financial year based on the initial consideration and the
discounted value of the additional minimum payments of £20 million.

In addition, in the 2002 financial year we recognised an impairment charge of £347 million in relation to the fixed asset investment in AT&T Canada, as
noted above, and £157 million in relation to Impsat.

In the 2001 financial year, we sold our 34% interest in sunrise communications of Switzerland to another joint venture partner in November 2000 for £464
million, realising a profit of £454 million. This was the main element in the total profit from disposals of group undertakings and fixed asset investments of £619 million in that year. Other profits during the year were principally
derived from the disposal of certain of our aeronautical and maritime interests, the sale of an interest in I.Net by way of a public offering, the reduction of our equity interest in BiB to below 20% and the sale of minor equity investments.

Profit on sale of property fixed assets
In December 2001, as part of a wider property outsourcing arrangement, BT completed the sale and leaseback of the majority of its UK properties to Telereal, a joint venture partnership formed
by Land Securities Trillium and The William Pears Group. Around 6,700 properties were transferred totalling some 5.5 million square metres. The consideration received amounted to £2,380 million. BT has leased the properties back at a total
annual rental commencing at £190 million and subject to a 3% annual increase. In addition, BT has transferred the economic risk on a large portion of its leased properties to Telereal in return for an annual rental commencing at approximately
£90 million per annum. This is broadly equivalent to the current level of rentals. In February 2002, BT outsourced its property management unit to Telereal.

BT
  has the option to purchase the reversionary interest from Telereal (i) when
  BT vacates a property at open market value (ii) at the end of 30 years for the
  specialised estate (buildings of an operational nature such as telephone exchanges)
  at open market value

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or (iii) if BT wishes to terminate
  all arrangements with Telereal at any time, in which circumstances BT would
  pay open market values for the property and compensation to Telereal covering
  funding costs and equity return. BT can also re-acquire the reversion of the
  general estate (non-operational buildings such as offices and warehousing) at
  the end of the headlease term of 999 years. BT has the right to renew the lease
  of the specialised estate for successive periods which, in total, amount to
  130 years. After 130 years, the freehold specialised properties revert to BT.
  The leases include normal commercial restrictions and covenants.

BTs
  divestment of its property estate provides a flexible approach to BTs
  office arrangements and building requirements. BT expects to reduce its property
  needs over time and the transaction allows BT to vacate properties covering
  approximately 35% by rental value of the estate, including existing lease ends,
  over the contract term without penalty.

The profit on the sale of the properties amounted to £1,019 million and was determined after allowing £129 million for BTs actual and future
obligations under the terms of the legal agreement with Telereal and for the cost of advisors fees. The obligations include expenditure of £34 million to be incurred on completing nearly finished new properties and remedial work to be
undertaken on several properties.

Part of the proceeds of sale were used in novating fixed interest rate obligations to support Telereals financing. An exceptional cost of £162 million
was incurred in unwinding this position and was included in the interest charge for the year.

In summary, the property transaction benefited the results for the 2002 financial year by £857 million as shown below:

|Profit
        on sale and leaseback of properties   | £m      | 
|---------------------------------------------------- | ------- | 
|                                                     |        
|Sales proceeds                                       | 2,380   | 
|Net book value of assets
      disposed              | (1,232) | 
|Estimated cost of BTs
      future obligations      | (129)   | 
|                                                     |        
|Profit on properties sold                            | 1,019   | 
|Interest rate swap novation
      costs              | (162)   | 
|                                                     |        
|Net profit on sale and
      leaseback of properties | 857     | 
|                                                     |        

The rentals payable under the lease have an adverse impact on other operating costs in future years, which is initially around £190 million for the 2003 financial year which is wholly
offset by reduced depreciation and interest charges.

In advance of the property transaction being completed with Telereal, BT also completed the sale of one of its major properties in London at a profit of £43
million.

Interest charge
In the 2003 financial year,
  the total net interest charge, including BTs share of its ventures
  charges, at £1,439 million was £183 million lower than in the preceding
  year, which in turn was £308 million higher than in the 2001 financial
  year. Of the total net charge, £1,420 million arises in the BT group for
  the 2003 financial year, compared with £1,540 million and £1,044
  million in the 2002 and 2001 financial years, respectively.

The reduction in the net interest charge in the 2003 financial year reflects the reduction in the level of net debt and is partly offset by the £293 million
exceptional cost of terminating fixed interest rate swaps as a consequence of the receipt of the Cegetel sale proceeds.

The
  substantially higher charge in the 2002 and 2001 financial years is mainly due
  to the cost of funding the acquisition of mmO2s
  third-generation mobile licences, principally in the UK and Germany, and the cost of acquisitions in the 2001 and 2000 financial years. In the 2002 financial year, the groups net interest charge was
further increased by the £162 million exceptional cost of novating interest swaps as a consequence of the property sale and leaseback transaction. In the 2001 financial year, there was also a one-off £194 million increase in BTs
share of its ventures interest charges principally through the Japanese investments and Viag Interkom which was partly offset by an exceptional interest receipt of £25 million relating to the rates refund from the UK Government, noted
above.

Interest cover for continuing activities in the 2003 financial year represented 2.6 times total operating profit before goodwill amortisation and exceptional
items, and compares with interest cover of 1.9 in the 2002 financial year and 2.4 in the 2001 financial year. The improvement in cover in the 2003 financial year is due to the reduction in the interest charge and improvement in the operating profit
before goodwill amortisation and exceptional items. We expect the net interest charge to decrease and interest cover to continue to improve in the 2004 financial year following the continued reduction in net debt during the 2003 financial
year.

Profit (loss) before taxation
The groups profit before taxation for the 2003 financial year was £3,157 million, compared with a profit of £1,461 million in the 2002 financial year and a loss of
£1,031 million in the 2001 financial year. The profit in the 2003 financial year included the exceptional profits from the sale of investments and businesses totalling £1,691 million. The profit in the 2002 financial year included net
exceptional gains of £753 million. The loss in the 2001 financial year was principally due to the £3,200 million exceptional goodwill impairment charges.

The groups profit before taxation from continuing activities before goodwill amortisation and exceptional items for the 2003 financial year was £1,829
million, compared with £1,273 million in the 2002 financial year and £1,763 million in the 2001 financial year. The significantly higher underlying profit in the 2003 financial year was principally due to the exit from loss making
businesses, improved operating profits and lower interest charges explained above.

The
  profit before taxation from discontinued activities in the 2002 and 2001 financial
  years amounted to £3,954 million and a loss of £2,968 million, respectively.
  The 2002 financial year included

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gains on disposals from discontinued
  activities of £4,368 million.

Taxation
  The tax charge for the 2003 financial
  year was £459 million and comprises £598 million on the profit before
  taxation, goodwill amortisation and exceptional items, offset by tax relief
  of £139 million on certain exceptional charges. The tax charge on the
  profit before taxation, goodwill amortisation and exceptional items is at an
  effective rate of 32.7%.

The tax charge for the 2002 financial year was £443 million. The effective rate was 41.5% of the profit from continuing activities before taxation, goodwill
amortisation and exceptional items. This was in excess of the standard UK tax rate of 30% due to the impact of loss making subsidiaries outside the UK for which tax relief is not immediately available and associate company taxation.

The tax charge for the 2001 financial year was £712 million. The effective rate was 21.8% of profit from continuing activities before taxation, goodwill
amortisation and exceptional items. This was lower than the standard UK corporation tax rate of 30% due to tax relief on losses surrendered by discontinued activities.

Earnings (loss) per share
The basic earnings per share of 31.2 pence per share for the 2003 financial year compares with 12.0 pence for the 2002 financial year and loss of 25.7 pence for the 2001 financial year. These
results include those of the groups discontinued activities up to the date of demerger or sale, as well as significant exceptional items and goodwill amortisation. The following table illustrates the impact of these factors on the basic
earnings per share for the past three financial years:

|                                                                                                       | 2003  |  | 2002   |  | 2001   | 
|------------------------------------------------------------------------------------------------------ | ----- |  | ------ |  | ------ | 
|                                                                                                       | pence |  | pence  |  | pence  | 
|                                                                                                       |      
|Earnings per share from
      continuing activities before goodwill amortisation and exceptional items | 14.2  |  | 8.8    |  | 19.3   | 
|Exceptional items and goodwill
      amortisation from continuing activities                           | 17.0  |  | (43.6) |  | 1.4    | 
|                                                                                                       |      
|Earnings (loss) per share
      from continuing activities                                             | 31.2  |  | (34.8) |  | 20.7   | 
|Earnings (loss) per share
      from discontinued activities                                           |      |  | 46.8   |  | (46.4) | 
|                                                                                                       |      
|Total earnings (loss) per
      share                                                                  | 31.2  |  | 12.0   |  | (25.7) | 
|                                                                                                       |      

Basic earnings per share before goodwill amortisation and exceptional items, from BTs continuing activities of 14.2 pence for the 2003 financial year compares with an equivalent of 8.8
pence and 19.3 pence for the 2002 and 2001 financial years, respectively.

Diluted earnings per share are not materially different in all three years.

Dividends
The board recommends a final dividend of 4.25 pence per share to shareholders, amounting to £366 million.

This
  will be paid, subject to shareholder approval, on 8 September 2003 to shareholders
  on the register on 8 August 2003. This takes the dividend for the full year
  to 6.5 pence per share, compared to 2.0 pence in the 2002 financial year. This
  years dividend is covered 2.2 times by the profit before goodwill amortisation
  and exceptional items. BT remains committed to a progressive dividend policy,
  reflecting growth in earnings per share and an improving balance sheet. In view
  of our strong cash generation and success in reducing net debt, in the 2004
  financial year we expect dividend cover to reduce further towards the 2 times
  target that we set out last year.

The final and full dividend for the 2002 financial year was 2.0 pence per share, which absorbed £173 million. As part of BTs debt reduction and
restructuring plans, the Board decided in May 2001 that there was to be no interim dividend for the 2002 financial year, nor any final dividend in respect of the 2001 financial year. The dividend for the 2001 financial year of 7.8 pence per share
therefore solely comprised the interim dividend paid in February 2001 which absorbed £571 million.

Financing
Net cash inflow from operating activities of £6,023 million in the 2003 financial year compares with £5,257 million in the 2002 financial year and £5,887 million in the 2001
financial year. Net cash inflow from continuing operating activities amounted to £6,023 million, £5,023 million and £5,410 million in the 2003, 2002 and 2001 financial years, respectively. Special and deficiency contributions to
the main pension fund, described below, of £329 million in the 2003 financial year, £600 million in the 2002 financial year and £300 million in the 2001 financial year were paid, consequently reducing the net cash inflow by these
amounts. The strong cash generation in the 2003 financial year reflects the improved operating performance of the group.

Tax paid in the 2003 financial year totalled £434 million compared with £562 million in the 2002 financial year and £669 million paid in the
2001 financial year. The lower tax paid in the 2003 and 2002 financial years reflects the lower current tax charge.

The net cash outflow of £2,381 million for capital expenditure and financial investment in the 2003 financial year included £2,580 million of capital
expenditure on plant and equipment, offset by £200 million received on the sale of fixed assets. In the 2002 financial year the net cash outflow of £1,354 million for capital expenditure and financial investment included £4,069
million of capital expenditure on plant and equipment, offset by £2,752 million received on the sale of fixed assets. These proceeds included £2,380 million from the property sale and leaseback transaction completed in December 2001,
described above. Net cash outflow of £8,442 million for capital expenditure and financial investment in the 2001 financial year was principally for capital expenditure on plant and equipment of £4,756 million and £4,208 million invested in mmO2s third-generation mobile licences.

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The net cash inflow from disposals
  less acquisitions in the 2003 financial year totalled £2,842 million.
  Cash proceeds from disposals amounted to £2,919 million and principally
  comprised £2,603 million from the sale of the investment in Cegetel. In
  the 2002 financial year the net cash inflow from disposals less acquisitions
  totalled £5,785 million. Cash proceeds from disposals amounted to £6,916
  million and principally comprised £3,075 million from the sale of the
  investment in Japan Telecom and J-Phone, £1,838 million from the sale
  of the Yell directories business and £1,084 million from the sale of our
  investment in Airtel. The principal cash outflow for acquisitions was the completion
  of the purchase of a minority interest in Esat Digifone in April 2001 for £869
  million.

In the 2001 financial year, the group made significant acquisitions and the net cash outflow on these totalled £13,754 million in that year. This included
£11,438 million invested in Viag Interkom, including acquisition of its licences, £1,233 million in Telfort, £1,176 million in completing the Esat Telecom Group acquisitions, offset by £464 million received principally on the
disposal of sunrise communications.

Equity dividends paid in the 2003 financial year totalled £367 million whilst there were no equity dividends paid in the 2002 financial year, as explained
above. Equity dividends paid in the 2001 financial year totalled £1,432 million.

The
  resulting cash inflow for the 2003 financial year, before management of liquid
  resources and financing, of £4,183 million was mainly applied in repaying
  short-term borrowings and investing in short-term investments, with total borrowings
  of £2,535 million being repaid. The cash inflow for the 2002 financial
  year of £7,433 million was also applied in repaying short-term borrowings
  and investing in short-term investments. In the 2001 financial year, the significant
  cash outflow of £19,127 million was funded by issuing substantial amounts
  of long-term debt instruments and drawing on medium-term notes programmes. In
  December 2000, £6,909 million was raised through the issue of four series
  of US dollar notes totalling $10 billion, with maturities between three and
  thirty years. In February 2001, £6,038 million was received through the
  issue of six series of euro and sterling notes totalling €9.7
  billion, with maturities between two and sixteen years. In April 2000, a twenty-five
  year £250 million index-linked Eurobond was issued.

The cash inflow for the 2003 financial year resulted in net debt reducing by a further £4,128 million to £9,573 million having reduced by
£14,241 million to £13,701 million in the 2002 financial year. In the 2001 financial year the cash outflow resulted in net debt increasing to £27,942 million at 31 March 2001.

In
  the 2003 financial year, the group repaid borrowings totalling £2,535
  million and no new long-term debt was raised having repaid borrowings totalling
  £12,006 million in the 2002 financial year. This was in part due to the
  success of the companys rights issue which closed in June 2001. 1,976
  million new shares were issued for a total consideration of £5,876 million,
  net of expenses. As part of the demerger arrangements, £440 million was
  received from mmO2; additionally mmO2 assumed £60
  million of the groups external net debt.

In the 2001 financial year, the group borrowed £14,552 million in long-term loans and repaid £225 million in long-term debt. This was in accordance
with our intention, expressed at the end of the 2000 financial year, to refinance a significant part of our commercial paper borrowings with medium or longer-term debt when market conditions allowed and also to raise further significant finance in
the 2001 financial year to meet the financing needs of the UK third-generation mobile licence, won in April 2000, increased capital expenditure and acquisitions of interests in subsidiaries, joint ventures and associates and their additional funding
requirements.

We expect to see a continued improvement in the financial position of BT and are seeking to obtain a single A rating from all the major rating agencies.

|                                                                                | 2003    |  | 2002    |  | 2001     | 
|------------------------------------------------------------------------------- | ------- |  | ------- |  | -------- | 
|Summarised
      cash flow statement                                            | £m      |  | £m      |  | £m       | 
|                                                                                |        
|Net cash inflow from operating
      activities:                                |         |  |         |  |          | 
|Continuing activities                                                           | 6,023   |  | 5,023   |  | 5,410    | 
|Discontinued activities                                                         |        |  | 234     |  | 477      | 
|                                                                                |        
|Total net cash inflow from
      operating activities                           | 6,023   |  | 5,257   |  | 5,887    | 
|Dividends from associates
      and joint ventures                              | 6       |  | 2       |  | 10       | 
|Net cash outflow for returns
      on investments and servicing of finance      | (1,506) |  | (1,695) |  | (727)    | 
|Taxation paid                                                                   | (434)   |  | (562)   |  | (669)    | 
|Net cash outflow for capital
      expenditure and financial investment         | (2,381) |  | (1,354) |  | (8,442)  | 
|Net cash inflow (outflow)
      for acquisitions and disposals                  | 2,842   |  | 5,785   |  | (13,754) | 
|Equity dividends paid                                                           | (367)   |  |        |  | (1,432)  | 
|                                                                                |        
|Cash inflow (outflow) before
      management of liquid resources and financing | 4,183   |  | 7,433   |  | (19,127) | 
|Management of liquid resources                                                  | (1,729) |  | (1,864) |  | (480)    | 
|Net cash (outflow) inflow
      from financing                                  | (2,473) |  | (5,479) |  | 19,735   | 
|                                                                                |        
|(Decrease) increase in
      cash in the year                                   | (19)    |  | 90      |  | 128      | 
|                                                                                |        
|Decrease (increase) in
      net debt in the year resulting from cash flows     | 4,225   |  | 13,930  |  | (18,942) | 
|                                                                                |        

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Treasury policy
The group has a centralised treasury operation whose primary role is to manage liquidity, funding, investment and the groups financial risk, including risk from volatility in currency
and interest rates and counterparty credit risk. The treasury operation is not a profit centre and the objective is to manage risk at optimum cost.

The Board sets the treasury departments policy and its activities are subject to a set of controls commensurate with the magnitude of the borrowings and
investments under its management. Counterparty credit risk is closely monitored and managed within controls set by the Board. Derivative instruments, including forward foreign exchange contracts, are entered into for hedging purposes only.

We have set out further details on this topic and on our capital resources and foreign currency exposure in note 36 to the financial statements in compliance with
FRS 13.

Capital resources
During the 2003 and 2002 financial
  years the group has reduced its level of borrowings so that its net debt was
  £9.6 billion at 31 March 2003 compared with £13.7 billion at 31
  March 2002 and £27.9 billion at 31 March 2001. The debt reduction in the
  2003 and 2002 financial years was achieved by the disposal of our stake in Cegetel,
  a successful rights issue in June 2001, the mmO2demerger, sales
  of investments and the Yell business and the property sale and leaseback transaction.

The directors have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future and therefore
they continue to adopt the going concern basis in preparing the financial statements.

There has been no significant change in the financial or trading position of the group since 31 March 2003.

At 31 March 2003, the group had cash and short-term investments of £6,431 million. At that date, £2,548 million of debt falls due for repayment in the
2004 financial year. The group had unused short-term bank facilities, amounting to approximately £575 million at 31 March 2003.

At 31 March 2002, the group had cash and short-term investments of £4,739 million. In addition, the group had unused committed short-term bank facilities,
amounting to approximately £2,100 million at 31 March 2002, in support of a commercial paper programme or other borrowings. The group also had £461 million of uncommitted short-term bank facilities.

Foreign currency and interest rate exposure
Most of the groups current turnover is invoiced in pounds sterling, and most of its operations and costs arise within the UK. The groups foreign currency borrowings, which totalled
£12.3 billion at 31 March 2003, are used to finance its operations. These borrowings have been predominantly swapped into sterling. 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 investment, interest
expense and purchase and sale commitments. The commitments hedged are principally US dollar and euro denominated. As a result of these policies, the groups exposure to foreign currency arises mainly on the residual currency exposure on its
non-UK investments in its subsidiaries and ventures and on any imbalances between the value of outgoing and incoming international calls. To date, these imbalances have not been material. As a result, the groups profit has not been materially
affected by movements in exchange rates in the three years under review.

The
  groups exposure to changes in currency movements decreased significantly
  following the demerger of the mmO2business and its European
  operations in November 2001. A 10% strengthening in sterling against major currencies
  would cause the groups net assets at 31 March 2003 to fall by less than
  £100 million, with insignificant effect on the groups profit. This
  compares with a fall of less than £150 million and £1,200 million
  in the years ended 31 March 2002 and 2001, respectively.

Foreign exchange contracts are entered into as a hedge of sales and purchases, accordingly a change in the fair value of the hedge is offset by a corresponding
change in the value of the underlying sale or purchase.

The majority of the groups long-term borrowings have been, and are, subject to fixed interest rates. The group has entered into interest rate swap
agreements with commercial banks and other institutions to vary the amounts and period for which interest rates are fixed. At 31 March 2003, the group had outstanding interest rate swap agreements with notional principal amounts totalling
£5,170 million compared to £7,870 million at 31 March 2002.

The long-term debt instruments which BT issued in December 2000 and February 2001 both contained covenants that if the BT group credit rating were downgraded
below A3 in the case of Moodys or below A minus in the case of Standard & Poors (S&P), additional interest would accrue from the next interest coupon period at the rate of 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 annual interest charge by approximately £32 million. BTs credit rating from S&P is A minus. Based upon
the total amount of debt of £12 billion outstanding on these instruments at 31 March 2003, BTs annual interest charge would increase by approximately £60 million if BTs credit rating 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 with Moodys was to be upgraded by one credit rating category the annual interest charge would be reduced by approximately £30
million.

Based
  upon the composition of net debt at 31 March 2003, a one percentage point increase
  in interest rates would increase the groups annual net interest expense
  by less than £10 million. This

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compares with an increase of
  less than £20 million and less than £90 million in the years ended
  31 March 2002 and 2001 respectively. The groups exposure to interest rate
  fluctuations has reduced in line with the decrease in net debt and the increased
  percentage of the groups net debt being at fixed rates.

Capital
  expenditureCapital expenditure on plant,
  equipment and property (excluding the movement on capital accruals) totalled
  £2,445 million in the 2003 financial year, compared with £3,908
  million and £4,986 million in the 2002 and 2001 financial years, respectively.
  Of the total capital expenditure, £3,100 million and £3,857 million
  were in relation to the groups continuing activities in the 2002 and 2001
  financial years, respectively. The reduction in the level of capital expenditure
  reflects continued management focus and tight control. Work continues on enhancing
  the intelligence of the network to enable customers to benefit from advanced
  services and improving the networks capacity to carry high-speed data.
  Capital expenditure is expected to rise in the 2004 financial year as the group
  invests in its 21st century network programme.

Capital expenditure in relation to the groups discontinued activities amounted to £808 million and £1,129 million in the 2002 and 2001 financial
years, respectively. Prior to the demerger, mmO2 continued improving the quality and capacity of its digital GSM network. In April 2000, we purchased one of the five 3G licences in the UK Governments auction for £4.03 billion, which we
paid in May 2000. A third generation mobile licence in the Netherlands was awarded to Telfort in July 2000 for £267 million.

Of the capital expenditure, £138 million was in Europe, outside the UK, in the 2003 financial year and £634 million was spent there in the 2002
financial year.

Contracts placed for ongoing capital expenditure totalled £616 million at 31 March 2003. We plan to develop the 21st century network using stringent capital
return criteria and a rigorous approach to any investment in the narrowband network. The 21st century network aims to deliver long term, structural cost reduction, as we progressively migrate onto a simpler, lower cost network architecture. BT
expects that future capital expenditure will be funded from net cash inflows from operating activities, and, if required, by external financing.

Acquisitions
The total amount invested in the 2003 financial year, including further funding of existing ventures, was £77 million, significantly lower than the £1,131 million invested in the
2002 financial year. In the 2002 financial year only one significant acquisition was made, being the purchase in April 2001 of the 49.5% interest in Esat Digifone that we did not already own, from Telenor, for £869 million under an agreement
made in early 2000.

During
  the 2001 financial year, BT completed a number of acquisitions of businesses,
  mainly located outside the UK. The total amount invested, including further
  funding of existing ventures, was £14,501 million.

In
  April 2000, we took an equity interest, jointly with Japan Telecom, in a number
  of regional Japanese mobile phone companies (J-Phone Communications). Instead
  of investing directly in J-Phone Communications, we guaranteed bank loans to
  that group totalling £782 million at 31 March 2001 that no longer apply
  following the disposal. As noted above, we have now sold our interests to Vodafone
  for £3.7 billion. In June 2000, we acquired for £1,207 million our
  partners 50% interest in Telfort, the communications joint venture which
  we established in the Netherlands in 1997. The wireless business of Telfort
  was demerged with mmO2 in November 2001. In the 2002 financial year the remaining
  goodwill was written off.

In
  the final quarter of the 2001 financial year, we acquired the 55% interest in
  Viag Interkom that we did not already own. In January 2001, we acquired a 10%
  interest in Viag Interkom including its share of the German third generation
  licence from Telenor for £1,611 million, and in February 2001, we acquired
  the remaining 45% interest from E.ON for £7,148 million, including its
  share of the cost of the licence. Goodwill of £4,992 million arose on
  these transactions. In the light of falling equity valuations for wireless companies
  in the 2001 financial year, we carried out impairment reviews of the carrying
  values of Viag Interkom and other major wireless interests at that time. As
  discussed above, we recognised a £3,000 million goodwill impairment in
  Viag Interkom of which £200 million related to the fixed network business remaining in the BT Group after the mmO2demerger. In the 2002 financial year the remaining goodwill was written off.

Demerger
  and capital reductionThe demerger of mmO2,
  the groups former mobile phone business, was completed in November 2001.
  The demerger, scheme of arrangement and associated reduction in capital were
  approved by shareholders in October 2001 and the High Court in November 2001.
  The demerger of mmO2 created
  two new listed companies and dealings in BT Group and mmO2 shares commenced on 19 November 2001. BT shareholders
  on record on 16 November 2001, received one BT Group plc share and one mmO2 plc share for each existing British Telecommunications
  plc share held. Based on the first days dealings on the London Stock Exchange,
  BT Group represented approximately 78% of the equity value of the former BT
  group and mmO2 represented approximately 22%.

On the demerger, net assets of £19,490 million attributable to mmO2 were distributed to
shareholders in the form of a demerger distribution. mmO2 assumed approximately £500 million of debt, with the bulk of the outstanding debt remaining with the continuing BT Group. The reduction of capital had the effect of increasing distributable
reserves in BT Group plc by £9,537 million.

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Balance sheet
Net assets at 31 March 2003 amounted to £2,642 million compared to a deficit of £358 million at 31 March 2002, with the increase principally due to the retained profits of £2,126 million.

BT Group plc, the parent company, has maintained reserves at £9,537 million at both 31 March 2003 and 31 March 2002.

BTs fixed assets totalled £16,661 million at 31 March 2003 of which £15,888 million were tangible assets, principally forming the UK fixed
network. At 31 March 2002 fixed assets were £17,551 million and tangible assets were £16,078 million. The reduction in fixed assets is principally due to the groups exit from non core investments as a result of which investments
have reduced by £666 million to £555 million at 31 March 2003.

Return on capital employed
The return before goodwill amortisation and exceptional items on the average capital employed (total assets, excluding goodwill, less current liabilities, excluding corporate taxes and
dividends payable, and provisions other than those for deferred taxation) was 15.7% for the 2003 financial year. In the 2002 financial year the group made a return from continuing activities before goodwill amortisation and exceptional items of
15.7% on the average capital employed in its business excluding mmO2and goodwill. In the
2001 financial year, the group made a return on all activities before goodwill amortisation and exceptional items of 14.9%.

Pensions
The most recently completed triennial actuarial valuation of the BT Pension Scheme (BTPS), BTs main pension fund, performed by the schemes independent actuary for the trustees of
the scheme, was carried out as at 31 December 2002. This valuation showed the fund to be in deficit to an amount of £2.1 billion. Assets of the fund of £22.8 billion at that date covered 92% of the funds liabilities. The previous
valuation was carried out as at 31 December 1999. The result of this valuation was that the fund was in deficit by £1.0 billion. Assets of the fund of £29.7 billion at that date covered 97% of the funds liabilities.
The deterioration in the funding position was principally the result of lower equity returns over the last three years and improved life expectancy of scheme members and is in spite of the
additional deficiency funding payments totalling £600 million that have been paid over the last three years. The valuation under the prescribed Minimum Funding Requirement approach showed the assets to cover 101% of the liabilities at 31
December 2002.

The groups ordinary contribution rate will increase to 12.2% of employees pensionable pay with effect from April 2003. The contribution rate was 11.6%
for the 2003, 2002 and 2001 financial years. In addition, the company will make annual deficiency contributions to the scheme of £232 million with effect for the 2004 financial year. This compares to the £200 million annual deficiency
payments made in the 2003, 2002 and 2001 financial years. The group is also required to pay special contributions to cover costs arising from enhanced pension benefits provided to leavers. The special contributions paid in
the 2003, 2002 and 2001 financial years amounted to £129 million, £400 million and £100 million, respectively, in respect of early leavers. The payment expected to be made in December 2003 is £100 million in relation to
leavers in the calendar year ended 31 December 2002.

The group continues to account for pension costs in accordance with UK Statement of Standard Accounting Practice No. 24 (SSAP 24). The groups total annual
pension charges, including discontinued activities, for the 2003, 2002 and 2001 financial years were £322 million, £382 million and £326 million, respectively. This includes £314 million, £373 million and £315
million, respectively, in relation to the BTPS.

The reduction in the pension charge in the 2003 financial year reflects the lower membership of the BTPS and the interest credit on the balance sheet prepayment.
The increase in the pension charge in the 2002 financial year was due principally to the £46 million charge for enhanced pension benefits provided to leavers.

Under the UK accounting standard SSAP 24, and BTs accounting policy, if the costs of providing incremental pension benefits for leavers are less than the
total accounting surplus based on the latest actuarial valuation of the scheme and the amount of the provision for pension liabilities on the balance sheet, the costs are not charged to the profit and loss account. In the 2001 financial year the
cost of the incremental benefits was charged against the accounting surplus and was not charged against the profit in the period in which people agreed to leave. In the 2003 and 2002 financial years the total cost of the incremental pension benefits
exceeded the total accounting surplus and accordingly the excess was charged to the profit and loss account. This amounted to £60 million and £46 million in the 2003 and 2002 financial years, respectively.

The pension charge for the 2004 financial year will be based upon the SSAP 24 valuation as at 31 March 2003. This valuation is based on the December 2002 funding
valuation, rolled forward to 31 March 2003, and uses a slightly higher investment return assumption than was used for the trustees funding valuation, a lower inflation rate and lower salary increase assumptions. The resulting SSAP 24 deficit
amounts to £1.4 billion. The regular pension cost will be charged at 11.3% of pensionable salaries compared to the 11.6% rate applied in the 2003, 2002 and 2001 financial years. In addition, the pension charge will include the amortisation of
the combined pension fund position of £1.4 billion and pension prepayment of £630 million held on the BT group balance sheet, over the average remaining service lives of members which amounts to 13 years, and enhanced pension benefits
provided to leavers.

The
  number of retired members and other current beneficiaries in the pension fund
  has been increasing in recent years and, at 31 December 2002, was approximately
  94% higher than the number of active

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members. Consequently, BTs
  future pension costs and contributions will depend on the investment returns
  of the pension fund and could fluctuate in the medium term.

We
  changed the arrangements for people leaving BT in advance of the normal retirement
  age. Under our NewStart programme launched during the fourth quarter of the
  2001 financial year, BT employees will be expected to leave with a leaving payment
  in place of a redundancy payment, and incremental pension benefits have been
  scaled down. This should reduce the level of early leaver costs, which have
  been significant in recent years.

The BTPS was closed to new entrants on 31 March 2001 and we launched a new defined contribution pension scheme for people joining BT after that date which is to
provide benefits based on the employees and the employing companys contributions. This change is in line with the practice increasingly adopted by major UK groups and is designed to be more flexible for employees and enable the group to
determine its pension costs more precisely than is the case for defined benefit schemes. The financial impact of this change was not significant in the 2003 and 2002 financial years and is not expected to be significant in the next few years but it
should reduce pension costs in the longer term.

Regulation and prices
BT has been operating under a revised retail price control from 1 August 2002, under which a cap of RPI minus RPI (therefore price cannot increase) applies to the services used by the lowest
80% of BTs residential customers by bill size. This retail price control is estimated to have covered services representing about 13% of the groups turnover from continuing activities for the 2003 financial year. The requirement is to
keep prices unchanged for the price control year to 31 July 2003. Regulation allows any unused allowance or excess deduction remaining at the end of the price control year (31 July) to be carried forward. The equivalent reduction in the previous
control year was 2.50% against the required reduction of 2.45%.

Most of BTs interconnect (network) charges to other UK operators are based on long-run incremental costs. Until 30 September 2001, there were annual
reductions in these charges based on a RPI minus 8 price cap. Since that date, the broad structure of the interconnect (network) services has been retained but the X within the RPI minus X price-cap formula now varies between
7.5 and 13, this new price control runs until 2005.

The regulatory environment in the UK has had, and is expected to continue to have, a significant adverse impact on the groups turnover and operating profit.
As the group has extended its activities to other countries, BT is required to comply with the regulatory regimes in those countries.

Competition and the UK economy
BT has a significant market share in its main UK markets for fixed network calls and provision of exchange lines, although competition has eroded BTs
market share significantly in key market sectors, in particular areas of the UK and for certain products and services. This trend shows signs of slowing in the residential market and we
estimate that BT had 73% of the market for residential fixed voice calls in the 2003, 2002 and 2001 financial years. Additionally, we estimate that BT had 45% of the market for business fixed voice calls in the 2003 financial year, compared with 49%
and 53% in the 2002 and 2001 financial years, respectively. We also estimate that BT supplied 81% of the exchange lines in the UK at 31 March 2003, compared with 83% and 84% at 31 March 2002 and 2001, respectively.

The growth in cable operators networks in the UK has historically had an adverse effect on BTs share of the residential market as a result of
increasing competition from these cable operators. However, in the 2003 financial year, BT has grown its residential customer base by 100,000. The cable operators have been concentrating on financial restructuring and increasing penetration in
current markets. Current and future wholesale line rental arrangements will allow BTs fixed line customers to move PSTN lines to other operators which are expected to be the source of more competition in future.

The group has seen some diversion of demand from its fixed network as a result of the growth in mobile voice calls and other licensed operators activities.
This diversion may intensify now that BTs fixed line customers are able to pre-select their carrier.

Additionally, BTs Licence was amended in April 2000 to require BT to provide other operators with use of the lines connecting BTs local exchanges to
its customers and allow operators to install equipment in BTs exchanges (local loop unbundling). This amendment took effect as a result of an EU Regulation which came into force on 1 January 2001.

For its operations as a whole, BT expects the competitive pressure to persist and it will continue to defend its market share vigorously and fairly.

The strength of the UK economy is an important determinant of BTs business volumes and the gross domestic product grew by 2.3% in the 2003 financial year,
compared with 1.2% and 2.6% in the 2002 and 2001 financial years, respectively.

Environment
When removing old analogue exchange equipment from buildings, BT recycles the metal content and takes special care to properly dispose of any hazardous materials. Although BT receives proceeds
from the sale of recovered materials, this is more than offset by the cost of dealing with hazardous materials, contracting and planning their removal and preparing the released site for further development. BT believes that the total cost of
dealing with these hazardous materials will not be significant.

Geographical
  informationIn the 2003 financial year, approximately
  94% of the groups turnover was generated by operations in the UK, compared
  with 89% in the 2002 and 91% in the

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2001 financial years. Of its
  continuing activities, approximately 92% of the groups turnover was generated
  by operations in the UK in the 2002 financial year, compared with 95% in the
  2001 financial year. BTs operating profits have been derived from its
  UK operations with losses being incurred outside the UK in each of the last
  three financial years.

Regulatory
  financial informationBT is required under its main
  licence to publish disaggregated financial information for various activities
  of the group, which have been used as the basis of charges paid by other telecommunication
  operators in the UK for the use of BTs network. The activities presented
  separately in the regulatory financial statements do not necessarily correspond
  with any businesses separately managed, funded or operated within the group.
  The results set out in regulatory financial statements for the 2002 and 2001
  financial years showed that the groups operating profit is derived predominantly
  from fixed-network calls.

Critical accounting policies
The groups principal accounting policies are set out on pages 76 to 78 of the consolidated financial statements and conform with UK Generally Accepted Accounting Principles (UK GAAP). In
accordance with the requirements of Financial Reporting Standard No. 18, these policies and applicable estimation techniques have been reviewed by the directors who have confirmed them to be the most appropriate for the preparation of the 2003
financial statements.

We, in common with virtually all other companies, need to use estimates in the preparation of our financial statements. The most sensitive estimates affecting our
financial statements are in the areas of assessing the level of interconnect income with and payments to other telecommunications operators, providing for doubtful debts, establishing fixed asset lives for depreciation purposes, making appropriate
long-term assumptions in calculating pension liabilities and costs, making appropriate medium-term assumptions on asset impairment reviews and calculating current tax liabilities on our profits.

We are required to interconnect our networks with other telecommunications operators. In certain instances we rely on other operators to measure the traffic flows
interconnecting with our networks. We use estimates in these cases to determine the amount of income receivable from or payments we need to make to these other operators. The prices at which these services are charged are often regulated and are
subject to retrospective adjustment. We use estimates in assessing the likely effect of these adjustments.

We provide services to over 20 million individuals and businesses, mainly on credit terms. We know that certain debts due to us will not be paid through the
default of a small number of our customers. We use estimates, based on our historical experience, in determining the level of debts that we believe will not be collected. These estimates include such factors as the current state of the UK economy
and particular industry issues.

The
  plant and equipment used in our networks is long-lived with cables and switching
  equipment operating for over ten years and underground ducts being used for
  decades. The annual depreciation charge is sensitive to the estimated service
  lives we allocate to each type of asset. We regularly review these asset lives
  and change them when necessary to reflect current thinking on their remaining
  lives in light of technological change, prospective economic utilisation and
  physical condition of the assets concerned.

As part of the property rationalisation programme we have identified a number of properties that are surplus to requirements. Although efforts are being made to
sub-let this space it is recognised by management that this may not be possible immediately in the current economic environment. Estimates have been made of the cost of vacant possession and any shortfall arising from the sub lease rental income
being lower than the lease costs being borne by BT.

We have a commitment, mainly through the BT Pension Scheme, to pay pension benefits to approximately 366,000 people over more than 60 years. The cost of these
benefits and the present value of our pension liabilities depend on such factors as the life expectancy of the members, the salary progression of our current employees, the return that the pension fund assets will generate in the time before they
are used to fund the pension payments and the discount rate at which the future pension payments are discounted. We use estimates for all these factors in determining the pension costs and liabilities incorporated in our financial statements.

In the 2002 and 2001 financial years, we made charges for the impairment of the carrying value of goodwill, investments and tangible fixed assets in our balance
sheet. The amount of the charges are in most cases based on the discounted present value of the future cash flows that we expected to be derived from these assets. We use estimates in determining these future cash flows and the discount rate.

The actual tax we pay on our profits is determined according to complex tax laws and regulations. Where the effect of these laws and regulations is unclear, we
use estimates in determining the liability for the tax to be paid on our past profits which we recognise in our financial statements.

New
  UK accounting standardsUnder a new UK accounting standard,
  FRS 17 Retirement benefits, the method of accounting
  for defined benefit pensions will be substantially changed. The Accounting Standards
  Board has delayed the full adoption of this new standard until our 2006 financial
  year. The pension cost charged to the profit and loss account would have been
  lower under FRS 17 than SSAP 24 in the 2003 financial year. Net financing costs
  will be volatile reflecting movements in the value of the scheme assets and
  interest rates. Pension fund actuarial gains and losses, including investment
  returns varying from the assumed returns, will be recorded in full in the statement
  of total recognised gains and

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losses annually. Pension fund
  deficits, calculated in accordance with prescribed rules in the standard, will
  be shown on the balance sheet as will any surpluses to the extent we expect
  to obtain value from them in the foreseeable future. In accordance with the
  transitional rules of the standard the pension fund deficit and profit and loss
  charge calculated under FRS 17 is disclosed in note 31. It should be noted that
  the deficit is largely dependent on the strength of equity markets at the balance
  sheet date and is expected to be volatile.

Economic
  and Monetary UnionThe euro is now established as
  a single currency spanning the 12 EU member countries participating in Economic
  and Monetary Union (EMU).

Most of the groups business in Europe is conducted in the UK, which is not one of the 12 participants. Government policy on UK membership was set out by the
Chancellor of the Exchequer in his statement to the House of Commons in October 1997 and restated by the Prime Minister in February 1999. The Chancellor has set five economic tests to define whether or not a clear and unambiguous case can be made in
support of the UK joining the EMU.

Based on the outcome of the economic assessment, the Government will take a decision on whether the five tests have been met and an announcement on whether the UK
should join will be made in the House of Commons on 9 June 2003.

If the Government decides to recommend UK entry, it will be put to a vote in Parliament and then to a referendum. In the interim, BT has maintained a steering
group, with representatives from across each of the lines of business and supporting group functions, to review the impact of the euro. A project team acts as co-ordination point to ensure consistency of approach across the group and that plans are
in place to meet agreed business strategy for the possibility of euro changeover in the UK.

US GAAP
The groups net income (loss) and earnings (loss) per share for the three financial years ended 31 March 2003 and shareholders equity at 31 March 2003 and 2002 under US Generally
Accepted Accounting Principles (US GAAP) are shown further in the United States Generally Accepted Accounting Principles Section (see Consolidated financial statements). Differences between UK GAAP and US GAAP include results of the differing
accounting treatment of leasing transactions, pension costs, redundancy costs, intangible assets, goodwill, deferred taxation, capitalisation of interest, financial instruments, contributing assets to joint ventures, stock compensation, and
dividends. Cash flow information under the US GAAP presentation is also shown further in this document.

In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 Accounting for Asset Retirement Obligations which is
applicable to financial years commencing after 15 June 2002. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognised in the period
in which it is incurred if it is possible to make a reasonable estimate of the fair value. The associated asset retirement costs are required to be capitalised as part of the carrying value of
the long lived asset. The adoption of SFAS No. 143 is not expected to have a material impact on the consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which is applicable to
disposals initialised after 31 December 2002. The Statement requires costs associated with exit or disposal activities to be recognised when the costs are incurred rather than at the date of the commitment to an exit or disposal plan. Accordingly,
we have reflected the impact of SFAS No. 146 in the 2003 financial year. SFAS No. 146 may apply to future activities which are not currently envisaged and accordingly it is not possible to assess the future impact of SFAS No. 146 on any such
activities at this time.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation Transition and Disclosure  an amendment of FASB
Statement No. 123 which is applicable to financial years beginning after 15 December 2002. The Statement permits two additional transition methods for an entity voluntarily adopting fair value based accounting for stock based
compensation. It also amends the disclosure requirements to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock based employee compensation. This Statement does
not have a significant impact on the consolidated financial statements as SFAS No. 123 continues to be satisfied for disclosure purposes only.

In April 2003 the FASB issued SFAS No. 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. BT is currently evaluating the impact of this change.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that certain guarantees must be recognised at fair value. FIN 45 also requires disclosure of detailed information about each guarantee or group of guarantees. The disclosure
requirements are effective for financial statements ending after 15 December 2002. The recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after 31 December 2002. FIN 45 could have an impact on the future
results of BT depending on guarantees issued; however, at this time the adoption of this statement did not have a material impact on BTs consolidated financial statements.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities  an

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Interpretation of Accounting Research Bulletin (ARB) No. 51. FIN 46 requires the primary beneficiary to consolidate a variable interest entity (VIE) if it has a variable interest
that will absorb a majority of the entitys expected losses if they occur, receive a majority of the entitys expected residual returns if they occur, or both. FIN 46 applies immediately to VIEs created after 31 January 2003, and to VIEs
in which the entity obtains an interest after that date. This statement is not expected to have a material impact on BTs consolidated financial statements.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21, Revenue Arrangements with Multiple
Deliverables. The consensus addresses how to account for arrangements that may involve multiple revenue generating activities, for example, the delivery or performance of multiple products, services, and/or rights to use assets. In
applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a package, and the consideration will be measured and allocated to the separate units based on their relative fair values.
This consensus guidance will be applicable to agreements entered into after 15 June 2003. BT is currently evaluating the impact of this new pronouncement.

In January 2003, the EITF reached a consensus on EITF 02-18, Accounting for Subsequent Investments in an Investee after Suspension of Equity Method
Loss Recognition. This consensus states that if the additional investment, in whole or in part, represents the funding of prior losses, the investor should recognise previously suspended losses. When appropriate to recognise prior
losses, the amount recognised would be limited to the amount of the additional investment determined to represent the funding of prior losses. The consensus is effective for additional investments made after 5 February 2003. This consensus is not
expected to have a material impact on BTs consolidated financial statements.

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Board of directors and Operating Committee

Board of directors
Sir Christopher
  Bland Chairmand,e,fSir Christopher Bland was appointed to the Board as Chairman on 1 May 2001. He chairs the Nominatingand Community Supportcommittees.

He was chairman of the BBC Board of Governors from 1 April 1996 until 30 September 2001. From 1972 to 1979, Sir Christopher was deputy chairman of the Independent
Broadcasting Authority and chairman of its Complaints Review Board. In 1982, he became a non-executive director of LWT Holdings and was chairman from 1983 to 1994, when LWT was acquired by Granada Group. From December 1994 to May 2000, he was
chairman of NFC. From 1977 to 1985, he was chairman of Sir Joseph Causton & Sons.

Sir Christopher, who was chairman of the Hammersmith and Queen Charlottes Hospitals Special Health Authority from 1982 to 1994 and of Hammersmith
Hospitals NHS Trust from 1994 to February 1997, was knighted for his work in the NHS in 1993. He was chairman of the Private Finance Panel from 1995 to 1996 and a member of the Prime Ministers Advisory Panel on the Citizens
Charter. He is senior adviser at Warburg Pincus. Aged 64.

Executive directors
Ben Verwaayen
  Chief ExecutiveaBen Verwaayen was appointed
  to the Board on 14 January 2002 and became Chief Executive on 1 February
  2002. He chairs the Operating Committee.

Ben Verwaayen was formerly vice chairman of the management board of Lucent Technologies in the USA from October 1999. He joined Lucent in September 1997 as
executive vice president international and became chief operating officer the following month. Prior to joining Lucent, Ben Verwaayen worked for KPN in the Netherlands for nine years as president and managing director of its telecoms subsidiary, PTT
Telecom. From 1975 to 1988, he worked for ITT in Europe. He is a member of the advisory council of ING. A Dutch national, he is aged 51.

Ian Livingston
  Group Finance Directora,fIan Livingston was appointed Group Finance Director in April 2002. He was formerly group finance director of Dixons Group from 1997. He joined Dixons in 1991 after working for 3i Group and
Bank of America International. His experience at Dixons spanned a number of operational and financial roles, both in the UK and overseas. He was also a director of Freeserve from its inception. He is a Chartered Accountant. He becomes a
non-executive director of Hilton Group from 1 June 2003. Aged 38.

Pierre
  DanonChief Executive,
  BT RetailaPierre Danon
  was appointed to the Board on 19 November 2001. He joined BT as Chief Executive
  of BT Retail in October 2000 and was a member of the former Executive Committee.
  From 1981 to 2000, he worked for Rank Xerox (which became Xerox in 1997), latterly
  as president of Xerox Europe. He was a senior vice president of Xerox Corporation
  since 1997. He is a non-executive director of Hays plc. A French national, he
  is aged 47.

Andy Green
  Chief Executive, BT Global ServicesaAndy Green was
  appointed to the Board on 19 November 2001. He was appointed as Chief Executive
  of BT Global Services in October 2001. Since joining BT in 1986, he has held
  a number of positions, including Chief Executive of BT Openworld and Group Director
  of Strategy and Development. Andy Green was a member of the former Executive
  Committee from February 1995. Aged 47.

Dr Paul
  ReynoldsChief Executive, BT WholesaleaPaul Reynolds
  was appointed to the Board on 19 November 2001. In April 2000, he was appointed
  to the former Executive Committee as Chief Executive of BT Wholesale. He joined
  BT from the companys predecessor corporation, which he joined in 1983,
  and has held a number of roles, including Director of the Office of the Chairman,
  Director of Multimedia and, from 1999, Managing Director of Networks and Information
  Services. Aged 46.

Non-Executive directorsClayton Brendishb,eClayton Brendish was appointed to the Board on 1 September 2002. He is non-executive chairman of Beacon Investment Fund and a non-executive director of Elexon and Herald Investment Trust. He is also a trustee of Economist Newspapers and
the Foundation for Liver Research and a council member of City University of London. Prior to his retirement in May 2001, Clayton Brendish was executive Deputy Chairman of CMG having joined the Board when it acquired Admiral. Clayton Brendish was
co-founder and executive chairman of Admiral, incorporated in 1979. He also acted as an advisor to the Government on the efficiency of the Civil Service, working as an advisor to the Chancellor of the Duchy of Lancaster and the Office of Public
Services on their respective Next Steps Agencies. Aged 56.

Sir Anthony
  Greener Deputy Chairmanb,c,dSir Anthony Greener was appointed
  to the Board on 1 October 2000. He was appointed Joint Deputy Chairman and chairman
  of the Audit Committeeon 1 January 2001. He became Deputy Chairman and
  chairman of the Remuneration Committeeon 18 July 2001.

Sir Anthony is chairman of University for Industry (learndirect) and the Qualifications and Curriculum Authority and a non-executive director of Robert Mondavi
Corporation. He was formerly chairman of Diageo. Prior to the merger of Guinness and Grand Metropolitan, he was chairman and chief executive of Guinness, having been chief executive of Guinness since 1992. Aged 62.

Louis R Hughesb,cLouis Hughes joined the Board on 1 January 2000. He is non-executive chairman of Maxager Technology Inc. (USA). He was formerly president and chief operating

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officer of Lockheed Martin Corporation and previously executive vice president of General Motors.

Louis Hughes is a non-executive director of AB Electrolux (Sweden) and Sulzer AG and ABB Limited (both Switzerland). From 1993 to 2000, he was a member of the
supervisory board of Deutsche Bank. A US national, he is aged 54.

The Rt Hon
  Baroness Jay of Paddington PCc,eBaroness (Margaret)
  Jay was appointed to the Board on 14 January 2002. She was formerly Lord Privy
  Seal, Leader of the House of Lords and Minister for Women. Previously, she was
  Minister of State at the Department of Health.

Baroness Jay is a non-executive director of Independent News & Media UK and has held non-executive positions with Scottish Power, Carlton Television and LBC.
Currently chairman of the Overseas Development Institute, she has been a member of the Central Research and Development Committee for the NHS, was a founding director of the National AIDS trust, a governor of South Bank University and a member of
the Meteorological Office Council. Aged 63.

John Nelsonb,d,fJohn Nelson was appointed to the Board on 14 January 2002. A Chartered Accountant, he retired as chairman of Credit Suisse First Boston Europe (CSFB) on 31 January 2002. He was a member of the
executive board and chairman of the European executive committee of CSFB.

Prior to joining CSFB in January 1999, John Nelson spent 13 years with Lazard Brothers. He was appointed vice chairman of Lazard Brothers in 1990. He was also a
chairman of Lazard S.p.A. in Italy and a managing director of Lazard Freres, New York.

He was a non-executive director of Woolwich until it was taken over by Barclays Bank in 2000. In January 2002, he was appointed deputy chairman of Kingfisher.
Aged 55.

Carl G Symonb,cCarl Symon was appointed to the Board on 14 January 2002. He is managing director, global business development, DiamondCluster International Inc. (USA). He retired from IBM in May 2001 after a
32-year career, during which he held senior executive positions in the USA, Canada, Latin America, Asia and Europe, including chairman and chief executive officer of IBM UK.

Carl Symon is chairman of a number of private companies, a non-executive director of Rolls-Royce, and vice-chairman of Cross Atlantic Capital Partners. A US
national, he is aged 57.

Maarten van den Berghb,c,d,fMaarten van den Bergh was appointed to the Board on 1 September 2000. He chairs thePension Scheme Performance Review
Group. He is chairman of Lloyds TSB Group and a non-executive director of Royal Dutch Petroleum Company and British Airways.

Prior to his retirement in July 2000, Maarten van den Bergh was president of the Royal Dutch Petroleum Company and vice chairman of its committee of managing directors from July 1998, having
been appointed a managing director of the Royal Dutch Shell Group of companies in July 1992. A Dutch national, he is aged 61.

Key to membership of principal Board committees:aOperatingbAuditcRemunerationdNominatingeCommunity
  SupportfPension
  Scheme Performance Review Group

All the non-executive directors are considered independent of the management of the company.

Operating CommitteeBen Verwaayen
  Chief ExecutiveIan LivingstonGroup Finance DirectorPierre DanonChief Executive, BT RetailAndy GreenChief
  Executive, BT Global ServicesDr Paul
  ReynoldsChief Executive,
  BT Wholesale

See page 50
  for biographical details.

Alison RitchieChief Broadband
  OfficerAlison Ritchie joined BT from
  the companys predecessor corporation, which she joined in 1981. She was
  appointed a member of the former Executive Committee in December 2000.

Alison Ritchie was appointed Chief Broadband Officer in November 2002 and she directs BTs policy on broadband developments across the whole of BT ensuring a
co-ordinated approach to the delivery of high quality broadband services to residential and business customers. Alison Ritchie was formerly Chief Executive, BT Openworld. Before joining BT Openworld, she was BTs Restructuring Project Director,
co-ordinating the project teams working on the financial, organisational and managerial restructuring of BT. She is a member of the board of the British Quality Foundation. Aged 42.

Company
  SecretaryLarry StoneLarry Stone, formerly Corporate Governance Director from 1 June 2000, was appointed Company Secretary on 27 March 2002. He previously held external relations and regulatory roles with BT in
Tokyo and Brussels and with BT Cellnet
  (now O2UK).
  He is a trustee
  of the BT Pension Scheme and a member of the executive committee of the British
  Quality Foundation. Aged 45.

BT Annual Report and Form 20-F 200351

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Report of
  the directors

Directors
The names and biographical details of the directors of the company are given on pages 50 and 51. All served throughout the financial year, with the exception of Ian Livingston and Clayton
Brendish who joined the Board on 8 April and 1 September 2002, respectively. In addition, Philip Hampton served as a director until his retirement on 30 April 2002.

Following his retirement from the Board on 1 May 2001, the former Chairman, Sir Iain Vallance, remained with BT as President Emeritus until 31 July 2002.

In accordance with the articles of association, Clayton Brendish, having been appointed as a director by the Board, retires at the forthcoming annual general
meeting (AGM) and will be proposed for election. Sir Anthony Greener, Louis Hughes and Maarten van den Bergh retire by rotation and will be proposed for re-election. Details of these directors contracts of appointment are included in theReport on directors remunerationon pages 62 and 63 and the discussion onCorporate governanceon page 53.

Substantial shareholdings
At 21 May 2003, the company had received notifications from Legal & General Investment Management Limited and Barclays PLC under Part VI of the Companies Act 1985 in respect of holdings of
261,519,674 shares and 261,518,424 shares respectively each representing holdings of 3.02% of the companys issued ordinary share capital.

Interest of management in certain transactions
During and at the end of the 2003 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.

By order of the Board

Larry StoneSecretary21 May 2003

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

52 BT
  Annual Report and Form 20-F 2003

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Corporate
  governance

BTs policy is to achieve best practice in our standards of business integrity for all our operations. This includes a commitment to maintaining the highest standards of corporate
governance throughout the group.

During the year there have been recommendations on UK corporate governance by Derek Higgs and Sir Robert Smith, and hence proposed changes to the UKs
Combined Code on Corporate Governance. This section of the annual report describes how BT has applied the Code and where it stands on some of the key proposed changes resulting from the above recommendations. The directors consider that BT has,
throughout the year, complied with the provisions of the current Code.

The BoardThe Board meets every month, except in August. Additionally, it meets on an ad hoc basis to consider matters which are time critical. The Board met 14 times during the 2003 financial
year.

The
  Boards principal focus is the overall strategic direction, development
  and control of the group. In support of this focus the Board approves the groups
  strategic plans, annual budget, capital expenditure and investments budgets,
  larger capital expenditure proposals and the groups overall system of
  internal controls, governance and compliance authorities and it has oversight
  and control of the groups operating and financial performance. These responsibilities
  are set out in a formal statement of the Boards role which, together with
  the powers of the Operating Committeeand
  Management Counciland the authorities delegated to individual members
  of the Operating Committee,are made available to everyone in the group
  on the groups intranet site.

The
  Board, which operates as a single team, is currently made up of the part-time
  Chairman, five executive directors and seven independent non-executive directors.
  It is BTs policy that the board will comprise a majority of independent
  non-executive directors. The desired combination of experience, skills and other
  attributes that the non-executive directors as a whole are to bring to the Board
  is agreed and regularly reviewed by theNominating
  Committee.This profile is used by the Committee to assess the suitability as non-executive
  directors of candidates put forward by the directors and outside consultants
  before the Committee meets short-listed candidates. Between them, the current
  non-executive directors bring experience and independent judgement, gained at
  the most senior levels, of international business operations and strategy, marketing,
  technology, communications and political and international affairs.

The
  non-executive directors provide a strong independent element on the Board. Sir
  Anthony Greener, the Deputy Chairman, is the senior independent director. In
  his capacity as the chairman of theRemuneration
  Committee, he meets
  with BTs major institutional shareholders. The Deputy Chairman will also
  continue to be available to discuss matters with institutional shareholders
  where it would be inappropriate for those discussions to take place with

either the Chairman or the Chief Executive. He will also attend, at his discretion and in consultation with the Chairman and the Chief Executive, other meetings with shareholders during the
year. The Chairman and the non-executive directors hold regular dinners at which they discuss matters without the presence of the executive directors.

Sir Anthony Greener chairs
  theAuditandRemuneration
  Committees. He is
  also a member of theNominating
  Committee.Maarten van den Bergh sits on all three committees. Both directors bring great
  breadth of relevant experience to these committees, whose total memberships
  are six, five and four directors, respectively.

Non-executive directors are appointed initially for three years. At the end of that period the appointment may be continued by mutual agreement, subject normally
to three months termination notice from either BT or the director. The longest serving non-executive director has been in office for nearly three and a half years.

All directors are required by the companys articles of association to be elected by shareholders at the first AGM after their appointment, if appointed by
the Board. A director must subsequently retire by rotation at an AGM if he or she was elected or last re-elected at or before the AGM in the third year before the year in question. The director may seek re-election.

The
  Chairman and executive directors have service agreements, which are approved
  by theRemuneration Committee.
  Information about the periods of these contracts is in theReport on directors
  remunerationon page
  63.

The Board has a procedure for directors, in furtherance of their duties, to take independent professional advice if necessary, at the companys expense. In
addition, all directors have access to the advice and services of the Secretary, the appointment and removal of whom is a matter for the whole Board. He advises the Board on appropriate procedures for the management of its meetings and duties (and
the meetings of the companys principal committees), as well as the implementation of corporate governance and compliance within the group.

On
  appointment, the directors take part in an induction programme when they receive
  information about BT, the role of the Board and the matters reserved for its
  decision, the terms of reference and membership of the principal Board and management
  committees, and the powers delegated to those committees, the companys
  corporate governance practices and procedures, including the powers reserved
  to the groups most senior executives, and the latest financial information
  about the group. This is supplemented by visits to key BT locations and meetings
  with members of theOperating
  Committeeand other key senior
  executives. Throughout their period in office the directors are continually
  updated on BTs business, the competitive and regulatory environments in
  which it operates, corporate social responsibility matters and other changes
  affecting BT and the communications industry as a whole, bywritten
  briefings and meetings with senior BT executives. Directors are also advised
  on appointment of their legal and other duties and obligations as a director
  of a listed company, both in writing and in face-to-face meetings with the Secretary.
  They are reminded of these duties each year and they are also updated on changes
  to the legal and governance requirements of the company and upon themselves
  as directors. During the 2003 financial year, for example, they have received
  briefings on the recommended changes to UK corporate governance put forward
  by Derek Higgs and Sir Robert Smith, the Enterprise Act and the provisions of
  the US Sarbanes-Oxley Act of 2002 that affect BT because its shares are registered
  with the US Securities and Exchange Commission (SEC).

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Corporate
  governance



Guidelines are in place concerning
  the content, presentation and delivery of papers for each Board meeting, so
  that the directors have enough information to be properly briefed.

The Board has agreed that it will carry out an evaluation of its performance. This will be carried out by questionnaire and, where appropriate, individual
interviews during summer 2003, with a subsequent review at a board meeting.

Principal Board committeesThe Chief Executive, Ben Verwaayen,
  chairs theOperating
  Committee, which meets weekly. The other members are
  the Group Finance Director, the Chief Executives of BT Retail, BT Wholesale
  and BT Global Services and the Chief Broadband Officer. The Secretary attends
  all meetings. The Committee has collective responsibility for running the groups
  business end-to-end. To do that, it develops the groups strategy and budget
  for Board approval, recommends to the Board the groups capital expenditure
  and investments budgets, monitors the financial, operational and customer quality
  of service performance of the whole group, allocates resources across the group
  within plans agreed by the Board, plans and delivers major cross-business programmes
  and reviews the senior talent base and succession plans of the group.

A
  sub-committee of theOperating
  Committee, theManagement
  Council,
  meets monthly. It consists of theOperating Committeemembers
  plus a number of other senior executives. It is an advisory forum supporting
  the Chief Executive and theOperating
  Committeein policy formulation,
  in areas such as public policy, reputation and business practices policies,
  human resources and employment policies. Through a specific sub-committee of
  its own theManagement
  Councilmonitors the performance
  of the BT Pension Scheme, draws material matters on pensions policy to the Boards
  attention, reviews public policy, regulatory and Government activities in the
  pensions area and oversees internal and external communications on pensions
  matters.

TheNominating Committee,
  consisting
  of the Chairman, the Deputy Chairman and two other non-executive directors,
  ensures an appropriate balance of experience and abilities on the Board, using
  this evaluation to review annually the size and composition of the Board and
  to recommend any proposed changes to the Board. It keeps under review the need
  for appointments to the Board, prepares a description of the specific experience
  and skills needed for an appointment, considers candidates who are put forward
  by the directors and external consultants, and recommends to the Board the appointments
  of all directors after having met short-listed candidates. It also reviews the
  time required from the Deputy Chairman and other non-executive directors to
  carry out their duties and advises the Board on succession planning for the
  positions of the Chairman, Deputy Chairman, Chief Executive and all other Board
  appointments. In the Boards opinion, it is appropriate for the Chairman
  to chair theNominating
  Committeein its task of reviewing
  and agreeing the structure of the board and considering candidates as directors,
  both executive and non-executive. The Committee met once during the 2003 financial
  year.

TheAudit Committee,
  comprising solely independent non-executive directors, is chaired by Sir Anthony
  Greener. The members of the Committee all bring relevant experience from senior
  executive levels. The Committee recommends the appointment and reappointment
  of the companys auditors, ensuring that key partners are rotated at appropriate
  intervals, and considers the resignation or dismissal of the auditors, recommending
  to the Board appropriate action to appoint new auditors. It reviews the auditors
  performance, including the scope of the audit, and recommends to the Board appropriate
  remuneration. The Committee monitors the extent of non-audit work to be performed
  by the companys auditors to ensure that the provision of non-audit services
  does not impair their independence or objectivity. It discusses with the auditors
  the scope of their audits before they commence, reviews the results and considers
  the auditors Management Letter and reports the results of those reviews
  to the Board. TheAudit
  Committeereviews the companys
  published financial results, the Annual Report and Form 20-F and other published
  information for statutory and regulatory compliance. It also reviews the disclosure
  made by the Chief Executive and Group Finance Director during the certification
  process for the annual report about the design or operation of internal controls
  or material weaknesses in the controls, including any fraud involving management
  or other employees who have a significant role in the companys financial
  controls. The Board, as required by UK law, takes responsibility for all disclosures
  in the annual report. TheAudit
  Committeemonitors and reviews
  the standards of risk management and internal control, the effectiveness of
  internal control, financial reporting, accounting policies and procedures, and
  the companys statements on internal controls before they are agreed by
  the Board for each years annual report. It also reviews the companys
  internal audit function and its relationship with the external auditors, including
  internal audits plans and performance. The Group Finance Director and
  the Secretary attend its meetings. Each year, the Committee sets aside time
  to seekthe views of the
  companys internal and external auditors in the absence of executives.
  The Committee met four times during the 2003 financial year. At its meetings
  the Committee has reviewed the companys full year and quarterly results
  and its Annual Report and Form 20-F and considered the adequacy of the financial
  systems that have produced those results. It has reported its views to the Board
  so it has been able to approve the results announcements and the annual report
  for publication. It has also during the 2003 financial year considered the groups
  risk register as submitted to it by theManagement Counciland
  reviewed the companys internal control, accounting systems and related
  matters.



54 BT Annual Report and Form 20-F 2003

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  governance

The
  Committee has agreed, for the 2004 financial year, in accordance with the Sarbanes-Oxley
  Act, to:nestablish
  a process for dealing with complaints received by the company regarding accounting,
  internal accounting controls or auditing matters, and the confidential, anonymous
  submission by employees of concerns regarding questionable accounting or auditing
  matters.noversee the adoption of
  a specific code of ethics for the Chief Executive, Group Finance Director and
  Director Group Financial Control, which is consistent with BTs overall
  statement of business ethics (see Statement of business practice
  on page 56).

TheRemuneration Committeecomprises solely independent non-executive directors
  and is chaired by Sir Anthony Greener. It met seven times during the 2003 financial
  year. Further details about the Committee are included in theReport
  on directors remuneration.

Committee memberships are shown inBoard of directors and Operating Committeeon pages 50 to 51.

Internal control and risk managementThe Board is responsible for the groups systems of internal control and risk management and for reviewing the effectiveness of those systems. Such systems are designed to manage, rather
than eliminate, the risk of failure to achieve business objectives; any system can provide only reasonable and not absolute assurance against material misstatement or loss.

The Board also takes account of significant social, environmental and ethical matters that relate to BTs businesses. The companys workplace practices,
specific environmental, social and ethical risks and opportunities and details of underlying governance processes are dealt with in theOur peopleandOur commitment to societysections of this report.

BT has processes for identifying, evaluating and managing the significant risks faced by the group. These processes have been in place for the whole of the 2003
financial year and have continued up to the date on which this document was approved. The processes are in accordance with the guidance for directors published in the UK in September 1999.

Risk
  assessment and evaluation takes place as an integral part of the groups
  annual strategic planning cycle. The group has a detailed risk management process
  which identifies the key risks facing the group and each business unit. This
  information is reviewed by senior management as part of the strategic review.
  The groups current key risks are summarised on page 140 of this document.

The
  key features of the risk management process comprise the following procedures:nsenior executives, led
  by the groups Risk Manager, review the groups key risks and have
  created a group risk register. This is reviewed by the Management Councilbefore being approved by the Board.nthe 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. Line of business
  audit committees monitor the standards of internal controls in the lines of
  business.nsenior management report
  regularly to the Group Finance Director on the operation of internal controls
  in their area of responsibility.nthe 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.nthe groups internal
  auditors carry out continuing assessments of the quality of risk management
  and control. They also promote effective risk management in the lines of business
  operations.nthe Audit Committee,
  on behalf of the Board, considers the effectiveness of the operation of internal
  control procedures in the group during the financial year. This follows consideration
  of the matter by the Management Council. The Audit Committeereviews
  reports from the internal auditors and from the external auditors and reports
  its conclusions to the Board. The Audit Committeehas carried out these
  actions for the 2003 financial year.

Material joint ventures and associates, which BT does not control, outside the UK have not been dealt with as part of the group for the purposes of this internal
control assessment.

Relations with shareholdersSenior executives, led by the
  Chief Executive and the Group Finance Director, hold meetings with the companys
  principal institutional shareholders to discuss the companys strategy,
  financial performance and specific major investment activities. As explained
  in theReport
  on directors remuneration, we also maintain contact, when appropriate,
  through the chairman of theRemuneration
  Committeeand other senior executives to discuss overall
  remuneration policies and plans. Contact with institutional shareholders (and
  with financial analysts, brokers and the media) is controlled by written guidelines
  to ensure the protection of share price sensitive information that has not already
  been made generally available to the companys shareholders.

We
  are continuing our policy that shareholders vote on the annual report at the
  AGM. Shareholders will also be asked this year to vote on theReport on directors remunerationas
  required by the Directors Remuneration Report Regulations 2002, having
  beenasked to vote on
  the companys remuneration policy at previous AGMs.

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Corporate
  governance

It is part of our policy to involve shareholders fully in the affairs of the company and to give them the opportunity at the AGM to ask questions about the
companys activities and prospects. We also give the shareholders the opportunity to vote on every substantially different issue by proposing a separate resolution for each issue. The Boards opinion is that the re-election and the fees of
the auditors are inter-related matters and should therefore be dealt with in one resolution.

The proxy votes for and against each resolution, as well as abstentions, will be counted before the AGM and the results will be made available at the meeting
after the shareholders have voted on each resolution on a show of hands.

It
  is our policy for all directors to attend the AGM if at all possible. Whilst,
  because of ill health or other pressing reasons, this may not always be possible,
  in normal circumstances this means that the chairman of theAuditandRemuneration Committeesis
  at the AGM and is available to answer relevant questions.

The Annual Review and, if requested, the Annual Report and Form 20-F, together with the Notice of the AGM, are sent to shareholders in the most cost-effective
fashion, given the large number of shareholders. We aim to give as much notice as possible and at least 21 clear days, as required by the companys articles of association. In practice, these documents are being sent to shareholders more than
20 working days before the AGM.

Established procedures ensure the timely release of share price sensitive information and the publication of the companys financial results and regulatory
financial statements.

Non audit
  services provided by the external auditorsAs a result of regulatory or
  similar requirements, it is necessary to employ the companys external
  auditors for certain non-audit work. 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 the external auditors unless there are clear efficiencies
  and value added benefits to the company. TheAudit
  Committeemonitors the level of non-audit fees paid to
  the external auditors.

Statement
  of business practiceTo reinforce our commitment
  to achieve best practice in our standards of business integrity, BT has a written
  statement of business practice (The Way We Work).
  The statement covers all our operations and reflects the expectations in the
  area of corporate governance and business practice standards. A copy of the
  statement has been sent to every employee and is also available on the companys
  intranet site.

These high-level principles are supported by a comprehensive communications programme and online training. A confidential helpline and e-mail facility are also available to employees who have questions about the application of these principles. We also continue to require our
agents and contractors to apply these principles when representing BT.

Political donations
It has always been BTs policy that no company in the group shall make cash contributions to any political party. This policy continues. However, the Companies Act 1985 requires companies
to obtain shareholder authority before they can make donations to EU political organisations (which includes UK political parties). The definition of political donations used in the Act is very much broader than the ordinary sense in which these
words are used. As a result, it covers activities which form part of normal relationships between BT and the political machinery. These activities are not designed to support any political party or to influence public support for a particular party
and would not be thought of as political donations in the everyday sense of these words. They are entirely non-political in nature and are designed so that BT can make MPs and others aware of key industry issues and matters affecting the
company.

The authority we are requesting from shareholders at the AGM is not designed to change the companys stated policy of not making cash contributions. It will,
however, ensure that BT acts within the provisions of the current UK law when carrying out the above activities. They are carried out on an even-handed basis related broadly to the major UK political parties electoral strength and the company
believes that they make an important contribution to the success of BT.

Pension
  fundsBTs two main pension funds  the BT Pension Scheme and the BT Retirement Plan  are not controlled by the Board but by separate trustees who are company and union nominees,
under independent chairmen. The trustees look after the assets of the funds, which are held separately from those of the company. The pension schemes funds can only be used in accordance with their respective rules and for no other
purpose.

ReportingA statement by the directors of their responsibilities for preparing the financial statements is included in theStatement of
directors responsibilityon page 73.

US Sarbanes-Oxley Act of 2002BT has securities registered with the US Securities and Exchange Commission (SEC). As a result, BT is obliged to comply with those provisions of the Sarbanes-Oxley Act (the
Act) applicable to foreign issuers. BT will comply with the legal and regulatory requirements introduced pursuant to this new legislation, in so far as they are applicable to the group.

In accordance with the recommendations issued by the SEC, BT has established a Disclosure Committee comprising appropriate senior executives which reports to the
Chief Executive and Group Finance Director.

56 BT Annual Report and Form 20-F 2003

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Corporate governance

The Chief Executive and Group Finance Director after evaluating the effectiveness of BTs disclosure controls and procedures within 90 days of the date of the groups Annual Report
and Form 20-F, have concluded that, at that date, BTs disclosure controls and procedures were effective to ensure that material information relating to BT was made known to them by others within the BT group particularly during the period in
which the Annual Report and Form 20-F was being prepared. The Chief Executive and Group Finance Director have also provided the certifications required by the Act.

There were no significant changes in BTs internal controls or in other factors that could significantly affect these controls subsequent to the date the
Chief Executive and Group Finance Director completed their evaluation, nor were there any significant deficiencies or material weaknesses in BTs internal controls requiring corrective actions.

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Report on directors remuneration

|   | The review
        is divided into the following sections:      
|-- | ----------------------------------------------------------------
|59 | Remuneration
      policy (Not audited)                         
|   | Packages                                                        
|   | Annual
      package  2004 financial year                      
|   | Executive
      share ownership                                 
|   | Pensions                                                        
|   | Other
      benefits                                            
|   | Service
      agreements                                        
|   | Termination
      payments                                      
|   | Outside
      appointments                                      
|   | Non-executive
      directors contracts of appointment         
|   | Non-executive
      directors remuneration                     
|   | Directors
      service agreements and contracts of appointment
|   | Directors
      interests                                      
|   | Performance
      graph                                         
|65 | Remuneration
      review (Audited)                             
|   | Directors
      remuneration                                   
|   | Former
      directors                                          
|   | Loans                                                           
|   | Pensions                                                        
|   | Share
      options                                             
|   | Share
      awards                                              
|   | Deferred
      Bonus Plan                                       
|   | Share
      awards under all-employee share ownership plans     
|   | Operating
      Committee                                       

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Report on directors remuneration

The Remuneration Committeeis made up wholly of independent
non-executive directors. Throughout the year, the company has applied the principles in Section 1 of the Combined Code on Corporate Governance (the Code) and complied with the Code.

The Board is ultimately responsible for both the structure and amount of executive remuneration, but it has delegated prime responsibility for executive
remuneration to the Remuneration Committee. The Committees role is to set the remuneration policy and individual remuneration packages for the Chairman, the executive directors, members of the Operating Committee(OC) and other senior executives reporting to the Chief Executive. It also approves changes in the companys
long-term incentive plans, recommends to the Board those plans which require shareholder approval and oversees their operation.

The Committee met seven times during the 2003 financial year. Sir Anthony Greener has chaired the Committee since 18 July 2001. Other members of the Remuneration Committeeduring the year were:

n Maarten van den Bergh
n Louis Hughes
n Margaret Jay (appointed 5 November 2002)

n Carl Symon.

The Chairman and Chief Executive are invited to attend meetings. They are not present when matters affecting their own remuneration arrangements are
considered.

Non-executive directors who are not members of the Committee are entitled to receive papers and minutes of the Committee.

The Committee has access to professional advisers, both from within the company and externally. Towers Perrin, (HR consultants); Ben Verwaayen, Chief Executive;
Ian Livingston, Group Finance Director; Alex Wilson, Group HR Director (and his predecessor John Steele) and Larry Stone, Company Secretary (and his predecessor Colin Green), provided advice that materially assisted the Committee in relation to the
2003 financial year. The Committee has agreed that Towers Perrin may advise both the Committee and BT, and should be invited to attend meetings when major remuneration policy issues are being discussed. Towers Perrin provides BT with a range of data
and advisory services covering all aspects of executive pay, bonus arrangements, shares and benefits.

Remuneration policy
This part of the report is not subject to audit.

BTs executive remuneration policy is to reward employees competitively, taking into account individual performance, company performance, market comparisons
and the competitive pressures in the information and communication technology industry. Base salaries are positioned around the mid-market, with total direct compensation (basic salary, annual bonus and the value of any long-term incentives) to be
at the upper quartile only for sustained and excellent performance. There are no plans to change this policy.

A
  significant proportion of the total executive remuneration package is linked
  to line of business and corporate performance. Remuneration arrangements and
  performance targets are kept under regular review to achieve this.

Where any significant changes are proposed to executive remuneration, these are discussed with BTs principal shareholders and the main representative groups
of the institutional shareholders.

Packages
The remuneration package for the executive directors, members of the OC and certain other senior executives reporting to the Chief Executive comprises:

Basic salary
Salaries are reviewed annually. Salary increases are made where the Committee believes that adjustments are appropriate to reflect contribution, increased responsibilities and/or market
pressures.

Performance-related
  remuneration
Annual bonus
The annual bonus plan is designed to reward the achievement of results against set objectives. Targets, set at the beginning of the 2003 financial year for each objective, were based on
earnings per share, cash flow and customer satisfaction. Specific weights were attached to each objective. On-target and maximum bonus levels, as a percentage of salary, were unchanged at 50% and 75% (Chief Executive 85% and 130% under his service
agreement).

The Committee retains the flexibility to enhance or reduce bonus awards in exceptional circumstances.

Deferred bonus
Awards in the form of BT shares, granted under the Deferred Bonus Plan (DBP), are linked to the value of annual bonuses. The shares are held in trust and transferred to the executive if still
employed by the company in three years time. There are no additional performance measures for the vesting of DBP awards.

Awards are generally equivalent in value to 50% of the executives gross annual bonus, except in the case of the Chief Executive whose award in respect of
the 2003 financial year is 100% of gross annual bonus in accordance with his service agreement.

The awards under the DBP held by Ben Verwaayen, Pierre Danon, Andy Green and Paul Reynolds at the end of the 2003 financial year are contained in the table on
page 71. The awards this year include an award for Ian Livingston. The amounts are in note f on page 65.

Long-term incentives
The BT Equity Incentive Portfolio (the Portfolio) is designed to ensure that equity participation is a significant part of overall remuneration. It comprises three elements: share options,
incentive shares and retention shares. Share options are currently the main element of equity participation, replacing incentive shares in the 2003 financial year. Retention shares are used primarily as a recruitment tool.

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No individual receives awards under all elements of the Portfolio in any one year.

Generally, awards vest and options become exercisable only if a predetermined performance target has been achieved. The performance measure is TSR (total
shareholder return) compared with the FTSE 100 companies. The Remuneration Committeechose TSR as it links the reward
given to directors with the performance of BT against the shares of other major UK companies in which investors have the opportunity to invest.

For
  1998, 1999, 2000 and 2001 awards, the base price at the beginning of the performance
  period has been calculated by averaging the BT share price over the six months
  to 31 March in the year of award. For the 2002 awards, the period was from 19
  November 2001 (the date of the mmO2demerger) to 31 March 2002. The end price is the average of the share price over the six months to the end of the performance period. The end price is adjusted for all capital actions and dividend payments that
occur during the performance periods.

Share options
The price at which shares may be acquired under the Global Share Option Plan (GSOP) is the market price at the date of grant. Other than for new recruits, the size of option grant is based on
corporate and individual performance, and market relativity.

Options granted will be exercisable in three years only if a performance target has been met. The Committee would not normally expect the initial value of annual grants of options, based on the market price of a BT share, to exceed three times salary.

In the 2003 financial year, as BT embarked on a radical business transformation and rejuvenation programme, the initial value was four times salary in the case of
the senior executives most responsible for delivering BTs strategic plan. The grants comprised options with an initial value of 2.5 times salary relative to a TSR test and 1.5 times salary relative to an earnings per share test.

For those options that were granted subject to a TSR measure, BTs TSR at the end of the three-year period must be in the upper quartile for all of the
options to be exercisable. At median, 30% of the options will be exercisable. Below that point, none of the options may be exercised. If the performance measure is not met at the first measurement, it may be re-tested against a fixed base in years
four and five. If TSR has not reached the median at the end of the fifth year, previously unexercisable options will lapse.

To provide an additional incentive for exceptional performance in exceeding business goals, further options were granted to seven senior executives. For these
options to become exercisable, there must be a 35% compound annual growth in BTs earnings per share over three years (equivalent to 22 pence per share at the end of the 2005 financial year). There will be no opportunity to re-test.

An
  option was granted to Sir Christopher Bland on 22 June 2001 as part of his recruitment
  package. This was not subject to a performance measure as it matched a personal
  investment in BT shares of £1 million.

The details of the options held by Sir Christopher Bland, Ben Verwaayen, Pierre Danon, Andy Green, Ian Livingston and Paul Reynolds at the end of the 2003
financial year are contained in the table on page 68.

Incentive shares
There were no awards under the Incentive Share Plan (ISP) in the 2003 financial year. A number of awards made in previous years are, however, still outstanding.

Participants are entitled to shares at the end of a three-year performance period if the company has met the relevant predetermined performance target and
participants are still employed by the group. At the end of the three-year period, BTs TSR must be in the upper quartile for all the shares to vest. At median, 25% of the shares under award vest. Below that point, none of the shares
vest.

None of the awards of incentive shares granted in 2000 will vest as BTs TSR was at 85th position on 31 March 2003, the closing date of the performance
period.

The awards under the ISP held by Sir Christopher Bland, Pierre Danon, Andy Green and Paul Reynolds at the end of the 2003 financial year are contained in the
table on page 69.

Retention shares
Retention shares are granted under the Retention Share Plan (RSP) to individuals with critical skills, as a recruitment or retention tool. As a result, awards of shares currently in place are
not linked to the satisfaction of a corporate performance target.

The length of the retention period before awards vest is flexible. The shares are transferred at the end of the specified period if the individual is still
employed by BT.

Retention shares are used only in exceptional circumstances and, in the 2003 financial year, six awards were made for recruitment purposes (one of which was made
to an executive director) and a further six were made for retention purposes.

The awards under the RSP held by Ben Verwaayen, Pierre Danon and Ian Livingston at the end of the 2003 financial year are contained in the table on page 69.

Executive Share Plan (ESP)
The last awards under the ESP were granted in 1999. Participants will generally only be entitled to shares at the end of a five-year performance period if the company has met the relevant
predetermined performance target and participants are still employed by the group. At the end of the five-year period, if BTs TSR reaches 30th position, all the shares vest. If BT is at 70th position starting from the top of the list, none of
the shares vest. Between those points, the shares will vest on a straight line pro rata basis.

In 1994, 1995 and 1996 ESP participants could invest 50% of their annual bonus in the ESP for the purchase of shares. These invested shares were matched by the
company.

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The vesting date of 1998 ESP awards is in August 2003. None of the shares will vest as BTs TSR was at 83rd position on 31 March 2003, the closing date of the performance period.

The awards under the ESP held by Andy Green and Paul Reynolds at the end of the 2003 financial year are contained in the table on page 69.

Other share plans
The executive directors may participate in BTs Inland Revenue approved all-employee share plans, the Employee Sharesave Scheme and Employee Share Investment Plan (which replaced the
Employee Share Ownership Scheme), on the same basis as other employees. There are further details of these plans in note 34 to the accounts.

Annual package 
  2004 financial year The Remuneration Committeehas decided that there should be no
increase in base pay for executive directors in 2004. For the achievement of target, performance-related remuneration will be approximately 67% of total remuneration (excluding pension) for the Chief Executive and 54% for the other executive
directors.

Under his current service agreement the Chairman is not entitled to be paid a bonus, or to participate in the Equity Incentive Portfolio.

Performance targets for the 2004 financial year are significantly more challenging than the outturn of the 2003 financial year. To increase the proportion of
performance-related remuneration, the maximum bonus level will increase to 100% of salary for truly exceptional performance for six executives only. The on-target and maximum bonus levels for the Chief Executive are unchanged. The threshold level,
below which a bonus payment will not be paid, has been set at a higher level than the results achieved in the 2003 financial year. The proportion of the bonus linked to corporate performance has been increased from 60% to 75% for the lines of
business chief executives. For all other relevant executives, bonuses are based solely on corporate performance.

The Committee has decided that in 2004 and subsequent years the value of the Chief Executives DBP awards will be in line with other executives at 50% of his
gross annual bonus.

The value of options granted in the 2004 financial year will not exceed three times salary. Grants will be subject to the same TSR performance conditions as
described above, except that the number of re-tests will be reduced to one only, in year five.

Executive share ownership
A shareholding programme encourages executive directors and OC members to build up a shareholding in the company. The programme, which is not mandatory, is designed to encourage executive
directors and members of the OC to build up a shareholding with a value of 100% of their annual salary within a period of three years from appointment.

Pensions
  For the executive directors and
  most other senior executives who joined the company prior to 1 April 2001, pension
  benefits are one-thirtieth of final salary for each year of service with two-thirds
  of the executives pension for the surviving spouse. Those with longer
  BT service have undertakings of pension benefits of two-thirds of final salary
  payable at normal retirement age (inclusive of the pension equivalent of any
  retirement cash lump sum) plus a pension of two-thirds of the directors
  or executives pension for the surviving spouse. On death-in-service, a
  lump sum equal to four times annual salary is payable together with a pension
  of two-thirds of the directors or executives prospective pension
  for the surviving spouse. Pensions are based on salary alone  bonuses,
  other benefits and long-term incentives are excluded.

BT closed its final salary pension arrangements to new employees with effect from 1 April 2001 and this has been reflected in the retirement provision granted to
executive directors and other senior executives hired since that date.

For these executive directors and other senior executives, retirement provision is made on a defined contribution basis where the company agrees to pay a fixed
percentage of the executives salary each year towards the provision of retirement benefits. Typically this is 20-30% of salary. On death-in-service, a lump sum equal to four times annual salary is payable.

Other benefits
Other benefits for the Chairman and executive directors include some or all of the following: company car, fuel and driver, personal telecommunications facilities and home security, medical
and dental cover for the director and immediate family, professional subscriptions and personal tax and financial counselling. The company has a permanent health insurance policy to provide cover for the Chairman and executive directors and members
of the OC who may become permanently incapacitated.

Service agreements
It is the policy for the Chairman and executive directors to have service agreements providing for one years notice. It may be necessary on recruitment to offer longer initial periods to
new directors from outside BT, or circumstances may make it appropriate to offer a longer fixed term. All the service agreements contain provisions dealing with the removal of a director through poor performance, including in the event of early
termination of the contract by BT.

Termination payments
  Sir Christopher Blands
  contract entitles him on termination of his contract by BT to payment of salary
  and the value of benefits until 12 months from notice of termination. Ben Verwaayens
  contract entitles him on termination of his contract by BT to payment of £700,000.
  The contracts of Pierre Danon, Andy Green, Ian Livingston and Paul Reynolds
  entitle them on termination of their contract by BT to payment of salary and
  the value of benefits until the earlierof
  12 months from notice of termination or the director obtaining full-time employment.

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If the contract of an executive director is terminated by BT within one year after BT entering into a scheme of arrangement or becoming a subsidiary of another
company, he will be entitled to receive his salary, the higher of that current years on-target bonus or the previous years bonus, the market value of shares awarded under an employee share ownership plan or deferred bonus plan that have
not vested, together with a years salary and the value of any benefits.

The Committee intends to review contracts in the 2004 financial year taking into account the joint statement of best practice on executive contracts and
severance, published in December 2002 by the Association of British Insurers and the National Association of Pension Funds, and other relevant guidelines.

Outside appointments
The Committee believes that there are significant benefits, to both the company and the individual, from executive directors accepting non-executive directorships of companies outside BT. The
Committee will consider up to two external appointments (of which only one may be to the Board of a major company), for which a director may retain the fees.

Non-executive directors contracts of appointment
Non-executive directors have
  contracts of appointment. They are normally appointed for an initial period
  of three years. During that period, either party can give the other at least
  three months notice. At the end of the period the appointment may be continued
  by mutual agreement. Further details of their appointment arrangements are set
  out on page 53 in the section dealing with corporate governance issues.

The contracts of appointment of non-executive directors are terminable on notice by the company without compensation.

Non-executive directors remuneration
Seven of the directors on the Board are non-executive directors who, in accordance with BTs articles of association, cannot individually vote on their own remuneration. Therefore,
non-executive remuneration is set by the Chairman and the Chief Executive after considering advice on appropriate levels of remuneration (plus a general Board discussion).

The basic fee for non-executive directors, which includes membership of one committee, is £30,000 per year. Additional fees for membership of Board
committees range from £3,000 to £5,000 per year. Sir Anthony Greener, Deputy Chairman and senior non-executive director, who also chairs both the Remuneration Committeeand the Audit Committee, is paid an inclusive annual fee
of £90,000.

Non-executive directors fees will be reviewed during the 2004 financial year.

To
  align further the interests of the non-executive directors with those of shareholders,
  the companys policy is to encourage these directors to purchase, on a
  voluntary basis, £5,000 of BT shares each year. The directors are asked
  to hold these shares until they retire from the Board. This policy is not mandatory.

No element of non-executive remuneration is performance-related. Non-executive directors do not participate in BTs bonus or employee share plans.

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Directors service
  agreements and contracts of appointmentThe dates on which the Chairmans and each current executive directors initial service agreement commenced and the current expiry dates are as follows:

|Chairman
        and executive directors | Commencement
        date of initial service agreement | Expiry
        date of current service contract
|---------------------------------------- | ------------------------------------------------------ | -----------------------------------------------
|                                        
|Sir Christopher
      Bland              | 1 May 2001                                             | a                                              
|B Verwaayen                              | 14 January
      2002                                  | b                                              
|P Danon                                  | 19 November
      2001                                 | d                                              
|A Green                                  | 19 November
      2001                                 | d                                              
|I Livingston                             | 8 April 2002                                           | c                                              
|Dr P Reynolds                            | 19 November
      2001                                 | d                                              
|                                        

|a                                                                                                                                               | Sir
      Christopher Bland entered into a new service agreement on 19 November 2001,
      terminable on 12 months notice by either the company or the director.                                                                                                                                                                                  
|----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b                                                                                                                                               | The
      agreement was terminable during the first year by the company giving two
      years notice and thereafter by notice of not less than one year; terminable
      by the director on six months notice ending after the first two years.                                                                                                 
|c                                                                                                                                               | Ian
      Livingston entered into an initial service agreement on 8 April 2002 for
      two years. The contract is terminable on 12 months notice by the company
      and six months notice by the director ending at any time after the
      initial period.                                                                                  
|d                                                                                                                                               | The
      initial contract period was for one year and the contract is terminable
      by the company on 12 months notice and by the director on six months
      notice ending after the initial period.                                                                                                                                        
|e                                                                                                                                               | Philip
      Hampton left the company on 30 April 2002. The commencement date of his
      initial service agreement was 1 November 2000. The contract was for an initial
      period of two years. The contract was terminable on 12 months notice
      ending at any time after the initial period by either the company or the
      director.
|                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                     
|The dates on
      which current non-executive directors contracts of appointment commenced
      and the current expiry dates are as follows:

|Non-executive
        director | Commencement
        date of initial contract | Expiry
        date of current contract
|------------------------------ | --------------------------------------------- | ---------------------------------------
|                              
|Sir Anthony
      Greener      | 1 October 2000                                | 30 September
      2003a               
|M van den Bergh                | 1 September
      2000                        | 31 August 2003a                        
|C Brendish                     | 1 September
      2002                        | 31 August 2005c                        
|L R Hughes                     | 1 January 2000                                | 31 December
      2005b                
|Baroness Jay                   | 14 January
      2002                         | 13 January
      2005c                 
|J Nelson                       | 14 January
      2002                         | 13 January
      2005c                 
|C G Symon                      | 14 January
      2002                         | 13 January
      2005c                 
|                              

|a | Each
      directors contract of appointment is for an initial period of three
      years. After that period the contract will be terminable on three months
      notice by either the company or the director.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b | Contract
      extended for a further three years and is terminable by the company or the
      director on three months notice.                                                                                  
|c | Each
      directors contract is for an initial period of three years and is
      terminable by the company or the director on three months notice.
      The contract is renewable by mutual agreement.        

There are no other service agreements or material contracts, existing or proposed, between the company and the directors. There are no arrangements or understandings between any director or
executive officer and any other person pursuant to which any director or executive officer was selected to serve. There are no family relationships between the directors.

Directors interestsThe interests of directors and their families in the companys shares at 31 March 2003 and 1 April 2002, or date of appointment if later, are shown below:

|                            | No.
      of shares | 
|--------------------------- | ------------------- | 
|                            |                     | 
|Beneficial
        holdings | 2003                | 
|                            |                    
|Sir Christopher
      Bland | 673,876             | 
|B Verwaayen                 | 387,876             | 
|P Danon                     | 61,228              | 
|A Green                     | 85,729              | 
|I Livingston                | 110,444             | 
|Dr P Reynolds               | 43,223b             | 
|Sir Anthony
      Greener   | 11,167              | 
|M van den
      Bergh       | 4,800               | 
|C Brendish                  | 10,920              | 
|L R Hughes                  | 6,800               | 
|Baroness
      Jay          | 5,572               | 
|J Nelson                    | 50,000              | 
|C G Symon                   | 10,069              | 
|P Hampton                   |                    | 
|                            |                    
|Total                       | 1,461,704           | 
|                            |                    

|a | Includes
      4,196 and 2,462 shares purchased and held respectively by Andy Green and
      Paul Reynolds in the ESP. These shares were transferred into their personal holdings on 1 August 2002.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b | During the
      period from 1 April 2003 to 15 May 2003, Paul Reynolds purchased 138 shares
      under the BT Group Employee Share Investment Plan.                                               
|c | Includes
      free shares awarded under the Employee Share Investment Plan and Employee
      Share Ownership Scheme  details are set out on page 71.                                             
|d | Ian Livingston
      joined the Board on 8 April 2002.                                                                                                                                              
|e | Clayton
      Brendish joined the Board on 1 September 2002.                                                                                                                                        

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At 31 March 2003, Sir Christopher Bland, Ben Verwaayen, Pierre Danon, Andy Green, Ian Livingston and Paul Reynolds each had a non-beneficial interest in 73,069 shares (2002  73,069)
purchased by BT Employee Shares Trustees Limited for allocation to employees under the BT Employee Share Ownership Scheme, and 31,719,402 shares (2002  24,571,130) held in trust by Ilford Trustees (Jersey) Limited for allocation to employees
under the employee share schemes. Also, each had a non-beneficial interest in 15,876,189 shares (2002  45,286,908) held in trust by The Royal Bank of Scotland Trust Company (Jersey) Limited for allocation to employees under BTs employee
share schemes. Finally, each also had a non-beneficial interest in 19,822 shares (2002  nil) held in trust by Halifax Corporate Trustees Limited for participants in the Employee Share Investment Plan.

Performance
  graphThis graph illustrates, as required
  by the Directors Remuneration Report Regulations 2002, the performance
  of BT Group plc measured by TSR (adjusted for the rights issue and the demerger
  of BTs mobile business in the 2002 financial year) relative to a broad
  equity market index over the past five years. The FTSE 100 is considered
  to be the most appropriate index against which to measure performance, as BT
  has been a constituent of the FTSE 100 throughout the five-year period and the
  index is widely used. TSR is the measure of the returns that a company has provided
  for its shareholders, reflecting share price movements and assuming reinvestment
  of dividends.

BTs
  total shareholder return (TSR) performance 
  over five financial years to 31 March 20031 April 1998 = 100. Source:
  Datastream
  The graph shows our TSR performance (adjusted for the rights issue and demerger
  of our 
  mobile business in 2002 financial year) relative to the FTSE 100.

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Remuneration Review  the following pages comprise the audited part of the Report on directors remuneration

Directors remunerationDirectors remuneration for the 2003 financial year was as follows:

|                               | Basic
        
        salary and
        fees |  | Pension
        allowance net 
of pension contributiona |  | Total
        salary
        and fees |  | Annual
        bonus |  | Special
      bonusd |  | Expenses
      allowance |  | Other
      benefits
      excluding
      pensione |  | Termination
      Payments |  | Total    |  | Totali   | 
|------------------------------ | ---------------------------------------------- |  | ------------------------------------------------------- |  | ------------------------------------- |  | -------------------- |  | -------------------- |  | ------------------------ |  | --------------------------------------------------- |  | -------------------------- |  | -------- |  | -------- | 
|                               |                                                | 
|                               | £000                                           |  | £000                                                    |  | £000                                  |  | £000                 |  | £000                 |  | £000                     |  | £000                                                |  | £000                       |  | 2003£000 |  | 2002£000 | 
|                               |                                               
|Sir
      Christopher Bland    | 500                                            |  |                                                        |  | 500                                   |  |                     |  |                     |  |                         |  | 12                                                  |  |                           |  | 512      |  | 461      | 
|B
      Verwaayenc
      f     | 700                                            |  | 140                                                     |  | 840                                   |  | 849                  |  |                     |  | 468                      |  | 17                                                  |  |                           |  | 2,174    |  | 339      | 
|P
      Danonb
      f g       | 450                                            |  |                                                        |  | 450                                   |  | 338                  |  |                     |  | 19                       |  | 22                                                  |  |                           |  | 829      |  | 480      | 
|A
      Greenf
      g         | 425                                            |  |                                                        |  | 425                                   |  | 306                  |  |                     |  |                         |  | 30                                                  |  |                           |  | 761      |  | 366      | 
|I
      Livingstonb
      f g  | 445                                            |  | 116                                                     |  | 561                                   |  | 338                  |  | 190                  |  | 19                       |  | 8                                                   |  |                           |  | 1,116    |  |         | 
|Dr
      P Reynoldsb
      f g | 400                                            |  |                                                        |  | 400                                   |  | 288                  |  |                     |  | 19                       |  | 25                                                  |  |                           |  | 732      |  | 338      | 
|Sir
      Anthony Greener      | 90                                             |  |                                                        |  | 90                                    |  |                     |  |                     |  |                         |  |                                                    |  |                           |  | 90       |  | 86       | 
|M
      van den Bergh          | 40                                             |  |                                                        |  | 40                                    |  |                     |  |                     |  |                         |  |                                                    |  |                           |  | 40       |  | 40       | 
|C
      Brendishh              | 20                                             |  |                                                        |  | 20                                    |  |                     |  |                     |  |                         |  |                                                    |  |                           |  | 20       |  |         | 
|L
      R Hughes               | 37                                             |  |                                                        |  | 37                                    |  |                     |  |                     |  |                         |  |                                                    |  |                           |  | 37       |  | 36       | 
|Baroness
      Jay             | 35                                             |  |                                                        |  | 35                                    |  |                     |  |                     |  |                         |  |                                                    |  |                           |  | 35       |  | 7        | 
|J
      Nelson                 | 35                                             |  |                                                        |  | 35                                    |  |                     |  |                     |  |                         |  |                                                    |  |                           |  | 35       |  | 7        | 
|C
      G Symon                | 37                                             |  |                                                        |  | 37                                    |  |                     |  |                     |  |                         |  |                                                    |  |                           |  | 37       |  | 8        | 
|P
      Hamptonk               | 36                                             |  |                                                        |  | 36                                    |  |                     |  |                     |  |                         |  | 5                                                   |  | 242                        |  | 283      |  | 747      | 
|                               |                                               
|                               | 3,250                                          |  | 256                                                     |  | 3,506                                 |  | 2,119                |  | 190                  |  | 525                      |  | 119                                                 |  | 242                        |  | 6,701    |  | 2,915    | 
|                               |                                               

|a | Balance
      or part of the pension allowance for the 2003 financial year  see
      Pensions on page 66.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b | Pierre
      Danon, Ian Livingston and Paul Reynolds each received a monthly cash allowance
      in lieu of a company car totalling £18,500 per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|c | Ben
      Verwaayen is entitled to relocation expenses of £200,000 which were
      paid by the company during the 2003 financial year. He is also entitled
      to a housing allowance of £250,000 per annum until 13 January 2005.
      In the 2003 financial year, £250,000 was paid in respect of that year
      and a further £18,000 was paid in respect of the 2002 financial year
      (2002  £36,000). These amounts are included in the table above
      under Expenses allowance.                                                                                                                                                                                        
|d | Ian
      Livingston received the sum of £190,000, which was paid in lieu of
      the bonus to which he would have been entitled had he remained with his
      previous employer. When added to his annual bonus his total bonus was £528,000.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|e | Includes
      some or all of the following: company car, fuel and driver, personal telecommunications
      facilities and home security, medical and dental cover for the director
      and immediate family, professional subscriptions and personal tax and financial
      counselling.                                                                                                                                                                                                                                                                                                                                                                                             
|f | Deferred
      bonuses payable in shares in three years time, were awarded to Ben
      Verwaayen £849,000 (2002  £152,000), Pierre Danon £169,000
      (2002  £150,000), Andy Green £153,000 (2002  £100,000),
      Ian Livingston £169,000 (2002  nil) and Paul Reynolds £144,000
      (2002  £90,000). When added to the amounts paid or payable for
      the 2003 financial year, in the table above, the total remuneration of Ben
      Verwaayen was £3,023,000 (2002  £491,000); Pierre Danon
      £998,000 (2002  £630,000), Andy Green £914,000 (2002
       £466,000); Ian Livingston £1,285,000 (2002  Nil)
      and Paul Reynolds £876,000 (2002  £428,000).
|g | Pierre
      Danon, Andy Green and Paul Reynolds joined the Board on 19 November 2001.
      Ian Livingston joined the Board on 8 April 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|h | Clayton
      Brendish joined the Board on 1 September 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|i | In
      the 2002 financial year, the aggregate emoluments of the directors of BT
      Group plc for their services following the completion of the BT restructuring
      on 19 November 2001 amounted to £3,018,000. The aggregate amount paid
      to directors as deferred bonuses payable in shares was £492,000. The
      aggregate of contributions paid under defined contribution arrangements
      was £3,975.                                                                                                                                                                                                                                                              
|j | Retirement
      benefits are accruing to three directors (2002  two) under defined
      contribution arrangements and to three directors (2002  four) under
      a defined benefit scheme.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|k | On
      the terms of his leaving the company on 30 April 2002, a termination payment
      of £217,500 was made to Philip Hampton, equivalent to the balance
      of the initial period of his service contract together with a sum of £9,000
      in respect of benefits for that period. He also received £15,500 in
      lieu of holiday entitlement.                                                                                                                                                                                                                                                                                                                              

BT Annual Report and Form 20-F 200365

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Report on directors remuneration

Sir Christopher Bland was appointed as part-time Chairman on 1 May 2001. His annual salary on appointment was £500,000.

Ben Verwaayen joined the company on 14 January 2002 on an annual salary of £700,000. He became Chief Executive on 1 February 2002.

Pierre Danon, Andy Green and Paul Reynolds joined the Board on 19 November 2001 on salaries of £450,000, £425,000 and £400,000,
respectively.

Ian Livingston joined the Board on 8 April 2002 on a salary of £450,000.

The salaries of the Chairman and executive directors remained unchanged during the 2003 financial year and, following this years salary review, the
Committee decided there should be no increase from 1 June 2003 in basic salaries.

Annual bonus awards to executive directors ranged from 72% to 121% of salary in the 2003 financial year. These payments are not pensionable.

Former directorsYve Newbold, who retired from the Board in June 1997, remains a member of the Community Support Committee for which she received fees of £5,000 in the 2003 financial year.

Dr Iain Anderson, who retired from the Board in September 2001, is chairman of the BT Scotland Board, for which he received £12,000 in the 2003 financial
year.

On the terms of his leaving the company on 31 January 2002, Sir Peter Bonfield was entitled to the sum of £820,000 payable in 12 monthly instalments and
contractual benefits for one year. During the 2003 financial year, he received £683,000 as the final ten monthly instalments of his contract and contractual benefits of £1,000.

Sir Iain Vallance, following his retirement from the Board on 1 May 2001, received fees as President Emeritus of £350,000 per annum until 31 July 2002. He
received £117,000 for the 2003 financial year. He also received benefits of £18,000 in the 2003 financial year. He received a bonus of £600,000 on the expiry of his contract of service on 31 July 2002.

LoansPrior to the date of their appointment to the Board on 19 November 2001, Pierre Danon and Paul Reynolds each had interest free loans from the company to assist with re-location of
£375,000 and £300,000, respectively. At 31 March 2003, Pierre Danon owed £281,250 (2002  £318,750) and Paul Reynolds owed £290,000 (2002  £300,000). During the 2003 financial year, the maximum amount
outstanding was £571,250. There are no outstanding loans granted by any member of the BT group to any other of the directors or guarantees provided by any member of the BT group for their benefit.

PensionsSir 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 £9,720 were payable in respect of the 2003 financial year. The earnings cap is a restriction on the amount of pay which can be used to calculate contributions and benefits due to a tax approved pension scheme.

Ben Verwaayen is not a member of any of the company pension schemes, but the company has agreed to pay an amount equal to 20% of his salary towards pension
provision. The company paid £24,300 into his personal pension plan plus £140,007 as a cash payment. This amount, which is included in the table on page 65, represents £110,840 being part of the pension allowance for the 2003
financial year, plus £29,167 which was outstanding from the previous financial year. The balance of the 2003 pension allowance of £4,860 has been carried forward to the 2004 financial year. BT also provides him with a lump sum death in
service benefit of four times his salary.

Ian Livingston is not a member of any of the company pension schemes, but the company has agreed to pay an amount equal to 30% of his salary towards pension
provision. The company paid £19,440 into his personal pension plan plus a cash payment of £115,560 representing the balance of the pension allowance for the 2003 financial year, which is included in the table on page 65. BT also provides
him with a lump sum death in service benefit of four times his salary.

Pierre Danons pension accrues at the rate of one-thirtieth of his final salary for each year of service. In addition, a two-thirds widows pension
would be payable on his death. He is a member of the BT Pension Scheme, but as he is subject to the earnings cap the company has agreed to increase his benefits to the target level by means of a non-approved, unfunded arrangement.

Andy Green is a member of the BT Pension Scheme. From 31 December 1997 the company has been purchasing an additional 203 days of pensionable service each year to
bring his pensionable service at age 60 up to 40 years. A two-thirds widows pension would be payable on his death.

Paul Reynolds is a member of the BT Pension Scheme. From 1 July 1996 the company has been purchasing an additional 109 days of pensionable service each year to
bring his pensionable service at age 60 up to 40 years. A two-thirds widows pension would be payable on his death.

Sir Iain Vallance was part time Chairman and subsequently President Emeritus. His deferred pension under the BT Pension Scheme came into payment with effect from
1 April 2003, although as the pension is paid monthly in arrears the first payment was not made until 30 April 2003. During the year he received a pension payable by the company of £361,580. The pension payable by the company will be reduced
in the 2004 financial year by the equivalent amount of pension he will receive from the BT Pension Scheme. A two-thirds widows pension would be payable on his death.

66 BT Annual Report and Form 20-F 2003

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Report on directors remuneration

PensionscontinuedPhilip Hampton left the company on 30 April 2002. His pension accrued at the rate of one-thirtieth of his final salary for each year of service. In addition, a two-thirds widows pension
would have been payable on his death. He was a member of the BT Pension Scheme, but as he was subject to the earnings cap, the company agreed to increase his benefits to the target level by means of a non-approved, unfunded arrangement. On leaving
the company his deferred pension was increased to the level it would have been had he completed two years service.

The table below shows the increase in the accrued benefits, including those referred to above, to which each director has become entitled during the year and the
transfer value of the increase in accrued benefit:

|             | Accrued
      pension |  | Transfer
      value of
      accrued benefits |  | Change
      in
      transfer
      valuec-dless directorscontributions |  | Additionalaccruedbenefitsearned inthe year |  | Transfer
      valueof increasein accruedbenefits lessdirectorscontributions | 
|------------ | --------------------- |  | ---------------------------------------------- |  | ------------------------------------------------------------------------- |  | ------------------------------------------ |  | ----------------------------------------------------------------------------- | 
|             |                       |  |                                                |  |                                                                           |  |                                            |  |                                                                               | 
|             | 2003                  |  | 2002                                           |  | 2003                                                                      |  | 2002                                       |  | 2003                                                                          | 
|             | £000a                 |  | £000b                                          |  | £000c                                                                     |  | £000d                                      |  | £000                                                                          | 
|             |                      
|P Danon      | 37                    |  | 20                                             |  | 286                                                                       |  | 212                                        |  | 59                                                                            | 
|A Green      | 109                   |  | 99                                             |  | 1,103                                                                     |  | 1,420                                      |  | (343)                                                                         | 
|P Reynolds   | 110                   |  | 87                                             |  | 1,014                                                                     |  | 1,141                                      |  | (151)                                                                         | 
|P R Hamptong | 29                    |  | 29                                             |  | 250                                                                       |  | 347                                        |  | (97)                                                                          | 
|             |                      

|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 2002 and 2003, respectively.                                                                                                                                                                                                                                                                                                          
|c   | Transfer
      value of the deferred pension in column (a) as at 31 March 2003 calculated
      on the basis of actuarial advice in accordance with Actuarial Guidance Note
      GN11 and excludes directors contributions. 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 2002 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   | As
      explained above, Philip Hamptons pension benefit was increased on
      leaving the company. The entitlement shown above is after taking account
      of this increase, which was allowed for in last years accounts.                                                                                                                                                                                                                                                    

BT Annual Report and Form 20-F 200367

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Report on directors remuneration

|Share options
      held at 31 March 2003 |                                    
|----------------------------------------- | -----------------------------------
|                                          | Number
      of shares under option
|                                          |                                    
|                                          | 1
      April 2002                 
|                                          |                                    
|Sir
      Christopher Bland               | 314,244a                           
|                                          |                                    
|B
      Verwaayen                         | 1,121,121b                         
|                                          |                                   
|                                          |                                   
|                                          |                                    
|                                          | 1,121,121                          
|                                          |                                    
|P
      Danon                             |                                   
|                                          |                                   
|                                          |                                    
|                                          |                                   
|                                          |                                    
|A
      Green                             | 567f                               
|                                          |                                   
|                                          |                                   
|                                          |                                   
|                                          |                                    
|                                          | 567                                
|                                          |                                    
|I
      Livingston                        |                                   
|                                          |                                   
|                                          |                                   
|                                          |                                    
|                                          |                                   
|                                          |                                    
|Dr
      P Reynolds                       | 1,483f                             
|                                          | 4,555g                             
|                                          |                                   
|                                          |                                   
|                                          |                                    
|                                          | 6,038                              
|                                          |                                    
|Total                                     | 1,441,970                          
|                                          |                                    

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

|a | Options
      granted under the GSOP. 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. So long as Sir Christopher Bland is
      the legal and beneficial owner of the invested shares purchased on 1 May
      2001, the option will become exercisable on 1 May 2004. The option was granted
      on 22 June 2001.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. Details are set out on page 60.                                                                                                                                                                                                                                                                                                                                                                                                                               
|d | 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 earnings
      per share. Details are set out on page 60.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|e | Options
      granted on 24 June 2002 under the Employee Sharesave Scheme, in which all
      employees of the company are eligible to participate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|f | Options
      granted under the Employee Sharesave Scheme to Andy Green and Paul Reynolds
      on 23 June 2000 and 25 June 1998 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|g | Options
      granted on 21 December 2001 under the Employee Sharesave Scheme, in which
      all employees of the company are eligible to participate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|h | Details
      of the GSOP and performance conditions are set out on page 60.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

There were no unrealised gains on the above share options at 31 March 2003, based on the market price of the shares at that date.

At 31 March 2002, Ben Verwaayen had unrealised gains of £339,000 in respect of 1,121,121 shares under option under the GSOP. Paul Reynolds had unrealised
gains of £3,000 in respect of 6,038 shares under option under the Employee Sharesave Scheme.

The market price of the shares at 31 March 2003 was 157p (2002  280p) and the range during the 2003 financial year was 286.25p  141p.

68 BT Annual Report and Form 20-F 2003

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Report on
  directors remuneration

Share awards under long-term
  incentive schemes held at 31 March 2003Details of the companys ordinary shares provisionally awarded to directors, as participants under the ESP, ISP and RSP are as follows:

|                            | 1 April
        2002a |                    | Awarded |  | Vested  |  | Lapsed  |  | Dividends
      
      re-invested |  | Total
        number
      of
        award shares
      31
        March
      2003 |  | Expected
      vesting
        date |  | Range of value of award | 
|--------------------------- | --------------------- | ------------------ | ------- |  | ------- |  | ------- |  | ---------------------------------- |  | ------------------------------------------------------------------------------------ |  | ----------------------------------- |  | ----------------------- | 
|                           
|Minimum
      £000          |                       | Maximum
      £000 |        
|                            |                      
|                            |                      
|Sir Christopher
      Bland |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|ISP 2001                    | 311,073               |                    |        |  |        |  |        |  | 7,235                              |  | 318,308                                                                              |  | 01/08/04                            |  |                        | 
|                            |                      
|B Verwaayen                 |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|RSP 2001                    | 781,576               |                    |        |  |        |  |        |  | 18,178                             |  | 799,754                                                                              |  | 10/01/05                            |  | £1,256                  | 
|                            |                      
|P Danon                     |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|ISP 2000                    | 97,581                |                    |        |  |        |  |        |  | 2,269                              |  | 99,850                                                                               |  | 01/08/03                            |  |                        | 
|ISP 2001                    | 174,978               |                    |        |  |        |  |        |  | 4,069                              |  | 179,047                                                                              |  | 01/08/04                            |  |                        | 
|RSP 2000                    | 104,086               |                    |        |  | 52,585g |  |        |  | 1,752                              |  | 53,253                                                                               |  | 04/10/03                            |  | £84                     | 
|                            |                      
|A Green                     |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|ESP 1997                    | 69,530                |                    |        |  | 30,380b |  | 39,150  |  |                                   |  |                                                                                     |  |                                     |  |                        | 
|ESP 1998                    | 37,378                |                    |        |  |        |  |        |  | 717                                |  | 38,095                                                                               |  | 01/08/03                            |  |                        | 
|ESP 1999                    | 37,982                |                    |        |  |        |  |        |  | 728                                |  | 38,710                                                                               |  | 01/08/04                            |  |                        | 
|ISP 2000                    | 83,354                |                    |        |  |        |  |        |  | 1,938                              |  | 85,292                                                                               |  | 01/08/03                            |  |                        | 
|ISP 2001                    | 174,978               |                    |        |  |        |  |        |  | 4,069                              |  | 179,047                                                                              |  | 01/08/04                            |  |                        | 
|                            |                      
|I Livingstonc               |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|RSP 2002                    |                      |                    | 493,601 |  |        |  |        |  | 11,480                             |  | 505,081                                                                              |  | 05/04/05                            |  | £793                    | 
|RSP 2002                    |                      |                    | 110,444 |  |        |  |        |  | 2,568                              |  | 113,012                                                                              |  | 20/05/05                            |  | £177                    | 
|                            |                      
|Dr P Reynolds               |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|ESP 1997                    | 22,878                |                    |        |  | 10,523b |  | 12,355  |  |                                   |  |                                                                                     |  |                                     |  |                        | 
|ESP 1998                    | 11,409                |                    |        |  |        |  |        |  | 217                                |  | 11,626                                                                               |  | 01/08/03                            |  |                        | 
|ESP 1999                    | 11,388                |                    |        |  |        |  |        |  | 217                                |  | 11,605                                                                               |  | 01/08/04                            |  |                        | 
|ISP 2000                    | 47,019                |                    |        |  |        |  |        |  | 1,092                              |  | 48,111                                                                               |  | 01/08/03                            |  |                        | 
|ISP 2001                    | 144,649               |                    |        |  |        |  |        |  | 3,363                              |  | 148,012                                                                              |  | 01/08/04                            |  |                        | 
|                            |                      
|Former directors            |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|Sir Peter Bonfieldd         |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|ESP 1997                    | 152,652               |                    |        |  | 75,369b |  | 77,283  |  |                                   |  |                                                                                     |  |                                     |  |                        | 
|ESP 1998                    | 110,456               |                    |        |  |        |  |        |  | 2,123                              |  | 112,579                                                                              |  | 01/08/03                            |  |                        | 
|ESP 1999                    | 98,351                |                    |        |  |        |  |        |  | 1,888                              |  | 100,239                                                                              |  | 01/08/04                            |  |                        | 
|ISP 2000                    | 266,743               |                    |        |  |        |  |        |  | 6,204                              |  | 272,947                                                                              |  | 01/08/03                            |  |                        | 
|ISP 2001                    | 510,159               |                    |        |  |        |  |        |  | 11,866                             |  | 522,025                                                                              |  | 01/08/04                            |  |                        | 
|                            |                      
|R Bracee                    |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|ESP 1997                    | 101,765               |                    |        |  | 45,666b |  | 56,099  |  |                                   |  |                                                                                     |  |                                     |  |                        | 
|ESP 1998                    | 56,073                |                    |        |  |        |  |        |  | 1,076                              |  | 57,149                                                                               |  | 01/08/03                            |  |                        | 
|                            |                      
|B Cockburne                 |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|ESP 1998                    | 76,467                |                    |        |  |        |  |        |  | 1,468                              |  | 77,935                                                                               |  | 01/08/03                            |  |                        | 
|ESP 1999                    | 67,142                |                    |        |  |        |  |        |  | 1,290                              |  | 68,432                                                                               |  | 01/08/04                            |  |                        | 
|                            |                      
|P Hamptonf                  |                       |                    |         |  |         |  |         |  |                                    |  |                                                                                      |  |                                     |  |                         | 
|RSP 2000                    | 86,796                |                    |        |  |        |  | 86,796  |  |                                   |  |                                                                                     |  |                                     |  |                        | 
|ISP 2001                    | 202,975               |                    |        |  |        |  | 202,975 |  |                                   |  |                                                                                     |  |                                     |  |                        | 
|                            |                      

| |  | a | Excluding
      shares purchased by each director and held under the ESP (see page 60).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 
| |  | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | b | The
      ESP 1997 award, which was granted on 13 November 1997, vested on 1 August
      2002. On that date the market price of a BT Group share was 199p. The market
      price on the date of grant was 455.5p. The five year performance cycle for
      the award ended on 31 July 2002 and on the basis of BTs TSR position,
      32.5% of the performance shares under award, including re-invested dividends,
      vested.                                                                                                                                                                         | 
| |  | c | In
      accordance with the terms of his service agreement, an award of 493,601
      shares with a value of £1,350,000 was granted on 30 May 2002 to Ian
      Livingston under the RSP. This award of shares will vest in three equal
      tranches on the first three anniversaries of his joining BT. In addition,
      Ian Livingston purchased BT Group shares with a value of £300,000
      and on 20 May 2002 was granted an award under the RSP of 110,444 shares
      with a value of £300,000, which will vest on the third anniversary
      of the date of purchase of his purchased shares. | 
| |  | d | Under
      the terms of his service agreement, the awards granted to Sir Peter Bonfield
      were preserved on his leaving until the normal vesting date.                                                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| |  | e | The
      awards granted to Bill Cockburn and Robert Brace were preserved at the discretion
      of the Remuneration Committee on their leaving until the normal vesting
      date.                                                                                                                                                                                                                                                                                                                                                                                                                          | 
| |  | f | The
      awards granted to Philip Hampton lapsed on his leaving the company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
| |  | g | The
      RSP 2000 award, which was granted on 4 October 2000, vested on 4 October
      2002. On that date the market price of a BT Group share was 168p. The market
      price on the date of grant was 697.5p.                                                                                                                                                                                                                                                                                                                                                                                             | 
| |  | h | Details
      of the ESP, ISP and GSOP, and any relevant performance conditions are set
      out on pages 60 and 61.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 

BT Annual Report and Form 20-F 200369

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  of contents

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Report on
  directors remuneration

Vesting of outstanding share
  awards and optionsDetails of options granted under the GSOP and awards of shares under the ESP and ISP which would vest based on BT Groups TSR compared with the other companies in the FTSE 100 for the
relevant performance period up to 31 March 2003 are as follows:

|                              |                     |          |                      |  | 31
        March 2003 |                       | 31 March
        2002  | 
|----------------------------- | ------------------- | -------- | -------------------- |  | --------------------- | --------------------- | ---------------------- | 
|                              |                     |          |                      |  |                       |                       |                        | 
|No.
        of shares/options |                     | Expected |                      |  |                       | Percentage
        of |                        | 
|                              | under
        award |          | vesting
        date |  | TSR
        position  |                       | shares
        vesting | 
|                              |                    
|Sir Christopher
      Bland   |                     |          |                      |  |                       |                       |                        | 
|ISP 2001                      | 318,308             |          | 01/08/04             |  | 73                    |                       |                       | 
|                              |                    
|Ben Verwaayen                 |                     |          |                      |  |                       |                       |                        | 
|GSOP 2002                     | 1,121,121           |          | 11/02/05             |  | 61                    |                       |                       | 
|GSOP 2002                     | 935,830             |          | 29/07/05             |  | 61                    |                       |                       | 
|                              |                    
|P Danon                       |                     |          |                      |  |                       |                       |                        | 
|ISP 2000                      | 99,850              |          | 01/08/03             |  | 85                    |                       |                       | 
|ISP 2001                      | 179,047             |          | 01/08/04             |  | 73                    |                       |                       | 
|GSOP 2002a                    | 601,610             |          | 29/07/05             |  | 61                    |                       |                       | 
|                              |                    
|Ian Livingston                |                     |          |                      |  |                       |                       |                        | 
|GSOP 2002a                    | 601,610             |          | 29/07/05             |  | 61                    |                       |                       | 
|                              |                    
|A Green                       |                     |          |                      |  |                       |                       |                        | 
|ESP 1998                      | 38,095              |          | 01/08/03             |  | 83                    |                       |                       | 
|ESP 1999                      | 38,710              |          | 01/08/04             |  | 87                    |                       |                       | 
|ISP 2000                      | 85,292              |          | 01/08/03             |  | 85                    |                       |                       | 
|ISP 2001                      | 179,047             |          | 01/08/04             |  | 73                    |                       |                       | 
|GSOP 2002a                    | 568,190             |          | 29/07/05             |  | 61                    |                       |                       | 
|                              |                    
|Dr P Reynolds                 |                     |          |                      |  |                       |                       |                        | 
|ESP 1998                      | 11,626              |          | 01/08/03             |  | 83                    |                       |                       | 
|ESP 1999                      | 11,605              |          | 01/08/04             |  | 87                    |                       |                       | 
|ISP 2000                      | 48,111              |          | 01/08/03             |  | 85                    |                       |                       | 
|ISP 2001                      | 148,012             |          | 01/08/04             |  | 73                    |                       |                       | 
|GSOP 2002a                    | 534,760             |          | 29/07/05             |  | 61                    |                       |                       | 
|                              |                    
|Former
      directors        |                     |          |                      |  |                       |                       |                        | 
|Sir Peter
      Bonfield      |                     |          |                      |  |                       |                       |                        | 
|ESP 1998                      | 112,579             |          | 01/08/03             |  | 83                    |                       |                       | 
|ESP 1999                      | 100,239             |          | 01/08/04             |  | 87                    |                       |                       | 
|ISP 2000                      | 272,947             |          | 01/08/03             |  | 85                    |                       |                       | 
|ISP 2001                      | 522,025             |          | 01/08/04             |  | 73                    |                       |                       | 
|                              |                    
|R Brace                       |                     |          |                      |  |                       |                       |                        | 
|ESP 1998                      | 57,149              |          | 01/08/03             |  | 83                    |                       |                       | 
|                              |                    
|B Cockburn                    |                     |          |                      |  |                       |                       |                        | 
|ESP 1998                      | 77,935              |          | 01/08/03             |  | 83                    |                       |                       | 
|ESP 1999                      | 68,432              |          | 01/08/04             |  | 87                    |                       |                       | 
|                              |                    

|a | Options
      granted under the GSOP during the 2003 financial year, whose exercise is
      subject to a 35% compound annual growth in earnings per share being achieved
      over three years (equivalent to 22p per share at the end of the 2005 financial
      year), are not included in the above table. Earnings per share for
      the 2003 financial year are 14.2p per share. | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 

70 BT Annual Report and Form 20-F 2003

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---



Report on
  directors remuneration

Deferred Bonus Plan awards
  at 31 March 2003The following deferred bonuses have been awarded to the directors under the DBP. These shares will normally be transferred to participants at the end of the three-year deferred period if those
participants are still employed by BT Group.

|                            | 1 April
        2002 |                             | Awardede |  | Vestedcf |  | Lapsedd |  | Total
        number
      of
        award
        shares |  | Expected
      vesting
        date |  | Market
        value
      2003
      £000 |  | Market
        value
      2002
      £000 | 
|--------------------------- | -------------------- | --------------------------- | -------- |  | -------- |  | ------- |  | ---------------------------------------------------------- |  | ----------------------------------- |  | ------------------------------------------ |  | ------------------------------------------ | 
|Dividends
      re-invested |                      | 31
        March
      2003
|                            |                     
|B Verwaayen                 |                     |                             | 75,247   |  |         |  |        |  | 1,749                                                      |  | 76,996                              |  | 01/08/05                                   |  | 121                                        | 
|                            |                     
|P Danon                     | 21,872               |                             |         |  |         |  |        |  | 420                                                        |  | 22,292                              |  | 01/08/04                                   |  | 35                                         | 
|                            |                     |                             | 74,257   |  |         |  |        |  | 1,726                                                      |  | 75,983                              |  | 01/08/05                                   |  | 119                                        | 
|                            |                     
|A Greena                    | 8,478                |                             |         |  | 8,478    |  |        |  |                                                           |  |                                    |  |                                            |  |                                           | 
|                            | 10,719               |                             |         |  |         |  |        |  | 205                                                        |  | 10,924                              |  | 01/08/03                                   |  | 17                                         | 
|                            | 44,327               |                             |         |  |         |  |        |  | 852                                                        |  | 45,179                              |  | 01/08/04                                   |  | 71                                         | 
|                            |                     |                             | 49,504   |  |         |  |        |  | 1,150                                                      |  | 50,654                              |  | 01/08/05                                   |  | 80                                         | 
|                            |                     
|Dr P Reynoldsa              | 2,914                |                             |         |  | 2,914    |  |        |  |                                                           |  |                                    |  |                                            |  |                                           | 
|                            | 4,336                |                             |         |  |         |  |        |  | 83                                                         |  | 4,419                               |  | 01/08/03                                   |  | 7                                          | 
|                            | 32,195               |                             |         |  |         |  |        |  | 618                                                        |  | 32,813                              |  | 01/08/04                                   |  | 52                                         | 
|                            |                     |                             | 44,554   |  |         |  |        |  | 1,036                                                      |  | 45,590                              |  | 01/08/05                                   |  | 72                                         | 
|                            |                     
|Former directors            |                      |                             |          |  |          |  |         |  |                                                            |  |                                     |  |                                            |  |                                            | 
|Sir Peter Bonfielda
      c | 156,056              |                             |         |  | 156,056  |  |        |  |                                                           |  |                                    |  |                                            |  |                                           | 
|                            | 85,090               |                             |         |  |         |  |        |  | 1,635                                                      |  | 86,725                              |  | 01/08/03                                   |  | 136                                        | 
|                            | 149,626              |                             |         |  |         |  |        |  | 2,876                                                      |  | 152,502                             |  | 01/08/04                                   |  | 239                                        | 
|                            |                     
|R Bracea
      b            | 11,191               |                             |         |  | 11,191   |  |        |  |                                                           |  |                                    |  |                                            |  |                                           | 
|                            |                     
|B Cockburna
      b         | 37,995               |                             |         |  | 37,995   |  |        |  |                                                           |  |                                    |  |                                            |  |                                           | 
|                            |                     
|P Hamptond                  | 15,553               |                             |         |  |         |  | 15,553  |  |                                                           |  |                                    |  |                                            |  |                                           | 
|                            |                     

|a | Andy
      Green, Paul Reynolds, Sir Peter Bonfield, Robert Brace and Bill Cockburn
      received 68p per share on their awards vesting as compensation for the difference
      between the price of a BT share at the date of vesting and the demerger
      when the awards should have vested. The Remuneration Committee determined
      that the awards should continue until their normal vesting date and that
      participants should be compensated if there was a subsequent fall in the
      share price. | 
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | The
      awards granted to Bill Cockburn and Robert Brace were preserved at the discretion
      of the Remuneration Committee on leaving until the normal vesting date.                                                                                                                                                                                                                                                                                                                                                  | 
|c | Under
      the terms of his service agreement, the awards granted to Sir Peter Bonfield
      were preserved on his leaving until the normal vesting date.                                                                                                                                                                                                                                                                                                                                                                | 
|d | The
      award granted to Philip Hampton lapsed on his leaving the company on 30
      April 2002.                                                                                                                                                                                                                                                                                                                                                                                                                        | 
|e | Awards
      granted on 29 July 2002. On that date, the market price of a BT Group share
      was 202p.                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|f | Awards
      granted on 28 June 1999, vested on 1 August 2002. On that date, the market
      price of a BT Group share was 199p. The market price on the date of grant
      was 764p.                                                                                                                                                                                                                                                                                                                                    | 
|g | Details
      of the DBP are set out on page 59.                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | 

|Share
      awards under all-employee share ownership plans at 31 March 2003
|----------------------------------------------------------------------------
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|P Danon                                                                     
|ESIPa                                                                       
|                                                                            
|A Green                                                                     
|ESIPa                                                                       
|ESOS 1999b
      c                                                          
|ESOS 2000d                                                                  
|ESOS 2001                                                                   
|                                                                            
|P Reynolds                                                                  
|ESIPa                                                                       
|ESOS 1999b
      c                                                          
|ESOS 2000d                                                                  
|ESOS 2001                                                                   
|                                                                            

|a | Awards
      granted under the Employee Share Investment Plan (ESIP) on 14 August 2002.
      On that date the market price of a BT Group share was 195.75p.                                                                             | 
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | Awards
      granted under the Employee Share Ownership Scheme (ESOS) on 2 August 1999
      vested on 2 August 2002. On that date, the market price of a BT Group share
      was 191p. The market price on the date of award was 753p. | 
|c | Includes
      16 shares purchased under the rights issue in 2001 and attaching to shares
      originally awarded.                                                                                                                      | 
|d | Includes
      19 shares purchased under the rights issue in 2001 and attaching to shares
      originally awarded.                                                                                                                      | 
|e | The
      fifth anniversary of the award, at which date shares can be taken out of
      the ESIP with no tax charge.                                                                                                                    | 

BT Annual Report and Form 20-F 200371

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---



Report on
  directors remuneration

Operating Committee
The aggregate remuneration
  of members of theOperating
  Committee(OC), other than directors, for services in
  all capacities during the 2003 financial year was as follows:

|                                               | 2003 |  | 2002   | 
|---------------------------------------------- | ---- |  | ------ | 
|                                               | £000 |  | £000   | 
|                                               |     
|Salaries and benefits                          | 275  |  | 3,703  | 
|Annual bonuses                                 | 201  |  | 1,551  | 
|Termination and retention
      payments       |     |  | 1,276  | 
|Provision for long-term
      incentive awards | 327  |  | 4,959  | 
|Company pension contributions                  | 32   |  | 857    | 
|                                               |     
|Total                                          | 835  |  | 12,346 | 
|                                               |     

The OC replaced the Executive
  Committee in February 2002. Of the six members of the OC, five are members of
  the Board.
       Pierre
  Danon, Andy Green and Paul Reynolds were appointed to the Board on 19 November
  2001 and from that date their directors salaries are reflected in the
  table on page 65.
       No
  options were granted under the BT Group Employee Sharesave Scheme to OC members,
  other than directors, during the 2003 financial year (2002  5,650).
  The
  members of the OC beneficially own less than 1% of the companys outstanding
  ordinary shares.

By order of the Board

Sir Anthony
  GreenerDeputy Chairman and Chairman of Remuneration Committee
21 May 2003

72 BT Annual Report and Form 20-F 2003

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Statement
  of directors responsibilityfor preparing
  the financial statements

The directors are required by law to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the company and the group as at the end of
the financial year and of the profit or loss and cash flows of the group for that period.

The directors consider that, in preparing the financial statements for the year ended 31 March 2003, on pages 75 to 135 the company has used appropriate
accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates. The directors also consider that all applicable accounting standards have been followed and confirm that the financial statements have been
prepared on the going concern basis.

The directors are responsible for ensuring that the company keeps accounting records which disclose with reasonable accuracy at any time the financial position of
the company and which enable them to ensure that the financial statements comply with the Companies Act 1985.

The directors are also responsible for taking such steps that are reasonably open to them to safeguard the assets of the group and to prevent and detect fraud and
other irregularities.

The auditors responsibilities are stated in their report to the shareholders.

BT Annual Report and Form 20-F 200373

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Report of the
  independent auditorsto the shareholders of BT Group plc

We have audited the financial statements which comprise the group profit and loss account, group and company balance sheets, group cash flow statement, group statement of total recognised
gains and losses and the related notes which have been prepared under the historic cost convention and the accounting policies set out in the Accounting Policies section and the United States Generally Accepted Accounting Principles section. We have
also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the directors remuneration report (the audited part).

Respective responsibilities of directors and auditors
The directors responsibilities for preparing the annual report, the directors remuneration report and the financial statements in accordance with applicable United Kingdom law and
accounting standards and the requirements of the US Securities and Exchange Commission are set out in the statement of directors responsibilities.

Our responsibility is to audit the financial statements and the audited part of the directors remuneration report in accordance with relevant legal and
regulatory requirements, United Kingdom Auditing Standards issued by the Auditing Practices Board and the Listing Rules of the Financial Services Authority.

We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the audited part of the
directors remuneration report have been properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors report is not consistent with the financial statements, if the company has not
kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors remuneration and transactions is not
disclosed.

We read the other information contained in the annual report and consider the implications for our report if we become aware of any apparent misstatements or
material inconsistencies with the financial statements. The other information comprises only those sections set out in the table of contents including Financial headlines, Chairmans message, Chief Executives statement, Business and
Financial reviews, Five-year financial summary, Report of the directors, Corporate governance and Risk factors.

We review whether the corporate governance statement reflects the companys compliance with the seven provisions of the Combined Code specified for our
review by the Listing Rules, and we report if it does not. We are not required to consider whether the boards statements on internal control cover all risks and controls, or to form an opinion on the effectiveness of the companys or
groups corporate governance procedures or its risk and control procedures.

Basis of audit opinion
We conducted our audit in accordance with auditing standards issued by the Auditing Practices Board and in accordance with auditing standards generally accepted in the United States. An audit
includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the audited part of the directors remuneration report. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the companys circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient
evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of
information in the financial statements.

UK opinion
In our opinion the financial statements give a true and fair view of the state of affairs of the company and the group at 31 March 2003 and of the profit and cash flows of the group for the
year then ended; the financial statements have been properly prepared in accordance with the Companies Act 1985; and those parts of the directors remuneration report required by Part 3 of Schedule 7A of the Companies Act 1985 have been
properly prepared in accordance with the Companies Act 1985.

US opinion
In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the group as at 31 March 2003 and 31 March 2002, and the results of
its operations and its cash flows for the years ended 31 March 2003, 31 March 2002 and 31 March 2001 in conformity with accounting principles generally accepted in the United Kingdom.

Accounting principles generally accepted in the United Kingdom vary in certain respects from accounting principles generally accepted in the United States. The
application of the latter would have affected the determination of consolidated net income for the three years ended 31 March 2003, 31 March 2002 and 31 March 2001 and the consolidated shareholders equity at 31 March 2003 and 31 March 2002 as
shown in the summary of differences between United Kingdom and United States generally accepted accounting principles set out in the United States Generally Accepted Accounting Principles section.

PricewaterhouseCoopers LLP
Chartered Accountants and Registered Auditors
1 Embankment PlaceLondon WC2N 6RH21 May 2003

74 BT Annual Report and Form 20-F 2003

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Consolidated financial statements

|    | The consolidated
        financial statements are divided
        into the following sections:                                       
|--- | -------------------------------------------------------------------------------------------------------------------------------------
|76  | Accounting
      policies                                                                                                            
|79  | Group
      profit and loss account                                                                                                  
|82  | Group
      statement of total recognised gains and losses                                                                           
|83  | Group
      cash flow statement                                                                                                      
|84  | Group
      balance sheet                                                                                                            
|85  | Notes
      to the financial statements                                                                                              
|85  | Accounting
      for the reorganisation and demerger, changes in accounting policy and presentation
      and discontinued activities
|86  | Segmental
      analysis                                                                                                             
|90  | Turnover                                                                                                                             
|90  | Other
      operating income                                                                                                         
|91  | Operating
      costs                                                                                                                
|94  | Groups
      share of operating profit (loss) of associates and joint ventures                                                      
|94  | Profit
      on sale of fixed asset investments and group undertakings                                                               
|95  | Profit
      on sale of property fixed assets                                                                                        
|95  | Amounts
      written off investments                                                                                                
|95  | Interest
      receivable                                                                                                            
|95  | Interest
      payable                                                                                                               
|96  | Tax
      on profit (loss) on ordinary activities                                                                                    
|97  | Minority
      interests                                                                                                             
|97  | Dividends                                                                                                                            
|97  | Earnings
      (loss) per share                                                                                                      
|99  | Reconciliation
      of operating profit (loss) to operating cash flows                                                              
|99  | Management
      of liquid resources                                                                                                 
|99  | Acquisitions
      and disposals                                                                                                     
|104 | Net
      debt                                                                                                                       
|104 | Intangible
      assets                                                                                                              
|105 | Tangible
      fixed assets                                                                                                          
|106 | Fixed
      asset investments                                                                                                        
|107 | Debtors                                                                                                                              
|108 | Current
      asset investments                                                                                                      
|108 | Loans
      and other borrowings                                                                                                     
|109 | Other
      creditors                                                                                                                
|109 | Provisions
      for liabilities and charges                                                                                         
|110 | Reconciliation
      of movement in shareholders funds                                                                              
|111 | Related
      party transactions                                                                                                     
|111 | Financial
      commitments, contingent liabilities and subsequent events                                                            
|112 | Pension
      costs                                                                                                                  
|116 | Directors                                                                                                                            
|117 | People
      employed                                                                                                                
|117 | Employee
      share schemes                                                                                                         
|121 | Auditors                                                                                                                             
|121 | Financial
      instruments and risk management                                                                                      
|126 | Company
      balance sheet                                                                                                          

BT Annual Report and Form 20-F 200375

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---



Accounting policies

I Basis of preparation of the financial statements
The financial statements are prepared under the historical cost convention and in accordance with applicable accounting standards and the provisions of the Companies Act 1985. The group
financial statements consolidate those of the company and all of its subsidiary undertakings. Where the financial statements of subsidiary undertakings, associates and joint ventures do not conform with the groups accounting policies,
appropriate adjustments are made on consolidation in order to present the group financial statements on a consistent basis. The principal subsidiary undertakings financial years are all coterminous with those of the company.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenditure during the reporting period. Actual results could differ from those estimates. Estimates are used principally
when accounting for interconnect income, provision for doubtful debts, payments to telecommunication operators, depreciation, goodwill amortisation and impairment, employee pension schemes, provisions for liabilities and charges and taxes.

II Turnover
Group turnover net of discounts, which excludes value added tax and other sales taxes, comprises the value of services provided and equipment sales by group undertakings, excluding those
between them.

Total turnover is group turnover together with the groups share of its associates and joint ventures turnover, excluding the groups share
of transactions between the group and its principal joint venture, Concert BV.

Turnover from calls is recognised in the group profit and loss account at the time the call is made over the groups networks. Turnover from rentals is
recognised evenly over the period to which the charges relate. Turnover from equipment sales is recognised at the point of sale. Prepaid call card sales are deferred until the customer uses the stored value in the card to pay for the relevant calls.
Turnover arising from the provision of other services, including maintenance contracts, is recognised evenly over the periods in which the service is provided to the customer. Turnover from installation and connection activities is recognised in the
same period as the related costs. Turnover from classified directories, mainly comprising advertising revenue, is recognised in the group profit and loss account upon completion of delivery.

III Research and development
Expenditure on research and development is written off as incurred.

IV Leases
  Operating lease rentals are charged
  against the profit and loss account on a straight-line basis over the lease
  period except where the contractual paymentterms
  are considered to be a more systematic and appropriate basis.

V Interest
Interest payable, including that related to financing the construction of tangible fixed assets, is written off as incurred. Discounts or premiums and expenses on the issue of debt securities
are amortised over the term of the related security and included within interest payable. Premiums payable on early redemptions of debt securities, in lieu of future interest costs, are written off when paid.

VI Foreign currencies
On consolidation, assets and liabilities of foreign undertakings are translated into sterling at year end exchange rates. The results of foreign undertakings are translated into sterling at
average rates of exchange for the year.

Exchange differences arising from the retranslation at year end exchange rates of the net investment in foreign undertakings, less exchange differences on
borrowings which finance or provide a hedge against those undertakings, are taken to reserves and are reported in the statement of total recognised gains and losses.

All other exchange gains or losses are dealt with through the profit and loss account.

VlI Intangibles(a) Goodwill
Goodwill, arising from the purchase of subsidiary undertakings and interests in associates and joint ventures, represents the excess of the fair value of the purchase consideration over the
fair value of the net assets acquired.

For acquisitions completed on or after 1 April 1998, the goodwill arising is capitalised as an intangible asset or, if arising in respect of an associate or joint
venture, recorded as part of the related investment. Goodwill is amortised on a straight line basis from the time of acquisition over its useful economic life. The economic life is normally presumed to be a maximum of 20 years.

For acquisitions on or before 31 March 1998, the goodwill is written off on acquisition against group reserves.

If an undertaking is subsequently divested, the appropriate unamortised goodwill or goodwill written off to reserves is dealt with through the profit and loss
account in the period of disposal as part of the gain or loss on divestment.

(b) Other intangibles
Licence fees paid to governments, which permit telecommunication activities to be operated for defined periods, are amortised from the later of the start of the licence period or launch of
service to the end of the licence period on a straight-line basis.

76 BT Annual Report and Form 20-F 2003

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Accounting policies

VllI Tangible fixed assets
Tangible fixed assets are stated
  at historical cost less depreciation.

(a) CostCost in the case of network services includes contractors charges and payments on account, materials, direct labour and directly attributable overheads.

(b) Depreciation
Depreciation is provided on tangible fixed assets on a straight line basis from the time they are available for use, so as to write off their costs over their estimated useful lives taking
into account any expected residual values. No depreciation is provided on freehold land.

The lives assigned to other significant tangible fixed assets are:

|Freehold buildings
                                                      | 40 years                                                              
|------------------------------------------------------------------------- | ----------------------------------------------------------------------
|Leasehold land
      and buildings                                       | Unexpired portion
      of lease or 40 years, 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                                     | 2 to 6 years                                                          
|Payphones,
      other network equipment, motor vehicles and cableships  | 2 to 20 years                                                         
|Software                                                                 | 2 to 5 years                                                          

IX Fixed asset investments
Investments in subsidiary undertakings, associates and joint ventures are stated in the balance sheet of the company at cost less amounts written off. Amounts denominated in foreign currency
are translated into sterling at year end exchange rates.

Investments
  in associates and joint ventures are stated in the group balance sheet at the
  groups share of their net assets, together with any attributable unamortised
  goodwill on acquisitions arising on or after 1 April
  1998.

The groups share of profits less losses of associates and joint ventures is included in the group profit and loss account.

Investments in other participating interests and other investments are stated at cost less amounts written off.

X Asset impairment
Intangible and tangible fixed assets are tested for impairment when an event that might affect asset values has occurred. Goodwill is also reviewed for impairment at the end of the first
financial year after acquisition.

An impairment loss is recognised to the extent that the carrying amount cannot be recovered either by selling the asset or by the discounted future cash flows
from operating the assets.

XI Stocks
Stocks mainly comprise items of equipment, held for sale or rental, consumable items and work in progress on long-term contracts.

Equipment held and consumable items are stated at the lower of cost and estimated net realisable value, after provisions for obsolescence.

Work in progress on long-term contracts is stated at cost, after deducting payments on account, less provisions for any foreseeable losses.

XII Debtors
Debtors are stated in the balance sheet at estimated net realisable value. Net realisable value is the invoiced amount less provisions for bad and doubtful debtors. Provisions are made
specifically against debtors where there is evidence of a dispute or an inability to pay. An additional provision is made based on an analysis of balances by age, previous losses experienced and general economic conditions.

XIII Redundancy costs
Redundancy or leaver costs arising from periodic reviews of staff levels are charged against profit in the year in which the group is demonstrably committed to the employees leaving the
group.

If the estimated cost of providing incremental pension benefits in respect of employees leaving the group exceeds the total accounting surplus based on the latest
actuarial valuation of the groups pension scheme and the amount of the provision for pension liabilities on the balance sheet, then the excess estimated costs are charged against profit in the year in which the employees agree to leave the
group, within redundancy or leaver costs.

XIV Pension schemes
The group operates a funded defined benefit pension scheme, which is independent of the groups finances, for the substantial majority of its employees. Actuarial valuations of the main
scheme are carried out by an independent actuary as determined by the trustees at intervals of not more than three years, to determine the rates of contribution payable. The pension cost is determined on the advice of the companys actuary,
having regard to the results of these valuations. In any intervening years, the actuaries review the continuing appropriateness of the contribution rates.

The cost of providing pensions is charged against profits over employees working lives with the group using the projected unit method. Variations from this
regular cost are allocated on a straight-line basis over the average remaining service lives of current employees to the extent that these variations do not relate to the estimated cost of providing incremental pension benefits in the circumstances
described in XIII above.

Interest is accounted for on the provision or prepayment in the balance sheet which results from differences between amounts recognised as pension costs and
amounts funded. The regular pension cost, variations from the regular pension cost, described above, and interest are all charged within staff costs.

BT Annual Report and Form 20-F 200377

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---



Accounting policies

The group also operates defined contribution pension schemes and the profit and loss account is charged with the contributions payable.

XV Taxation
Full provision is made for deferred taxation on all timing differences which have arisen but have not reversed at the balance sheet date. Deferred tax assets are recognised to the extent that
it is regarded as more likely than not that there will be taxable profits from which the underlying timing differences can be deducted. No deferred tax is provided in respect of any future remittance of earnings of foreign subsidiaries or associates
where no commitment has been made to remit such earnings. The deferred tax balances are not discounted.

XVI Financial
  instruments(a) Debt
  instrumentsDebt instruments are stated at the amount of net proceeds adjusted to amortise any discount evenly over the term of the debt, and further adjusted for the effect of currency swaps acting as
hedges.

(b) Derivative financial instruments
The group uses derivative financial instruments to reduce exposure to foreign exchange risks and interest rate movements. The group does not hold or issue derivative financial instruments for
financial trading purposes.

Criteria to qualify for hedge accounting
The group considers its derivative financial instruments to be hedges when certain criteria are met. For foreign currency derivatives, the instrument must be related to actual foreign currency
assets or liabilities or a probable commitment and whose characteristics have been identified. It must involve the same currency or similar currencies as the hedged item and must also reduce the risk of foreign currency exchange movements on the
groups operations. For interest rate derivatives, the instrument must be related to assets or liabilities or a probable commitment, such as a future bond issue, and must also change the interest rate or the nature of the interest rate by
converting a fixed rate to a variable rate or vice versa.

Accounting for derivative financial
  instrumentsPrincipal amounts underlying
  currency swaps are revalued at exchange rates ruling at the date of the group
  balance sheet and, to the extent that they are not related to debt instruments,
  are included in debtors or creditors.

Interest differentials, under interest rate swap agreements used to vary the amounts and periods for which interest rates on borrowings are fixed, are recognised
by adjustment of interest payable.

The forward exchange contracts used to change the currency mix of net debt are revalued to balance sheet rates with net unrealised gains and losses being shown as
part of debtors, creditors, or as part of net debt. The difference between spot and forward rate for these contracts is recognised as part of net interest payable over the term of the contract.

The forward exchange contracts hedging transaction exposures are revalued at the prevailing forward rate on the balance sheet date with net unrealised gains and
losses being shown as debtors and creditors.

Instruments that form hedges against future fixed-rate bond issues are marked to market. Gains or losses are deferred until the bond is issued when they are
recognised evenly over the term of the bond.

78 BT Annual Report and Form 20-F 2003

Table
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---



Group profit and loss account

|for the
      year ended 31 March 2003                           | Notes |                                                                                       |          |                                                                                |       |  | Total
      £m | 
|---------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------- | -------- | ------------------------------------------------------------------------------ | ----- |  | -------------- | 
|                                                                 |       | Continuing
      activities                                                           |          |                                                                               
|                                                                 |       |                                                                                       |          |                                                                               
|                                                                 |       | Before
        goodwill
      amortisation
      and exceptional
      items
      £m |          | Goodwill
      amortisation
      and
        exceptional
      items
      £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                                           | 4     |                                                                                       | 215      |                                                                                |      |  | 215            | 
|Operating costs                                                  | 5     |                                                                                       | (16,152) |                                                                                | (218) |  | (16,370)       | 
|                                                                 |       |                                                                                       |         
|Group operating profit
      (loss)                              |       |                                                                                       | 2,790    |                                                                                | (218) |  | 2,572          | 
|Groups share of operating
      profit (loss) of joint ventures | 6     |                                                                                       | (31)     |                                                                                | 150   |  | 119            | 
|Groups share of operating
      profit (loss) of associates     | 6     |                                                                                       | 212      |                                                                                | (2)   |  | 210            | 
|                                                                 |       |                                                                                       |         
|Total operating profit
      (loss)                              |       |                                                                                       | 2,971    |                                                                                | (70)  |  | 2,901          | 
|Profit on sale of fixed
      asset investments                  | 7     |                                                                                       |         |                                                                                | 1,700 |  | 1,700          | 
|Loss on sale of group undertakings                               | 7     |                                                                                       |         |                                                                                | (9)   |  | (9)            | 
|Profit on sale of property
      fixed assets                    | 8     |                                                                                       | 11       |                                                                                |      |  | 11             | 
|Interest receivable                                              | 10    |                                                                                       | 195      |                                                                                |      |  | 195            | 
|Amounts written off investments                                  | 9     |                                                                                       | (7)      |                                                                                |      |  | (7)            | 
|Interest payable                                                 | 11    |                                                                                       | (1,341)  |                                                                                | (293) |  | (1,634)        | 
|                                                                 |       |                                                                                       |         
|Profit on ordinary activities
      before taxation              |       |                                                                                       | 1,829    |                                                                                | 1,328 |  | 3,157          | 
|Tax on profit on ordinary
      activities                       | 12    |                                                                                       | (598)    |                                                                                | 139   |  | (459)          | 
|                                                                 |       |                                                                                       |         
|Profit on ordinary activities
      after taxation               |       |                                                                                       | 1,231    |                                                                                | 1,467 |  | 2,698          | 
|Minority interests                                               | 13    |                                                                                       | (5)      |                                                                                | (7)   |  | (12)           | 
|                                                                 |       |                                                                                       |         
|Profit for the financial
      year                              |       |                                                                                       | 1,226    |                                                                                | 1,460 |  | 2,686          | 
|Dividends                                                        | 14    |                                                                                       |          |                                                                                |       |  | (560)          | 
|                                                                 |       |                                                                                       |         
|Retained profit for
      the financial year                     | 28    |                                                                                       |          |                                                                                |       |  | 2,126          | 
|                                                                 |       |                                                                                       |         
|Basic earnings per share                                         | 15    |                                                                                       | 14.2p    |                                                                                |       |  | 31.2p          | 
|Diluted earnings per
      share                                 | 15    |                                                                                       | 14.1p    |                                                                                |       |  | 31.0p          | 
|                                                                 |      

BT Annual Report and Form 20-F 200379

Table
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---



Group profit and loss account

|for the
      year ended 31 March 2002                           | Notes |                                                                                       |          |                                                                        |         |                                                  |          |  | Discontinued
      activities
        and
      intra-group
      items
      £m |  | Total
      £m | 
|---------------------------------------------------------------- | ----- | ------------------------------------------------------------------------------------- | -------- | ---------------------------------------------------------------------- | ------- | ------------------------------------------------ | -------- |  | -------------------------------------------------------------------------------- |  | -------------- | 
|                                                                 |       |                                                                                       |          |                                                                        |         |                                                  |          |  |                                                                                 
|                                                                 |       | Continuing
        activities                                                         |          |                                                                        |        
|                                                                 |       |                                                                                       |          |                                                                        |        
|                                                                 |       | Before
        goodwill
      amortisation
      and exceptional
      items
      £m |          | Goodwill
      amortisation
      and exceptional
      items
      £m |         | Total
      continuing
      activities
      £m |          |  |                                                                                 
|                                                                 |       |                                                                                       |          |                                                                        |         |                                                 
|                                                                 |       |                                                                                       |          |                                                                        |         |                                                 
|                                                                 |       |                                                                                       |          |                                                                        |         |                                                 
|                                                                 |       |                                                                                       |          |                                                                        |         |                                                 
|                                                                 |      
|Total turnover                                                   | 2     |                                                                                       | 21,815   |                                                                        |        |                                                  | 21,815   |  | 2,827                                                                            |  | 24,642         | 
|                                                                 |       |                                                                                       |         
|Groups share of joint
      ventures turnover                  | 3     |                                                                                       | (2,752)  |                                                                        |        |                                                  | (2,752)  |  | (76)                                                                             |  | (2,828)        | 
|Groups share of associates
      turnover                      | 3     |                                                                                       | (1,297)  |                                                                        |        |                                                  | (1,297)  |  | (639)                                                                            |  | (1,936)        | 
|Trading between group and
      principal joint venture          | 3     |                                                                                       | 681      |                                                                        |        |                                                  | 681      |  |                                                                                 |  | 681            | 
|                                                                 |       |                                                                                       |         
|Group turnover                                                   | 2     |                                                                                       | 18,447   |                                                                        |        |                                                  | 18,447   |  | 2,112                                                                            |  | 20,559         | 
|Other operating income                                           | 4     |                                                                                       | 361      |                                                                        |        |                                                  | 361      |  | 1                                                                                |  | 362            | 
|Operating costs                                                  | 5     |                                                                                       | (16,037) |                                                                        | (2,817) |                                                  | (18,854) |  | (2,546)                                                                          |  | (21,400)       | 
|                                                                 |       |                                                                                       |         
|Group operating profit
      (loss)                              |       |                                                                                       | 2,771    |                                                                        | (2,817) |                                                  | (46)     |  | (433)                                                                            |  | (479)          | 
|Groups share of operating
      profit (loss) of joint ventures | 6     |                                                                                       | (323)    |                                                                        | (1,160) |                                                  | (1,483)  |  | 19                                                                               |  | (1,464)        | 
|Groups share of operating
      profit (loss) of associates     | 6     |                                                                                       | 215      |                                                                        | (175)   |                                                  | 40       |  | 43                                                                               |  | 83             | 
|                                                                 |       |                                                                                       |         
|Total operating profit
      (loss)                              |       |                                                                                       | 2,663    |                                                                        | (4,152) |                                                  | (1,489)  |  | (371)                                                                            |  | (1,860)        | 
|Profit on sale of fixed
      asset investments                  | 7     |                                                                                       |         |                                                                        | 169     |                                                  | 169      |  | 3,208                                                                            |  | 3,377          | 
|Profit (loss) on sale of
      group undertakings                | 7     |                                                                                       |         |                                                                        | (148)   |                                                  | (148)    |  | 1,160                                                                            |  | 1,012          | 
|Profit on sale of property
      fixed assets                    | 8     |                                                                                       | 27       |                                                                        | 1,062   |                                                  | 1,089    |  |                                                                                 |  | 1,089          | 
|Interest receivable                                              | 10    |                                                                                       | 360      |                                                                        |        |                                                  | 360      |  |                                                                                 |  | 360            | 
|Amounts written off investments                                  | 9     |                                                                                       |         |                                                                        | (535)   |                                                  | (535)    |  |                                                                                 |  | (535)          | 
|Interest payable                                                 | 11    |                                                                                       | (1,777)  |                                                                        | (162)   |                                                  | (1,939)  |  | (43)                                                                             |  | (1,982)        | 
|                                                                 |       |                                                                                       |         
|Profit (loss) on ordinary
      activities before taxation       |       |                                                                                       | 1,273    |                                                                        | (3,766) |                                                  | (2,493)  |  | 3,954                                                                            |  | 1,461          | 
|Tax on profit (loss) on
      ordinary activities                | 12    |                                                                                       | (528)    |                                                                        | 143     |                                                  | (385)    |  | (58)                                                                             |  | (443)          | 
|                                                                 |       |                                                                                       |         
|Profit (loss) on ordinary
      activities after taxation        |       |                                                                                       | 745      |                                                                        | (3,623) |                                                  | (2,878)  |  | 3,896                                                                            |  | 1,018          | 
|Minority interests                                               | 13    |                                                                                       | (10)     |                                                                        |        |                                                  | (10)     |  | (13)                                                                             |  | (23)           | 
|                                                                 |       |                                                                                       |         
|Profit (loss) for the financial
      year                       |       |                                                                                       | 735      |                                                                        | (3,623) |                                                  | (2,888)  |  | 3,883                                                                            |  | 995            | 
|Dividends (see note below)                                       | 14    |                                                                                       |          |                                                                        |         |                                                  |          |  |                                                                                  |  | (173)          | 
|                                                                 |       |                                                                                       |         
|Retained profit for
      the financial year                     | 28    |                                                                                       |          |                                                                        |         |                                                  |          |  |                                                                                  |  | 822            | 
|                                                                 |       |                                                                                       |         
|Basic earnings (loss)
      per share                            | 15    |                                                                                       | 8.8p     |                                                                        |         |                                                  | (34.8)p  |  |                                                                                  |  | 12.0p          | 
|Diluted earnings (loss)
      per share                          | 15    |                                                                                       | 8.8p     |                                                                        |         |                                                  | (34.8)p  |  |                                                                                  |  | 11.9p          | 
|                                                                 |      

In addition to the final dividend
  for the year of £173 million there was a demerger distribution of £19,490
  million, representing
  the net assets of mmO2(including purchased
  goodwill) as at the date of demerger. Of the demerger distribution, £9 million represents a cash dividend paid by British Telecommunications plc to mmO2plc as part of the demerger process.

80 BT Annual Report and Form 20-F 2003

Table
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---



Group profit and loss account

|for the
      year ended 31 March 2001                       | Notes |                                                                                       |          |                                                                        |       |                                                  |          |  | Discontinued
      activities
        and
      intra-group
      items
      £m |  | Total
      £m | 
|------------------------------------------------------------ | ----- | ------------------------------------------------------------------------------------- | -------- | ---------------------------------------------------------------------- | ----- | ------------------------------------------------ | -------- |  | -------------------------------------------------------------------------------- |  | -------------- | 
|                                                             |       |                                                                                       |          |                                                                        |       |                                                  |          |  |                                                                                 
|                                                             |       |                                                                                       |          |                                                                        |       |                                                  |          |  |                                                                                 
|                                                             |       | Continuing
      activities                                                           |          |                                                                        |      
|                                                             |       |                                                                                       |          |                                                                        |      
|                                                             |       | Before
        goodwill
      amortisation
      and exceptional
      items
      £m |          | Goodwill
      amortisation
      and exceptional
      items
      £m |       | Total
      continuing
      activities
      £m |          |  |                                                                                 
|                                                             |       |                                                                                       |          |                                                                        |       |                                                 
|                                                             |       |                                                                                       |          |                                                                        |       |                                                 
|                                                             |       |                                                                                       |          |                                                                        |       |                                                 
|                                                             |       |                                                                                       |          |                                                                        |       |                                                 
|                                                             |      
|Total turnover                                               | 2     |                                                                                       | 21,068   |                                                                        |      |                                                  | 21,068   |  | 8,598                                                                            |  | 29,666         | 
|                                                             |       |                                                                                       |         
|Groups share of joint
      ventures turnover              | 3     |                                                                                       | (3,420)  |                                                                        |      |                                                  | (3,420)  |  | (598)                                                                            |  | (4,018)        | 
|Groups share of associates
      turnover                  | 3     |                                                                                       | (1,205)  |                                                                        |      |                                                  | (1,205)  |  | (4,714)                                                                          |  | (5,919)        | 
|Trading between group and
      principal joint venture      | 3     |                                                                                       | 698      |                                                                        |      |                                                  | 698      |  |                                                                                 |  | 698            | 
|                                                             |       |                                                                                       |         
|Group turnover                                               | 2     |                                                                                       | 17,141   |                                                                        |      |                                                  | 17,141   |  | 3,286                                                                            |  | 20,427         | 
|Other operating income                                       | 4     |                                                                                       | 346      |                                                                        |      |                                                  | 346      |  | 13                                                                               |  | 359            | 
|Operating costs                                              | 5     |                                                                                       | (14,405) |                                                                        | (95)  |                                                  | (14,500) |  | (6,259)                                                                          |  | (20,759)       | 
|                                                             |       |                                                                                       |         
|Group operating profit
      (loss)                          |       |                                                                                       | 3,082    |                                                                        | (95)  |                                                  | 2,987    |  | (2,960)                                                                          |  | 27             | 
|Groups share of operating
      loss of joint ventures      | 6     |                                                                                       | (268)    |                                                                        | (241) |                                                  | (509)    |  | (257)                                                                            |  | (766)          | 
|Groups share of operating
      profit (loss) of associates | 6     |                                                                                       | 111      |                                                                        | (133) |                                                  | (22)     |  | 391                                                                              |  | 369            | 
|                                                             |       |                                                                                       |         
|Total operating profit
      (loss)                          |       |                                                                                       | 2,925    |                                                                        | (469) |                                                  | 2,456    |  | (2,826)                                                                          |  | (370)          | 
|Profit on sale of fixed
      asset investments              | 7     |                                                                                       |         |                                                                        | 534   |                                                  | 534      |  | 1                                                                                |  | 535            | 
|Profit on sale of group
      undertakings                   | 7     |                                                                                       |         |                                                                        | 84    |                                                  | 84       |  |                                                                                 |  | 84             | 
|Profit on sale of property
      fixed assets                | 8     |                                                                                       | 34       |                                                                        |      |                                                  | 34       |  |                                                                                 |  | 34             | 
|Interest receivable                                          | 10    |                                                                                       | 379      |                                                                        | 25    |                                                  | 404      |  | 4                                                                                |  | 408            | 
|Interest payable                                             | 11    |                                                                                       | (1,575)  |                                                                        |      |                                                  | (1,575)  |  | (147)                                                                            |  | (1,722)        | 
|                                                             |       |                                                                                       |         
|Profit (loss) on ordinary
      activities before taxation   |       |                                                                                       | 1,763    |                                                                        | 174   |                                                  | 1,937    |  | (2,968)                                                                          |  | (1,031)        | 
|Tax on profit (loss) on
      ordinary activities            | 12    |                                                                                       | (385)    |                                                                        | (47)  |                                                  | (432)    |  | (280)                                                                            |  | (712)          | 
|                                                             |       |                                                                                       |         
|Profit (loss) on ordinary
      activities after taxation    |       |                                                                                       | 1,378    |                                                                        | 127   |                                                  | 1,505    |  | (3,248)                                                                          |  | (1,743)        | 
|Minority interests                                           | 13    |                                                                                       | 23       |                                                                        | (21)  |                                                  | 2        |  | (129)                                                                            |  | (127)          | 
|                                                             |       |                                                                                       |         
|Profit (loss) for the financial
      year                   |       |                                                                                       | 1,401    |                                                                        | 106   |                                                  | 1,507    |  | (3,377)                                                                          |  | (1,870)        | 
|Dividends                                                    | 14    |                                                                                       |          |                                                                        |       |                                                  |          |  |                                                                                  |  | (571)          | 
|                                                             |       |                                                                                       |         
|Transfer from reserves
      for the financial year          | 28    |                                                                                       |          |                                                                        |       |                                                  |          |  |                                                                                  |  | (2,441)        | 
|                                                             |       |                                                                                       |         
|Basic earnings (loss)
      per share                        | 15    |                                                                                       | 19.3p    |                                                                        |       |                                                  | 20.7p    |  |                                                                                  |  | (25.7)p        | 
|Diluted earnings (loss)
      per share                      | 15    |                                                                                       | 19.0p    |                                                                        |       |                                                  | 20.4p    |  |                                                                                  |  | (25.7)p        | 
|                                                             |      

BT Annual Report and Form 20-F 200381

Table
  of contents

---



Group
  statement of total recognised gains and lossesfor the year ended 31 March 2003

|                                                                                             | 2003  |  | 2002    |  | 2001    | 
|-------------------------------------------------------------------------------------------- | ----- |  | ------- |  | ------- | 
|                                                                                             | £m    |  | £m      |  | £m      | 
|                                                                                             |      
|Profit (loss) for the financial
      year:                                                  |       |  |         |  |         | 
|Group                                                                                        | 2,483 |  | 2,580   |  | (975)   | 
|Joint
      ventures                                                                         | 103   |  | (1,524) |  | (974)   | 
|Associates                                                                                   | 100   |  | (61)    |  | 79      | 
|                                                                                             |      
|Total profit (loss) for
      the financial year                                             | 2,686 |  | 995     |  | (1,870) | 
|Currency movements arising
      on consolidation of non-UK:                                 |       |  |         |  |         | 
|Subsidiaries                                                                                 | (2)   |  | (14)    |  | 215     | 
|Joint
      ventures                                                                         | 5     |  | (46)    |  | 245     | 
|Associates                                                                                   | 2     |  | 45      |  | (31)    | 
|Unrealised gain (loss)
      on transfer of assets and group undertakings to a joint venture |      |  | 5       |  | (49)    | 
|                                                                                             |      
|Total
      recognised gains and losses for the financial year                               | 2,691 |  | 985     |  | (1,490) | 
|                                                                                             |      

82 BT Annual Report and Form 20-F 2003

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---



Group cash flow statementfor the year ended 31 March 2003

|                                                                                                       |       | 2003    |  | 2002     |  | 2001     | 
|------------------------------------------------------------------------------------------------------ | ----- | ------- |  | -------- |  | -------- | 
|                                                                                                       | Notes | £m      |  | £m       |  | £m       | 
|                                                                                                       |      
|Net
      cash inflow from operating activities                                                        | 16    | 6,023   |  | 5,257    |  | 5,887    | 
|Dividends
      from associates and joint ventures                                                     |       | 6       |  | 2        |  | 10       | 
|Returns
      on investments and servicing of finance                                                  |       |         |  |          |  |          | 
|Interest received                                                                                      |       | 231     |  | 309      |  | 293      | 
|Interest paid, including
      finance costs                                                           |       | (1,737) |  | (2,004)  |  | (1,020)  | 
|Net
      cash outflow for returns on investments and servicing of finance                             |       | (1,506) |  | (1,695)  |  | (727)    | 
|                                                                                                       |      
|Taxation                                                                                               |       |         |  |          |  |          | 
|UK corporation tax paid                                                                                |       | (425)   |  | (557)    |  | (669)    | 
|Non-UK tax paid                                                                                        |       | (9)     |  | (5)      |  |         | 
|Taxation
      paid                                                                                    |       | (434)   |  | (562)    |  | (669)    | 
|                                                                                                       |      
|Capital
      expenditure and financial investment                                                     |       |         |  |          |  |          | 
|Purchase of intangible
      fixed assets                                                              |       |        |  |         |  | (4,208)  | 
|Purchase of tangible fixed
      assets                                                                |       | (2,580) |  | (4,069)  |  | (4,756)  | 
|Sale of tangible fixed
      assets                                                                    |       | 94      |  | 2,645    |  | 440      | 
|Purchase of fixed asset
      investments                                                              |       | (1)     |  | (37)     |  | (93)     | 
|Disposal of fixed asset
      investments                                                              |       | 106     |  | 107      |  | 175      | 
|Net
      cash outflow for capital expenditure and financial investment                                |       | (2,381) |  | (1,354)  |  | (8,442)  | 
|                                                                                                       |      
|Free
      cash flow before acquisitions, disposals and dividends                                      |       | 1,708   |  | 1,648    |  | (3,941)  | 
|                                                                                                       |       |         |  |          |  |          | 
|Acquisitions
      and disposals                                                                       |       |         |  |          |  |          | 
|Purchase of subsidiary
      undertakings, net of £13m cash acquired (2002  £nil, 2001
       £101m) |       | 56      |  | (896)    |  | (11,215) | 
|Investments in joint ventures                                                                          |       | (133)   |  | (235)    |  | (3,214)  | 
|Investments in associates                                                                              |       |        |  |         |  | (72)     | 
|Disposal of subsidiary
      undertakings, net of £nil cash disposed (2002  £28m, 2001
       £nil)  |       | 3       |  | 1,959    |  | 245      | 
|Sale of investments in
      joint ventures and associates                                             |       | 2,916   |  | 4,957    |  | 502      | 
|Net
      cash inflow (outflow) for acquisitions and disposals                                         |       | 2,842   |  | 5,785    |  | (13,754) | 
|                                                                                                       |       |         |  |          |  |          | 
|Equity
      dividends paid                                                                            |       | (367)   |  |         |  | (1,432)  | 
|                                                                                                       |      
|Cash
      inflow (outflow) before management of liquid resources and financing                        |       | 4,183   |  | 7,433    |  | (19,127) | 
|Management
      of liquid resources                                                                   | 17    | (1,729) |  | (1,864)  |  | (480)    | 
|Financing                                                                                              |       |         |  |          |  |          | 
|Issue of ordinary share
      capital                                                                  |       | 42      |  | 6,057    |  | 149      | 
|Issue of shares to minorities                                                                          |       |        |  |         |  | 36       | 
|Inflow on demerger
      of mmO2                                                                       | 19    |        |  | 440      |  |         | 
|New loans                                                                                              |       | 20      |  | 30       |  | 14,552   | 
|Repayment of loans                                                                                     |       | (2,471) |  | (1,851)  |  | (225)    | 
|Net (decrease) increase
      in short-term borrowings                                                 |       | (64)    |  | (10,155) |  | 5,223    | 
|Net
      cash (outflow) inflow from financing                                                         |       | (2,473) |  | (5,479)  |  | 19,735   | 
|                                                                                                       |      
|(Decrease)
      increase in cash in the year                                                          |       | (19)    |  | 90       |  | 128      | 
|                                                                                                       |      
|Decrease
      (increase) in net debt in the year                                                      | 19    | 4,225   |  | 13,930   |  | (18,942) | 
|                                                                                                       |      

BT Annual Report and Form 20-F 200383

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Group balance sheet

|as at 31
      March 2003                                     |              |  |        |  |         | 
|------------------------------------------------------------- | ------------ |  | ------ |  | ------- | 
|                                                              |              |  |        |  |         | 
|                                                              |              |  |        |  |         | 
|                                                              |              |  | 2003   |  | 2002    | 
|                                                              | Notes        |  | £m     |  | £m      | 
|                                                              |             
|Fixed
      assets                                            |              |  |        |  |         | 
|Intangible assets                                             | 20           |  | 218    |  | 252     | 
|Tangible assets                                               | 21           |  | 15,888 |  | 16,078  | 
|Investments in joint ventures:                                | 22           |  |        |  |         | 
|Share
      of gross assets and goodwill                      |              |  | 741    |  | 2,452   | 
|Share
      of gross liabilities                              |              |  | (610)  |  | (1,998) | 
|                                                              |              | 
|Total investments in joint
      ventures                     |              |  | 131    |  | 454     | 
|Investments in associates                                     | 22           |  | 27     |  | 224     | 
|Other investments                                             | 22           |  | 397    |  | 543     | 
|Total investments                                             | 22           |  | 555    |  | 1,221   | 
|                                                              |             
|Total
      fixed assets                                      |              |  | 16,661 |  | 17,551  | 
|                                                              |              |  |        |  |         | 
|Current
      assets                                          |              |  |        |  |         | 
|Stocks                                                        |              |  | 82     |  | 111     | 
|Debtors:                                                      |              |  |        |  |         | 
|Falling
      due within one year                             |              |  | 4,413  |  | 5,041   | 
|Falling
      due after more than one year                    |              |  | 630    |  | 231     | 
|                                                              |              | 
|Total
      debtors                                           | 23           |  | 5,043  |  | 5,272   | 
|Investments                                                   | 24           |  | 6,340  |  | 4,581   | 
|Cash at bank and in hand                                      |              |  | 91     |  | 158     | 
|                                                              |              | 
|Total
      current assets                                    |              |  | 11,556 |  | 10,122  | 
|                                                              |              | 
|Creditors:
      amounts falling due within one year          |              |  |        |  |         | 
|Loans and other borrowings                                    | 25           |  | 2,548  |  | 2,195   | 
|Other creditors                                               | 26           |  | 7,132  |  | 7,195   | 
|                                                              |              | 
|Total
      creditors: amounts falling due within one year    |              |  | 9,680  |  | 9,390   | 
|                                                              |             
|Net
      current assets                                      |              |  | 1,876  |  | 732     | 
|                                                              |             
|Total
      assets less current liabilities                   |              |  | 18,537 |  | 18,283  | 
|                                                              |             
|                                                              |              |  |        |  |         | 
|Creditors:
      amounts falling due after more than one year |              |  |        |  |         | 
|Loans and other borrowings                                    | 25           |  | 13,456 |  | 16,245  | 
|Provisions
      for liabilities and charges                  |              |  |        |  |         | 
|Deferred taxation                                             | 27           |  | 2,017  |  | 2,140   | 
|Other                                                         | 27           |  | 359    |  | 184     | 
|Total
      provisions for liabilities and charges            |              |  | 2,376  |  | 2,324   | 
|Minority
      interests                                      |              |  | 63     |  | 72      | 
|Capital
      and reserves                                    |              |  |        |  |         | 
|Called up share capital                                       | 28,
      37 |  | 434    |  | 434     | 
|Share premium account                                         | 28           |  | 2      |  | 2       | 
|Other reserves                                                | 28           |  | 998    |  | 1,025   | 
|Profit and loss account                                       | 28           |  | 1,208  |  | (1,819) | 
|Total
      equity shareholders funds (deficiency)           | 28           |  | 2,642  |  | (358)   | 
|                                                              |             
|                                                              |              |  | 18,537 |  | 18,283  | 
|                                                              |             

The financial statements on pages 75 to 135 were approved by the board of directors on 21 May 2003 and were signed on its behalf by

|Sir
      Christopher Bland | Chairman                    
|--------------------------- | ----------------------------
|Ben
      Verwaayen         | Chief Executive             
|Ian
      Livingston        | Group Finance
      Director

84 BT Annual Report and Form 20-F 2003

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Notes to
  the financial statements

1. Accounting
  for the reorganisation and demerger, changes in accounting policy and presentation
  and discontinued activities
(a) Reorganisation
  and demerger

On
  19 November 2001, the legal separation of the mmO2 business from the rest
  of the former BritishTelecommunications plc group was completed and BT Group
  plc (BT Group) became the ultimate parent company of British Telecommunications
  plc (BT). The legal structure of the transaction was such that BT transferred
  the mmO2 business to
  mmO2 plc and BT Group
  Investments Limited (BTGI) became the immediate parent company of BT on 16 November
  2001. On 19 November 2001, mmO2plc transferred the shares in BTGIto
  BT Group, as consideration for the issue to former BT shareholders of one ordinary
  share of 115 pence in the company, credited as fully paid, for each ordinary
  share in BT held on 16 November 2001.

On 21 November 2001, following the approval of the Court, the nominal value of BT Group shares was reduced from 115 pence per ordinary share to 5 pence per
ordinary share by way of a reduction of capital under section 135 of the Companies Act 1985. The surplus of £9,537 million arising from this capital reduction has been credited to the group profit and loss reserve.

The transfer of BTGI to the company has been accounted for as a group reconstruction in accordance with the principles of merger accounting set out in Financial
Reporting Standard 6 (FRS 6) and Schedule 4A to the Companies Act 1985. The consolidated financial statements are therefore presented as if the company had been the parent company of the group throughout the year ended 31 March 2001 and up to the
date of the demerger. The results of mmO2have been included
in discontinued activities in all three years.

The transfer of BT to BTGI on 16 November 2001 was a group reorganisation effected for non-equity consideration. This transaction has been accounted for in these
financial statements using the principles of merger accounting as if BT had been owned and controlled by BTGI throughout the year ended 31 March 2001 and up to 16 November 2001. This is not in accordance with the Companies Act 1985 since the group
reorganisation does not meet all the conditions for merger accounting. If acquisition accounting had been applied to account for the reorganisation whereby BTGI became the parent company of BT, this would have resulted in all the separable assets
and liabilities of the BT Group as at 16 November 2001 being recorded at their fair values, substantial goodwill and goodwill amortisation charges arising and only the post demerger results being reflected within the BT Group consolidated financial
statements. The directors consider that to have applied acquisition accounting in preparing these financial statements would have failed to give a true and fair view of the groups state of affairs and results. This is because, in substance, BT
Group is the successor to BT and its shareholders have had a continuing interest in the BT business both before and after the demerger. The directors consider that it is not practicable to quantify the effects of this departure from the requirements
of the Companies Act 1985.

In the companys financial statements, its investment in BTGI is stated at the nominal value of shares issued. In accordance with sections 131 and 133 of the
Companies Act 1985, no premium was recorded on the ordinary shares issued (see note 37). On consolidation, the difference between the nominal value of the shares issued and the aggregate share capital, share premium and capital redemption reserve of
BT at the date of the demerger (the merger difference), has been debited to the other reserves (see note 28).

(b) Changes in accounting policy and presentation
During the year ended 31 March 2003, the group has made a number of changes in the presentation of its financial statements. Comparative figures have been restated accordingly. These are
explained in the notes where material. There have been no changes to accounting policies in the 2003 financial year.

(c) Discontinued activities
On 1 June 2001, BT disposed of
  its interests in Japan Telecom and J-Phone Communications and, on 29 June 2001,
  its interest in Airtel. On 22 June 2001, BT sold Yell, its classified advertising
  directory businesses in the UK and the USA. These activities, together with
  mmO2, are shown as discontinued operations in the profit and loss
  accounts. The eliminations are intra-group eliminations. The interest charge
  allocated to mmO2 for all periods presented up to the date of the
  demerger has been calculated assuming that mmO2s net debt at
  the date ofthe demerger
  of £500 million, had been in existence for the whole of the period, and
  had been bearing an interest charge of 8% per annum.

The interest charge allocated to Yell for all periods presented up to the date of disposal represents amounts payable on intercompany loans charged at an
arms length rate of interest. The taxation charge allocated to discontinued activities, for all periods presented up to the date of demerger or disposal, represents amounts charged to these entities before recognising credit for group relief
surrendered to entities within continuing activities.

BT Annual Report and Form 20-F 200385

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Notes to
  the financial statements

2. Segmental analysis
The group provides telecommunication
  services, principally in the UK and essentially operates as a unitary business.
  Its main services and products are fixed voice and data calls, the provision
  of fixed exchange lines to homes and businesses, the provision of communication
  services to other operators, the provision of private services to businesses
  and the supply of telecommunication equipment for customers premises.

The
  turnover of each line of business is derived as follows:nBT Retail derives its turnover from the supply of exchange lines and from the calls made over these lines, 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 lines of business and from its narrowband and broadband internet access products.

nBT Wholesale derives its turnover from providing network services to BT Retail and other BT lines of business, and from
interconnecting the groups UK network to other operators.

nBT Global Services (formerly BT Ignite) mainly generates its turnover from 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 end customers and through BT lines of business.

Segmented
  information on the lines of business is given below for the years ended 31 March
  2003, 31 March 2002 and 31 March 2001 as required by the UK accounting standard
  SSAP 25 and the US accounting standard SFAS No. 131 (SFAS 131).

There
  is extensive trading between the lines of business and profitability is dependent
  on the transfer price levels. These intra-group trading arrangements and operating
  assets have been subject to review and have changed in certain instances. In
  addition, the group moved management responsibility of BT Openworld to BT Retail.
  Comparative figures have been restated for these and other changes and in certain
  instances have been determined using apportionments and allocations.

|                              | Turnover          |  | Depreciation
      and
      amortisation
      £m |  | Operating
      profit
        (loss) of
      associates
      and joint
      ventures
      £m       |  | Total
      operating
      profit
        (loss)
      £m | 
|----------------------------- | ----------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | 
|                              |                   |  |                                                    | 
|                              |                   |  |                                                    |  |                                                                                                        
|                              | External
      £m |  | Internal
      £m                                  |  | Group
      total
      £m                                                                              |  |                                                            | 
|                              |                   |  |                                                    |  |                                                                                                         | 
|Year ended 31 March 2003      |                   |  |                                                    |  |                                                                                                         | 
|                              |                  
|BT Retail                     | 11,333            |  | 1,968                                              |  | 13,301                                                                                                  |  | 210                                                        | 
|BT Wholesale                  | 3,472             |  | 7,788                                              |  | 11,260                                                                                                  |  | 1,923                                                      | 
|BT Global Services            | 3,882             |  | 1,369                                              |  | 5,251                                                                                                   |  | 624                                                        | 
|Other                         | 40                |  | 1                                                  |  | 41                                                                                                      |  | 278                                                        | 
|Intra-group                   |                  |  | (11,126)                                           |  | (11,126)                                                                                                |  |                                                           | 
|                              |                  
|Group totals                  | 18,727            |  |                                                   |  | 18,727                                                                                                  |  | 3,035                                                      | 
|                              |                  
|                              | Turnover          |  | Depreciation
      and
      amortisation
      £m |  | Operating
      profit
        (loss)
      of
      associates
      and joint
      ventures
      £m |  | Total
      operating
      profit
        (loss)
      £m | 
|                              |                   |  |                                                    | 
|                              |                   |  |                                                    | 
|                              |                   |  |                                                    | 
|                              |                   |  |                                                    |  |                                                                                                        
|                              | External
      £m |  | Internal
      £m                                  |  | Group
      total
      £m                                                                              |  |                                                            | 
|                              |                   |  |                                                    |  |                                                                                                         | 
|Year ended 31 March 2002      |                   |  |                                                    |  |                                                                                                         | 
|                              |                  
|BT Retail                     | 10,724            |  | 2,087                                              |  | 12,811                                                                                                  |  | 255                                                        | 
|BT Wholesale                  | 3,700             |  | 8,556                                              |  | 12,256                                                                                                  |  | 1,914                                                      | 
|BT Global Services            | 3,635             |  | 837                                                |  | 4,472                                                                                                   |  | 2,828                                                      | 
|Concert                       |                  |  |                                                   |  |                                                                                                        |  |                                                           | 
|Other                         | 58                |  | 12                                                 |  | 70                                                                                                      |  | 348                                                        | 
|Intra-group                   |                  |  | (11,162)                                           |  | (11,162)                                                                                                |  |                                                           | 
|                              |                  
|Total continuing activities   | 18,117            |  | 330                                                |  | 18,447                                                                                                  |  | 5,345                                                      | 
|                              |                  
|mmO2                          | 2,273             |  | 392                                                |  | 2,665                                                                                                   |  | 648                                                        | 
|Other                         | 169               |  | 2                                                  |  | 171                                                                                                     |  | 8                                                          | 
|Intra-group                   |                  |  | (724)                                              |  | (724)                                                                                                   |  |                                                           | 
|                              |                  
|Total discontinued activities | 2,442             |  | (330)                                              |  | 2,112                                                                                                   |  | 656                                                        | 
|                              |                  
|Group totals                  | 20,559            |  |                                                   |  | 20,559                                                                                                  |  | 6,001                                                      | 
|                              |                  

86 BT Annual Report and Form 20-F 2003

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Notes to
  the financial statements

|2. Segmental
      analysiscontinued |  | Turnover          |  | Depreciation
      and
      amortisation
      £m |  | Operating
      profit
        (loss)
      of
      associates
      and joint
      ventures
      £m |  | Total
      operating
      profit
        (loss)
      £m | 
|------------------------------------ |  | ----------------- |  | -------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | 
|                                     |  |                   |  |                                                    | 
|                                     |  |                   |  |                                                    | 
|                                     |  |                   |  |                                                    |  |                                                                                                        
|                                     |  | External
      £m |  | Internal
      £m                                  |  | Group
      total
      £m                                                                              |  |                                                            | 
|                                     |  |                   |  |                                                    |  |                                                                                                         | 
|                                     |  |                   |  |                                                    |  |                                                                                                         | 
|Year ended 31 March 2001             |  |                   |  |                                                    |  |                                                                                                         | 
|                                     | 
|BT Retail                            |  | 10,721            |  | 1,820                                              |  | 12,541                                                                                                  |  | 220                                                        | 
|BT Wholesale                         |  | 3,005             |  | 8,723                                              |  | 11,728                                                                                                  |  | 1,738                                                      | 
|BT Global Services                   |  | 2,966             |  | 502                                                |  | 3,468                                                                                                   |  | 646                                                        | 
|Concert                              |  |                  |  |                                                   |  |                                                                                                        |  |                                                           | 
|Other                                |  | 127               |  | 11                                                 |  | 138                                                                                                     |  | 376                                                        | 
|Intra-group                          |  |                  |  | (10,734)                                           |  | (10,734)                                                                                                |  |                                                           | 
|                                     | 
|Total continuing activities          |  | 16,819            |  | 322                                                |  | 17,141                                                                                                  |  | 2,980                                                      | 
|                                     | 
|mmO2                                 |  | 2,865             |  | 523                                                |  | 3,388                                                                                                   |  | 3,416                                                      | 
|Other                                |  | 743               |  | 6                                                  |  | 749                                                                                                     |  | 35                                                         | 
|Intra-group                          |  |                  |  | (851)                                              |  | (851)                                                                                                   |  |                                                           | 
|                                     | 
|Total discontinued activities        |  | 3,608             |  | (322)                                              |  | 3,286                                                                                                   |  | 3,451                                                      | 
|                                     | 
|Group totals                         |  | 20,427            |  |                                                   |  | 20,427                                                                                                  |  | 6,431                                                      | 
|                                     | 

Transactions between divisions are at prices set in accordance with those agreed with Oftel where the services provided are subject to regulation. Other transactions are at arms
length.

The following tables show the capital expenditure on plant, equipment and property, the net operating assets or liabilities and the net book value of associates
and joint ventures by line of business for the years ended 31 March 2003 and 2002. Net operating assets comprise tangible and intangible fixed assets, stocks, debtors, less creditors (excluding loans and other borrowings) and provisions for
liabilities and charges (excluding deferred tax).

|                              | Capital
      expenditure
      £m |  | Net operating
      assets
      (liabilities)
      £m |  | Associates
      and joint
      ventures
      £m | 
|----------------------------- | ---------------------------------- |  | ------------------------------------------------------- |  | -------------------------------------------------- | 
|                              |                                    |  |                                                        
|                              |                                    |  |                                                        
|Year ended 31 March 2003      |                                    |  |                                                        
|                              |                                   
|BT Retail                     | 115                                |  | (430)                                                   |  | (8)                                                | 
|BT Wholesale                  | 1,652                              |  | 12,041                                                  |  |                                                   | 
|BT Global Services            | 439                                |  | 1,912                                                   |  | 141                                                | 
|Other                         | 239                                |  | 217                                                     |  | 25                                                 | 
|                              |                                   
|Total                         | 2,445                              |  | 13,740                                                  |  | 158                                                | 
|                              |                                   
|                              | Capital
      expenditure
      £m |  | Net operating
      assets
      (liabilities)
      £m |  | Associates
      and joint
      ventures
      £m | 
|                              |                                    |  |                                                        
|                              |                                    |  |                                                        
|                              |                                    |  |                                                        
|Year ended 31 March 2002      |                                    |  |                                                        
|                              |                                   
|BT Retail                     | 153                                |  | (215)                                                   |  | (3)                                                | 
|BT Wholesale                  | 1,974                              |  | 12,163                                                  |  | 1                                                  | 
|BT Global Services            | 609                                |  | 1,907                                                   |  | 320                                                | 
|Concert                       |                                   |  |                                                        |  | 338                                                | 
|Other                         | 364                                |  | 479                                                     |  | 22                                                 | 
|                              |                                   
|Total continuing activities   | 3,100                              |  | 14,334                                                  |  | 678                                                | 
|                              |                                   
|mmO2                          | 807                                |  |                                                        |  |                                                   | 
|Other                         | 1                                  |  |                                                        |  |                                                   | 
|                              |                                   
|Total discontinued activities | 808                                |  |                                                        |  |                                                   | 
|                              |                                   
|Total                         | 3,908                              |  | 14,334                                                  |  | 678                                                | 
|                              |                                   

BT Annual Report and Form 20-F 200387

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Notes to
  the financial statements

|2.
      Segmental analysiscontinued      |  |        |  |        |  |        | 
|----------------------------------------- |  | ------ |  | ------ |  | ------ | 
|Information about
      geographic areas: |  |        |  |        |  |        | 
|                                          |  | 2003   |  | 2002   |  | 2001   | 
|                                          |  | £m     |  | £m     |  | £m     | 
|                                          | 
|Turnover
      with external customers    |  |        |  |        |  |        | 
|Attributable
      to UK                  |  | 17,536 |  | 16,703 |  | 15,924 | 
|Attributable
      to non-UK countriesa   |  | 1,191  |  | 1,414  |  | 895    | 
|                                          | 
|Total
      continuing activitiesb        |  | 18,727 |  | 18,117 |  | 16,819 | 
|                                          | 
|Attributable
      to UK                  |  |       |  | 1,555  |  | 2,718  | 
|Attributable
      to non-UK countriesa   |  |       |  | 887    |  | 890    | 
|                                          | 
|Total
      discontinued activities       |  |       |  | 2,442  |  | 3,608  | 
|                                          | 
|Group
      turnover                      |  | 18,727 |  | 20,559 |  | 20,427 | 
|                                          | 

|a | Turnover
      attributable to non-UK countries comprises the external turnover of group
      companies and branches operating outside the UK, income from non-UK operators
      for calls terminating in or in transit through the UK and turnover with
      non-UK joint ventures and associates. | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|b | The
      group turnover from continuing activities as disclosed in the group profit
      and loss account includes intra-group trading with discontinued activities.                                                                                                                                 | 

|                                                                                                  |        |  | 2003   |  | 2002   | 
|------------------------------------------------------------------------------------------------- | ------ |  | ------ |  | ------ | 
|                                                                                                  |        |  | £m     |  | £m     | 
|                                                                                                  |       
|                                                                                                  |        |  |        |  |        | 
|Group
      fixed assets are located                                                              |        |  |        |  |        | 
|UK                                                                                                |        |  | 14,785 |  | 15,384 | 
|Europe, excluding
      the UK                                                                    |        |  | 1,227  |  | 1,275  | 
|Americas                                                                                          |        |  | 510    |  | 683    | 
|Asia and Pacific                                                                                  |        |  | 139    |  | 209    | 
|                                                                                                  |       
|Total                                                                                             |        |  | 16,661 |  | 17,551 | 
|                                                                                                  |       
|                                                                                                  |        |  |        |  |        | 
|Geographical
      segment analysis in accordance with the requirements of SSAP 25 is as follows: |        |  |       
|                                                                                                  | 2003   |  | 2002   |  | 2001   | 
|                                                                                                  | £m     |  | £m     |  | £m     | 
|                                                                                                  |       
|Total
      turnover on basis of origin                                                           |        |  |        |  |        | 
|UK                                                                                                | 17,544 |  | 16,428 |  | 15,580 | 
|Europe, excluding
      the UK                                                                    | 2,151  |  | 2,449  |  | 1,840  | 
|Americas                                                                                          | 155    |  | 2,000  |  | 2,557  | 
|Asia and Pacific                                                                                  | 332    |  | 608    |  | 769    | 
|                                                                                                  |       
|Total
      continuing activitiesa                                                                | 20,182 |  | 21,485 |  | 20,746 | 
|                                                                                                  |       
|UK                                                                                                |       |  | 1,635  |  | 2,920  | 
|Europe, excluding
      the UK                                                                    |       |  | 927    |  | 1,244  | 
|Americas                                                                                          |       |  | 36     |  | 214    | 
|Asia and Pacific                                                                                  |       |  | 559    |  | 4,542  | 
|                                                                                                  |       
|Total
      discontinued activities                                                               |       |  | 3,157  |  | 8,920  | 
|                                                                                                  |       
|Total                                                                                             | 20,182 |  | 24,642 |  | 29,666 | 
|                                                                                                  |       

|a | The total
      turnover from continuing activities as disclosed in the group profit and
      loss account includes intra-group trading with discontinued activities.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                        | 2003   |  | 2002   |  | 2001   | 
|--------------------------------------- | ------ |  | ------ |  | ------ | 
|                                        | £m     |  | £m     |  | £m     | 
|                                        |       
|Group
      turnover on basis of origin |        |  |        |  |        | 
|UK                                      | 17,536 |  | 16,703 |  | 15,924 | 
|Europe, excluding the UK                | 978    |  | 1,113  |  | 507    | 
|Americas                                | 153    |  | 147    |  | 154    | 
|Asia and Pacific                        | 60     |  | 154    |  | 234    | 
|                                        |       
|Total
      continuing activitiesa      | 18,727 |  | 18,117 |  | 16,819 | 
|                                        |       
|UK                                      |       |  | 1,555  |  | 2,718  | 
|Europe, excluding the UK                |       |  | 851    |  | 676    | 
|Americas                                |       |  | 36     |  | 214    | 
|                                        |       
|Total
      discontinued activities     |       |  | 2,442  |  | 3,608  | 
|                                        |       
|Total                                   | 18,727 |  | 20,559 |  | 20,427 | 
|                                        |       

|a | The group turnover from continuing activities as disclosed in the group profit and loss account includes intra-group trading with discontinued activities. | 
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | 

88 BT Annual Report and Form 20-F 2003

Table
  of contents

---



Notes to
  the financial statements

2. Segmental analysiscontinued
The analysis of turnover by geographical area is stated on the basis of origin. In an analysis of turnover by destination, incoming and transit international calls by country of origin and
turnover with non-UK joint ventures and associates would be treated differently but would not lead to a materially different geographical analysis. See the information about geographic areas above.

|                                                                                                                            |               |  |                   |  |        |  | 2003      |  | 2002       |  | 2001    | 
|--------------------------------------------------------------------------------------------------------------------------- | ------------- |  | ----------------- |  | ------ |  | --------- |  | ---------- |  | ------- | 
|                                                                                                                            |               |  |                   |  |        |  | £m        |  | £m         |  | £m      | 
|                                                                                                                            |              
|Group
      operating profit (loss)                                                                                         |               |  |                   |  |        |  |           |  |            |  |         | 
|UK                                                                                                                          |               |  |                   |  |        |  | 3,220     |  | 2,628      |  | 3,330   | 
|Europe, excluding
      the UK                                                                                              |               |  |                   |  |        |  | (627)     |  | (2,829)    |  | (252)   | 
|Americas                                                                                                                    |               |  |                   |  |        |  | (28)      |  | 153        |  | 15      | 
|Asia and Pacific                                                                                                            |               |  |                   |  |        |  | 7         |  | 2          |  | (106)   | 
|                                                                                                                            |              
|Total
      continuing activities                                                                                           |               |  |                   |  |        |  | 2,572     |  | (46)       |  | 2,987   | 
|                                                                                                                            |              
|UK                                                                                                                          |               |  |                   |  |        |  |          |  | 4          |  | 156     | 
|Europe, excluding
      the UK                                                                                              |               |  |                   |  |        |  |          |  | (429)      |  | (3,094) | 
|Americas                                                                                                                    |               |  |                   |  |        |  |          |  | (6)        |  | (22)    | 
|Asia and Pacific                                                                                                            |               |  |                   |  |        |  |          |  | (2)        |  |        | 
|                                                                                                                            |              
|Total
      discontinued activities                                                                                         |               |  |                   |  |        |  |          |  | (433)      |  | (2,960) | 
|                                                                                                                            |              
|Total                                                                                                                       |               |  |                   |  |        |  | 2,572     |  | (479)      |  | 27      | 
|                                                                                                                            |              
|                                                                                                                            |               |  |                   |  |        |  |           |  |            |  |         | 
|                                                                                                                            |               |  |                   |  |        |  | 2003      |  | 2002       |  | 2001    | 
|                                                                                                                            |               |  |                   |  |        |  | £m        |  | £m         |  | £m      | 
|                                                                                                                            |              
|                                                                                                                            |               |  |                   |  |        |  |           |  |           
|Share
      of operating results of associates and joint ventures, including goodwill
      amortisation  profits (losses) |               |  |                   |  |        |  |           |  |            |  |        
|UK                                                                                                                          |               |  |                   |  |        |  | (2)       |  | (17)       |  | (51)    | 
|Europe, excluding
      the UK                                                                                              |               |  |                   |  |        |  | 305       |  | (240)      |  | (212)   | 
|Americas                                                                                                                    |               |  |                   |  |        |  | (1)       |  | (1,135)    |  | (66)    | 
|Asia and Pacific                                                                                                            |               |  |                   |  |        |  | 27        |  | (51)       |  | (202)   | 
|                                                                                                                            |              
|Total
      continuing activities                                                                                           |               |  |                   |  |        |  | 329       |  | (1,443)    |  | (531)   | 
|                                                                                                                            |              
|UK                                                                                                                          |               |  |                   |  |        |  |          |  | 5          |  | 19      | 
|Europe, excluding
      the UK                                                                                              |               |  |                   |  |        |  |          |  | 20         |  | (259)   | 
|Asia and Pacific                                                                                                            |               |  |                   |  |        |  |          |  | 37         |  | 374     | 
|                                                                                                                            |              
|Total
      discontinued activities                                                                                         |               |  |                   |  |        |  |          |  | 62         |  | 134     | 
|                                                                                                                            |              
|Total                                                                                                                       |               |  |                   |  |        |  | 329       |  | (1,381)    |  | (397)   | 
|                                                                                                                            |              
|                                                                                                                            |               |  |                   |  |        |  |           |  |            |  |         | 
|                                                                                                                            |               |  |                   |  | 2003   |  |           |  |            |  | 2002    | 
|                                                                                                                            |               |  |                   | 
|                                                                                                                            | Net           |  |                   |  |        |  |           |  |            |  |         | 
|                                                                                                                            | operating     |  | Associates        |  |        |  | Net       |  | Associates |  |         | 
|                                                                                                                            | assets        |  | and
        joint |  |        |  | operating |  | and joint  |  |         | 
|                                                                                                                            | (liabilities) |  | ventures          |  | Total  |  | assets    |  | ventures   |  | Total   | 
|                                                                                                                            | £m            |  | £m                |  | £m     |  | £m        |  | £m         |  | £m      | 
|                                                                                                                            |              
|                                                                                                                            |               |  |                   |  |        |  |           |  |            |  |         | 
|Net
      operating assets (liabilities)                                                                                    |               |  |                   |  |        |  |           |  |            |  |         | 
|UK                                                                                                                          | 12,196        |  | (8)               |  | 12,188 |  | 13,186    |  | (2)        |  | 13,184  | 
|Europe, excluding
      the UK                                                                                              | 1,652         |  | 76                |  | 1,728  |  | 925       |  | 178        |  | 1,103   | 
|Americas                                                                                                                    | (85)          |  |                  |  | (85)   |  | 222       |  | 337        |  | 559     | 
|Asia and Pacific                                                                                                            | (23)          |  | 90                |  | 67     |  | 1         |  | 165        |  | 166     | 
|                                                                                                                            |              
|Total                                                                                                                       | 13,740        |  | 158               |  | 13,898 |  | 14,334    |  | 678        |  | 15,012  | 
|                                                                                                                            |              

Net operating assets comprise tangible and intangible fixed assets, stocks, debtors less creditors (excluding loans and other borrowings), and provisions for liabilities and charges (excluding
deferred tax).

BT Annual Report and Form 20-F 200389

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Notes to
  the financial statements

3. Turnover
Groups share of associates and joint ventures turnover comprised:

|                                                                | 2003  |  | 2002  |  | 2001  | 
|--------------------------------------------------------------- | ----- |  | ----- |  | ----- | 
|                                                                | £m    |  | £m    |  | £m    | 
|                                                                |      
|Joint ventures:                                                 |       |  |       |  |       | 
|Continuing
      activities                                     | 425   |  | 2,752 |  | 3,420 | 
|Discontinued
      activities                                   |      |  | 76    |  | 598   | 
|                                                                | 425   |  | 2,828 |  | 4,018 | 
|Associates:                                                     |       |  |       |  |       | 
|Continuing
      activities                                     | 1,030 |  | 1,297 |  | 1,205 | 
|Discontinued
      activities                                   |      |  | 639   |  | 4,714 | 
|                                                                | 1,030 |  | 1,936 |  | 5,919 | 
|                                                                |      
|Groups
      share of associates and joint ventures turnover | 1,455 |  | 4,764 |  | 9,937 | 
|                                                                |      

Concert, the joint venture with AT&T, was formed on 5 January 2000 and was unwound on 1 April 2002 (see note 18). The groups share of trading with Concert in the 2001 and 2002
financial years, primarily in respect of international calls made to and from the UK and for services provided to Concert in the UK for the multinational customers transferred to Concert, is eliminated in arriving at total turnover, including the
proportionate share of the groups associates and joint ventures, and is added back in arriving at group turnover.

|4.
      Other operating income                                             | 2003 |  | 2002 |  | 2001 | 
|--------------------------------------------------------------------------- | ---- |  | ---- |  | ---- | 
|                                                                            | £m   |  | £m   |  | £m   | 
|                                                                            |     
|Seconded
      staff, administration and other services provided to Concert |     |  | 135  |  | 168  | 
|Other                                                                       | 215  |  | 226  |  | 178  | 
|                                                                            |     
|Total
      continuing activities                                           | 215  |  | 361  |  | 346  | 
|Discontinued
      activities                                               |     |  | 1    |  | 13   | 
|                                                                            |     
|Total
      other operating income                                          | 215  |  | 362  |  | 359  | 
|                                                                            |     

90 BT Annual Report and Form 20-F 2003

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Notes to
  the financial statements

5. Operating costs

|                                                                                       | 2003   |  | 2002   |  | 2001   | 
|-------------------------------------------------------------------------------------- | ------ |  | ------ |  | ------ | 
|Total
      Group                                                                      | £m     |  | £m     |  | £m     | 
|                                                                                       |       
|Staff costs:                                                                           |        |  |        |  |        | 
|Wages
      and salaries                                                               | 3,621  |  | 4,013  |  | 3,954  | 
|Social
      security costs                                                            | 275    |  | 304    |  | 313    | 
|Pension
      costsa(note 31)                                                          | 322    |  | 382    |  | 326    | 
|Employee
      share ownershipb                                                        | 36     |  | 25     |  | 32     | 
|                                                                                       |       
|Total staff
      costs                                                                | 4,254  |  | 4,724  |  | 4,625  | 
|Own work
      capitalised                                                             | (583)  |  | (659)  |  | (693)  | 
|Depreciation(note 21)                                                                  | 3,011  |  | 3,680  |  | 3,045  | 
|Amortisation
      and impairment of goodwill and other intangibles(note
      20)     | 24     |  | 2,321  |  | 3,386  | 
|Payments
      to telecommunications operators                                         | 3,846  |  | 4,299  |  | 3,802  | 
|Other operating
      costs                                                            | 5,818  |  | 7,035  |  | 6,594  | 
|                                                                                       |       
|Total
      operating costs                                                            | 16,370 |  | 21,400 |  | 20,759 | 
|                                                                                       |       
|Operating
      costs included the following:                                          |        |  |        |  |        | 
|Early leaver
      costsc                                                              | 276    |  | 252    |  | 118    | 
|Research
      and development                                                         | 380    |  | 362    |  | 364    | 
|Rental
      costs relating to operating leases, including plant and equipment hire of |        |  |        |  |        | 
|£34
      million (2002  £51 million, 2001  £15 million)                             | 395    |  | 283    |  | 166    | 
|Foreign
      currency gains                                                           | (12)   |  | (1)    |  | (50)   | 
|                                                                                       |       
|Amortisation of goodwill
      and exceptional items comprising:                       |        |  |        |  |        | 
|Property
      rationalisation provision                                               | 198    |  |       |  |       | 
|Goodwill
      impairment in subsidiary undertakings                                   |       |  | 1,955  |  | 3,000  | 
|Asset
      impairments                                                                |       |  | 324    |  |       | 
|Costs
      relating to the Concert unwind                                             |       |  | 172    |  |       | 
|Costs
      relating to the demerger of mmO2                                           |       |  | 109    |  |       | 
|BT Retail
      call centre rationalisation costs                                      |       |  | 68     |  |       | 
|BT Wholesale
      bad debt costs                                                      |       |  | 79     |  |       | 
|Credit
      for rates refunds, relating to prior years                                |       |  |       |  | (193)  | 
|Write
      off of subscriber acquisition costsd                                       |       |  |       |  | 7      | 
|Write
      off of Viag Interkom IT systems                                            |       |  |       |  | 43     | 
|                                                                                       |       
|Total exceptional items                                                                | 198    |  | 2,707  |  | 2,857  | 
|Goodwill amortisation                                                                  | 20     |  | 352    |  | 373    | 
|                                                                                       |       
|Total
      amortisation of goodwill and exceptional items                             | 218    |  | 3,059  |  | 3,230  | 
|                                                                                       |       

|a | No charge
      for the cost of providing incremental pension benefits for employees taking
      early retirement was made in the year ended 31 March 2001 in view of the
      combined surplus in the BT Pension Scheme and the amount provided for pension
      costs within provisions for liabilities and charges. | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | Amount set
      aside for the year for allocation of ordinary shares in the company to eligible
      employees.                                                                                                                                                                                                         | 
|c | Includes
      £61 million of leaver costs associated with the rationalisation of
      the BT Retail call centres in the year ended 31 March 2002.                                                                                                                                                                       | 
|d | The
      accounting of all the mmO2 operating units was aligned; this
      resulted in a write off of previously capitalised costs in certain non-UK
      operations.                                                                                                                                                  | 

The directors believe that the nature of the groups business is such that the analysis of operating costs required by the Companies Act 1985 is not appropriate. As required by the Act,
the directors have therefore adapted the prescribed format so that operating costs are disclosed in a manner appropriate to the groups principal activity.

BT Annual Report and Form 20-F 200391

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  of contents

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Notes to
  the financial statements

5. Operating costscontinued

|                                                                                                                                                              | 2003   |  | 2002   |  | 2001   | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------ |  | ------ |  | ------ | 
|Continuing
      activities                                                                                                                                   | £m     |  | £m     |  | £m     | 
|                                                                                                                                                              |       
|Staff costs:                                                                                                                                                  |        |  |        |  |        | 
|Wages
      and salaries                                                                                                                                      | 3,621  |  | 3,659  |  | 3,465  | 
|Social
      security costs                                                                                                                                   | 275    |  | 270    |  | 273    | 
|Pension
      costsa(note 31)                                                                                                                                 | 322    |  | 367    |  | 299    | 
|Employee
      share ownershipb                                                                                                                               | 36     |  | 25     |  | 32     | 
|                                                                                                                                                              |       
|Total staff
      costs                                                                                                                                       | 4,254  |  | 4,321  |  | 4,069  | 
|Own work
      capitalised                                                                                                                                    | (583)  |  | (623)  |  | (642)  | 
|Depreciation(note 21)                                                                                                                                         | 3,011  |  | 3,266  |  | 2,689  | 
|Amortisation
      and impairment of goodwill and other intangibles(note
      20)                                                                            | 24     |  | 2,079  |  | 291    | 
|Payments
      to telecommunications operators                                                                                                                | 3,846  |  | 4,289  |  | 3,736  | 
|Other operating
      costs                                                                                                                                   | 5,818  |  | 5,522  |  | 4,357  | 
|                                                                                                                                                              |       
|Total
      operating costs                                                                                                                                   | 16,370 |  | 18,854 |  | 14,500 | 
|                                                                                                                                                              |       
|Operating
      costs included the following:                                                                                                                 |        |  |        |  |        | 
|Early leaver
      costsc                                                                                                                                     | 276    |  | 247    |  | 109    | 
|Research
      and development                                                                                                                                | 380    |  | 362    |  | 361    | 
|Rental
      costs relating to operating leases, including plant and equipment hire of  £34
      million 
          (2002  £51 million, 2001  £13 million) | 395    |  | 277    |  | 156    | 
|Foreign
      currency gains                                                                                                                                  | (12)   |  | (1)    |  | (50)   | 
|                                                                                                                                                              |       
|Amortisation
      of goodwill and exceptional items comprising:                                                                                              |        |  |        |  |        | 
|Property
      rationalisation provision                                                                                                                      | 198    |  |       |  |       | 
|Goodwill
      impairment in subsidiary undertakings                                                                                                          |       |  | 1,955  |  | 200    | 
|Asset
      impairments                                                                                                                                       |       |  | 324    |  |       | 
|Costs
      relating to the Concert unwind                                                                                                                    |       |  | 172    |  |       | 
|Costs
      relating to the demerger of mmO2                                                                                                                  |       |  | 98     |  |       | 
|BT
      Retail call centre rationalisation costs                                                                                                             |       |  | 68     |  |       | 
|BT
      Wholesale bad debt costs                                                                                                                             |       |  | 79     |  |       | 
|Credit
      for rates refunds, relating to prior years                                                                                                       |       |  |       |  | (193)  | 
|                                                                                                                                                              |       
|Total exceptional
      items                                                                                                                                 | 198    |  | 2,696  |  | 7      | 
|Goodwill
      amortisation                                                                                                                                   | 20     |  | 121    |  | 88     | 
|                                                                                                                                                              |       
|Total
      amortisation of goodwill and exceptional items                                                                                                    | 218    |  | 2,817  |  | 95     | 
|                                                                                                                                                              |       

|a | No
      charge for the cost of providing incremental pension benefits for employees
      taking early retirement was made in the year ended 31 March 2001 in view
      of the combined surplus in the BT Pension Scheme and the amount provided
      for pension costs within provisions for liabilities and charges. | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | Amount
      set aside for the year for allocation of ordinary shares in the company
      to eligible employees.                                                                                                                                                                                                         | 
|c | Includes
      £61 million of leaver costs associated with the rationalisation of
      the BT Retail call centres in the year ended 31 March 2002.                                                                                                                                                                       | 

92 BT Annual Report and Form 20-F 2003

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---



Notes to
  the financial statements

5. Operating costscontinued

|                                                                                                                                                 | 2003 |  | 2002  |  | 2001  | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | ---- |  | ----- |  | ----- | 
|Discontinued
      activities                                                                                                                    | £m   |  | £m    |  | £m    | 
|                                                                                                                                                 |     
|Staff
      costs:                                                                                                                               |      |  |       |  |       | 
|Wages
      and salaries                                                                                                                         |     |  | 354   |  | 489   | 
|Social
      security costs                                                                                                                      |     |  | 34    |  | 40    | 
|Pension
      costsa(note
      31)                                                                                                              |     |  | 15    |  | 27    | 
|                                                                                                                                                 |     
|Total
      staff costs                                                                                                                          |     |  | 403   |  | 556   | 
|Own
      work capitalised                                                                                                                       |     |  | (36)  |  | (51)  | 
|Depreciation(note 21)                                                                                                                            |     |  | 414   |  | 356   | 
|Amortisation
      and impairment of goodwill and other intangibles(note
      20)                                                               |     |  | 242   |  | 3,095 | 
|Payments
      to telecommunications operators                                                                                                   |     |  | 10    |  | 66    | 
|Other
      operating costs                                                                                                                      |     |  | 1,513 |  | 2,237 | 
|                                                                                                                                                 |     
|Total
      operating costs                                                                                                                      |     |  | 2,546 |  | 6,259 | 
|                                                                                                                                                 |     
|Operating
      costs included the following:                                                                                                    |      |  |       |  |       | 
|Early
      leaver costs                                                                                                                         |     |  | 5     |  | 9     | 
|Research
      and development                                                                                                                   |     |  |      |  | 3     | 
|Rental
      costs relating to operating leases, including plant and equipment hire of
      £nil (2002
       £nil million, 2001  £2 million) |     |  | 6     |  | 10    | 
|                                                                                                                                                 |     
|Amortisation
      of goodwill and exceptional items comprising:                                                                                 |      |  |       |  |       | 
|Goodwill
      impairment in subsidiary undertakings                                                                                             |     |  |      |  | 2,800 | 
|Costs
      relating to the demerger of mmO2                                                                                                     |     |  | 11    |  |      | 
|Write
      off of subscriber acquisition costsb                                                                                                 |     |  |      |  | 7     | 
|Write
      off of Viag Interkom IT systems                                                                                                      |     |  |      |  | 43    | 
|                                                                                                                                                 |     
|Total
      exceptional items                                                                                                                    |     |  | 11    |  | 2,850 | 
|Goodwill
      amortisation                                                                                                                      |     |  | 231   |  | 285   | 
|                                                                                                                                                 |     
|Total
      amortisation of goodwill and exceptional items                                                                                       |     |  | 242   |  | 3,135 | 
|                                                                                                                                                 |     

|a | No
      charge for the cost of providing incremental pension benefits for employees
      taking early retirement was made in the year ended 31 March 2001 in view
      of the combined surplus in the BT Pension Scheme and the amount provided
      for pension costs within provisions for liabilities and charges. | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | The
      accounting of all the mmO2operating units was aligned; this resulted
      in a write off of previously capitalised costs in certain non-UK operations.                                                                                                                                                         | 

BT Annual Report and Form 20-F 200393

Table
  of contents

---



Notes to
  the financial statements

6. Groups share of operating profit (loss) of associates and joint ventures
The groups share of operating profit (loss) of associates and joint ventures comprised:

|                                                                                 | 2003 |  | 2002    |  | 2001  | 
|-------------------------------------------------------------------------------- | ---- |  | ------- |  | ----- | 
|                                                                                 | £m   |  | £m      |  | £m    | 
|                                                                                 |     
|Joint
      ventures:                                                            |      |  |         |  |       | 
|Continuing
      activities                                                      | 119  |  | (1,483) |  | (509) | 
|Discontinued
      activities                                                    |     |  | 19      |  | (257) | 
|                                                                                 | 119  |  | (1,464) |  | (766) | 
|Associates:                                                                      |      |  |         |  |       | 
|Continuing
      activities                                                      | 210  |  | 40      |  | (22)  | 
|Discontinued
      activities                                                    |     |  | 43      |  | 391   | 
|                                                                                 | 210  |  | 83      |  | 369   | 
|                                                                                 |     
|Groups
      share of operating profit (loss) of associates and joint venturesa | 329  |  | (1,381) |  | (397) | 
|                                                                                 |     

|a | Includes:                                                                                                          |       |  |     |  |     | 
|- | ------------------------------------------------------------------------------------------------------------------ | ----- |  | --- |  | --- | 
|  | Exceptional
      costs relating to the impairment of goodwill                                                     |      |  | 433 |  | 200 | 
|  | Exceptional
      costs relating to the impairment of investments and (release) charge of
      related exit costs | (150) |  | 780 |  |    | 
|  | Exceptional
      costs relating to the Concert unwind                                                             |      |  | 81  |  |    | 
|  | Exceptional
      costs relating to write off of subscriber acquisition costs                                      |      |  |    |  | 132 | 
|  | Amortisation
      of goodwill arising in joint ventures and associates                                            | 2     |  | 53  |  | 185 | 
| 

7. Profit on sale of fixed asset investments and group undertakingsIn the year ended 31 March 2003, disposals of subsidiary undertakings resulted in losses of £9 million, the consideration received in relation to these disposals was £3
million.

In
  January 2003, the group sold its 26% interest in Cegetel Groupe SA to Vivendi
  Universal SA for consideration of €4,000
  million (£2,603 million) in cash. The profit on disposal was £1,509
  million, before the recognition of an exceptional interest charge of £293
  million on closing out fixed interest rate swaps following receipt of the sale
  proceeds, and includes a write-back of £862 million of goodwill taken
  directly to reserves before April 1998.

In October 2002, the group sold its 2% interest in Mediaset for consideration of £87 million in cash. The profit on disposal was £14 million.

In May 2002 and November 2002, the group sold its remaining holding of shares in BSkyB, received for the exchange of the residual interest in British Interactive
Broadcasting, for consideration of £192 million recognising a profit of £131 million.

In December 2002, the group sold its interest in Blu SpA for consideration of £29 million. The profit on disposal was £19 million.

Other gains of £39 million and losses of £12 million were recognised during the year ended 31 March 2003. These gains and losses included a write-back
of £7 million of goodwill taken directly to reserves before April 1998. The consideration received in relation to these disposals was £114 million.

In June 2001, the group sold its interest in the Yell Group comprising mainly the Yellow Pages unit of BT, Yellow Pages Sales Limited and Yellow Book USA Inc. and
its subsidiary undertakings. The consideration for this sale was £1,960 million and a profit of £1,128 million was realised. This profit includes a write-back of £9 million of goodwill taken directly to reserves before April
1998.

In December 2001, the group sold its wholly owned subsidiary Clear Communications Limited, which operates in New Zealand, for consideration of £119 million.
A loss of £126 million was recognised on this sale, of which £45 million relates to goodwill taken directly to reserves before April 1998.

Other disposals of subsidiary companies in the year ended 31 March 2002 resulted in gains on disposal of £10 million.

A profit of £120 million was recognised for the exchange of the residual interest in British Interactive Broadcasting for BSkyB shares in May 2001. The
consideration received was £241 million of BSkyB shares and the profit recognised relates to those shares that were marketable.

In June 2001, the group sold its effective 20% interest in Japan Telecom Co. Limited and its 20% interest in J-Phone Communications Co. Limited to Vodafone plc
for £3,075 million in cash. Under the sale agreement, the group also sold shares representing 4.9% of J-Phone Communications Co. Limited obtained by exercising an option in June 2001 for £634 million in cash. The realised profit on the
sale of the 20% interest in Japan Telecom Co. Limited and J-Phone Communications Co. Limited, and the sale of the 4.9% share of J-Phone Communications Co. Limited obtained through the exercise of options was £2,358 million.

In June 2001, the group sold its 17.81% interest in Airtel Movil SA to Vodafone plc for £1,084 million in cash. The profit on disposal was £844
million.

Other gains of £135 million and losses of £80 million were also recognised during the year ended 31 March 2002. These gains and losses included a
write-back of £14 million of goodwill taken directly to reserves before April 1998. The consideration received in relation to these disposals was £860 million, including deferred and non-cash amounts of £63 million.

94 BT Annual Report and Form 20-F 2003

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Notes to the financial statements

7. Profit on sale of fixed asset investments and group undertakingscontinuedIn November 2000, the group sold its 34% stake in sunrise communications, its joint venture in Switzerland, to a fellow shareholder for consideration of £464 million, on which a realised
profit of £454 million has been recognised. In December 2000, BT sold off part of its Aeronautical and Maritime division at a profit of £46 million. Reductions in BTs holdings in I.Net SpA and British Interactive Broadcasting
Limited resulted in gains of £38 million and £25 million, respectively. Other gains during the 2001 financial year totalled £56 million.

8. Profit on sale of property fixed assetsIn December 2001 the group entered into a sale and leaseback transaction with Telereal under which substantially all of the groups interest in most of its UK freehold and long leasehold
properties and its obligations in respect of rack rented properties were transferred to Telereal for cash consideration of £2,380 million. Of the total profit from the sale of property in the year to 31 March 2002, £1,019 million relates
to this transaction.

9. Amounts written off investmentsAmounts written off investments were £7 million (2002  £535 million, 2001  £nil). In the year ended 31 March 2002 these were mainly attributable to investments in
AT&T Canada, £347 million and Impsat, £157 million.

|10.
        Interest receivable | 2003 |  | 2002 |  | 2001 | 
|------------------------------- | ---- |  | ---- |  | ---- | 
|                                | £m   |  | £m   |  | £m   | 
|                                |     
|Income from listed investments  | 2    |  | 5    |  | 30   | 
|Other interest receivablea      | 187  |  | 334  |  | 352  | 
|                                |     
|Group                           | 189  |  | 339  |  | 382  | 
|Joint ventures                  | 1    |  | 14   |  | 19   | 
|Associates                      | 5    |  | 7    |  | 7    | 
|                                |     
|Total
      interest receivable | 195  |  | 360  |  | 408  | 
|                                |     

|a | Includes
      £25 million of interest on rates refunds received in the year ended
      31 March 2001, relating to prior years.
|- | --------------------------------------------------------------------------------------------------------------------------------

|                                                          |       |  |       |  |       | 
|--------------------------------------------------------- | ----- |  | ----- |  | ----- | 
|11.
      Interest payable                                | 2003  |  | 2002  |  | 2001  | 
|                                                          | £m    |  | £m    |  | £m    | 
|                                                          |      
|Interest payable and similar
      charges in respect of: |       |  |       |  |       | 
|Bank loans and overdrafts                                 | 82    |  | 184   |  | 181   | 
|Other borrowingsab                                        | 1,527 |  | 1,695 |  | 1,245 | 
|                                                          |      
|Group                                                     | 1,609 |  | 1,879 |  | 1,426 | 
|Joint ventures                                            | 17    |  | 60    |  | 176   | 
|Associates                                                | 8     |  | 43    |  | 120   | 
|                                                          |      
|Total
      interest payable                              | 1,634 |  | 1,982 |  | 1,722 | 
|                                                          |      

|a | Includes
      £293 million charged in the year ended 31 March 2003 on the termination
      of interest rate swap agreements following the receipt of the Cegetel sale
      proceeds.                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b | Includes £162
      million charged in the year ended 31 March 2002 on the novation of interest
      rate swap agreements as a consequence of the property sale and leaseback
      transaction with Telereal.

BT Annual Report and Form 20-F 200395

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Notes to the financial statements

|12.
      Tax on profit (loss) on ordinary activities            |       |  |      |  |       | 
|---------------------------------------------------------------- | ----- |  | ---- |  | ----- | 
|                                                                 | 2003  |  | 2002 |  | 2001  | 
|                                                                 | £m    |  | £m   |  | £m    | 
|                                                                 |      
|United Kingdom:                                                  |       |  |      |  |       | 
|Corporation
      tax at 30%                                     | 447   |  | 275  |  | 690   | 
|Taxation
      on the groups share of results of associates     |      |  | 2    |  | 6     | 
|Taxation
      on the groups share of results of joint ventures |      |  |     |  | 42    | 
|Prior
      year adjustments                                     | 12    |  |     |  | (185) | 
|Non-UK taxation:                                                 |       |  |      |  |       | 
|Current                                                          | 47    |  | 23   |  | 24    | 
|Taxation
      on the groups share of results of associates     | 81    |  | 50   |  | 33    | 
|Taxation
      on the groups share of results of joint ventures |      |  | 34   |  | 146   | 
|Prior
      year adjustments                                     | (26)  |  | (7)  |  | (20)  | 
|                                                                 |      
|Total
      current taxation                                     | 561   |  | 377  |  | 736   | 
|Deferred taxation charge
      (credit) at 30%                   |       |  |      |  |       | 
|Origination
      and reversal of timing differences             | (29)  |  | 34   |  | 87    | 
|Prior
      year adjustments                                     | (73)  |  | 32   |  | (111) | 
|                                                                 |      
|Total
      deferred taxation                                    | (102) |  | 66   |  | (24)  | 
|                                                                 |      
|Total
      tax on profit (loss) on ordinary activities          | 459   |  | 443  |  | 712   | 
|                                                                 |      

The tax credit relating to exceptional items is £139 million (2002  £143 million credit, 2001  £22 million charge) of which £nil (2002  £nil,
2001  £12 million charge) relates to profit on sale of fixed asset investments and group undertakings, and profit on sale of property fixed assets.

A tax charge on recognised gains and losses not included in the profit and loss account of £16 million (2002  £11 million, 2001  £29
million) related to exchange movements offset in reserves.

In the year ended 31 March 2001, the loss on ordinary activities before taxation was £1,031 million, after charging £3,200 million of goodwill
impairment, which is not an allowable expense for taxation. In the following table, the effective corporation tax rate is reconciled to the profit of £2,169 million before this impairment charge.

Current tax and total tax on profit on ordinary activities, differs from the amount computed by applying the corporation tax rate to profit on ordinary activities
before taxation. The differences were attributable to the following factors:

|                                                                                                      | 2003   |  | 2002   |  | 2001  | 
|----------------------------------------------------------------------------------------------------- | ------ |  | ------ |  | ----- | 
|                                                                                                      | %      |  | %      |  | %     | 
|                                                                                                      |       
|UK corporation tax rate                                                                               | 30.0   |  | 30.0   |  | 30.0  | 
|Non-deductible depreciation,
      amortisation and impairment                                        | 0.4    |  | 92.6   |  | 9.0   | 
|Non-deductible non-UK losses                                                                          | 3.3    |  | 17.8   |  | 11.3  | 
|Higher taxes on non-UK
      profits                                                                  | 0.4    |  | 0.8    |  | 4.0   | 
|Excess depreciation over
      capital allowances                                                     | 3.4    |  | 9.7    |  | 0.7   | 
|Pension provisions and
      prepayments                                                              | (3.2)  |  | (11.5) |  | (4.0) | 
|Other timing differences                                                                              | 0.7    |  | (0.5)  |  | (0.7) | 
|Lower effective tax on
      gain on disposal of fixed asset investments
      and group undertakings | (16.5) |  | (66.3) |  | (8.3) | 
|Higher (lower) effective
      tax on gain on disposal of non qualifying assets                       | 2.0    |  | (44.6) |  |      | 
|Prior year adjustments                                                                                | (2.0)  |  | (0.5)  |  | (9.5) | 
|Other                                                                                                 | (0.8)  |  | (1.7)  |  | 1.4   | 
|                                                                                                      |       
|Current
      tax  effective corporation tax rate                                                    | 17.7   |  | 25.8   |  | 33.9  | 
|Deferred taxes on excess
      depreciation over capital allowances                                   | (3.4)  |  | (9.7)  |  | (0.7) | 
|Pension provisions and
      prepayments                                                              | 3.2    |  | 11.5   |  | 4.0   | 
|Other timing differences                                                                              | (0.7)  |  | 0.5    |  | 0.7   | 
|Prior year adjustments                                                                                | (2.3)  |  | 2.2    |  | (5.1) | 
|                                                                                                      |       
|Total
      tax  effective corporation tax rate                                                      | 14.5   |  | 30.3   |  | 32.8  | 
|                                                                                                      |       

Factors that may affect future tax chargesThe group operates in countries where the tax rate is different to the UK corporate tax rate, primarily the USA, the Netherlands, the Republic of Ireland, Germany and Spain.

As at 31 March 2003, the group had overseas corporate tax losses estimated to be £1.2 billion which are not recognised as deferred tax assets. In addition,
the group has unutilised capital losses estimated to be in excess of £10 billion which were not recognised as deferred tax assets.

96 BT Annual Report and Form 20-F 2003

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Notes to the financial statements

|13.
      Minority interests   |                                          |  |                                  |  |                                  |  |               |  |               |  |               | 
|------------------------------ | ---------------------------------------- |  | -------------------------------- |  | -------------------------------- |  | ------------- |  | ------------- |  | ------------- | 
|                               |                                          |  |                                  |  |                                  |  | 2003          |  | 2002          |  | 2001          | 
|                               |                                          |  |                                  |  |                                  |  | £m            |  | £m            |  | £m            | 
|                               |                                         
|Minority interests in profits: |                                          |  |                                  |  |                                  |  |               |  |               |  |               | 
|Group                          |                                          |  |                                  |  |                                  |  | 4             |  | 7             |  | 6             | 
|Associates                     |                                          |  |                                  |  |                                  |  | 8             |  | 16            |  | 121           | 
|                               |                                         
|Total
      minority interests |                                          |  |                                  |  |                                  |  | 12            |  | 23            |  | 127           | 
|                               |                                         
|                               |                                          |  |                                  |  |                                  |  |               |  |               |  |               | 
|                               |                                          |  |                                  |  |                                  |  |               |  |               |  |               | 
|14.
      Dividends            | 2003
      pence
      per
        share |  | 2002
      pence
      per share |  | 2001
      pence
      per share |  | 2003
      £m |  | 2002
      £m |  | 2001
      £m | 
|                               |                                         
|                               |                                         
|                               |                                         
|Interim dividend paid          | 2.25                                     |  |                                 |  | 7.80                             |  | 194           |  |              |  | 571           | 
|Proposed final dividend        | 4.25                                     |  | 2.00                             |  |                                 |  | 366           |  | 173           |  |              | 
|                               |                                         
|Total
      dividends          | 6.50                                     |  | 2.00                             |  | 7.80                             |  | 560           |  | 173           |  | 571           | 
|                               |                                         

In addition to the final dividend
  for the year ended 31 March 2002 of £173 million there was a demerger
  distribution of £19,490 million, representing the net assets of mmO2(including purchased goodwill) as at the date
  of demerger. Of the demerger distribution, £9 million represents a cash
  dividend paid by British Telecommunications plc to mmO2 plc as part of the
  demerger process.

15. Earnings (loss) per shareThe basic earnings (loss) per share are calculated by dividing the profit for the financial year attributable to shareholders by the weighted average number of shares in issue after deducting
the companys shares held by employee share ownership trusts.

In calculating the diluted earnings (loss) per share, share options outstanding and other potential ordinary shares have been taken into account.

|The weighted average number
      of shares in the years were:                         | 2003              |  | 2002      |  | 2001      | 
|-------------------------------------------------------------------------------------- | ----------------- |  | --------- |  | --------- | 
|                                                                                       | millions          |  | millions  |  | millions  | 
|                                                                                       | of
        shares |  | of shares |  | of shares | 
|                                                                                       |                  
|Basic                                                                                  | 8,616             |  | 8,307     |  | 7,276     | 
|Dilutive ordinary shares
      from share options outstanding and shares held in trust | 52                |  | 70        |  | 107       | 
|                                                                                       |                  
|Total
      diluted                                                                    | 8,668             |  | 8,377     |  | 7,383     | 
|                                                                                       |                  

Options over 177 million shares (2002  16 million, 2001  nil) were excluded from the calculation of the total diluted number of shares as they were anti-dilutive.

BT Annual Report and Form 20-F 200397

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Notes to the financial statements

15. Earnings
  (loss) per sharecontinued
  The items in the calculation of earnings (loss) per share before goodwill amortisation and exceptional items in the years were:

|                                                                                                                                                                                  | 2003
      pence
      per
        share |  | 2002
      pence
      per share |  | 2001
      pence
      per share |  | 2003
      £m |  | 2002
      £m |  | 2001
      £m | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- |  | -------------------------------- |  | -------------------------------- |  | ------------- |  | ------------- |  | ------------- | 
|                                                                                                                                                                                  |                                         
|                                                                                                                                                                                  |                                         
|                                                                                                                                                                                  |                                         
|Attributable
      to exceptional items and goodwill amortisation from 
    continuing activities:                                                                                |                                          |  |                                  |  |                                  |  |               |  |               |  |               | 
|Property
      rationalisation costs                                                                                                                                              | (2.3)                                    |  |                                 |  |                                 |  | (198)         |  |              |  |              | 
|Goodwill
      impairment in subsidiary undertakings                                                                                                                              |                                         |  | (23.5)                           |  | (2.7)                            |  |              |  | (1,955)       |  | (200)         | 
|Asset impairment
      in subsidiary undertakings                                                                                                                                 |                                         |  | (3.9)                            |  |                                 |  |              |  | (324)         |  |              | 
|Costs relating
      to the Concert unwind                                                                                                                                        |                                         |  | (3.0)                            |  |                                 |  |              |  | (253)         |  |              | 
|Costs
      relating to the demerger of mmO2                                                                                                                                      |                                         |  | (1.2)                            |  |                                 |  |              |  | (98)          |  |              | 
|BT Retail
      call centre rationalisation costs                                                                                                                                 |                                         |  | (0.8)                            |  |                                 |  |              |  | (68)          |  |              | 
|BT Wholesale
      bad debts costs                                                                                                                                                |                                         |  | (0.9)                            |  |                                 |  |              |  | (79)          |  |              | 
|Rates refunds
      relating to prior years                                                                                                                                       |                                         |  |                                 |  | 2.7                              |  |              |  |              |  | 193           | 
|Write off
      of subscriber acquisition costs                                                                                                                                   |                                         |  |                                 |  | (1.3)                            |  |              |  |              |  | (96)          | 
|Goodwill
      impairment in associates and joint ventures                                                                                                                        |                                         |  | (5.2)                            |  | (2.7)                            |  |              |  | (433)         |  | (200)         | 
|Impairment
      of investment in associates and joint ventures and release 
    (charge) for
      related exit costs                                                            | 1.8                                      |  | (9.4)                            |  |                                 |  | 150           |  | (780)         |  |              | 
|Profit
      on sale of fixed asset investments                                                                                                                                   | 19.8                                     |  | 2.0                              |  | 7.3                              |  | 1,700         |  | 169           |  | 534           | 
|(Loss)
      profit on sale of group undertakings                                                                                                                                 | (0.1)                                    |  | (1.8)                            |  | 1.2                              |  | (9)           |  | (148)         |  | 84            | 
|Profit
      on sale of property fixed assets                                                                                                                                     |                                         |  | 12.8                             |  |                                 |  |              |  | 1,062         |  |              | 
|Amounts
      written off investments                                                                                                                                             |                                         |  | (6.4)                            |  |                                 |  |              |  | (535)         |  |              | 
|Finance
      cost of novating interest rate swaps                                                                                                                                | (3.4)                                    |  | (2.0)                            |  |                                 |  | (293)         |  | (162)         |  |              | 
|Interest
      receivable on rates refunds, relating to prior years                                                                                                               |                                         |  |                                 |  | 0.3                              |  |              |  |              |  | 25            | 
|Goodwill
      amortisation                                                                                                                                                       | (0.3)                                    |  | (2.0)                            |  | (2.4)                            |  | (22)          |  | (162)         |  | (166)         | 
|Tax credit
      (charge)                                                                                                                                                         | 1.6                                      |  | 1.7                              |  | (0.7)                            |  | 139           |  | 143           |  | (47)          | 
|Minority interest                                                                                                                                                                 | (0.1)                                    |  |                                 |  | (0.3)                            |  | (7)           |  |              |  | (21)          | 
|                                                                                                                                                                                  |                                         
|Net
      credit (charge) attributable to exceptional items and goodwill 
          amortisation from continuing activities                                                       | 17.0                                     |  | (43.6)                           |  | 1.4                              |  | 1,460         |  | (3,623)       |  | 106           | 
|Attributable
      to discontinued activities:                                                                                                                                    |                                          |  |                                  |  |                                  |  |               |  |               |  |               | 
|Costs
      relating to the demerger of mmO2                                                                                                                                      |                                         |  | (0.1)                            |  |                                 |  |              |  | (11)          |  |              | 
|Goodwill
      impairment in subsidiary undertakings                                                                                                                              |                                         |  |                                 |  | (38.5)                           |  |              |  |              |  | (2,800)       | 
|Write off
      of Viag Interkom IT Systems                                                                                                                                       |                                         |  |                                 |  | (0.6)                            |  |              |  |              |  | (43)          | 
|Write off
      of subscriber acquisition costs                                                                                                                                   |                                         |  |                                 |  | (0.6)                            |  |              |  |              |  | (43)          | 
|Profit
      on sale of group undertakings                                                                                                                                        |                                         |  | 14.0                             |  |                                 |  |              |  | 1,160         |  |              | 
|Profit
      on sale of fixed asset investments                                                                                                                                   |                                         |  | 38.6                             |  |                                 |  |              |  | 3,208         |  | 1             | 
|Goodwill
      amortisation                                                                                                                                                       |                                         |  | (3.0)                            |  | (5.3)                            |  |              |  | (243)         |  | (392)         | 
|Tax credit                                                                                                                                                                        |                                         |  |                                 |  | 0.4                              |  |              |  |              |  | 25            | 
|Results
      of discontinued activities before goodwill amortisation and 
          exceptional
      items after tax and minority interest                                      |                                         |  | (2.7)                            |  | (1.8)                            |  |              |  | (231)         |  | (125)         | 
|                                                                                                                                                                                  |                                         
|Net
      credit (charge) attributable to discontinued activities                                                                                                                 |                                         |  | 46.8                             |  | (46.4)                           |  |              |  | 3,883         |  | (3,377)       | 
|                                                                                                                                                                                  |                                         
|Basic earnings
      (loss) per share/profit (loss) for the financial year after goodwill 
          amortisation and exceptional items                                           | 31.2                                     |  | 12.0                             |  | (25.7)                           |  | 2,686         |  | 995           |  | (1,870)       | 
|Less: Basic
      earnings (loss) per share/profit (loss) for the financial year attributable
      
          to discontinued activities                                         |                                         |  | 46.8                             |  | (46.4)                           |  |              |  | 3,883         |  | (3,377)       | 
|                                                                                                                                                                                  |                                         
|Basic
      earnings (loss) per share/profit (loss) for the financial year before 
          discontinued activities                                                              | 31.2                                     |  | (34.8)                           |  | 20.7                             |  | 2,686         |  | (2,888)       |  | 1,507         | 
|Less: Basic
      earnings (loss) per share/profit (loss) for the financial year attributable
          to exceptional items and goodwill amortisation from continuing activities | 17.0                                     |  | (43.6)                           |  | 1.4                              |  | 1,460         |  | (3,623)       |  | 106           | 
|                                                                                                                                                                                  |                                         
|Basic
      earnings per share/profit for the financial year from continuing 
          activities before goodwill amortisation and exceptional items                             | 14.2                                     |  | 8.8                              |  | 19.3                             |  | 1,226         |  | 735           |  | 1,401         | 
|                                                                                                                                                                                  |                                         

Earnings per share before goodwill amortisation and exceptional items are provided to help readers evaluate the performance of the group.

98 BT Annual Report and Form 20-F 2003

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Notes to the financial statements

|16.
      Reconciliation of operating profit (loss) to operating cash flows                                       | 2003    |  | 2002    |  | 2001    | 
|----------------------------------------------------------------------------------------------------------------- | ------- |  | ------- |  | ------- | 
|                                                                                                                  | £m      |  | £m      |  | £m      | 
|                                                                                                                  |        
|Group operating profit
      (loss)                                                                               | 2,572   |  | (479)   |  | 27      | 
|Depreciation                                                                                                      | 3,011   |  | 3,680   |  | 3,045   | 
|Goodwill amortisation and
      impairment                                                                        | 24      |  | 2,321   |  | 3,386   | 
|Decrease (increase) in
      stocks                                                                               | 31      |  | 43      |  | (67)    | 
|Decrease (increase) in
      debtors                                                                              | 764     |  | (545)   |  | (432)   | 
|(Decrease) increase in
      creditors                                                                            | (294)   |  | 803     |  | 203     | 
|Increase in pension prepayment
      and decrease in pension liabilities                                          | (314)   |  | (537)   |  | (294)   | 
|Increase in provisions                                                                                            | 171     |  | 52      |  | 72      | 
|Other                                                                                                             | 58      |  | (81)    |  | (53)    | 
|                                                                                                                  |        
|Net
      cash inflow from operating activities                                                                   | 6,023   |  | 5,257   |  | 5,887   | 
|                                                                                                                  |        
|Analysed as:                                                                                                      |         |  |         |  |         | 
|Continuing activities                                                                                             | 6,023   |  | 5,023   |  | 5,410   | 
|Discontinued activities                                                                                           |        |  | 234     |  | 477     | 
|                                                                                                                  |        
|Net
      cash inflow from operating activities                                                                   | 6,023   |  | 5,257   |  | 5,887   | 
|                                                                                                                  |        
|                                                                                                                  |         |  |         |  |         | 
|17.
      Management of liquid resources                                                                          | 2003    |  | 2002    |  | 2001    | 
|                                                                                                                  | £m      |  | £m      |  | £m      | 
|                                                                                                                  |        
|Purchase of short-term
      investments and payments into short-term deposits over 3 months                      | (3,990) |  | (7,601) |  | (1,344) | 
|Sale of short-term investments
      and withdrawals from short-term deposits over 3 months                       | 4,082   |  | 4,695   |  | 1,765   | 
|Net movement of short-term
      investments and short-term deposits
      under 3 months not repayable on demand | (1,821) |  | 1,042   |  | (901)   | 
|                                                                                                                  |        
|Net
      cash outflow from management of liquid resources                                                        | (1,729) |  | (1,864) |  | (480)   | 
|                                                                                                                  |        

Movements in all short-term investments and deposits not repayable on demand are reported under the heading of management of liquid resources.

|18.
      Acquisitions and disposals                                                                                     |                 |  |                         |  |                 |  |                | 
|------------------------------------------------------------------------------------------------------------------------ | --------------- |  | ----------------------- |  | --------------- |  | -------------- | 
|Acquisition
      of subsidiary companies and businesses                                                                 |                 |  |                         |  |                 |  |                | 
|                                                                                                                         |                 |  | Concerta
      £m       |  | Otherb
      £m |  | Total
      £m | 
|Year ended
      31 March 2003                                                                                           |                 |  |                        
|                                                                                                                         |                
|Consideration:                                                                                                           |                 |  |                         |  |                 |  |                | 
|Cash                                                                                                                     |                 |  |                        |  | 13              |  | 13             | 
|Carrying value
      of Concert global venture                                                                           |                 |  | 338                     |  |                |  | 338            | 
|                                                                                                                         |                
|Total                                                                                                                    |                 |  | 338                     |  | 13              |  | 351            | 
|                                                                                                                         |                
|                                                                                                                         |                 |  |                         |  |                 |  |                | 
|In addition,
      net cash of £56 million was received in settlement of the unwind of
      the Concert global venture. |                 |  |                        
|                                                                                                                         |                 |  |                         |  |                 |  |                | 
|                                                                                                                         |                 |  | Esat Digifonec
      £m |  | Otherd
      £m |  | Total
      £m | 
|Year ended
      31 March 2002                                                                                           |                 |  |                        
|                                                                                                                         |                
|Consideration:                                                                                                           |                 |  |                         |  |                 |  |                | 
|Cash                                                                                                                     |                 |  | 869                     |  | 27              |  | 896            | 
|Deferred                                                                                                                 |                 |  |                        |  | 8               |  | 8              | 
|                                                                                                                         |                
|Total                                                                                                                    |                 |  | 869                     |  | 35              |  | 904            | 
|                                                                                                                         |                
|                                                                                                                         |                 |  |                         |  |                 |  |                | 
|                                                                                                                         | ViagInterkome£m |  | Telfortf
      £m       |  | Otherf
      £m |  | Total
      £m | 
|                                                                                                                         |                
|Year ended
      31 March 2001                                                                                           |                
|                                                                                                                         |                
|Consideration:                                                                                                           |                 |  |                         |  |                 |  |                | 
|Cash                                                                                                                     | 8,770           |  | 1,207                   |  | 160             |  | 10,137         | 
|Carrying value
      of joint venture wholly acquired                                                                    | 479             |  | 235                     |  |                |  | 714            | 
|                                                                                                                         |                
|Total                                                                                                                    | 9,249           |  | 1,442                   |  | 160             |  | 10,851         | 
|                                                                                                                         |                

In addition, cash of £1,179 million was paid in settlement of deferred consideration on acquisitions in earlier years.

BT Annual Report and Form 20-F 200399

Table
  of contents

---



Notes to
  the financial statements

18. Acquisitions and disposalscontinued
aOn
  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. As part of the settlement with
  AT&T for the unwind of the Concert global venture BT received net cash of
  $72 million (£56 million). This net settlement included the receipt
  of $350 million reflecting the allocation of the businesses and the payment
  of $278 million to achieve the equal division of specified 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
        and
      fair 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                                              | 
|                                                                        |                                                 

The consideration was satisfied
  through the unwind of the Concert global venture, the carrying value of which
  was £338 million. Accordingly there is no further profit or loss on the
  unwind and no goodwill on the acquisition.

bDuring
  the year ended 31 March 2003, the acquisition of other subsidiary companies
  and businesses and the consideration given comprised:

|                                                                                 | Book value
        and
      fair value
      £m | 
|-------------------------------------------------------------------------------- | ------------------------------------------------ | 
|                                                                                 |                                                 
|                                                                                 |                                                 
|                                                                                 |                                                 
|Fixed assets                                                                     | 1                                                | 
|Current liabilities                                                              | (1)                                              | 
|                                                                                 |                                                 
|Groups
      share of original book value of net assets and fair value to group |                                                 | 
|Goodwill                                                                         | 13                                               | 
|                                                                                 |                                                 
|Total cost                                                                       | 13                                               | 
|                                                                                 |                                                 

cOn
  18 April 2001, the group took full control of O2 Communications
  (Ireland) (formerly Esat Digifone). Under an agreement made in 2000 the group
  purchased from Telenor its 49.5% interest in Esat Digifone for £869 million.
  Goodwill arising on the acquisition was being amortised over 20 years until
  it was demerged with mmO2.

|                                                              | Book value
        and
      fair value
      £m | 
|------------------------------------------------------------- | ------------------------------------------------ | 
|                                                              |                                                 
|                                                              |                                                 
|                                                              |                                                 
|Minority interest                                             | (7)                                              | 
|                                                              |                                                 
|Groups
      share of original book value of net liabilities | (7)                                              | 
|Goodwill                                                      | 876                                              | 
|                                                              |                                                 
|Total cost                                                    | 869                                              | 
|                                                              |                                                 

dOther subsidiary companies
During the year ended 31 March 2002, the acquisition of interests in other subsidiary companies and the consideration given comprised:

|                                                                                 | Book value
        and
      fair value
      £m | 
|-------------------------------------------------------------------------------- | ------------------------------------------------ | 
|                                                                                 |                                                 
|                                                                                 |                                                 
|                                                                                 |                                                 
|Fixed assets                                                                     | 3                                                | 
|Current assets                                                                   | 5                                                | 
|Current liabilities                                                              | (6)                                              | 
|                                                                                 |                                                 
|Groups
      share of original book value of net assets and fair value to group | 2                                                | 
|Goodwill                                                                         | 33                                               | 
|                                                                                 |                                                 
|Total cost                                                                       | 35                                               | 
|                                                                                 |                                                 

100BT Annual Report and Form 20-F 2003

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Notes to
  the financial statements

18. Acquisitions and disposalscontinued
eOn
  20 February 2001, the group took full control of Viag Interkom GmbH & Co
  (Viag Interkom). Under an agreement announced in August 2000, the group purchased
  from E.ON its 45% interest in Viag Interkom by means of a
  put option priced at€7.25
  billion (£4,562 million). In January 2001, the group acquired the 10%
  interest in the company previously owned by Telenor for€1.6 billion (£1,032 million). As part
  of the transactions, the group repaid loans due by Viag Interkom
  to E.ON and Telenor totalling £3,165 million. The total cash consideration
  amounted to £8,770 million, including £11 million expenses.

|                                                         | Book value
        and
      fair value
      £m | 
|-------------------------------------------------------- | ------------------------------------------------ | 
|                                                         |                                                 
|                                                         |                                                 
|                                                         |                                                 
|Fixed assets                                             | 6,728                                            | 
|Current assets                                           | 619                                              | 
|Current liabilities                                      | (585)                                            | 
|Long-term liabilities                                    | (2,505)                                          | 
|                                                         |                                                 
|Groups
      share of original book value of net assets | 4,257                                            | 
|Goodwill                                                 | 4,992                                            | 
|                                                         |                                                 
|Total cost                                               | 9,249                                            | 
|                                                         |                                                 

Since the acquisition was made
  towards the end of the year ended 31 March 2001, the fair values of the identifiable
  assets and liabilities were determined on a provisional basis which were then
  confirmed in the 2002 financial year. Goodwill arising on acquisition of Viag
  Interkom and remaining in the group was being amortised over 20 years until
  it was partially demerged with mmO2 and the remaining
  balance was written off in the 2002 financial year.

The consolidated results of Viag Interkom for the year ended 31 December 2000 and for the period from
1 January 2001 to 19 February 2001, on the basis of its accounting policies, are summarised as follows:

|                                                                                                                    |          |  | Period
        1 January to
      19 February
        2001
      £m |  | Year ended
      31 December
        2000
      £m | 
|------------------------------------------------------------------------------------------------------------------- | -------- |  | ------------------------------------------------------------------- |  | -------------------------------------------------- | 
|                                                                                                                    |          |  |                                                                     | 
|                                                                                                                    |          |  |                                                                     | 
|                                                                                                                    |         
|Group turnover                                                                                                      |          |  | 216                                                                 |  | 856                                                | 
|Total operating
      loss                                                                                          |          |  | (108)                                                               |  | (686)                                              | 
|Loss before taxation                                                                                                |          |  | (160)                                                               |  | (784)                                              | 
|Loss for the
      financial period                                                                                 |          |  | (160)                                                               |  | (784)                                              | 
|                                                                                                                    |         
|fOther
      subsidiary companies                                                                                   |          |  |                                                                     |  |                                                    | 
|During
      the year ended 31 March 2001, the acquisition of interests in other subsidiary
      companies and the |         
|consideration
      given comprised:                                                                                |          |  |                                                                     |  |                                                    | 
|                                                                                                                    | Telfortg |  | Other                                                               |  | Total                                              | 
|Year ended 31
      March 2001                                                                                      | £m       |  | £m                                                                  |  | £m                                                 | 
|                                                                                                                    |         
|Minority
      interest                                                                                             |         |  | 31                                                                  |  | 31                                                 | 
|Fixed
      assets                                                                                                  | 496      |  |                                                                    |  | 496                                                | 
|Current
      assets                                                                                                | 221      |  | 16                                                                  |  | 237                                                | 
|Current
      liabilities                                                                                           | (261)    |  |                                                                    |  | (261)                                              | 
|                                                                                                                    |         
|Group
      share of original book value of net assets and fair value to group                                      | 456      |  | 47                                                                  |  | 503                                                | 
|Goodwill                                                                                                            | 986      |  | 113                                                                 |  | 1,099                                              | 
|                                                                                                                    |         
|Total
      cost                                                                                                    | 1,442    |  | 160                                                                 |  | 1,602                                              | 
|                                                                                                                    |         

gOn
  22 June 2000, BT received regulatory approval to acquire the remaining 50% interest
  of Telfort BV, its provider of fixed and mobile services to businesses and consumers
  in the Netherlands, that it did not already own for £1,207 million. Goodwill
  arising on the acquisition of Telfort BV and remaining in the group was being amortised over 20 years until it was partially demerged with mmO2
  and the remaining balance was written off in the
  2002 financial year. Telfort BVs loss after tax for the year ended 31
  December 1999 was £141 million and its loss for the six months ended 30
  June 2000 was £86 million.hOn
  5 January 2000, BT and AT&T formed their global venture named Concert for
  the two companies trans-border communications activities. The venture
  is jointly owned and controlled. The group contributed the majority of its cross-border
  international networks, its international traffic, its business with selected
  multinational customers and its international products for business customers,
  as well as Concert Communications. AT&T contributed a similar set of assets and
  businesses.

BT Annual Report and Form 20-F 2003101

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Notes to
  the financial statements

18. Acquisitions and disposalscontinued
The book value of the assets contributed by the group to the joint venture comprised:

|                                                                        | £m      | 
|----------------------------------------------------------------------- | ------- | 
|                                                                        |        
|Intangible assets                                                       | 568     | 
|Tangible fixed
      assets                                             | 870     | 
|Total fixed
      assets                                                | 1,438   | 
|Current assets                                                          | 123     | 
|Current liabilities                                                     | (183)   | 
|Net current
      liabilities                                           | (60)    | 
|Provisions for
      liabilities and charges                            | (13)    | 
|Long-term debt
      owed to the BT group                               | (1,169) | 
|                                                                        |        
|Net
      assets contributed                                            | 196     | 
|                                                                        |        
|                                                                        |         | 
|The acquisition
      of the groups 50% interest in Concert comprised: |         | 
|                                                                        | £m      | 
|                                                                        |        
|Groups
      share of Concerts opening net assets (US GAAP)           | 631     | 
|Groups
      share of US to UK GAAP adjustments                        | (180)   | 
|                                                                        |        
|Groups
      share of Concerts opening net assets (UK GAAP)           | 451     | 
|Net assets contributed
      by the group to the joint venture          | (196)   | 
|Transition costs                                                        | (96)    | 
|                                                                        |        
|Unrealised
      gain on the contribution                               | 159     | 
|                                                                        |        

The gain on the transfer of the assets is unrealised since the group continues to maintain a 50% interest in the assets contributed. This gain has been taken to a non-distributable reserve and
is shown in the statement of total recognised gains and losses for the year ended 31 March 2000. There is no tax charge on the gain.

During the year ended 31 March 2001, the groups share of Concerts opening net assets was amended, due to certain true up contributions, reducing the
unrealised gain by £49 million. This is shown in the statement of total recognised gains and losses for the year ended 31 March 2001.

|Acquisition of associates
      and joint ventures                                 |                      |  |                   | 
|---------------------------------------------------------------------------------- | -------------------- |  | ----------------- | 
|                                                                                   |                      |  | Blui              | 
|Year ended
        31 March 2002                                                   |                      |  | £m                | 
|                                                                                   |                     
|Group share of original
      book value of net assets and fair value to the group |                      |  | 16                | 
|Goodwill                                                                           |                      |  | 50                | 
|                                                                                   |                     
|Total cost                                                                         |                      |  | 66                | 
|                                                                                   |                     
|Year
      ended 31 March 2001                                                     | Telenordiaj
      £m |  | J-Phonek
      £m | 
|                                                                                   |                     
|                                                                                   |                     
|Group share of original
      book value of net assets and fair value to the group | 10                   |  | 5                 | 
|Goodwill                                                                           | 84                   |  |                  | 
|                                                                                   |                     
|Total cost                                                                         | 94                   |  | 5                 | 
|                                                                                   |                     

iOn
  31 January 2002, one of the venture partners in Blu exercised a put option for
  BT to purchase a 9% interest for £66 million. The cost of £66 million
  arising on this purchase was written off. In addition in the year ended 31 March
  2002 the value of BTs investment was reviewed and provision was made for
  the associated impairment and exit costs. In December 2002 the group sold its
  interest in Blu (note 7).

jOn
  8 September 2000, BT increased its existing 33% interest in Telenordia, based
  in Sweden, to 50% for £94 million. Goodwill was being amortised over 20
  years until its disposal in October 2001.

kOn
  8 May 2000, the group acquired a 40% interest in a company, with Japan Telecom
  owning the other 60% interest, which holds a 74% interest in J-Phone Communications
  Co. Limited (JPC). JPC in turn acquired controlling interests, averaging 51%,
  in nine regional Japanese mobile phone J-Phone companies. These J-Phone companies
  merged into three larger regional companies during the year ended 31 March 2001.
  Japan Telecom also held a direct 18% interest in the J-Phone companies.

During the year ended 31 March 2001, the group held an effective 23% interest in J-Phone. The impact of the combined J-Phone/Japan Telecom ownership structure,
however, led the group to reflect 63% of the J-Phone results at the turnover and operating profit levels and all items below including interest and taxation, in accordance with the requirements of FRS 9. In June 2001, the group sold this interest
(note 7).

102BT Annual Report and Form 20-F 2003

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---



Notes to
  the financial statements

|18.
        Acquisitions and disposalscontinued                                                                                                                                                   
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Disposal of subsidiaries
        and the demerger of mmO2                                                                                                                                         
|In the year ended 31 March
      2003, BT disposed of subsidiaries with net assets of £12 million.
      Consideration amounted to £3 million resulting in a loss on disposal
      of £9 million.
|The table below analyses
        the disposal of subsidiaries and the demerger of mmO2
        for the year ended 31 March 2002.                                                                  

|                                                              |         |        |       |       |      |       |         |        | 
|------------------------------------------------------------- | ------- | ------ | ----- | ----- | ---- | ----- | ------- | ------ | 
|                                                              |         | mmO2l  |       | Yellm |      | Other |         | Total  | 
|Year
      ended 31 March 2002                                |         | £m     |       | £m    |      | £m    |         | £m     | 
|                                                              |        
|Net
      assets demerged or disposed of:                     |         |        |       |       |      |       |         |       
|Fixed
      assets                                            | 20,459  |        | 467   |       | 211  |       | 21,137  |       
|Stocks                                                        | 109     |        | 98    |       |     |       | 207     |       
|Debtors                                                       | 1,381   |        | 400   |       | 19   |       | 1,800   |       
|Cash                                                          | 121     |        | 21    |       | 7    |       | 149     |       
|Creditors:
      amounts falling due within one year          | (1,790) |        | (153) |       | (46) |       | (1,989) |       
|Creditors:
      amounts falling due after more than one year |        |        | (10)  |       |     |       | (10)    |       
|Provisions                                                    | (229)   |        |      |       |     |       | (229)   |       
|Intercompany
      loans                                      | (561)   |        |      |       |     |       | (561)   |       
|Goodwill
      previously written off to reserves             |        |        | 9     |       | 44   |       | 53      |       
|                                                              |        
|Net assets disposed of                                        |         | 19,490 |       | 832   |      | 235   |         | 20,557 | 
|Profit (loss) on disposal                                     |         |       |       | 1,128 |      | (116) |         | 1,012  | 
|                                                              |        
|Consideration                                                 |         | 19,490 |       | 1,960 |      | 119   |         | 21,569 | 
|                                                              |        
|Cash                                                          |         |       |       | 1,859 |      | 119   |         | 1,978  | 
|Demerger distribution                                         |         | 19,490 |       |      |      |      |         | 19,490 | 
|Loan notes                                                    |         |       |       | 60    |      |      |         | 60     | 
|Other                                                         |         |       |       | 41    |      |      |         | 41     | 
|                                                              |        
|Total                                                         |         | 19,490 |       | 1,960 |      | 119   |         | 21,569 | 
|                                                              |        

In addition £9 million
  deferred consideration was received during the year ended 31 March 2002 in settlement
  of the disposals on 18 July 1999 of BT New Towns Cable and Westminster Cable
  Limited.

Amounts included in the
  cash flow statement for the year ended 31 March 2002 attributable to mmO2
  and Yell and the results of mmO2 and Yell included in
  the results for the 2002 financial year to the date of demerger and disposal
  respectively were:

|                                                                           | mmO2  |  | Yell | 
|-------------------------------------------------------------------------- | ----- |  | ---- | 
|                                                                           | £m    |  | £m   | 
|                                                                           |      
|Net cash flow
      from operating activities                              | 227   |  | 7    | 
|Capital expenditure                                                        | 865   |  | 2    | 
|Decrease in
      cash in the year                                         | (262) |  | (4)  | 
|                                                                           |      
|Results
      of mmO2and
      Yell included to date of demerger/disposal: |       |  |      | 
|Group turnover                                                             | 2,665 |  | 171  | 
|Total operating
      (loss) profit                                        | (461) |  | 33   | 
|(Loss) profit
      before taxation                                        | (569) |  | 27   | 
|Taxation charge                                                            | (24)  |  | (9)  | 
|(Loss) profit
      for the financial year                                 | (593) |  | 18   | 
|                                                                           |      

lOn
  19 November 2001 BT completed the demerger of mmO2, the groups
  former mobile phone business in Europe. mmO2 consists of O2
  UK Limited (formerly BT Cellnet Limited), O2 Communications (Ireland)
  Limited (formerly Esat Digifone Limited), Telfort Mobiel BV, Viag Interkom GmbH
  & Co, Manx Telecom and Genie.mOn
  22 June 2001, BT completed the sale of the Yell Group. The Yell Group consisted
  of the Yellow Pages division of British Telecommunications plc, Yellow Pages
  Sales Limited and Yellow Book USA Inc., and its group undertakings.

BT Annual Report and Form 20-F 2003103

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Notes to the financial statements

|19.
      Net debt                                                | At 1 April
      2002
      £m |  | Cash flow
      £m |  | Acquisition
      of subsidiary
      undertakings
      £m |  | Other
      non-cash
        changes
      £m |  | Currency
        movement
      £m |  | At
        31 March
      2003
      £m | 
|----------------------------------------------------------------- | ------------------------------ |  | ------------------ |  | ----------------------------------------------------------- |  | --------------------------------------------- |  | ---------------------------------- |  | --------------------------------------- | 
|                                                                  |                                |  |                    |  |                                                             | 
|                                                                  |                                |  |                    |  |                                                             | 
|                                                                  |                                |  |                    |  |                                                             | 
|                                                                  |                                |  |                    |  |                                                             | 
|                                                                  |                               
|Analysis
      of net debt                                        |                                |  |                    |  |                                                             |  |                                               |  |                                    |  |                                         | 
|Cash in
      hand and at bank                                    | 158                            |  | (67)               |  |                                                            |  |                                              |  |                                   |  | 91                                      | 
|Overnight
      deposits                                          | 232                            |  | 36                 |  |                                                            |  |                                              |  |                                   |  | 268                                     | 
|Bank overdrafts                                                   | (16)                           |  | 12                 |  |                                                            |  |                                              |  |                                   |  | (4)                                     | 
|                                                                  |                               
|                                                                  | 374                            |  | (19)               |  |                                                            |  |                                              |  |                                   |  | 355                                     | 
|Other current
      asset investments                             | 4,349                          |  | 1,729              |  | 23                                                          |  | (13)                                          |  | (16)                               |  | 6,072                                   | 
|                                                                  |                               
|Short-term
      investments and cash, less
      bank overdrafts | 4,723                          |  | 1,710              |  | 23                                                          |  | (13)                                          |  | (16)                               |  | 6,427                                   | 
|                                                                  |                               
|Debt due
      within one year, excluding bank
      overdrafts   | (2,179)                        |  | 2,109              |  |                                                            |  | (2,414)                                       |  | (60)                               |  | (2,544)                                 | 
|Debt due
      after one year                                     | (16,245)                       |  | 406                |  | (10)                                                        |  | 2,384                                         |  | 9                                  |  | (13,456)                                | 
|                                                                  |                               
|Total
      debt, excluding bank overdrafts                       | (18,424)                       |  | 2,515              |  | (10)                                                        |  | (30)                                          |  | (51)                               |  | (16,000)                                | 
|                                                                  |                               
|Net
      debt                                                    | (13,701)                       |  | 4,225              |  | 13                                                          |  | (43)                                          |  | (67)                               |  | (9,573)                                 | 
|                                                                  |                               

|                                                                                       | 2003     |  | 2002     |  | 2001     | 
|-------------------------------------------------------------------------------------- | -------- |  | -------- |  | -------- | 
|                                                                                       | £m       |  | £m       |  | £m       | 
|                                                                                       |         
|Reconciliation
      of net cash flow to movement in net debt                          |          |  |          |  |          | 
|(Decrease) increase in
      cash in the year                                          | (19)     |  | 90       |  | 128      | 
|Cash outflow (inflow) from
      decrease (increase) in debt                           | 2,515    |  | 11,976   |  | (19,550) | 
|Cash outflow from increase
      in liquid resources                                   | 1,729    |  | 1,864    |  | 480      | 
|                                                                                       |         
|Decrease (increase) in
      net debt resulting from cash flows                        | 4,225    |  | 13,930   |  | (18,942) | 
|Currency and translation
      movements                                               | (67)     |  | (32)     |  | (26)     | 
|Decrease (increase) in
      debt on disposal (acquisition) of subsidiary undertakings | 13       |  | 75       |  | (48)     | 
|Other non-cash movements                                                               | (43)     |  | 268      |  | (226)    | 
|                                                                                       |         
|Decrease (increase) in
      net debt in the year                                      | 4,128    |  | 14,241   |  | (19,242) | 
|Net debt at 1 April                                                                    | (13,701) |  | (27,942) |  | (8,700)  | 
|                                                                                       |         
|Net
      debt at 31 March                                                             | (9,573)  |  | (13,701) |  | (27,942) | 
|                                                                                       |         

On the demerger, mmO2
  had net debt of approximately £500 million of which BT Group was owed
  approximately £440 million in addition to ordinary trading account balances.
  mmO2 repaid this loan to BT Group on 19 November 2001.

|20.
      Intangible assets               |                   |  |                                                   |  |                | 
|----------------------------------------- | ----------------- |  | ------------------------------------------------- |  | -------------- | 
|                                          | Goodwill
      £m |  | Telecommuni-
      cation
      licences
      £m |  | Total
      £m | 
|                                          |                  
|Cost                                      |                   |  |                                                   |  |                | 
|1 April 2002                              | 2,588             |  | 21                                                |  | 2,609          | 
|Acquisitions                              | 13                |  |                                                  |  | 13             | 
|Currency movements                        | (23)              |  |                                                  |  | (23)           | 
|                                          |                  
|Total cost
      at 31 March 2003         | 2,578             |  | 21                                                |  | 2,599          | 
|                                          |                  
|Amortisation                              |                   |  |                                                   |  |                | 
|1 April 2002                              | 2,351             |  | 6                                                 |  | 2,357          | 
|Charge for the
      year                 | 20                |  | 4                                                 |  | 24             | 
|                                          |                  
|Total amortisation
      at 31 March 2003 | 2,371             |  | 10                                                |  | 2,381          | 
|                                          |                  
|Net book
      value at 31 March 2003     | 207               |  | 11                                                |  | 218            | 
|                                          |                  
|Net book value
      at 31 March 2002     | 237               |  | 15                                                |  | 252            | 
|                                          |                  

104BT Annual Report and Form 20-F 2003

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Notes to
  the financial statements

|21.
        Tangible fixed assets                            | Land
      andbuildingsa£m |  | Plant
      andequipment£m |  | Assetsin
      course ofconstruction£m |  | Total£m | 
|------------------------------------------------------------ | -------------------------- |  | -------------------------- |  | -------------------------------------- |  | ------- | 
|                                                            
|                                                             |                           
|Cost                                                         |                            |  |                            |  |                                        |  |         | 
|1
      April 2002                                           | 984                        |  | 32,745                     |  | 1,183                                  |  | 34,912  | 
|Acquisitions
      of subsidiary undertakings                | 48                         |  | 279                        |  | 167                                    |  | 494     | 
|Additionsb                                                   | 9                          |  | 489                        |  | 1,956                                  |  | 2,454   | 
|Transfers                                                    | 48                         |  | 2,257                      |  | (2,305)                                |  |        | 
|Disposal
      of subsidiary undertakings                    |                           |  | (8)                        |  |                                       |  | (8)     | 
|Other
      disposals and adjustments                        | (147)                      |  | (1,596)                    |  | (34)                                   |  | (1,777) | 
|Currency
      movements                                     | 13                         |  | 180                        |  | (9)                                    |  | 184     | 
|                                                             |                           
|Total
      cost at 31 March 2003                            | 955                        |  | 34,346                     |  | 958                                    |  | 36,259  | 
|                                                             |                           
|Depreciation                                                 |                            |  |                            |  |                                        |  |         | 
|1 April
      2002                                           | 413                        |  | 18,475                     |  |                                       |  | 18,888  | 
|Acquisitions
      of subsidiary undertakings                | 2                          |  | 96                         |  |                                       |  | 98      | 
|Charge
      for the year                                    | 66                         |  | 2,945                      |  |                                       |  | 3,011   | 
|Disposal
      of subsidiary undertakings                    |                           |  | (5)                        |  |                                       |  | (5)     | 
|Other
      disposals and adjustments                        | (134)                      |  | (1,537)                    |  |                                       |  | (1,671) | 
|Currency
      movements                                     | 5                          |  | 90                         |  |                                       |  | 95      | 
|                                                             |                           
|Total
      depreciation at 31 March 2003                    | 352                        |  | 20,064                     |  |                                       |  | 20,416  | 
|                                                             |                           
|Net
      book value at 31 March 2003                        | 603                        |  | 14,282                     |  | 958                                    |  | 15,843  | 
|Engineering
      stores                                     |                           |  |                           |  | 45                                     |  | 45      | 
|                                                             |                           
|Total
      tangible fixed assets at 31 March 2003           | 603                        |  | 14,282                     |  | 1,003                                  |  | 15,888  | 
|                                                             |                           
|Net book
      value at 31 March 2002                        | 571                        |  | 14,270                     |  | 1,183                                  |  | 16,024  | 
|Engineering
      stores                                     |                           |  |                           |  | 54                                     |  | 54      | 
|                                                             |                           
|Total
      tangible fixed assets at 31 March 2002           | 571                        |  | 14,270                     |  | 1,237                                  |  | 16,078  | 
|                                                             |                           
|                                                             |                            |  |                            |  | 2003                                   |  | 2002    | 
|                                                             |                            |  |                            |  | £m                                     |  | £m      | 
|                                                             |                           
|a  The
      net book value of land and buildings comprised: |                            |  |                            |  |                                        |  |         | 
|Freehold                                                     |                            |  |                            |  | 374                                    |  | 343     | 
|Long
      leases (over 50 years unexpired)                  |                            |  |                            |  | 27                                     |  | 34      | 
|Short
      leases                                           |                            |  |                            |  | 202                                    |  | 194     | 
|                                                             |                           
|Total
      net book value of land and buildings             |                            |  |                            |  | 603                                    |  | 571     | 
|                                                             |                           
|                                                             |                            |  |                            |  | 2003                                   |  | 2002    | 
|                                                             |                            |  |                            |  | £m                                     |  | £m      | 
|                                                             |                           
|bExpenditure
      on tangible fixed assets comprised:       |                            |  |                            |  |                                        |  |         | 
|Plant
      and equipment                                    |                            |  |                            |  |                                        |  |         | 
|Transmission
      equipment                                 |                            |  |                            |  | 1,277                                  |  | 1,373   | 
|Exchange
      equipment                                     |                            |  |                            |  | 228                                    |  | 428     | 
|Other
      network equipment                                |                            |  |                            |  | 466                                    |  | 694     | 
|Computers
      and office equipment                         |                            |  |                            |  | 281                                    |  | 273     | 
|Motor
      vehicles and other                               |                            |  |                            |  | 162                                    |  | 189     | 
|Land
      and buildings                                     |                            |  |                            |  | 40                                     |  | 153     | 
|                                                             |                           
|                                                             |                            |  |                            |  | 2,454                                  |  | 3,110   | 
|Decrease
      in engineering stores                         |                            |  |                            |  | (9)                                    |  | (10)    | 
|                                                             |                           
|Total
      continuing activities                            |                            |  |                            |  | 2,445                                  |  | 3,100   | 
|Total
      discontinued activities                          |                            |  |                            |  |                                       |  | 808     | 
|                                                             |                           
|Total
      expenditure on tangible fixed assets             |                            |  |                            |  | 2,445                                  |  | 3,908   | 
|                                                             |                           

BT Annual Report and Form 20-F 2003105

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Notes to
  the financial statements

|22.
      Fixed asset investments                               | Interests
      in associates and joint venturesb |  |         |  |                                        | 
|--------------------------------------------------------------- | ------------------------------------------------- |  | ------- |  | -------------------------------------- | 
|                                                                |                                                   |  |         |  |                                        | 
|                                                                | Shares£m                                          |  | Loans£m |  | Share
      of postacquisitionlosses£m | 
|                                                                |                                                  
|Cost                                                            |                                                   |  |         |  |                                        | 
|1 April 2002                                                    | 3,673                                             |  | 22      |  | (795)                                  | 
|Additions                                                       | 46                                                |  | 107     |  |                                       | 
|Acquisitions
      of subsidiary undertakings                   |                                                  |  |        |  |                                       | 
|Disposals                                                       | (1,652)                                           |  |        |  | 180                                    | 
|Unwind of Concert
      joint venture                           | (1,475)                                           |  |        |  | 314                                    | 
|Share of profits
      for the year                             |                                                  |  |        |  | 49                                     | 
|Repayments
      and other transfers                            | (3)                                               |  | (110)   |  | 16                                     | 
|Currency movements                                              | 6                                                 |  | 1       |  |                                       | 
|                                                                |                                                  
|Total cost
      at 31 March 2003                               | 595                                               |  | 20      |  | (236)                                  | 
|                                                                |                                                  
|Provisions
      and amounts written off                        |                                                   |  |         |  |                                        | 
|1 April 2002                                                    | (2,222)                                           |  |        |  |                                       | 
|Goodwill amortisation
      for the year                        | (2)                                               |  |        |  |                                       | 
|Disposals                                                       | 1,179                                             |  |        |  |                                       | 
|Unwind of Concert
      joint venture                           | 823                                               |  |        |  |                                       | 
|Repayments
      and other transfers                            | 1                                                 |  |        |  |                                       | 
|Increase in
      the year                                      |                                                  |  |        |  |                                       | 
|                                                                |                                                  
|Total provisions
      and amounts written off at 31 March 2003 | (221)                                             |  |        |  |                                       | 
|                                                                |                                                  
|Net book
      value at 31 March 2003                           | 374                                               |  | 20      |  | (236)                                  | 
|                                                                |                                                  
|Net book value
      at 31 March 2002                           | 1,451                                             |  | 22      |  | (795)                                  | 
|                                                                |                                                  

aSubsidiary undertakings, associates and joint ventures

Details of the principal operating subsidiary undertakings, joint ventures and associates are set out on page 135.

|bAssociates
      and joint ventures | 2003
      £m |  | 2002
      £m | 
|------------------------------------ | ------------- |  | ------------- | 
|                                     |              
|Associates:                          |               |  |               | 
|Goodwill                             | 1             |  | 15            | 
|Loans                                | 1             |  | 1             | 
|Share
      of other net assets      | 25            |  | 208           | 
|Total
      associates               | 27            |  | 224           | 
|Joint
      ventures:                |               |  |               | 
|Loans                                | 19            |  | 21            | 
|Share
      of other net assets      | 112           |  | 433           | 
|Total
      joint ventures           | 131           |  | 454           | 
|                                     |              
|Net
      book value at 31 March     | 158           |  | 678           | 
|                                     |              

106BT Annual Report and Form 20-F 2003

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Notes to
  the financial statements

22. Fixed asset investmentscontinuedThe groups proportionate share of its associates and joint ventures assets and liabilities, in aggregate, at 31 March was as follows:

|                          | 2003
      £m |  | 2002
      £m | 
|------------------------- | ------------- |  | ------------- | 
|                          |              
|Fixed assets              | 570           |  | 1,668         | 
|Current assets            | 186           |  | 1,973         | 
|Current liabilities       | (344)         |  | (2,362)       | 
|Net current liabilities   | (158)         |  | (389)         | 
|Long-term liabilities     | (271)         |  | (558)         | 
|Minority interests        | (4)           |  | (66)          | 
|                          |              
|Share
      of net assets | 137           |  | 655           | 
|                          |              

The groups proportionate
  share of its associates and joint ventures profits less losses before
  taxation excluding minority interests totalled £310 million (losses less
  profits 2002  £1,463 million, losses less profits 2001  £667
  million) and its share of their profits less losses attributable to shareholders
  excluding minority interests totalled £229 million for the year ended
  31 March 2003 (losses less profits 2002  £1,548 million, losses
  less profits 2001  £895 million).

Up to 21 August 2001, the group had a 74.5% interest in e-escape Limited, a UK telecommunications service provider, having acquired an additional 25.5% on 19
December 2000. This additional interest was not for holding as a long-term investment and was sold on 22 August 2001. For this reason, the investment in this company continued to be accounted for on the equity basis. For the period to 21 August
2001, e-escapes turnover was £1 million and it incurred a loss after taxation of £2 million. Purchases from the group amounted to £1 million.

cOther investmentsOther investments include ordinary shares of the company, with a net book value of £61 million (2002  £69 million) and a market value of £50 million (2002 
£69 million), held in trust for the BT Incentive Share Plan, the BT Retention Share Plan, the BT Executive Share Plan and the BT Deferred Bonus Plan (note 34). They also include ordinary shares of the company, with a net book value of
£37 million (2002  £108 million) and a market value of £25 million (2002  £127 million), held in trust for employee sharesave schemes. In the group balance sheet at 31 March 2003, listed investments were held with
a book value of £22 million (2002  £94 million) and a market value of £15 million (2002  £171 million).

|23.
      Debtors                              | 2003
      £m |  | 2002
      £m | 
|---------------------------------------------- | ------------- |  | ------------- | 
|                                               |              
|Trade debtorsa                                 | 2,240         |  | 2,393         | 
|Amounts owed by joint ventures
      (trading) | 9             |  | 582           | 
|Amounts owed by associates
      (trading)     |              |  | 1             | 
|Other debtors                                  | 517           |  | 664           | 
|Accrued income                                 | 1,486         |  | 1,262         | 
|Pension fund prepaymentb                       | 630           |  | 231           | 
|Other prepayments                              | 161           |  | 139           | 
|                                               |              
|Total
      debtors                            | 5,043         |  | 5,272         | 
|                                               |              

|a | Trade debtors
      are stated after deducting £491 million (2002  £450 million)
      for doubtful debts. The amount charged to the group profit and lossaccount
      for doubtful debts for the year ended 31 March 2003 was £264 million
      (2002  £369 million including an exceptional charge of £79
      million,2001 
      £227 million).
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b | Falling
      due after more than one year.                                                                                                                                                                                                                                                                                                              

BT Annual Report and Form 20-F 2003107

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Notes to
  the financial statements

|24.
      Current asset investments              | 2003
      £m |  | 2002
      £m | 
|------------------------------------------------ | ------------- |  | ------------- | 
|                                                 |              
|Listed
      investments                         | 267           |  | 231           | 
|Other short-term
      deposits and investmentsa | 6,073         |  | 4,350         | 
|                                                 |              
|Total
      current asset investments            | 6,340         |  | 4,581         | 
|                                                 |              
|Market
      value of listed investments         | 268           |  | 246           | 
|                                                 |              

|a | Included
      within other short-term deposits and investments is £149 million invested
      with a swap counterparty. The counterparty has security over this investment
      in the event of BT defaulting on the swap.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|25.
      Loans and other borrowings                                      | 2003
      £m |  | 2002
      £m | 
|------------------------------------------------------------------------- | ------------- |  | ------------- | 
|                                                                          |              
|US dollar
      8.875% notes 2030 (minimum 8.625%a)                       | 1,928         |  | 1,928         | 
|5.75% bonds
      2028                                                    | 596           |  | 596           | 
|3.5% indexed
      linked notes 2025                                      | 262           |  | 258           | 
|8.625%
      bonds 2020                                                   | 297           |  | 296           | 
|7.75% notes
      2016 (minimum 7.5%a)                                    | 691           |  | 690           | 
|Euro 7.125%
      notes 2011 (minimum 6.875%a)                            | 1,368         |  | 1,368         | 
|US dollar
      8.375% notes 2010 (minimum 8.125%a)                       | 2,049         |  | 2,072         | 
|US dollar
      8.765% bonds 2009                                         | 138           |  | 138           | 
|Euro 11.875%
      senior notes 2009                                      | 3             |  | 129           | 
|US dollar
      11.875% senior notes 2008                                 |              |  | 124           | 
|US dollar
      7% notes 2007                                             | 606           |  | 605           | 
|12.25%
      bonds 2006                                                   | 229           |  | 229           | 
|7.375%
      notes 2006 (minimum 7.125%a)                                 | 398           |  | 397           | 
|Euro 6.375%
      notes 2006 (minimum 6.125%a)                            | 1,858         |  | 1,857         | 
|US dollar
      7.875% notes 2005 (minimum 7.624%a)                       | 1,942         |  | 2,066         | 
|US dollar
      6.75% bonds 2004                                          | 604           |  | 604           | 
|Euro 5.875%
      notes 2004 (minimum 5.625%a)                            | 1,087         |  | 1,085         | 
|US dollar
      floating rate notes 2003a                                 | 761           |  | 761           | 
|7.125%
      bonds 2003                                                   | 500           |  | 499           | 
|12.25%
      bonds 2003                                                   |              |  | 180           | 
|Euro floating
      rate notes 2003a                                      |              |  | 611           | 
|US dollar
      6.75% notes 2002                                          |              |  | 830           | 
|                                                                          |              
|Total listed
      bonds, debentures and notes                            | 15,317        |  | 17,323        | 
|Lease finance                                                             | 13            |  | 4             | 
|Bank loans
      due 2001-2009 (average effective interest rate 9.8%)     | 558           |  | 659           | 
|Floating
      rate note 2001-2009 (average effective interest rate 4.1%) | 112           |  | 126           | 
|Other loans                                                               |              |  | 123           | 
|Bank overdrafts
      and other short-term borrowings                     | 4             |  | 16            | 
|Euro Medium
      Term Notes                                              |              |  | 125           | 
|Commercial
      paper                                                    |              |  | 64            | 
|                                                                          |              
|Total
      loans and other borrowings                                    | 16,004        |  | 18,440        | 
|                                                                          |              

|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 ratingascribed 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 ratepayable
      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 payableon
      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
      noevent will the
      interest rate be reduced below the minimum interest rate reflected in the
      table above. | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

108BT Annual Report and Form 20-F 2003

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---



Notes to
  the financial statements

25. Loans and other borrowingscontinued
Apart from the lease finance all borrowings at 31 March 2003 are unsecured. Lease finance is repayable by instalments.

|                                                       | 2003
      £m |  | 2002
      £m | 
|------------------------------------------------------ | ------------- |  | ------------- | 
|                                                       |              
|Repayments fall due as
      follows:                  |               |  |               | 
|Within one year, or on
      demand                    | 2,548         |  | 2,195         | 
|Between one and two years                              | 846           |  | 2,408         | 
|Between two and three years                            | 4,031         |  | 844           | 
|Between three and four
      years                     | 501           |  | 4,152         | 
|Between four and five years                            | 606           |  | 497           | 
|After five years                                       | 7,472         |  | 8,344         | 
|Total due for repayment
      after more than one year | 13,456        |  | 16,245        | 
|                                                       |              
|Total
      loans and other borrowings                 | 16,004        |  | 18,440        | 
|                                                       |              
|                                                       |               |  |               | 
|26.
      Other creditors                              | 2003          |  | 2002          | 
|                                                       | £m            |  | £m            | 
|                                                       |              
|Trade creditors                                        | 2,772         |  | 2,396         | 
|Amounts owed to joint ventures
      (trading)         | 3             |  | 529           | 
|Corporation taxes                                      | 406           |  | 336           | 
|Other taxation and social
      security               | 438           |  | 477           | 
|Other creditors                                        | 1,389         |  | 1,558         | 
|Accrued expenses                                       | 718           |  | 772           | 
|Deferred income                                        | 1,040         |  | 954           | 
|Dividends payable                                      | 366           |  | 173           | 
|                                                       |              
|Total
      other creditors                            | 7,132         |  | 7,195         | 
|                                                       |              

|27.
      Provisions for liabilities and chargesProvisions
      for liabilities and charges excluding deferred taxation | Propertyprovisionsa£m |  | Pensionprovisionsb£m |  | Otherprovisionsc£m |  | Total£m | 
|------------------------------------------------------------------------------------------------------------------------ | --------------------- |  | -------------------- |  | ------------------ |  | ------- | 
|                                                                                                                         |                      
|Balances
      at 1 April 2002                                                                                           | 85                    |  | 29                   |  | 70                 |  | 184     | 
|Charged against
      profit for the year                                                                                | 200                   |  | 4                    |  | 6                  |  | 210     | 
|Utilised in
      the year                                                                                               | (27)                  |  |                     |  | (8)                |  | (35)    | 
|                                                                                                                         |                      
|Total
      provisions at 31 March 2003                                                                                  | 258                   |  | 33                   |  | 68                 |  | 359     | 
|                                                                                                                         |                      

|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.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b | Provision
      for unfunded pension obligations.                                                                                                                                                                                                                           
|c | Other
      provisions include amounts provided for legal or constructive obligations
      arising from insurance claims and litigation.                                                                                                                                   

|Deferred
      taxation                                                                                       | £m    | 
|------------------------------------------------------------------------------------------------------------- | ----- | 
|Deferred tax is provided
      for in full on certain timing differences, BT does not discount the provision. |      
|                                                                                                              |      
|                                                                                                              |      
|Balance at 1 April 2002                                                                                       | 2,140 | 
|Credit against profit for
      the year                                                                      | (102) | 
|Transfer to current tax                                                                                       | (23)  | 
|Acquisition                                                                                                   | 2     | 
|                                                                                                              |      
|Total
      deferred tax provisions at 31 March 2003                                                          | 2,017 | 
|                                                                                                              |      

|                                               | 2003£m |  | 2002£m | 
|---------------------------------------------- | ------ |  | ------ | 
|                                               |       
|Tax effect of timing differences
      due to: |        |  |        | 
|Excess capital allowances                      | 2,035  |  | 2,161  | 
|Pension prepayment                             | 167    |  | 69     | 
|Other                                          | (185)  |  | (90)   | 
|                                               |       
|Total
      provision for deferred taxation    | 2,017  |  | 2,140  | 
|                                               |       

BT Annual Report and Form 20-F 2003109

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Notes to the financial statements

28. Reconciliation of movement in shareholders funds

|                                                                                                                 |         |  | Share   |  |          |  | Profit   |  |          | 
|---------------------------------------------------------------------------------------------------------------- | ------- |  | ------- |  | -------- |  | -------- |  | -------- | 
|                                                                                                                 | Share   |  | premium |  | Other    |  | and loss |  |          | 
|                                                                                                                 | capital |  | account |  | reserves |  | account  |  | Total    | 
|                                                                                                                 | £m      |  | £m      |  | £m       |  | £m       |  | £m       | 
|                                                                                                                 |        
|Balances
      at 1 April 2000                                                                                   | 7,485   |  |        |  | (3,345)  |  | 9,700    |  | 13,840   | 
|Employee
      share option schemes  78 million shares issued(note
      34)                                    | 88      |  |        |  | 546      |  |         |  | 634      | 
|Movement
      relating to BTs employee share ownership trusta                                                  |        |  |        |  |         |  | (359)    |  | (359)    | 
|Currency
      movements (including £65 million net movements in respect of foreign
      currency borrowings)b  |        |  |        |  |         |  | 429      |  | 429      | 
|Loss for
      the financial year                                                                                |        |  |        |  |         |  | (1,870)  |  | (1,870)  | 
|Dividend
      (7.8p per ordinary share)                                                                         |        |  |        |  |         |  | (571)    |  | (571)    | 
|Adjustment
      to unrealised gain on transfer of assets and group undertakings to a joint
      venture        |        |  |        |  | (49)     |  |         |  | (49)     | 
|                                                                                                                 |        
|Balances
      at 1 April 2001                                                                                   | 7,573   |  |        |  | (2,848)  |  | 7,329    |  | 12,054   | 
|Rights
      issuec                                                                                              | 2,272   |  |        |  | 3,604    |  |         |  | 5,876    | 
|Shares
      issued to special purpose trustd                                                                    | 65      |  |        |  | 108      |  |         |  | 173      | 
|Other allotments
      of ordinary shares prior to demerger  52 million shares issued                           | 61      |  |        |  | 160      |  |         |  | 221      | 
|Distribution
      relating to demerger of mmO2e                                                                 |        |  |        |  |         |  | (19,490) |  | (19,490) | 
|Capital
      reduction on 21 November 2001f                                                                     | (9,537) |  |        |  |         |  | 9,537    |  |         | 
|Goodwill,
      previously written off to reserves, taken back to the profit and loss accountg(note 7)           |        |  |        |  |         |  | 68       |  | 68       | 
|Employee
      share option schemes  1 million shares issued(note
      34)                                     |        |  | 2       |  |         |  |         |  | 2        | 
|Movement
      relating to BTs employee share ownership trusta                                                  |        |  |        |  |         |  | (70)     |  | (70)     | 
|Unrealised
      gain on start up of joint ventures                                                              |        |  |        |  | 5        |  |         |  | 5        | 
|Realisation
      of gain made on start up of joint ventures                                                     |        |  |        |  | (2)      |  |         |  | (2)      | 
|Movement
      in other reserves due to demerger                                                                 |        |  |        |  | (2)      |  |         |  | (2)      | 
|Currency
      movements (including £36 million net movements in respect of foreign
      currency borrowings)b  |        |  |        |  |         |  | (15)     |  | (15)     | 
|Profit
      for the financial year                                                                              |        |  |        |  |         |  | 995      |  | 995      | 
|Dividend
      (2.0p per ordinary share)                                                                         |        |  |        |  |         |  | (173)    |  | (173)    | 
|                                                                                                                 |        
|Balances
      at 1 April 2002                                                                                   | 434     |  | 2       |  | 1,025    |  | (1,819)  |  | (358)    | 
|Goodwill,
      previously written off to reserves, taken back to the profit and loss accountg(note 7)           |        |  |        |  |         |  | 869      |  | 869      | 
|Employee
      share option schemes  0.2 million shares issued(note
      34)                                   |        |  |        |  |         |  |         |  |         | 
|Transfer
      between reservesh                                                                                 |        |  |        |  | (27)     |  | 27       |  |         | 
|Currency
      movements (including £106 million net movements in respect of foreign
      currency borrowings)b |        |  |        |  |         |  | 5        |  | 5        | 
|Profit
      for the year                                                                                        |        |  |        |  |         |  | 2,686    |  | 2,686    | 
|Dividend
      (6.5p per ordinary share)                                                                         |        |  |        |  |         |  | (560)    |  | (560)    | 
|                                                                                                                 |        
|Balances
      at 31 March 2003                                                                                  | 434     |  | 2       |  | 998      |  | 1,208    |  | 2,642    | 
|                                                                                                                 |        

|a | During
      the year ended 31 March 2002 the company issued shares at a market value
      of £154 million (2001  £400 million) in respect of the
      exercise of options awarded under its principal savings-related share option
      scheme. Employees paid £84 million (2001  £145 million)
      to the group for the issue of these shares and the balance of £70
      million (2001  £255 million) comprised contributions to the
      qualifying employee share ownership trust from group undertakings. The movement
      relating to BTs Employee Share Ownership Trust in 2001 included the
      writedown of shares held in trust.                                                                                                 | 
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | The
      cumulative foreign currency translation adjustment, which increased retained
      earnings at 31 March 2003, was £222 million (2002  £217
      million, 2001  £278 million).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|c | The
      groups rights issue closed on 15 June 2001, when British Telecommunications
      plc was the parent company of the group. A total of 1,976 million ordinary
      shares of 25p each was issued at 300p per share in a 3 for 10 rights issue.
      Of the total of £5,876 million raised, net of £52 million expenses,
      £494 million was credited to share capital and £5,382 million
      to the share premium account of British Telecommunications plc. Following
      the introduction of BT Group plc as the parent company of the group, the
      increase in consolidated share capital has been restated to reflect the
      nominal value of BT Group plc shares and the balance has been credited to
      other reserves. | 
|d | In
      connection with outstanding share options at the date of demerger, 57 million
      British Telecommunications plc ordinary shares were issued on 14 November
      2001 to a special purpose trust. Of the consideration of £173 million,
      £159 million was credited to the share premium account of British
      Telecommunications plc. Following the introduction of BT Group plc as the
      parent company of the group, the increase in consolidated share capital
      has been restated to reflect the nominal value of BT Group plc shares and
      the balance has been credited to other reserves.                                                                                                                           | 
|e | The
      demerger distribution of £19,490 million represents the net assets
      of mmO2, including purchased goodwill, as at the date of the
      demerger. See also the note on the face of the group profit and loss account
      for the year ended 31 March 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|f | Following
      the approval of the Court, the nominal value of BT Group shares was reduced
      from 115p per share to 5p per share on 21 November 2001 by way of a reduction
      of capital under section 135 of the Companies Act 1985. The surplus of £9,537
      million arising from this reduction has been credited to group profit and
      loss reserve.                                                                                                                                                                                                                                                                                                                                                                                    | 
|g | Aggregate
      goodwill at 31 March 2003 in respect of acquisitions completed prior to
      1 April 1998 of £385 million (2002  £1,254 million, 2001
       £1,383 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.                                                                                                                                                                                                                                                                                       | 
|h | Release
      of statutory reserves in subsidiary undertakings on cessation of associated
      activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 

110BT Annual Report and Form 20-F 2003

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Notes to the financial statements

29. Related party transactionsIn the year ended 31 March 2003, the groups turnover with its associates and joint ventures amounted to £3 million (2002  £15 million, 2001  £21 million)
and the group purchased £69 million (2002  £99 million, 2001  £63 million) in services and products from these undertakings. Interest for the year of £nil (2002  £1 million, 2001  £81
million) was receivable on debt due from these undertakings. The amount of debt outstanding with these undertakings, at 31 March 2003, was £20 million (2002  £22 million). The maximum debt outstanding during the year was £92
million (2002  £73 million). As at the latest practicable date, 30 April 2003, the amount of debt outstanding was £20 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.

|30.
      Financial commitments, contingent liabilities and subsequent events                       |  | 2003 |  | 2002   | 
|--------------------------------------------------------------------------------------------------- |  | ---- |  | ------ | 
|                                                                                                    |  | £m   |  | £m     | 
|                                                                                                    | 
|Contracts placed for capital
      expenditure not provided in the accounts                         |  | 616  |  | 740    | 
|                                                                                                    | 
|Operating lease payments
      payable within one year of the balance sheet date were in respect of |  |      |  |        | 
|leases
      expiring:                                                                              |  |      |  |        | 
|Within
      one year                                                                               |  | 11   |  | 13     | 
|Between
      one and five years                                                                    |  | 26   |  | 11     | 
|After
      five years                                                                              |  | 317  |  | 314    | 
|                                                                                                    | 
|Total
      payable within one year                                                                 |  | 354  |  | 338    | 
|                                                                                                    | 
|                                                                                                    |  |      |  |        | 
|Future minimum operating
      lease payments for the group at 31 March 2003 were as follows:       |  |      |  | 2003   | 
|                                                                                                    |  |      |  | £m     | 
|                                                                                                    | 
|Payable in the year ending
      31 March:                                                          |  |      |  |        | 
|2003                                                                                                |  |      |  | 354    | 
|2004                                                                                                |  |      |  | 347    | 
|2005                                                                                                |  |      |  | 351    | 
|2006                                                                                                |  |      |  | 354    | 
|2007                                                                                                |  |      |  | 357    | 
|Thereafter                                                                                          |  |      |  | 9,597  | 
|                                                                                                    | 
|Total
      future minimum operating lease payments                                                 |  |      |  | 11,360 | 
|                                                                                                    | 

Operating lease commitments were mainly in respect of leases of land and buildings.

At 31 March 2003, 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 major claims 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 O2UK Limited prior to its demerger with mmO2on 19 November 2001,
  amounting to US$96 million (£61 million) as at 31 March 2003. mmO2plc has given BT
  a counterindemnity for these guarantees.

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 first hearing has been scheduled for 11 July 2003, in Rome. If the proceedings are successful, BT could be 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.

BT Annual Report and Form 20-F 2003111

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Notes to the financial statements

31. Pension
  costsBackgroundThe 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 group offers retirement plans to its employees. The groups main scheme, the BT Pension Scheme (BTPS), is a defined benefit scheme where the benefits are
based on employees length of service and final pensionable pay. The BTPS is funded through a legally separate trustee administered fund. This scheme has been closed to new entrants since 31 March 2001 and replaced by a defined contribution
scheme. Under this defined contribution scheme the profit and loss charge represents the contribution paid by the group based upon a fixed percentage of employees pay.

The total pension costs of the group (including discontinued activities) expensed within staff costs in the year was £322 million (2002  £382
million, 2001  £326 million), of which £314 million (2002  £373 million, 2001  £315 million) related to the groups main defined benefit pension scheme, the BTPS. The decline in the pension cost
reflects the reduction in the number of active members of the BTPS and the interest credit relating to the balance sheet prepayment. This total pension cost includes the cost of providing enhanced pension benefits to leavers, which amounted to
£60 million (2002  £46 million, 2001  £nil). In the year ended 31 March 2002 this profit and loss charge of £46 million was not the full cash cost of £186 million because there was a pension fund accounting
surplus, including the provision on the balance sheet of £140 million that was fully utilised before making a charge to the profit and loss account.

The pension cost applicable to defined contribution schemes in the year ended 31 March 2003 was £4 million, (2002  £5 million, 2001 
£nil), and £0.4 million (2002  £0.3 million, 2001  £nil) of contributions to the schemes were outstanding at 31 March 2003.

The group occupies seven properties owned by the scheme on which an annual rental of £3 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 2003, the UK equities included 37 million (2002  55 million, 2001  51 million) ordinary shares of the
company with a market value of £58 million (2002  £154 million, 2001  £258 million).

BT Pension SchemeFunding 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 2004 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 the BTPS.

The valuation basis for funding purposes is broadly as follows:

nscheme assets are valued at market value at the valuation date; and

nscheme 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%                  | 
|                                                              |                             
|Return on existing assets,
      relative to market values    | 4.52                         |  | 2.38                            | 
|(after
      allowing for an annual increase in dividends of) | 1.00                         |  | 1.00                            | 
|Return on future investments                                  | 4.00                         |  | 4.00                            | 
|Average increase in retail
      price index                  |                             |  |                                | 
|Average future increases
      in wages and salaries          | 1.50*                        |  | 1.75                            | 
|Average increase in pensions                                  |                             |  |                                | 
|                                                              |                             

*There is a short term reduction in the real salary growth assumption to 1.25% for the first three years.

112BT Annual Report and Form 20-F 2003

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Notes to the financial statements

31. Pension costscontinued
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                               | 
|                                       |                                  
|0.25 percentage point change
      in: |                                   | 
|Investment return                      | (0.9)                             | 
|Wage and salary increases              | 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 of providing 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s view of the median
estimate basis, the funding deficit would have been reduced to £0.4 billion. Although the current market value of equity investments has 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 a result of the triennial funding valuation the group has 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 compares to the employers contribution rate of 11.6% and annual deficiency payments of £200 million that were determined under the 1999 funding valuation. In the year ended 31 March 2003, the group made regular
contributions of £278 million (2002  £303 million, 2001  £308 million) and additional special contributions for enhanced pension benefits to leavers in the year ended 31 December 2001 of £129 million in the 2003
financial year (2002  £400 million, 2001  £100 million) and deficiency contributions of £200 million (2002  £200 million, 2001  £200 million). The group will also pay a special contribution in
December 2003, which is expected to amount to approximately £100 million in respect of early leavers in the year ended 31 December 2002 which has already been reflected in the profit and loss account.

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 annual deficiency payments until 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 scheme approach retirement. Despite the scheme being closed to new entrants, the projected payment profile extends
over more than 60 years.

SSAP 24 accounting
  valuationThe SSAP 24 valuation is broadly
  on the following basis:

nscheme assets are valued at market value; and

nscheme liabilities are measured using the projected unit method and discounted at the estimated rate of return reflecting
the assets of the scheme.

For the purpose of determining the groups pension expenses under SSAP 24 in the years ended 31 March 2003, 2002 and 2001, the same assumptions were used as
set out above for 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 (allowing for
real equity dividend growth of 1.25% per annum). This equates to a real return of 2.5% per annum rather than the more conservative funding valuation, which used a real return of 2.4% per annum.

At 31 March 2000 there was a SSAP 24 deficit of £0.2 billion and the regular cost for the 2003, 2002 and 2001 financial years was 11.6% of pensionable
salaries based on the 31 March 2000 SSAP 24 valuation.

The
  pension cost for the 2004 financial year will be based upon the 31 March 2003
  SSAP 24 valuation. 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 will be 11.3% of pensionable salaries. The SSAP 24 valuation 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:

nreturn
  on existing assets is assumed to be a nominal 7.1% per annum, which equates
  to a real return of 4.7%;

naverage
  increase in retail price index is assumed to be 2.25% per annum; and

nthe
  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%.

BT Annual Report
  and Form 20-F 2003113

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  of contents

---



Notes to the financial statements

31. Pension costscontinuedThe 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 as a prepayment on the balance sheet. At 31 March 2003 the prepayment was £630 million (2002  £231 million) with the increase
being principally due to the additional special and deficiency contributions in the year.

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 until accounting periods commencing
  on or after 1 January 2005. The requirements for disclosure under FRS 17 remain
  in force between its issue and full implementation, 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:

nscheme
  assets are valued at market value at the balance sheet date;

nscheme
  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; and

nmovement
  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 2003 are:

|                                                                                                      |  |   |  |       | Real
      rates (per annum) |      | Nominal
      rates (per annum) |      
|----------------------------------------------------------------------------------------------------- |  | - |  | ----- | ---------------------------- | ---- | ------------------------------- | -----
|                                                                                                      |  |   |  |       |                              |      |                                 |      
|                                                                                                      |  |   |  |       | 2003                         |      | 2002                            |      
|                                                                                                      |  |   |  |       | %                            |      | %                               |      
|                                                                                                      | 
|Average
      future increases in wages and salaries                                                  |  |   |  | 1.50* |                              | 1.50 |                                 | 3.78*
|Average
      increase in pensions in payment and deferred pensions                                   |  |  |  |      |                              | 2.25 |                                 | 2.50 
|Rate
      used to discount scheme liabilities                                                        |  |   |  | 3.08  |                              | 3.41 |                                 | 5.40 
|Inflation
       average increase in retail price index                                              |  |   |  |      |                              |     |                                 | 2.25 
|                                                                                                      | 
|                                                                                                      | 
|The expected nominal rate
      of return and fair values of the assets of the BTPS at 31 March were: | 

|                                | 31
        March 2003                              |  | 31 March
        2002    | 
|------------------------------- | -------------------------------------------------- |  | ------------------------ | 
|                                |                                                    |  |                          | 
|                                | Expected
      long-term rate of return(per annum) |  | Asset
        fair value | 
|                                |                                                   
|                                | %                                                  |  | £bn                      | 
|                                |                                                   
|UK equities                     | 8.2                                                |  | 7.4                      | 
|Non-UK
      equities           | 8.2                                                |  | 6.4                      | 
|Fixed-interest
      securities | 5.2                                                |  | 3.1                      | 
|Index-linked
      securities   | 4.3                                                |  | 1.7                      | 
|Property                        | 7.0                                                |  | 3.3                      | 
|Cash
      and other            | 4.0                                                |  | (0.4)                    | 
|                                |                                                   
|Total                           | 7.4                                                |  | 21.5                     | 
|                                |                                                   

114BT Annual Report and Form 20-F 2003

Table
  of contents

---



Notes to
  the financial statements

31. Pension costscontinuedThe 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 March 2003 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 2003 |  | 31
      March 2002                 | 
|------------------------------- | ------------------- |  | ----------------------------------- | 
|                                |                     |  |                                     | 
|                                | Assets£m            |  | Present
      valueof liabilities£m | 
|                                |                    
|BTPS                            | 21,500              |  | 30,500                              | 
|Other liabilities               |                    |  | 33                                  | 
|                                |                    
|Total deficit                   |                     |  |                                     | 
|Deferred tax
      asset at 30% |                     |  |                                     | 
|                                |                    
|Net
      pension liability     |                     |  |                                     | 
|                                |                    

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:

|                                                              | 31
      March 2003£m |  | 31
      March 2002£m | 
|------------------------------------------------------------- | --------------------- |  | --------------------- | 
|                                                              |                      
|Net assets (deficiency)                                       |                       |  |                       | 
|Net assets (deficiency),
      as reported                    | 2,642                 |  | (358)                 | 
|SSAP 24 pension prepayment
      (net of deferred tax)        | (441)                 |  | (162)                 | 
|SSAP 24 pension provision
      (net of deferred tax)         | 23                    |  | 20                    | 
|Net pension liability under
      FRS 17                      | (6,323)               |  | (1,281)               | 
|                                                              |                      
|Net deficiency including
      net pension liability          | (4,099)               |  | (1,781)               | 
|                                                              |                      
|                                                              | 31
      March 2003£m |  | 31
      March 2002£m | 
|                                                             
|                                                              |                      
|Profit and loss reserve                                       |                       |  |                       | 
|Profit and loss reserve,
      as reported                    | 1,208                 |  | (1,819)               | 
|SSAP 24 pension prepayment
      (net of deferred tax)        | (441)                 |  | (162)                 | 
|SSAP 24 pension provision
      (net of deferred tax)         | 23                    |  | 20                    | 
|Net pension liability under
      FRS 17                      | (6,323)               |  | (1,281)               | 
|                                                              |                      
|Profit and loss reserve
      including net pension liability | (5,533)               |  | (3,242)               | 
|                                                              |                      

On 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 2003 would be as follows:

|                                                                                                                                                  | 2003£m  | 
|------------------------------------------------------------------------------------------------------------------------------------------------- | ------- | 
|                                                                                                                                                 
|                                                                                                                                                  |        
|Analysis of amounts
      that would be charged to operating profit on an FRS 17 basis                                                            |         | 
|Current service cost                                                                                                                              | 444     | 
|Past service cost                                                                                                                                 | 60      | 
|                                                                                                                                                  |        
|Total operating charge                                                                                                                            | 504     | 
|                                                                                                                                                  |        
|Amount that would be
      charged (credited) to net interest payable on an FRS 17 basis                                                          |         | 
|Expected return on pension
      scheme assets                                                                                                    | (1,983) | 
|Interest on pension scheme
      liabilities                                                                                                      | 1,694   | 
|                                                                                                                                                  |        
|Net finance expense
      (return)                                                                                                                | (289)   | 
|                                                                                                                                                  |        
|Amount that would be
      charged to profit before taxation on an FRS 17 basis                                                                   | 215     | 
|                                                                                                                                                  |        
|Analysis of the amount
      that would be recognised in the consolidated statement of total recognised
      gains and losses on an FRS 17 basis |         | 
|Expected return less actual
      return on pension scheme assets                                                                                 | 6,995   | 
|Experience (gains) losses
      arising on pension scheme liabilities                                                                             | (1,056) | 
|Changes in assumptions
      underlying the present value of the pension scheme liabilities                                                       | 1,660   | 
|                                                                                                                                                  |        
|Actuarial loss recognised                                                                                                                         | 7,599   | 
|                                                                                                                                                  |        

BT Annual Report and Form 20-F 2003115

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Notes to the financial statements

31. Pension
  costscontinued
  The net pension cost of £215 million for the year ended 31 March 2003 under FRS 17 is £107 million lower 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
  ended 31 March 2003 were:

|                                                                                                   | £m      | 
|-------------------------------------------------------------------------------------------------- | ------- | 
|                                                                                                   |        
|Deficit at 1 April 2002                                                                            | 1,830   | 
|Current service cost                                                                               | 444     | 
|Contributions                                                                                      | (611)   | 
|Past service costs                                                                                 | 60      | 
|Other finance income                                                                               | (289)   | 
|Actuarial loss recognised                                                                          | 7,599   | 
|                                                                                                   |        
|Deficit
      at 31 March 2003                                                                     | 9,033   | 
|                                                                                                   |        
|Net
      pension liability, post tax, at 31 March 2003                                            | 6,323   | 
|                                                                                                   |        
|The history of experience
      gains (losses) which would have been recognised under FRS 17 were: |         | 
|Difference
      between expected and actual return on scheme assets:                              |         | 
|Amount (£m)                                                                                        | (6,995) | 
|Percentage of scheme assets                                                                        | 32.5%   | 
|Experience gains and losses on scheme liabilities:                                                 |         | 
|Amount (£m)                                                                                        | 1,056   | 
|Percentage of the present
      value of scheme liabilities                                        | 3.5%    | 
|Total amount recognised in statement of total recognised gains and losses:                         |         | 
|Amount (£m)                                                                                        | (7,599) | 
|Percentage of the present
      value of scheme liabilities                                        | 24.9%   | 

32. DirectorsDirectors emolumentsThe emoluments of the directors for the year ended 31 March 2003 and the benefits received under the long-term incentive plans were, in summary, as follows:

|                                                                                      | 2003£000 |  | 2002£000 |  | 2001£000 | 
|------------------------------------------------------------------------------------- | -------- |  | -------- |  | -------- | 
|                                                                                      |         
|Salaries                                                                              | 3,212    |  | 2,223    |  | 2,199    | 
|Performance-related
      and special bonus                                           | 2,309    |  | 1,691    |  | 1,036    | 
|Deferred
      bonus in shares                                                        | 1,484    |  | 492      |  | 531      | 
|Other benefits                                                                        | 644      |  | 160      |  | 182      | 
|                                                                                      |         
|                                                                                      | 7,649    |  | 4,566    |  | 3,948    | 
|Payments
      to non-executive directors                                             | 294      |  | 414      |  | 388      | 
|                                                                                      |         
|Total
      emoluments                                                                | 7,943    |  | 4,980    |  | 4,336    | 
|                                                                                      |         
|Gain on
      the exercise of share optionsa                                          |         |  | 75       |  |         | 
|Value of
      shares vested under the Executive Share Plan and Retention Share Planb | 411      |  | 483      |  | 782      | 
|                                                                                      |         

|aThe
      amount for the year ended 31 March 2002 is entirely attributable to former
      directors.
|------------------------------------------------------------------------------------------------------
|bThe amount
      for the year ended 31 March 2001 is entirely attributable to former directors.      

More detailed information concerning directors remuneration, shareholdings, pension entitlements, share options and other long-term incentive plans is shown in the report on
directors remuneration on pages 58 to 72.

116BT Annual Report and Form 20-F 2003

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Notes to the financial statements

|33.
      People employed              
|---------------------------------------
|                                       
|                                       
|                                       
|                                       
|Number of employees
      in the group:
|UK                                     
|Non-UK                                 
|                                       
|Total
      continuing activities      
|                                       
|UK                                     
|Non-UK                                 
|                                       
|Total
      discontinued activities    
|                                       
|Total
      employees                  
|                                       

34. Employee share schemesThe company has a share ownership scheme used for employee share allocations (profit sharing), an employee share investment plan, savings-related share option schemes for its employees and
those of participating subsidiaries, further share option schemes for selected group employees and an employee stock purchase plan for employees in the United States. It also has several share plans for executives.

Share option schemesThe major share option scheme, the BT Group Employee Sharesave Scheme, is savings related and the share options are normally exercisable on completion of a three or five year Save As You Earn
contract. A similar savings related scheme exists for group employees based outside the UK.

Following the scheme of arrangement and demerger in November 2001, all options under the savings related schemes became exercisable for a period of six months. On
expiry of this period, these options lapsed to the extent to which they had not been exercised. Shortly before the scheme of arrangement, 57 million shares were allotted to a special purpose trust to satisfy options which were likely to be exercised
during that six month period.

Participants in the BT Share Option Scheme, the BT US Stock Option Plan, the BT Worldwide Share Option Scheme, and the BT Global Share Option Plan (the Executive
Option Plans) were given the opportunity to (i) conditionally on the scheme of arrangement being sanctioned by the Court, release their options over British Telecommunications plc shares in consideration for the grant of options in their
employers new holding company (BT Group plc or mmO2plc); or (ii) if their
options were already exercisable, exercise their options over ordinary shares irrespective of whether the scheme of arrangement was sanctioned by the Court; or (iii) if their options were not already exercisable, conditionally on the scheme of arrangement being
sanctioned by the Court, exercise their options immediately following that time but prior to the reduction of BT Groups share capital.

To the extent that they had not already been exercised, these options lapsed on 16 November 2001, the effective date of the scheme of arrangement.

On 17 December 2001, replacement unapproved options over BT Group shares were granted under the BT Group Legacy Option Plan to all participants in the Executive
Option Plans who had released their options over British Telecommunications plc shares. The value of the replacement options was determined by averaging the combined prices of BT Group plc and mmO2plc
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 option over 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.

BT Annual Report and Form 20-F 2003117

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Notes to the financial statements

|34.
      Employee share schemescontinued                                                                                                                        
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Options outstanding
      under these share option schemes at 31 March 2003 and 2002, together with
      their exercise prices and
      dates, were as follows:
|Normal
      dates of exercise                                                                                                                                   
|                                                                                                                                                                 
|BT
      Employee Sharesave schemes                                                                                                                              
|British Telecommunications
      plc shares                                                                                                                      
|2002-2005                                                                                                                                                        
|                                                                                                                                                                 
|BT
      Group Employee Sharesave schemes                                                                                                                        
|BT Group plc
      shares                                                                                                                                        
|2005                                                                                                                                                             
|2007                                                                                                                                                             
|                                                                                                                                                                 
|Total                                                                                                                                                            
|                                                                                                                                                                 
|BT
      Group Legacy Option Plana                                                                                                                               
|BT Group plc
      shares                                                                                                                                        
|1993-2009                                                                                                                                                        
|2001-2011                                                                                                                                                        
|2004-2011                                                                                                                                                        
|                                                                                                                                                                 
|Total                                                                                                                                                            
|                                                                                                                                                                 
|BT
      Group Global Share Option Plan                                                                                                                          
|BT Group plc
      shares                                                                                                                                        
|2005-2012                                                                                                                                                        
|                                                                                                                                                                 
|Total outstanding
      options                                                                                                                                  
|                                                                                                                                                                 

|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 117. | 
|- | ------------------------------------------------------------------------------------------------------------------------------------ | 

On the demerger, BTs share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave schemes and the BT Group Global Share Option Plan.

The weighted average fair value of share options granted during the year ended 31 March 2003 has been estimated on the date of grant using the Black-Scholes
option pricing model. The following weighted average assumptions were used in that model: an expected life extending one month later than the first exercise date; estimated annualised dividend yield of approximately 5% (2002  5%, 2001 
2%); risk free interest rates of approximately 5% (2002  6%, 2001  7%); and expected volatility of approximately 40% (2002  34%, 2001  41%).

The weighted average fair value of the share options granted in the year ended 31 March 2003 was 55p (2002  55p, 2001  329p) for options exercisable
three years after the date of grant and 72p (2002  55p, 2001  424p) for options exercisable five years after the date of grant. The weighted average fair value of options granted under the BT Group Global Share Option Plan has been
estimated as 24p. The total value of share options granted by BT in the year ended 31 March 2003 was £41 million (2002  £88 million, 2001  £168 million).

In accordance with UK accounting practices, no compensation expense is recognised for the fair value of options granted where the exercise price equals the market
price at date of grant or options granted under approved Sharesave schemes. See United States Generally Accepted Accounting Principles  IV Accounting for share options for the treatment under US GAAP.

118BT Annual Report and Form 20-F 2003

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Notes to the financial statements

34. Employee share schemescontinuedOptions granted, exercised and lapsed under these share option schemes during the years ended 31 March 2001, 2002 and 2003 and options exercisable at 31 March 2001, 2002 and 2003 were as
follows:

|                                 | Savingsarelatedschemesmillions |  | Savingsbrelatedschemesmillions |  | Executiveoptionplansmillions |  | Totalmillions |  | Exercisepricerange |  | Weightedaverageexerciseprice | 
|-------------------------------- | ------------------------------ |  | ------------------------------ |  | ---------------------------- |  | ------------- |  | ------------------ |  | ---------------------------- | 
|                                 |                               
|Outstanding, 31 March 2000       |                                |  | 226                            |  | 6                            |  | 232           |  | 267p1206p         |  | 432p                         | 
|Granted                          |                                |  | 41                             |  | 8                            |  | 49            |  | 534p885p          |  | 751p                         | 
|Exercised                        |                                |  | (46)                           |  | (1)                          |  | (47)          |  | 168p1315p         |  | 319p                         | 
|Lapsed                           |                                |  | (17)                           |  | (1)                          |  | (18)          |  | 168p1351p         |  | 619p                         | 
|                                 |                               
|Outstanding, 31 March 2001       |                                |  | 204                            |  | 12                           |  | 216           |  | 168p1351p         |  | 564p                         | 
|Rights issue adjustment          |                                |  | 21                             |  | 2                            |  | 23            |  |                   |  |                             | 
|Granted                          |                                |  |                               |  | 6                            |  | 6             |  | 420p               |  | 420p                         | 
|Exercised                        |                                |  | (83)                           |  | (1)                          |  | (84)          |  | 240p523p          |  | 259p                         | 
|Lapsed                           |                                |  | (50)                           |  |                             |  | (50)          |  | 240p852p          |  | 622p                         | 
|                                 |                               
|Outstanding pre demerger         |                                |  | 92                             |  | 19                           |  | 111           |  | 299p959p          |  | 533p                         | 
|Lapsed at demerger               |                                |  |                               |  | (19)                         |  | (19)          |  | 299p959p          |  | 595p                         | 
|                                 |                               
|Outstanding at demerger          |                               |  | 92                             |  |                             |  | 92            |  | 322p852p          |  | 520p                         | 
|Granted                          | 160                            |  |                               |  | 26                           |  | 186           |  | 218p727p          |  | 413p                         | 
|Exercised                        |                               |  |                               |  | (1)                          |  | (1)           |  | 231p292p          |  | 232p                         | 
|Lapsed                           |                               |  |                               |  | (1)                          |  | (1)           |  | 318p602p          |  | 358p                         | 
|                                 |                               
|Outstanding, 31 March 2002       | 160                            |  | 92                             |  | 24                           |  | 276           |  | 218p852p          |  | 448p                         | 
|Granted                          | 45                             |  |                               |  | 65                           |  | 110           |  | 168p255p          |  | 201p                         | 
|Exercised                        |                               |  | (8)                            |  |                             |  | (8)           |  | 240p332p          |  | 321p                         | 
|Lapsed                           | (41)                           |  | (84)                           |  | (4)                          |  | (129)         |  | 187p852p          |  | 432p                         | 
|                                 |                               
|Outstanding,
      31 March 2003 | 164                            |  |                               |  | 85                           |  | 249           |  |                    |  |                              | 
|                                 |                               
|Exercisable, 31 March 2000       |                                |  |                               |  | 3                            |  | 3             |  | 289p460p          |  | 369p                         | 
|Exercisable, 31 March 2001       |                                |  |                               |  | 3                            |  | 3             |  | 289p460p          |  | 369p                         | 
|Exercisable, 31 March 2002       |                                |  | 47                             |  | 7                            |  | 54            |  | 218p852p          |  | 395p                         | 
|Exercisable, 31 March 2003       |                               |  |                               |  | 11                           |  | 11            |  | 255p727p          |  | 491p                         | 
|                                 |                               

|a | The BT Group Employee Sharesave schemes. | 
|- | ---------------------------------------- | 
|b | The BT Employee Sharesave schemes.       | 

Incentive
  Share Plan and Retention Share PlanThe 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 only entitled 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 may be awarded up to double the shares conditionally awarded. The corporate performance
measure assesses the companys overall performance against those top 100 companies listed on the London Stock Exchange, as rated by theFinancial Times(the FTSE 100 index), at the beginning of the relevant performance period. 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 if the individual is still employed by the group. During the 2003 financial year, 374,039 (2002  162,772) shares vested in 11 (2002  12) participants in the RSP.

Executive Share Plan and Deferred Bonus PlanThe BT Executive Share Plan (ESP) was introduced for employees of the group in 1994. Under the ESP, company shares are acquired by an employee share ownership trust and are conditionally
awarded to participants. Participants are only entitled to these shares in full at the end of a five-year period under the ESP if, at the end of the period, the company has met the relevant pre-determined corporate performance measure. Awards of
shares were granted in each of the years from 1994 to 1999 under the ESP.

In 1994, 1995, 1996 and 1997 ESP participants could invest 50% of their annual bonus in the ESP for the purchase of shares. These invested shares were matched by
the company.

The corporate performance measure assesses the companys overall performance against those top 100 companies listed on the London Stock Exchange, as rated by
the FTSE 100 index, at the beginning of the relevant performance period.

BT Annual Report and Form 20-F 2003119

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Notes to the financial statements

34. Employee share schemescontinuedThe fourth five-year performance cycle of the ESP ended on 31 July 2002 and on the basis of the corporate performance measure, the companys Total Shareholder Return (TSR) target relative
to the other companies in the FTSE 100, 32.5% (2002  85%) of the shares vested on 1 August 2002 in 65 participants (1 August 2001: 62 participants) and 1.0 million shares (1 August 2001  1.2 million shares) were transferred to those
participants.

The BT Deferred Bonus Plan (DBP) was established in 1998 and awards were granted to employees of the group in July 1998, 1999, 2000, 2001 and June 2002. 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 be employed by the group throughout that period. On 1 August 2002, 657,592
shares (1 August 2001  303,326) were transferred to 223 participants (1 August 2001  154) at the end of the three-year deferred period.

At 31 March 2003, 31.7 million shares (2002  24.6 million shares) in the company were held in trust for employee share schemes, of which 15.5 million shares
(2002  16.5 million shares) were held for the ISP, 2.9 million shares (2002  1.1 million shares) were held for the RSP, 2.3 million shares (2002  4.4 million shares) were held for the ESP and 4.2 million shares (2002  2.7
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 2003                                                                             | ISP£m |  | RSP£m |  | ESP£m |  | DBP£m |  | Total£m | 
|---------------------------------------------------------------------------------------------------- | ----- |  | ----- |  | ----- |  | ----- |  | ------- | 
|                                                                                                     |      
|Value of range of possible
      future transfers: nil to                                            | 24.3  |  | 4.6   |  | 3.6   |  | 6.7   |  | 39.2    | 
|Provision for the costs
      of the plans charged (credited) to the profit and loss account in year |      |  | (0.2) |  | (0.2) |  | 5.8   |  | 5.4     | 
|Nominal value of shares
      held in trust                                                          | 0.8   |  | 0.1   |  | 0.1   |  | 0.2   |  | 1.2     | 
|Market value of shares
      held in trust                                                           | 24.3  |  | 4.6   |  | 3.6   |  | 6.7   |  | 39.2    | 
|                                                                                                     |      
|Year ended 31 March 2002                                                                             | ISP£m |  | RSP£m |  | ESP£m |  | DBP£m |  | Total£m | 
|                                                                                                     |      
|Value of range of possible
      future transfers: nil to                                            | 46.0  |  | 3.0   |  | 12.3  |  | 7.5   |  | 68.8    | 
|Provision for the costs
      of the plans charged (credited) to the profit and loss account in year |      |  | 5.4   |  | (9.2) |  | 2.1   |  | (1.7)   | 
|Nominal value of shares
      held in trust                                                          | 0.8   |  | 0.1   |  | 0.2   |  | 0.1   |  | 1.2     | 
|Market value of shares
      held in trust                                                           | 46.0  |  | 3.0   |  | 12.3  |  | 7.5   |  | 68.8    | 
|                                                                                                     |      

Of the total BT Group plc shares held, 6.8 million shares were held at 31 March 2003 in trust for future awards under employee share schemes. These shares had a nominal value of £0.3
million and a market value of £10.7 million at 31 March 2003.

The values of possible future transfers of shares under the plans were based on the BT Group plc share price at 31 March 2003 of 157p (2002  280p). The
provisions for the costs of the ISP, RSP and ESP 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.

Employee Share Investment PlanFrom December 2001 the BT Group Employee Share Investment Plan (ESIP) was in operation. The ESIP, which has been approved by the Inland Revenue, gives UK employees an opportunity to purchase
shares (partnership shares) monthly out of pre-tax salary up to a maximum value of £125 per month. During the 2003 financial year, 5.3 million shares (2002  0.7 million shares) were purchased by the Trustee of the ESIP on behalf of
12,092 employees at a total cost of £10.6 million (2002  £1.8 million). The free shares 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 2003, 2% of pre-tax profits, amounting to £36 million, was set aside for the ESIP and the phantom plan for employees outside the UK
(2002  £25 million). The allocation of this sum was subject to two performance targets, one of increasing earnings per share by 25% and the other of reducing customer dissatisfaction by 25%, both of which were achieved. The ESIP replaced
the BT Employee Share Ownership Scheme which operated for employee profit sharing until 2001.

Employee Stock Purchase PlanThe 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 (and in the case of employees who have joined the ESPP after the start of the offer, 85% of the market price on the date of joining, whichever is higher). At 15 May 2003, 69,164 shares have been issued under the BT
Group ESPP. As the ADS price has been less than the Base Option Price since the date of the quarterly purchase in July 2002 the ESPP has been suspended until the ADS price rises above the Base Option Price.

120BT Annual Report and Form 20-F 2003

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Notes to the financial statements

35. AuditorsThe auditors remuneration
  for the year ended 31 March 2003 for the group was £2,943,000 (2002 
  £2,702,000, 2001  £3,639,000). The audit fees payable to the
  companys auditors, PricewaterhouseCoopers LLP (and formerly PricewaterhouseCoopers),
  for the company and UK subsidiary undertakings statutory accounts were
  £1,910,000 (2002  £1,656,000, 2001  £2,100,000).
  The audit fee of the company was £31,000 (2002  £44,000).

The
  following fees for non-audit services were paid or are payable to the companys
  auditors, PricewaterhouseCoopers LLP, in the UK for the years ended 31 March
  2003, 31 March 2002 and 31 March 2001:

|                                                        | 2003  |  | 2002   |  | 2001   | 
|------------------------------------------------------- | ----- |  | ------ |  | ------ | 
|                                                        | £000  |  | £000   |  | £000   | 
|                                                        |      
|Rights issue, restructuring
      and demerger projects |      |  | 14,161 |  | 9,756  | 
|Regulatory audit and associated
      services          | 1,690 |  | 1,142  |  | 1,130  | 
|Tax services                                            | 1,817 |  | 1,075  |  | 1,539  | 
|Concert global venture
      related work               | 505   |  | 591    |  | 1,196  | 
|Systems advice                                          | 3,765 |  | 2,565  |  | 1,360  | 
|Corporate Finance advice                                | 265   |  | 982    |  | 730    | 
|Other                                                   | 938   |  | 2,167  |  | 512    | 
|                                                        |      
|Total                                                   | 8,980 |  | 22,683 |  | 16,223 | 
|                                                        |      

In addition, fees of £1,586,000 were paid or are payable to PricewaterhouseCoopers LLP for the year ended 31 March 2003 (2002  £2,540,000, 2001  £3,025,000) in
respect of audit and other services to the companys subsidiary undertakings outside the UK.

Total fees paid or payable to PricewaterhouseCoopers LLP for all services in the year ended 31 March 2003 were £12,476,000 (2002  £26,879,000,
2001  £21,348,000).

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 the external auditors unless there are clear efficiencies and value added benefits to the
company.

Under the terms of BTs main licence the group is required 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 systems advice 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 in the prior year and
are now completed.

36. Financial
  instruments and risk managementThe 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 trade debtors 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 are principally 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 limited to 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 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s fixed:floating interest rate profile therefore remains at 88:12 at 31
March 2003.

BT Annual Report and Form 20-F 2003121

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Notes to the financial statements

36. Financial instruments and risk managementcontinuedDuring the year ended 31 March
  2002, net debt was reduced from £27.9 billion to £13.7 billion mainly
  by the groups rights issue, disposal of its Yell business, its Japanese
  and Spanish interests, and the property sale and leaseback transaction. The
  proceeds of the rights issue and sale of assets were applied mainly in reducing
  short-term borrowings. The group repaid substantially all of its medium-term
  notes and commercial paper in that year. As a result of the demerger of the
  mmO2business including its European operations,
  the group swapped an additional €7
  billion into floating rate sterling debt. This, in conjunction with the novation
  of £1 billion fixed rate swaps to Telereal for the property transaction,
  enabled the group to maintain its fixed:floating ratio at approximately 88:12
  at 31 March 2002.

During the year ended 31 March 2001, net debt increased from £8.7 billion to £27.9 billion mainly as a result of the group making acquisitions of
businesses and third-generation mobile licences. This increase in debt was funded primarily by the issuance of long-term debt together with use of the groups medium-term note programme. As a result of this, together with the groups
interest rate swap activity, the borrowing profile changed during that year from one mainly at floating rates to one with a fixed: floating rate ratio of approximately 70:30. This change was in line with the groups intention to limit the
groups exposure to interest rate increases given the substantial size of the groups debt portfolio at the time. During the second quarter of the year ended 31 March 2001, it was not practical for the group to issue longer-term debt in
the global capital markets. The group therefore pre-hedged its desired fixed rate profile by transacting £9.3 billion of interest rate swaps with maturities ranging from five to 30 years at a weighted average fixed interest payable rate of
6.2%.

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 foreign currency 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 2003 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 of the derivatives which relate to interest and exchange rates.

(a) Interest rate risk managementThe 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 rate and 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 future borrowings, all of which have now been taken on.

At 31 March 2003, the group had outstanding interest rate swap agreements having a total notional principal amount of £5,170 million (2002 
£7,870 million).

(b) Foreign exchange risk managementCross 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 sale commitments denominated in foreign currencies (principally US dollars and the euro). The remaining terms of the currency swaps are
up to 30 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 2003, the group had outstanding foreign currency swap agreements and forward exchange contracts having a total notional principal amount of
£14,545 million (2002  £16,670 million).

The fair values of forward foreign currency contracts at 31 March 2003 were £673 million (2002  £864 million) for purchases of currency and
£1,041 million (2002  £1,582 million) for sales of currency. These fair 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 2003, the group had deferred unrealised gains of £2 million (2002  £1 million) and losses of £nil (2002  £13
million), based on dealer-quoted prices, from hedging purchase and sale commitments, and in addition had deferred realised net gains of £10 million (2002  £20 million). These are included 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.

122BT Annual Report and Form 20-F 2003

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Notes to the financial statements

36. Financial instruments and risk managementcontinued
(c) Concentrations of credit risk and credit exposures of financial instrumentsThe 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 the amount 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 rate of 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 £12 billion
outstanding on these instruments at 31 March 2003, BTs annual interest charge would increase by approximately £60 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 with Moodys was to be upgraded by one credit rating category the annual interest charge would be reduced by approximately £30 million.

(d) Fair value of financial instrumentsThe following table shows the carrying amounts and fair values of the groups financial instruments at 31 March 2003 and 2002. 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 other creditors 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 | 
|-------------------------------------------------------------------------- | ----------------------- |  | ---------- | 
|                                                                           |                         |  |            | 
|                                                                           | 2003                    |  | 2002       | 
|                                                                           | £m                      |  | £m         | 
|                                                                           |                        
|Non-derivatives:                                                           |                         |  |            | 
|Assets                                                                     |                         |  |            | 
|Cash
      at bank and in hand                                             | 91                      |  | 158        | 
|Short-term
      investmentsa                                              | 6,311                   |  | 4,590      | 
|Fixed
      asset investmentsb                                             | 317                     |  | 373        | 
|Liabilities                                                                |                         |  |            | 
|Short-term
      borrowings                                                | 4                       |  | 78         | 
|Long-term
      borrowings, excluding finance leasesc                      | 15,966                  |  | 18,750     | 
|Derivatives
      relating to investments and borrowings (net)d:           |                         |  |            | 
|Assets                                                                     | 10                      |  | 427        | 
|Liabilities                                                                |                        |  |           | 
|Derivative
      financial instruments held or issued to hedge the current |                         |  |            | 
|exposure
      on expected future transactions (net):                      |                         |  |            | 
|Assets                                                                     | 2                       |  |           | 
|Liabilities                                                                |                        |  |           | 
|                                                                           |                        

|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.                                                               | 

BT Annual Report and Form 20-F 2003123

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Notes to the financial statements

36. Financial
  instruments and risk managementcontinuedThe 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 liabilitiesAfter 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:

|          | 2003                                                                | 2002
|--------- | ------------------------------------------------------------------- | ----
|          |                                                                     |     
|Currency: | Fixed
        rate
        financial
        liabilities
        £m |     
|          |                                                                    
|Sterling  | 8,814                                                               |     
|US dollar |                                                                    |     
|Euro      |                                                                    |     
|          |                                                                    
|Total     | 8,814                                                               |     
|          |                                                                    
|          |                                                                     |     

|For the fixed
      rate financial liabilities, the average interest rates and the average periods
      for which the rates are fixed are: | 
|------------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                            | 
|                                                                                                                                            | 
|Currency:                                                                                                                                   | 
|                                                                                                                                            | 
|Sterling                                                                                                                                    | 
|US dollar                                                                                                                                   | 
|Euro                                                                                                                                        | 
|                                                                                                                                            | 
|Total                                                                                                                                       | 
|                                                                                                                                            | 

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 financial liabilities on which no
interest is paid are due to mature within one year of the balance sheet date.

The
  maturity profile of financial liabilities is as given in note 25.

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:

|          | 2003                                                     |  | 2002                                                        | 
|--------- | -------------------------------------------------------- |  | ----------------------------------------------------------- | 
|          |                                                          |  |                                                             | 
|Currency: | Fixed
        rate
      financial
      assets
      £m |  | Floating
        rate
      financial
      assets
      £m | 
|         
|         
|         
|          |                                                         
|Sterling  | 457                                                      |  | 5,974                                                       | 
|US dollar |                                                         |  |                                                            | 
|Euro      |                                                         |  |                                                            | 
|Other     |                                                         |  |                                                            | 
|          |                                                         
|Total     | 457                                                      |  | 5,974                                                       | 
|          |                                                         

The sterling fixed rate financial assets yield interest at a weighted average of 4.3% (2002  4.3%) for a weighted average period of 16 months (2002  39 months).

The floating rate financial assets bear interest at rates fixed in advance for periods up to one year by reference to LIBOR.

124BT Annual Report and Form 20-F 2003

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Notes to the financial statements

36. Financial
  instruments and risk managementcontinuedCurrency
  exposuresThe 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 group that 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:

|                                              | 2003              |  | 2002                       | 
|--------------------------------------------- | ----------------- |  | -------------------------- | 
|                                              |                   |  |                            | 
|                                              | Sterling
      £m |  | US
        dollar
      £m | 
|                                              |                  
|                                              |                  
|Functional currency of
      group operation: |                  
|Sterling                                      |                  |  |                           | 
|Euro                                          | 3                 |  | (6)                        | 
|Other                                         | 1                 |  | 3                          | 
|                                              |                  
|Total                                         | 4                 |  | (3)                        | 
|                                              |                  

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 2003, 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            | 2003  |  | 2002  | 
|----------------------------------------------------------------- | ----- |  | ----- | 
|                                                                  | £m    |  | £m    | 
|                                                                  |      
|Net gain included in profit
      and loss account                | 34    |  | 50    | 
|Fair value of financial
      assets held for trading at 31 March | 2,610 |  | 1,510 | 
|                                                                  |      

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 2003 did not
differ materially from the year end position.

HedgesGains 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 2003 and 31 March 2002 are as follows:

|                                                                                                               |       |  | 2003   |  |       |  | 2002   | 
|-------------------------------------------------------------------------------------------------------------- | ----- |  | ------ |  | ----- |  | ------ | 
|                                                                                                               |       |  |        | 
|                                                                                                               | Gains |  | Losses |  | Gains |  | Losses | 
|                                                                                                               | £m    |  | £m     |  | £m    |  | £m     | 
|                                                                                                               |      
|Gains and
      losses:                                                                                        |       |  |        |  |       |  |        | 
|recognised
      in the year but arising in previous yearsa                                                    | 16    |  | 27     |  | 27    |  | 7      | 
|unrecognised
      at the balance sheet date                                                                   | 1,088 |  | 878    |  | 99    |  | 772    | 
|carried
      forward in the year end balance sheet, pending recognition in the profit
      and loss accounta | 140   |  | 128    |  | 71    |  | 73     | 
|expected
      to be recognised in the following year:                                                         |       |  |        |  |       |  |        | 
|unrecognised
      at balance sheet date                                                                       | 16    |  | 1      |  | 22    |  | 61     | 
|carried
      forward in the year end balance sheet, pending recognition in the profit
      and loss accounta | 104   |  | 106    |  | 16    |  | 27     | 
|                                                                                                               |      

|a | Excluding
      gains and losses on hedges accounted for by adjusting the carrying amount
      of a fixed asset. | 
|- | ----------------------------------------------------------------------------------------------------------------- | 

During the year ended 31 March 2003, the group entered into two derivatives contracts as an investment in a UK listed equity, with limited net overall exposure. At 31 March 2003, the two
contracts had a net value of £nil, consisting of a futures purchase contract with a fair value of £68 million and a futures sales contract with a fair value of £68 million.

Unused committed lines of
  creditUnused committed lines of credit for short-term financing available at 31 March 2003 totalled approximately £575 million (2002  £2,100 million), which was in support of a
commercial paper programme or other borrowings. These lines of credit are available for up to one year.

BT Annual Report and Form 20-F 2003125

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Notes to the financial statements

|37.
      Company balance sheet                       | 2003
      £m |  | 2002a
      £m | 
|----------------------------------------------------- | ------------- |  | -------------- | 
|                                                      |              
|                                                      |              
|Fixed
      assets                                    |               |  |                | 
|Investment
      in subsidiary undertakinga           | 9,971         |  | 9,971          | 
|                                                      |              
|Total
      fixed assets                              | 9,971         |  | 9,971          | 
|Current
      assets                                  |               |  |                | 
|Debtorsb                                              | 368           |  | 174            | 
|Investmentsc                                          | 2             |  | 1              | 
|Cash at
      bank and in hand                        | 2             |  |               | 
|                                                      |              
|Total
      current assets                            | 372           |  | 175            | 
|Creditors:
      amounts falling due within one yeard | 370           |  | 173            | 
|                                                      |              
|Net
      current assets                              | 2             |  | 2              | 
|                                                      |              
|Total
      assets less current liabilities           | 9,973         |  | 9,973          | 
|                                                      |              
|Capital
      and reserves                            |               |  |                | 
|Called
      up share capitale                        | 434           |  | 434            | 
|Share premium
      accounte                          | 2             |  | 2              | 
|Profit
      and loss accounte                        | 9,537         |  | 9,537          | 
|                                                      |              
|Total
      equity shareholders funds                | 9,973         |  | 9,973          | 
|                                                      |              

The financial statements of the company on page 126 were approved by the board of directors on 21 May 2003 and were signed on its behalf by

|Sir
      Christopher Bland | Chairman                    
|--------------------------- | ----------------------------
|Ben
      Verwaayen         | Chief Executive             
|Ian Livingston              | Group Finance
      Director

|  |                                                                                                                                                                                                                              | 
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|a | During
      the year ended 31 March 2002, the company acquired BT Group Investments
      Limited (BTGI) for £9,971 million (see note 1). BTGI is the intermediate
      holding company of British Telecommunications plc. | 
|b | Debtors
      consists of amounts owed by subsidiary undertakings of £368 million
      (2002  £173 million) and other debtors of £nil (2002 
      £1 million).                                                           | 
|c | The
      company invested in a listed investment, with a book value and market value
      of £1 million (2002  £1 million), and short term loans
      to subsidiary undertakings of £1 million (2002  £nil).            | 
|d | Creditors
      consists of dividends payable of £366 million (2002  £173
      million), and other creditors of £4 million (2002  £nil).                                                                                  | 
|e | Capital
      and reserves are:                                                                                                                                                                                              | 

|                                                                | Share
      capitalf
      £m |  | Share
        premium
      accountg
      £m |  | Profit
        and loss
      account
      £m |  | Total
      £m | 
|--------------------------------------------------------------- | ----------------------------- |  | --------------------------------------------- |  | ---------------------------------------------- |  | -------------- | 
|                                                                |                              
|                                                                |                              
|                                                                |                              
|Balances
      on incorporation at 30 March 2001                |                              |  |                                              |  |                                               |  |               | 
|                                                                |                              
|Balances
      at 31 March 2001                                 |                              |  |                                              |  |                                               |  |               | 
|Issue of
      shares                                           | 9,971                         |  |                                              |  |                                               |  | 9,971          | 
|Capital
      reduction                                         | (9,537)                       |  |                                              |  | 9,537                                          |  |               | 
|Movement
      relating to BTs employee share ownership trust  |                              |  | 2                                             |  |                                               |  | 2              | 
|Profit
      for the financial yearh                            |                              |  |                                              |  | 173                                            |  | 173            | 
|Dividend
      (2.0p per ordinary share)                        |                              |  |                                              |  | (173)                                          |  | (173)          | 
|                                                                |                              
|Balances
      at 31 March 2002                                 | 434                           |  | 2                                             |  | 9,537                                          |  | 9,973          | 
|                                                                |                              
|Movement
      relating to BTs employee share ownership trusti |                              |  |                                              |  |                                               |  |               | 
|Profit
      for the financial yearh                            |                              |  |                                              |  | 560                                            |  | 560            | 
|Dividend
      (6.5p per ordinary share)                        |                              |  |                                              |  | (560)                                          |  | (560)          | 
|                                                                |                              
|Balances
      at 31 March 2003                                 | 434                           |  | 2                                             |  | 9,537                                          |  | 9,973          | 
|                                                                |                              

|f | The
      authorised share capital of the company throughout the year ended 31 March
      2003 and 31 March 2002 was £13,463 million representing 269,260,253,468
      ordinary shares of 5 pence each.                                                                                                                                              | 
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|  | The
      allotted, called up and fully paid ordinary share capital of the company
      at 31 March 2003 and 31 March 2002 was £434 million, representing
      8,670,849,554 ordinary shares of 5 pence each (2002  8,670,692,996).                                                                                                                 | 
|  | Of
      the authorised but unissued share capital at 31 March 2003, 25 million ordinary
      shares (2002  25 million) were reserved to meet options granted under
      employee share option schemes described in note 34.                                                                                                                        | 
|g | The
      share premium account, representing the premium on allotment of shares is
      not available for distribution.                                                                                                                                                                                                                              | 
|h | 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 £560 million (2002  £173 million). As permitted by
      Section 230 of the Companies Act 1985, no profit and loss account of the
      company is presented. | 
|i | Ordinary
      shares allotted during the year were as follows:                                                                                                                                                                                                                                                                                        | 

|                                              |         |  | Nominal
        value |  | Consideration | 
|--------------------------------------------- | ------- |  | --------------------- |  | ------------- | 
|                                              | Number  |  | £m                    |  | £m            | 
|                                              |        
|Savings related schemes                       | 3,944   |  |                      |  |              | 
|Other share option schemes                    | 152,614 |  |                      |  |              | 
|                                              |        
|Totals
      for the year ended 31 March 2003 | 156,558 |  |                      |  |              | 
|                                              |        

126BT Annual Report and Form 20-F 2003

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United States
  Generally Accepted Accounting Principles

|    | The
      United States Generally Accepted Accounting Principles are divided into
      the following sections:
|--- | ---------------------------------------------------------------------------------------------------------------
|128 | Differences
      between United Kingdom and United States generally accepted accounting principles            
|130 | Net
      income and shareholders equity reconciliation statements                                            
|131 | Minority
      interests                                                                                       
|131 | Accounting
      for share options                                                                             
|131 | Consolidated
      statements of cash flows                                                                    
|132 | Current
      asset investments                                                                                
|132 | Pension
      costs                                                                                            
|134 | US
      GAAP developments                                                                                     

BT Annual Report and Form 20-F 2003127

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United States
  Generally Accepted Accounting Principles

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 equivalent to 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, costs being charged against profits over employees working lives.
Under US GAAP, pension costs are determined in accordance with the requirements of US Statements of Financial 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 UK actuarial 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.

(d) Capitalisation of interest
Under UK GAAP, the group does not capitalise interest in its financial statements. 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. This included capitalisation of interest incurred on funding the 3G licences up to the date of the demerger. The amount of interest capitalised is determined by
reference to the average interest rates on outstanding borrowings. At 31 March 2003 under US GAAP, gross capitalised interest of £461 million (2002  £330 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 of the calculation of the gain or loss on divestment. All unamortised and pre-April 1998 goodwill will be brought back to the
profit and loss account on disposal. 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.

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. With effect from 1 April 2002 BT has adopted SFAS No. 142, and goodwill is no longer amortised but tested annually for impairment.
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, a goodwill impairment charge of £54 million has been recognised in the year ended 31 March 2003. Goodwill of £20 million amortised under UK GAAP is written back through the income statement.

(f) Mobile cellular telephone licences, software and other intangible assets
Certain intangible fixed assets recognised under US GAAP purchase accounting requirements are subsumed within goodwill under UK GAAP. Under US GAAP these separately identified intangible
assets are valued and amortised over their useful lives of 20 years.

(g) Financial instruments
Under UK GAAP, investments are held on the balance sheet at historical cost, and own shares held in trust for share schemes are recorded in fixed asset investments. Gains and losses on
instruments used for hedges are not

128BT Annual Report and Form 20-F 2003

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United States
  Generally Accepted Accounting Principles

I Differences
  between United Kingdom and United States generally accepted accounting principlescontinuedrecognised until the exposure being hedged is
  recognised. Under US GAAP, trading securities and available-for-sale securities
  are carried at market value with appropriate valuation adjustments recorded
  in profit and loss and shareholders equity, respectively.

Certain 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, under US GAAP, are carried at market value with valuation adjustments recorded in the profit and loss account.
The reassessment and purchase of derivatives in the year ended 31 March 2003 gave rise to an adjustment increasing net income by £610 million net of tax (2002  reduction £20 million). The net unrealised holding gain on
available-for-sale securities for the year ended 31 March 2003 was £22 million (2002  £271 million, 2001  £8 million). SFAS 133 became effective for BT on 1 April 2001 and the unamortised transitional adjustment of
£26 million net of tax remains in shareholders equity at 31 March 2003.

(h) Deferred gain
Under UK GAAP, assets contributed to a joint venture by the groups partners are measured at their net replacement cost. Any difference between the groups share of the joint
ventures resulting net assets and the net book value of assets contributed by the group to the joint venture, including certain accrued start up costs, is immediately reflected by adjusting the groups investment in the joint venture and
recording a deferred difference in shareholders equity. Under US GAAP, the assets contributed by all joint venture partners are carried at their historical net book value and any difference between the groups share of the joint
ventures resulting net assets and the net book value of assets contributed by the group to the joint venture is amortised over the life of the items giving rise to the difference.

(i) 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.

Under UK GAAP, shares held by employee share ownership trusts are recorded as fixed asset investments at cost less amounts written off. Under US GAAP, those
shares not fully vested are regarded as treasury stock and recorded at cost as a deduction from shareholders equity.

(j) 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 whom a
minority interest is recognised in their respective statements of profit and loss, such minority interest is reported as minority interest 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.

(k) 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 for on a full liability basis. Future tax benefits are recognised as deferred tax assets to the extent that their realisation is
more likely than not. As a result of changes in circumstances, previously recognised deferred tax liabilities have been released in the 2003 financial year. At 31 March 2003 total deferred tax liabilities were £2,806 million primarily in
respect of accelerated capital allowances and total deferred tax assets were £2,491 million, primarily in respect of pension obligations.

(l) 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 are declared.

(m) 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s fair value, being either market value or the sum of discounted future cash flows.

BT Annual Report
  and Form 20-F 2003129

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United States
  Generally Accepted Accounting Principles

I  
  Differences
  between United Kingdom and United States generally accepted accounting principlescontinued(n) Discontinued
  operationsUnder UK GAAP, the disposal of certain lines of business and joint ventures and associates are shown as discontinued activities. Under US GAAP, only the disposals of lines of business under
SFAS No. 144 would be reported as discontinued operations.

(o) Directories in progress
Under UK GAAP, the cost of classified advertising directories in progress deferred in stock represents direct fixed and variable costs as well as directly attributable overhead costs. Under US
GAAP, the deferred costs associated with directories in progress comprise only the incremental direct costs associated with selling and creating the directories. Directories in progress acquired in a business purchase are valued at replacement value
under UK GAAP and at retail value under US GAAP. Under UK GAAP, this difference is included in goodwill.

(p) 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 shown under this line item.

(q) 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 recognised. 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 affected properties.

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                                                                                            | 2003  |  | 2002    |  | 2001    | 
|----------------------------------------------------------------------------------------------------- | ----- |  | ------- |  | ------- | 
|Years ended
      31 March                                                                            | £m    |  | £m      |  | £m      | 
|                                                                                                      |      
|Net income (loss)
      applicable to shareholders under UK GAAP                                      | 2,686 |  | 995     |  | (1,870) | 
|Restatement
      for deferred tax under FRS 19                                                       |      |  |        |  | 60      | 
|                                                                                                      |      
|Net income (loss)
      applicable to shareholders under UK GAAP as previously reported               | 2,686 |  | 995     |  | (1,810) | 
|Adjustment for:                                                                                       |       |  |         |  |         | 
|Sale
      and leaseback of properties                                                                | (114) |  | (1,178) |  |        | 
|Pension
      costs                                                                                   | (177) |  | (106)   |  | (42)    | 
|Redundancy
      charges                                                                              |      |  | (140)   |  | (453)   | 
|Capitalisation
      of interest, net of related depreciation                                         | (17)  |  | 398     |  | 348     | 
|Goodwill                                                                                              | (35)  |  | 11      |  | (55)    | 
|Mobile
      licences, software and other intangible asset capitalisation and amortisation,
      net | (26)  |  | (32)    |  | (32)    | 
|Financial
      instruments                                                                           | 731   |  | 23      |  | (133)   | 
|Deferred
      gain                                                                                   |      |  | 313     |  | (71)    | 
|Impairment                                                                                            | (24)  |  | 147     |  |        | 
|Employee
      share plans                                                                            | (11)  |  | (8)     |  | (38)    | 
|Property
      rationalisation provision                                                              | 147   |  |        |  |        | 
|Directories
      in progress                                                                         |      |  |        |  | (82)    | 
|Disposals
      of businesses                                                                         | 130   |  | 254     |  |        | 
|Deferred
      taxation                                                                               | 976   |  | (1,320) |  | (64)    | 
|                                                                                                      |      
|                                                                                                      | 4,266 |  | (643)   |  | (2,432) | 
|Tax
      effect of US GAAP adjustments                                                               | (132) |  | (89)    |  | 75      | 
|                                                                                                      |      
|Net income
      (loss) as adjusted for US GAAP                                                       | 4,134 |  | (732)   |  | (2,357) | 
|                                                                                                      |      
|Basic earnings
      (loss) per American Depositary Share as adjusted for US GAAPa                    | £4.80 |  | £(0.88) |  | £(3.24) | 
|Diluted earnings
      (loss) per American Depositary Share as adjusted for US GAAPa                  | £4.77 |  | £(0.88) |  | £(3.24) | 
|                                                                                                      |      

|a   Each American Depositary
      Share is equivalent to ten ordinary shares.
|------------------------------------------------------------------------------

In the 2003 financial year all the adjustments relate to continuing operations (2002  £2,009 million reduction, 2001  £823 million reduction). Net income from
continuing operations was £4,134 million (2002  £1,680 million loss, 2001  £809 million).

The adjustments to net income relating to discontinued operations are £nil (2002  £282 million, 2001  £276 million).

130BT Annual Report and Form 20-F 2003

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United
  States Generally Accepted Accounting Principles

II Net income
  and shareholders equity reconciliation statementscontinued

|Shareholders
      equity |  | 2003 |  | 2002 | 
|-------------------------- |  | ---- |  | ---- | 
|At 31 March                |  | £m   |  | £m   | 
|                          

|Shareholders equity
      under UK GAAP                                                     | 2,642   |  | (358)   | 
|-------------------------------------------------------------------------------------------- | ------- |  | ------- | 
|Adjustment for:                                                                              |         |  |         | 
|Sale
        and leaseback of properties                                                     | (1,292) |  | (1,178) | 
|Pension
        costs                                                                        | (6,371) |  | (3,003) | 
|Capitalisation
        of interest, net of related depreciation                              | 225     |  | 250     | 
|Goodwill                                                                                     | 113     |  | 186     | 
|Mobile
        licences, software and other intangible asset capitalisation and amortisation |        |  | 482     | 
|Financial
        instruments                                                                | 86      |  | (592)   | 
|Impairment                                                                                   | 124     |  | 147     | 
|Disposals
        of businesses                                                              |        |  | 120     | 
|Property
        rationalisation provision                                                   | 147     |  |        | 
|Deferred
        taxation                                                                    | (63)    |  | (1,375) | 
|Dividend
        declared after the financial year end                                       | 366     |  | 173     | 
|                                                                                             |        
|                                                                                             | (4,023) |  | (5,148) | 
|Tax effect
      of US GAAP adjustments                                                      | 1,765   |  | 901     | 
|                                                                                             |        
|Shareholders
      equity as adjusted for US GAAP                                           | (2,258) |  | (4,247) | 
|                                                                                             |        

III Minority interests
Under US GAAP, the income to minority interests would have been reduced by £27 million (2002  £26 million, 2001  £122 million) after adjusting for goodwill
amortisation and accounting for associates and joint ventures. Net assets attributable to minority interests would have been unchanged (2002  £26 million higher) after adjusting for financial instruments.

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-Based Compensation. 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 is recognised. Had the group expensed recognised compensation cost for options granted 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 £4,127 million (2002  £792 million loss, 2001  £2,419 million loss), 47.9p (2002  9.5p loss, 2001  33.2p loss)
and 47.6p (2002  9.5p loss, 2001  33.2p loss), respectively. The SFAS No. 123 method of accounting does not apply to share options granted before 1 January 1995, and accordingly, the resulting pro forma compensation costs may not be
representative of that to be expected in future years. See note 34 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. 95 requires 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 UK GAAP, 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.

BT Annual Report and Form 20-F 2003131

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United States Generally Accepted Accounting Principles

V Consolidated statements of cash flowscontinued
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.

|                                                                                | 2003    |  | 2002    |  | 2001     | 
|------------------------------------------------------------------------------- | ------- |  | ------- |  | -------- | 
|                                                                                | £m      |  | £m      |  | £m       | 
|                                                                                |        
|Net cash provided by operating
      activities                                 | 3,395   |  | 1,455   |  | 5,515    | 
|Net cash provided by (used
      in) investing activities                       | 1,253   |  | 3,049   |  | (22,785) | 
|Net cash (used in) provided
      by financing activities                       | (2,852) |  | (5,611) |  | 18,311   | 
|                                                                                |        
|Net increase (decrease)
      in cash and cash equivalents                      | 1,796   |  | (1,107) |  | 1,041    | 
|Effect of exchange rate
      changes on cash                                   | 13      |  | (50)    |  | (15)     | 
|Cash and cash equivalents
      under US GAAP at beginning of year              | 1,124   |  | 2,281   |  | 1,255    | 
|                                                                                |        
|Cash and cash equivalents
      under US GAAP at end of year                    | 2,933   |  | 1,124   |  | 2,281    | 
|Short-term investments
      with original maturities of less than three months | (2,842) |  | (966)   |  | (1,869)  | 
|                                                                                |        
|Cash at bank and in
      hand under UK GAAP at end of year                     | 91      |  | 158     |  | 412      | 
|                                                                                |        

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, with unrealised 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 2003, the group held trading investments (as defined by US GAAP) with fair values totalling £935 million (2002  £1,260 million).
Held-to-maturity securities at 31 March 2002 and 2003 consisted of the following:

|                                                                                                                 | Amortised |  | Estimated        | 
|---------------------------------------------------------------------------------------------------------------- | --------- |  | ---------------- | 
|                                                                                                                 | cost      |  | fair value       | 
|                                                                                                                 | £m        |  | £m               | 
|                                                                                                                 |          
|Commercial paper,
      medium-term notes and other investments                                                  | 2,565     |  | 2,565            | 
|                                                                                                                 |          
|Total at
      31 March 2003                                                                                     | 2,565     |  | 2,565            | 
|                                                                                                                 |          
|Commercial paper,
      medium-term notes and other investments                                                  | 2,372     |  | 2,372            | 
|                                                                                                                 |          
|Total at 31
      March 2002                                                                                     | 2,372     |  | 2,372            | 
|                                                                                                                 |          
|                                                                                                                 |           |  |                  | 
|The
      contractual maturities of the held-to-maturity debt securities at 31 March
      2003 were as follows: |           |  |                 
|                                                                                                                 | Cost      |  | Fair
      value | 
|                                                                                                                 | £m        |  | £m               | 
|                                                                                                                 |          
|Maturing on
      or before 31 March 2004                                                                        | 1,663     |  | 1,663            | 
|Maturing after
      31 March 2004                                                                               | 902       |  | 902              | 
|                                                                                                                 |          
|Total at
      31 March 2003                                                                                     | 2,565     |  | 2,565            | 
|                                                                                                                 |          

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 6.9% (2002  6.5%, 2001
 6.25%). The components of the pension cost for the main pension scheme comprised:

|                                                                                   | 2003    |  | 2002    |  | 2001    | 
|---------------------------------------------------------------------------------- | ------- |  | ------- |  | ------- | 
|                                                                                   | £m      |  | £m      |  | £m      | 
|                                                                                   |        
|Service cost                                                                       | 453     |  | 564     |  | 580     | 
|Interest cost                                                                      | 1,707   |  | 1,739   |  | 1,673   | 
|Expected return on scheme
      assets                                             | (1,813) |  | (1,863) |  | (1,850) | 
|Amortisation of prior service
      costs                                          | 24      |  | 24      |  | 24      | 
|Amortisation of net obligation
      at date of limited application of SFAS No. 87 | 52      |  | 52      |  | 52      | 
|Recognised gains                                                                   | (22)    |  | (67)    |  | (133)   | 
|Additional cost of termination
      benefits                                      | 60      |  | 140     |  | 349     | 
|                                                                                   |        
|Pension cost for the
      year under US GAAP                                      | 461     |  | 589     |  | 695     | 
|                                                                                   |        

132BT Annual Report and Form 20-F 2003

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United States Generally Accepted Accounting Principles

VII Pension costscontinued
The information required to
  be disclosed in accordance with SFAS No. 132 concerning the funded status of
  the main scheme at 31 March 2002 and 31 March 2003, based on the valuations
  at 1 January 2002 and1 January
  2003, respectively, is given below.

|                                                                                 |         |  | 2003    | 
|-------------------------------------------------------------------------------- | ------- |  | ------- | 
|Minimum liability, intangible
      asset and other comprehensive income         |         |  | £m      | 
|                                                                                 |        
|Plan assets at fair value                                                        |         |  | 22,757  | 
|Accumulated benefit obligation                                                   |         |  | 28,551  | 
|                                                                                 |        
|Minimum liability                                                                |         |  | 5,794   | 
|Net amount recognised at
      end of year                                       |         |  | (2,497) | 
|                                                                                 |        
|Minimum additional liability                                                     |         |  | 3,297   | 
|Intangible asset as at
      31 March 2003:                                      |         |  |         | 
|Unrecognised net transition
      obligation                                     |         |  | (2)     | 
|Unrecognised prior service
      cost                                            |         |  | (103)   | 
|                                                                                 |        
|Accumulated other comprehensive
      income                                     |         |  | 3,192   | 
|                                                                                 |        
|                                                                                 |         |  |         | 
|Changes
      in benefit obligation                                              | 2003    |  | 2002    | 
|                                                                                 | £m      |  | £m      | 
|                                                                                 |        
|Benefit obligation at the
      beginning of the year                            | 29,097  |  | 31,184  | 
|Service cost                                                                     | 453     |  | 564     | 
|Interest cost                                                                    | 1,707   |  | 1,739   | 
|Employees contributions                                                         | 156     |  | 180     | 
|Additional cost of termination
      benefits                                    | 60      |  | 140     | 
|Actuarial movement                                                               | 152     |  | (3,428) | 
|Other changes                                                                    | 13      |  | 27      | 
|Benefits paid or payable                                                         | (1,361) |  | (1,309) | 
|                                                                                 |        
|Benefit obligation at
      the end of the year                                  | 30,277  |  | 29,097  | 
|                                                                                 |        
|                                                                                 |         |  |         | 
|Changes
      in scheme assets                                                   | 2003    |  | 2002    | 
|                                                                                 | £m      |  | £m      | 
|                                                                                 |        
|Fair value of scheme assets
      at the beginning of the year                   | 26,597  |  | 29,031  | 
|Actual return on scheme
      assets                                             | (3,255) |  | (2,355) | 
|Employers contributionsa                                                        | 607     |  | 1,023   | 
|Employees contributions                                                         | 156     |  | 180     | 
|Other changes                                                                    | 13      |  | 27      | 
|Benefits paid or payable                                                         | (1,361) |  | (1,309) | 
|                                                                                 |        
|Fair value of scheme
      assets at the end of the year                         | 22,757  |  | 26,597  | 
|                                                                                 |        
|                                                                                 |         |  |         | 
|Funded
      status under US GAAP                                                | 2003    |  | 2002    | 
|                                                                                 | £m      |  | £m      | 
|                                                                                 |        
|                                                                                 |         |  |         | 
|Projected benefit obligation
      in excess of scheme assets                    | (7,520) |  | (2,500) | 
|Unrecognised net obligation
      at date of initial application of SFAS No. 87b | 2       |  | 54      | 
|Unrecognised prior service
      costsc                                          | 103     |  | 127     | 
|Other unrecognised net
      actuarial (gains) losses                            | 4,918   |  | (324)   | 
|                                                                                 |        
|Net amount recognised
      under US GAAP                                        | (2,497) |  | (2,643) | 
|                                                                                 |        

|a | The
      employers contributions for the year ended 31 March 2003 includes
      special contributions of £200 million paid on 11 December 2002 and
      £129 million paid on 12 December 2002 (2002  £300 million
      paid on 21 November 2001 and £300 million paid on 4 December 2001).
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|b | The
      unrecognised net obligation at the date of initial application is being
      amortised over 15 years from 1 April 1988.                                                                                                                                                              
|c | 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.                                                                                           

The benefit obligation for the main pension scheme was determined using the following assumptions at 1 January 2002 and 1 January 2003:

|                                       | 2003              |  | 2002      | 
|-------------------------------------- | ----------------- |  | --------- | 
|                                       | per
        annum |  | per annum | 
|                                       | %                 |  | %         | 
|                                       |                  
|Discount rate                          | 5.6               |  | 6.0       | 
|Rate of future
      pay increases     | 3.8               |  | 4.0       | 
|Rate of future
      pension increases | 2.25              |  | 2.5       | 
|                                       |                  

The accumulated benefit obligation at 31 March 2003 was £28,551 million (2002  £27,127 million).

BT Annual Report and Form 20-F 2003133

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United States Generally Accepted Accounting Principles

VIII US GAAP developments
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143 Accounting for Asset Retirement Obligations which is applicable to financial years
commencing after 15 June 2002. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognised in the period in which it is incurred if it is possible to make a reasonable estimate of the fair value. The
associated asset retirement costs are required to be capitalised as part of the carrying value of the long lived asset. The adoption of SFAS No. 143 is not expected to have a material impact on the consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities which is applicable to
disposals initialised after 31 December 2002. The Statement requires costs associated with exit or disposal activities to be recognised when the costs are incurred rather than at the date of the commitment to an exit or disposal plan. Accordingly,
we have reflected the impact of SFAS No. 146 in the 2003 financial year. SFAS No. 146 may apply to future activities which are not currently envisaged and accordingly it is not possible to assess the impact of SFAS No. 146 on any such activities at
this time.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock Based Compensation  Transition and Disclosure  an amendment of FASB
Statement No. 123 which is applicable to financial years beginning after 15 December 2002. The Statement permits two additional transition methods for an entity voluntarily adopting fair value based accounting for stock based
compensation. It also amends the disclosure requirements to require prominent disclosure about the effects on reported net income of an entitys accounting policy decisions with respect to stock based employee compensation. This Statement does
not have a significant impact on the consolidated financial statements as SFAS No. 123 continues to be satisfied for disclosure purposes only.

In April 2003 the FASB issued SFAS No 149 Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement
amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. BT is currently evaluating the impact of this change.

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 requires that certain guarantees must be recognised at fair value. FIN 45 also requires disclosure of detailed information about each guarantee or group of guarantees. The disclosure
requirements are effective for financial statements ending after 15 December 2002. The recognition and measurement provisions of FIN 45 are applicable to guarantees issued or modified after 31 December 2002. FIN 45 could have an impact on the future
results of BT depending on guarantees issued; however, at this time the adoption of this statement did not have a material impact on BTs consolidated financial statements.

In January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities  an Interpretation of Accounting Research Bulletin (ARB)
No. 51. FIN 46 requires the primary beneficiary to consolidate a variable interest entity (VIE) if it has a variable interest that will absorb a majority of the entitys expected losses if they occur, receive a majority of the
entitys expected residual returns if they occur, or both. FIN 46 applies immediately to VIEs created after 31 January 2003, and to VIEs in which the entity obtains an interest after that date. This statement is not expected to have a material
impact on BTs consolidated financial statements.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus on EITF 00-21, Revenue Arrangements with Multiple
Deliverables. The consensus addresses how to account for arrangements that may involve multiple revenue-generating activities, for example, the delivery or performance of multiple products, services, and/or rights to use assets. In
applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a package, and the consideration will be measured and allocated to the separate units based on their relative fair values.
This consensus guidance will be applicable to agreements entered into after 15 June 2003. BT is currently evaluating the impact of this new pronouncement.

In January 2003, the EITF reached a consensus on EITF 02-18, Accounting for Subsequent Investments in an Investee after Suspension of Equity Method
Loss Recognition. This consensus states that if the additional investment, in whole or in part, represents the funding of prior losses, the investor should recognise previously suspended losses. When appropriate to recognise prior
losses, the amount recognised would be limited to the amount of the additional investment determined to represent the funding of prior losses. The consensus is effective for additional investments made after 5 February 2003. This consensus is not
expected to have a material impact on BTs consolidated financial statements.

134BT Annual Report and Form 20-F 2003

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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 2003, all of which were unlisted
unless otherwise stated, were as follows:

|                                                      | Activity                                                                      | Group interest
      in allotted
        capitalb | Country
      of operationsc
|----------------------------------------------------- | ----------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------
|                                                     
|Subsidiary
      undertakings                         |                                                                               |                                                   |                             
|British Telecommunications
      plcd                 | Communication
        related services and products provider                  | 100% ordinary                                     | UK                          
|                                                     
|BT Pty Limitedde                                      | Communication
        related services and products provider                  | 100% ordinary                                     | Australia                   
|                                                      |                                                                               | 100% preference                                   |                             
|                                                     
|BT Cableships
      Limitedd                          | Cableship
        owner                                                       | 100% ordinary                                     | International               
|                                                     
|BT Communications
      Management Limitedd           | Telecommunication
        services provider                                   | 100% ordinary                                     | UK                          
|                                                     
|BT (Hong Kong)
      Limitedd                         | Communication
        related services and products provider                  | 100% ordinary                                     | Hong Kong                   
|                                                      |                                                                               | 100% preference                                   |                             
|                                                     
|BT Fleet Limitedd                                     | Fleet management
        company                                              | 100% ordinary                                     | UK                          
|                                                     
|BT Global Networks
      Limitedd                     | International
        telecommunication network systems provider              | 100% ordinary                                     | UK                          
|                                                     
|BT Holdings
      Limitedd                            | Investment
        holding company                                            | 100% ordinary                                     | UK                          
|                                                     
|BT Ignite GmbH
      & Co OHGd                        | Communication
        related services and products provider                  | 100% ordinary                                     | Germany                     
|                                                     
|BT Nederland
      NVdf                               | Communication
        related services and products provider                  | 100% ordinary                                     | Netherlands                 
|                                                     
|BT Americas
      Inc.dg                              | Communication
        related services and products provider                  | 100% common                                       | USA                         
|                                                     
|BT Property
      Limitedd                            | Property
        holding company                                              | 100% ordinary                                     | UK                          
|                                                     
|BT Subsea Cables
      Limitedd                       | Cable maintenance
        and repair                                          | 100% ordinary                                     | UK                          
|                                                     
|BT Ignite Espana
      SAUd                           | Communication
        related services and products provider                  | 100% ordinary                                     | Spain                       
|                                                     
|BT Limiteddh                                          | International
        telecommunication network systems provider              | 100% ordinary                                     | International               
|                                                     
|BT US Investments
      LLCd                          | Investment
        holding company                                            | 100% ordinary                                     | USA                         
|                                                     
|Communication
      Networking Services (UK)d         | Communication
        related services and products provider                  | 100% ordinary                                     | UK                          
|                                                     
|Communications
      Global Network Services Limitedd | Communication
        related services and products provider                  | 100% ordinary                                     | Bermuda                     
|                                                     
|Esat Telecommunications
      Limitedd                | Telecommunication
        services provider                                   | 100% ordinary                                     | Ireland                     
|                                                     
|Farland BVcd                                          | Provider
        of trans-border fibre network across BTs partners in Europe | 100% ordinary                                     | International               
|                                                     
|Syntegra Limitedd                                     | Systems
        integration and application development                       | 100% ordinary                                     | UK                          
|                                                     
|Syntegra Groep
      BVd                              | Systems
        integration and application development                       | 100% common                                       | Netherlands                 
|                                                     
|Syntegra SAd                                          | 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.                                               
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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 May 2003,
      BT Australasia Pty Limited changed its name to BT Pty Limited.                                                                                                                                                                                                                         
|f | In December
      2002 BT Ignite Nederland BV was merged into BT Ignite Nederland Holding
      NV. In the same month BT Ignite Nederland Holding NV changed its name to
      BT Nederland NV.                                                                                                           
|g | In December
      2002, BT North Americas Inc. changed its name to BT Americas Inc.                                                                                                                                                                                                                       
|h | In April 2003,
      BT (Worldwide) Limited changed its name to BT Limited.                                                                                                                                                                                                                               

|                               |                                                                |            | Share
      capital    |                                     
|------------------------------ | -------------------------------------------------------------- | ---------- | ---------------------- | ------------------------------------
|                               |                                                                |            |                       
|b = billionsm
      = millions | Activity                                                       | Issueda    | Percentage
      owned | Country
        of
      operationsb
|                              
|Joint
      Ventures           |                                                                |            |                        |                                     
|Albacom SpA                    | Communication
        related services and products provider   | €417m      | 45.5%c                 | Italy                               
|                              
|LG Telecom                     | Mobile
        cellular telephone system provider and operator | Won 1,386b | 16.59%                 | 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 | All overseas
      companies are incorporated in their country of operations.                                                                                  
|c | Held through
      a BT subsidiary, 50.5% BT owned. Economic holding is 23%.                                                                                   

BT Annual Report and Form 20-F 2003135

Table
  of contents

---



Quarterly
  analysis of turnover and profit

|Year
      ended 31 March 2003                                                            |          | Unaudited |      |       |     
|----------------------------------------------------------------------------------------- | -------- | --------- | ---- | ----- | ----
|                                                                                          |          |           |      |       |     
|                                                                                          | Quarters | 1st       |      | 2nd   |     
|Continuing
      and total activities                                                     |          | £m        |      | £m    |     
|                                                                                          |         
|Total
      turnover                                                                      |          | 4,998     |      | 5,094 |     
|Groups
      share of associates and joint ventures turnover                           |          | (411)     |      | (433) |     
|                                                                                          |         
|Group
      turnover                                                                      |          | 4,587     |      | 4,661 |     
|Other operating
      income                                                              |          | 52        |      | 44    |     
|                                                                                          |         
|Group
      operating profit                                                              | 562      |           | 726  |       | 555 
|Groups
      share of operating profit of associates and joint ventures                  | 49       |           | 66   |       | 197 
|                                                                                          |         
|Total
      operating profit                                                              | 611      |           | 792  |       | 752 
|Profit
      (loss) on sale of fixed asset investments and group undertakings             | 70       |           | (4)  |       | 99  
|Profit
      on sale of property fixed assets                                             | 3        |           | 3    |       | 1   
|Amounts written
      off investments                                                     |          |          |      | (7)   |     
|Net interest
      payable                                                                |          | (300)     |      | (295) |     
|                                                                                          |         
|Profit
      on ordinary activities before taxation                                       |          | 384       |      | 489   |     
|Tax on profit
      on ordinary activities                                                |          | (107)     |      | (165) |     
|                                                                                          |         
|Profit
      on ordinary activities after taxation                                        |          | 277       |      | 324   |     
|Minority interests                                                                        |          | (2)       |      | (9)   |     
|                                                                                          |         
|Profit
      for the financial period                                                     |          | 275       |      | 315   |     
|                                                                                          |         
|Basic earnings
      per share                                                            |          | 3.2p      |      | 3.7p  |     
|Diluted earnings
      per share                                                          |          | 3.2p      |      | 3.6p  |     
|                                                                                          |         
|Profit
      before goodwill amortisation, exceptional items and taxation                 | 322      |           | 496  |       | 521 
|Basic
      earnings per share before goodwill amortisation and exceptional
      items   | 2.5p     |           | 3.7p |       | 4.1p
|Diluted
      earnings per share before goodwill amortisation and exceptional
      items | 2.5p     |           | 3.7p |       | 4.1p
|                                                                                          |         

136BT Annual Report and Form 20-F 2003

Table
  of contents

---



Quarterly analysis of turnover and profit

|Year
      ended 31 March 2002                                                            |          | Unaudited |       |         |      
|----------------------------------------------------------------------------------------- | -------- | --------- | ----- | ------- | -----
|                                                                                          |          |           |       |         |      
|                                                                                          | Quarters | 1st       |       | 2nd     |      
|Continuing
      activities                                                               |          | £m        |       | £m      |      
|                                                                                          |         
|Total
      turnover                                                                      |          | 5,434     |       | 5,487   |      
|Groups share of associates
      and joint ventures turnover                           |          | (1,101)   |       | (1,087) |      
|Trading between group and
      principal joint venture                                   |          | 165       |       | 157     |      
|                                                                                          |         
|Group
      turnover                                                                      |          | 4,498     |       | 4,557   |      
|Other operating income                                                                    |          | 93        |       | 74      |      
|                                                                                          |         
|Group
      operating profit (loss)                                                       | 650      |           | 534   |         | 693  
|Groups
      share of operating loss of associates and joint ventures                    | (70)     |           | (816) |         | (174)
|                                                                                          |         
|Total
      operating profit (loss)                                                       | 580      |           | (282) |         | 519  
|Profit
      (loss) on sale of fixed asset investments and group undertakings             | 127      |           | 2     |         | (165)
|Profit
      on sale of property fixed assets                                             | 5        |           | 7     |         | 1,072
|Amounts written off investments                                                           |          |          |       | (535)   |      
|Net interest payable                                                                      |          | (446)     |       | (352)   |      
|                                                                                          |         
|Profit
      (loss) on ordinary activities before taxation                                |          | 266       |       | (1,160) |      
|Tax on profit (loss) on
      ordinary activities                                         |          | (102)     |       | (117)   |      
|                                                                                          |         
|Profit
      (loss) on ordinary activities after taxation                                 |          | 164       |       | (1,277) |      
|Minority interests                                                                        |          |          |       | (1)     |      
|                                                                                          |         
|Profit
      (loss) for the financial period                                              |          | 164       |       | (1,278) |      
|                                                                                          |         
|Basic earnings (loss) per
      share                                                     |          | 2.2p      |       | (15.0)p |      
|Diluted earnings (loss)
      per share                                                   |          | 2.2p      |       | (15.0)p |      
|                                                                                          |         
|Profit
      before goodwill amortisation, exceptional items and taxation                 | 200      |           | 321   |         | 381  
|Basic
      earnings per share before goodwill amortisation and exceptional items         | 1.3p     |           | 2.4p  |         | 2.6p 
|Diluted
      earnings per share before goodwill amortisation and exceptional items       | 1.2p     |           | 2.4p  |         | 2.6p 
|                                                                                          |         
|                                                                                          |          |           |       |         |      
|Year
      ended 31 March 2002                                                            |          | Unaudited |       |         |      
|                                                                                          |          |           |       |         |      
|                                                                                          | Quarters | 1st       |       | 2nd     |      
|Total
      Group                                                                         |          | £m        |       | £m      |      
|                                                                                          |         
|Total
      turnover                                                                      |          | 7,054     |       | 6,261   |      
|Groups share of associates
      and joint ventures turnover                           |          | (1,765)   |       | (1,114) |      
|Trading between group and
      principal joint venture                                   |          | 165       |       | 157     |      
|                                                                                          |         
|Group
      turnover                                                                      |          | 5,454     |       | 5,304   |      
|Other operating income                                                                    |          | 96        |       | 72      |      
|                                                                                          |         
|Group
      operating profit (loss)                                                       | 500      |           | 344   |         | 600  
|Groups
      share of operating loss of associates and joint ventures                    | (10)     |           | (814) |         | (174)
|                                                                                          |         
|Total
      operating profit (loss)                                                       | 490      |           | (470) |         | 426  
|Profit
      on sale of fixed assets investments and group undertakings                   | 4,484    |           | 11    |         | (163)
|Profit
      on sale of property fixed assets                                             | 5        |           | 7     |         | 1,072
|Amounts written off investments                                                           |          |          |       | (535)   |      
|Net interest payable                                                                      |          | (474)     |       | (362)   |      
|                                                                                          |         
|Profit
      (loss) on ordinary activities before taxation                                |          | 4,505     |       | (1,349) |      
|Tax on profit (loss) on
      ordinary activities                                         |          | (145)     |       | (127)   |      
|                                                                                          |         
|Profit
      (loss) on ordinary activities after taxation                                 |          | 4,360     |       | (1,476) |      
|Minority interests                                                                        |          | (13)      |       | (1)     |      
|                                                                                          |         
|Profit
      (loss) for the financial period                                              |          | 4,347     |       | (1,477) |      
|                                                                                          |         
|Basic earnings (loss) per
      share                                                     |          | 57.9p     |       | (17.3)p |      
|Diluted earnings (loss)
      per share                                                   |          | 57.4p     |       | (17.3)p |      
|                                                                                          |         
|Profit
      before goodwill amortisation, exceptional items and taxation                 | 186      |           | 219   |         | 337  
|Basic
      earnings per share before goodwill amortisation and exceptional
      items   | 0.3p     |           | 1.1p  |         | 1.9p 
|Diluted
      earnings per share before goodwill amortisation and exceptional
      items | 0.3p     |           | 1.1p  |         | 1.8p 
|                                                                                          |         

BT Annual Report and Form 20-F 2003137

Table
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---



Financial statistics

|years ended
      31 March                                                                                               |      |  |      |  |        |  |        |  |        | 
|------------------------------------------------------------------------------------------------------------------------ | ---- |  | ---- |  | ------ |  | ------ |  | ------ | 
|                                                                                                                         |      |  |      |  |        |  |        |  |        | 
|                                                                                                                         | 1999 |  | 2000 |  | 2001   |  | 2002   |  | 2003   | 
|                                                                                                                         |     
|Financial
      ratios                                                                                                   |      |  |      |  |        |  |        |  |        | 
|Basic earnings
      per share on continuing activities before goodwill amortisation and exceptional
      items  pence | 30.3 |  | 29.5 |  | 19.3   |  | 8.8    |  | 14.2   | 
|Basic earnings
      (loss) per share on continuing activities  pence                                                   | 40.5 |  | 29.2 |  | 20.7   |  | (34.8) |  | 31.2   | 
|Basic earnings
      (loss) per share  pence                                                                            | 41.1 |  | 27.6 |  | (25.7) |  | 12.0   |  | 31.2   | 
|Return
      on capital employed %a                                                                                      | 19.2 |  | 18.2 |  | 14.9   |  | 6.6de  |  | 15.5de | 
|Interest
      coverb                                                                                                    | 12.2 |  | 8.8  |  | 2.6    |  | 0.6c   |  | 2.0c   | 
|                                                                                                                         |     

|a | 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
      where average daily balances are used in their place. | 
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | The
      number of times net interest payable is covered by total operating profit
      before goodwill amortisation.                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|c | Interest
      cover based on continuing activities before goodwill amortisation and exceptional
      items was 2.6 times (2002  1.9 times).                                                                                                                                                                                                                                                                                                                                                                                                                    | 
|d | Return
      on capital employed is based upon the continuing activities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 
|e | Return
      on capital employed on continuing activities before goodwill amortisation
      and exceptional items was 15.7%.                                                                                                                                                                                                                                                                                                                                                                                                                                     | 

|                                                        | 1999  |  | 2000  |  | 2001  |  | 2002  |  | 2003  | 
|------------------------------------------------------- | ----- |  | ----- |  | ----- |  | ----- |  | ----- | 
|                                                        | £m    |  | £m    |  | £m    |  | £m    |  | £m    | 
|                                                        |      
|Expenditure
      on research and development           |       |  |       |  |       |  |       |  |       | 
|Total expenditure                                       | 268   |  | 345   |  | 364   |  | 362   |  | 380   | 
|                                                        |      
|                                                        |       |  |       |  |       |  |       |  |       | 
|                                                        | 1999  |  | 2000  |  | 2001  |  | 2002  |  | 2003  | 
|                                                        | £m    |  | £m    |  | £m    |  | £m    |  | £m    | 
|                                                        |      
|Expenditure
      on tangible fixed assets              |       |  |       |  |       |  |       |  |       | 
|Plant and equipment                                     |       |  |       |  |       |  |       |  |       | 
|Transmission
      equipment                            | 1,070 |  | 1,239 |  | 1,655 |  | 1,373 |  | 1,277 | 
|Exchange
      equipment                                | 410   |  | 412   |  | 478   |  | 428   |  | 228   | 
|Other
      network equipment                           | 555   |  | 636   |  | 918   |  | 694   |  | 466   | 
|Computers
      and office equipment                    | 364   |  | 419   |  | 407   |  | 273   |  | 281   | 
|Motor
      vehicles and other                          | 227   |  | 254   |  | 231   |  | 189   |  | 162   | 
|Land and buildings                                      | 200   |  | 187   |  | 171   |  | 153   |  | 40    | 
|                                                        |      
|                                                        | 2,826 |  | 3,147 |  | 3,860 |  | 3,110 |  | 2,454 | 
|(Decrease) increase in
      engineering stores         | (15)  |  | 13    |  | (3)   |  | (10)  |  | (9)   | 
|                                                        |      
|Total
      continuing activities                       | 2,811 |  | 3,160 |  | 3,857 |  | 3,100 |  | 2,445 | 
|Total
      discontinued activities                     | 458   |  | 520   |  | 1,129 |  | 808   |  |      | 
|                                                        |      
|Total
      expenditure on tangible fixed assets        | 3,269 |  | 3,680 |  | 4,986 |  | 3,908 |  | 2,445 | 
|Decrease (increase) in
      creditors                  | (49)  |  | (112) |  | (230) |  | 161   |  | 135   | 
|                                                        |      
|Cash
      outflow on purchase of tangible fixed assets | 3,220 |  | 3,568 |  | 4,756 |  | 4,069 |  | 2,580 | 
|                                                        |      

Financial statistics have been restated where necessary to provide consistency with the presentation of the 2003 financial year figures.

138BT Annual Report and Form 20-F 2003

Table
  of contents

---



Operational
  statistics

|years ended
      31 March                                                       |        |  |        |  |        |  |        |  |        | 
|-------------------------------------------------------------------------------- | ------ |  | ------ |  | ------ |  | ------ |  | ------ | 
|                                                                                 |        |  |        |  |        |  |        |  |        | 
|                                                                                 | 1999   |  | 2000   |  | 2001   |  | 2002   |  | 2003   | 
|                                                                                 |       
|Call
      growth                                                                |        |  |        |  |        |  |        |  |        | 
|% growth in UK fixed-network
      call volumes (minutes) over the previous year | 6      |  | 12     |  | 18     |  | 19     |  | 13     | 
|                                                                                 |       
|                                                                                 |        |  |        |  |        |  |        |  |        | 
|Growth
      is estimated by reference to growth in absolute call minutes.       |        |  |        |  |        |  |       
|                                                                                 |        |  |        |  |        |  |        |  |        | 
|                                                                                 | 1999   |  | 2000   |  | 2001   |  | 2002   |  | 2003   | 
|                                                                                 |       
|UK exchange
      line connections                                               |        |  |        |  |        |  |        |  |        | 
|Business (000)                                                                  | 7,982  |  | 8,450  |  | 8,910  |  | 9,030  |  | 9,062  | 
|% growth over previous
      year                                                | 6.1    |  | 5.9    |  | 5.4    |  | 1.3    |  | 0.4    | 
|Residential (000)                                                               | 20,067 |  | 20,040 |  | 19,970 |  | 20,027 |  | 20,201 | 
|% growth over previous
      year                                                | (0.3)  |  | (0.1)  |  | (0.3)  |  | 0.3    |  | 0.9    | 
|Service providers (000)                                                         |       |  | 90     |  | 70     |  | 56     |  | 90     | 
|% growth over previous
      year                                                |       |  |       |  | (22.2) |  | (20.0) |  | 61.0   | 
|                                                                                 |       
|Total exchange line connections
      (000)                                     | 28,049 |  | 28,580 |  | 28,950 |  | 29,113 |  | 29,353 | 
|                                                                                 |       
|% growth over previous
      year                                                | 1.4    |  | 1.9    |  | 1.3    |  | 0.6    |  | 0.8    | 
|                                                                                 |       
|                                                                                 |        |  |        |  |        |  |        |  |        | 
|                                                                                 |        |  |        |  |        |  |        |  |        | 
|                                                                                 | 1999   |  | 2000   |  | 2001   |  | 2002   |  | 2003   | 
|                                                                                 |       
|People
      employed                                                            |        |  |        |  |        |  |        |  |        | 
|Continuing activities (000)                                                     | 115.0  |  | 120.8  |  | 116.8  |  | 108.6  |  | 104.7  | 
|Discontinued activities
      (000)                                             | 9.7    |  | 16.0   |  | 20.2   |  |       |  |       | 
|                                                                                 |       
|Total employees (000)                                                           | 124.7  |  | 136.8  |  | 137.0  |  | 108.6  |  | 104.7  | 
|                                                                                 |       

BT Annual Report and Form 20-F 2003139

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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. This section 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 142 of this
document.

If BTs activities are subject to significant price controls, its market share, competitive position and future profitability may be affectedMost 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. Further details on the regulatory framework in which BT operates can be found in Business Review  regulation, competition and
prices on page 18 of this document.

BT faces strong competition in UK fixed network servicesBT continues to have a significant market share in some aspects of UK fixed network services. In particular, in the 2003 financial year we estimate we had a market share of 73% of consumer
calls and 45% of business calls in the UK and approximately 81% of exchange lines in the UK were in the BT network as at 31 March 2003. Regulators have promoted competition in this area by allowing BTs competitors to site equipment in or
adjacent to its exchanges (local loop unbundling) and 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.
Reduction in BTs market share in the fixed network may lead to a fall in BTs turnover and an adverse effect on profitability. Unlike its competitors, BT continues to be obliged by the current regulatory regime to serve customers in the
United Kingdom, whether or not such provision of service is economic, and the two competitive measures described above may have the effect of accelerating the diversion of its more profitable existing customers without it being able to reduce its
costs commensurately. These changes in the regulatory environment and ensuing increased competition on its fixed network may cause adverse 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 successfullyBT operates in an industry with a recent history of fast technological changes. It expects that new products and technologies will 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 cannot predict the actual effect of these technological changes on its business or on its ability to provide
competitive services. For example, presently 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 in place 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. Impairment write-downs may be incurred and margins may decline if fixed costs cannot be reduced in line with falling turnover.

BT has targeted significant growth in new business areas, such as broadband technology. 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 these growth targets, with a consequential impact on future turnover and profitability.

BTs businesses may be adversely affected if their networks or systems experience any significant failures or interruptionsBT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 strategy designed to deal with such catastrophic events, including major terrorist action,
industrial action, extreme virus attack, hurricane or flooding, that may impact the ability to maintain an effective service to customers. Any such strategy can provide only reasonable and not absolute assurance against material loss and there can
be no assurance that material adverse events will not occur.

Declining investment returns may result in the funding cost of the defined benefit pension scheme becoming a significant burden on the financial resources of BTThe 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, the schedule of contributions has been agreed with the scheme trustees under which BT will 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. The results of future scheme valuations will be impacted by the future investment market performance,
interest 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, the cash funding cost to BT may increase and may have a significant effect on the
financial resources of BT.

140BT Annual Report and Form 20-F 2003

Table
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---



Additional information for shareholders

|    | The
      additional information is divided into the following
      sections:    
|--- | ----------------------------------------------------------------------------------
|142 | Cautionary
      statement regarding forward-looking statements                   
|142 | Background                                                                        
|143 | Listings                                                                          
|143 | Share
      and ADS prices                                                        
|143 | Capital
      gains tax (CGT)                                                     
|    | Rights
      issue                                                                
|    | Demerger
      of mmO2                                                            
|144 | Analysis
      of shareholdings                                                   
|144 | Dividends                                                                         
|145 | Dividend
      mandate                                                            
|145 | Dividend
      investment plan                                                    
|145 | Global
      Invest Direct                                                        
|146 | Total
      shareholder return                                                    
|146 | Results
      announcements                                                       
|146 | Individual
      savings accounts (ISAs)                                          
|146 | ShareGift                                                                         
|146 | Unclaimed
      Assets Register                                                   
|147 | Exchange
      rates                                                              
|147 | Memorandum
      and Articles of Association                                      
|    | Memorandum                                                                        
|    | Articles                                                                          
|150 | Material
      contracts                                                          
|    | Airtel                                                                            
|    | Yell                                                                              
|    | Demerger
      agreement                                                          
|    | Separation
      agreement                                                        
|    | Property
      sale and leaseback                                                 
|    | Concert
      Unwind Agreement                                                    
|    | Cegetel                                                                           
|152 | Taxation
      (US Holders)                                                       
|    | Taxation
      of dividends                                                       
|    | Taxation
      of capital gains                                                   
|    | US
      information reporting and backup withholding                             
|    | UK
      stamp duty                                                               
|    | UK
      inheritance and gift taxes in connection with ordinary shares and/or ADSs
|154 | Exchange
      controls and other limitations affecting security holders          
|154 | Documents
      on display                                                        
|154 | Publications                                                                      
|155 | Electronic
      communication                                                    
|155 | Shareholder
      communication                                                   
|    | Private
      shareholders                                                        
|    | Institutional
      investors and analysts                                        

BT Annual Report and Form 20-F 2003141

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Additional information for shareholders

Cautionary statement regarding forward-looking statementsCertain 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 amounts not yet determinable. These statements include, without limitation, those concerning: BTs strategy and its ability to
achieve it; BTs debt reduction plans; 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; BTs network development and expansion plans; plans for 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.

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 or implied 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 operating areas, 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 need to 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 of entry 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; to the extent that BT chooses to sell assets or minority interests in its subsidiaries, prevailing market levels for such sales; 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, inRisk factors.

BackgroundTelephone services in almost all of the UK were, until 1981, provided by the Post Office, which was a government department until 1969 when it was established as a state public corporation. In
1981, the postal and telecommunications services of the Post Office became the responsibility of two separate corporations, with British Telecommunications  under the trading name of British Telecom  taking over the telecommunications
business.

As a result of theTelecommunications Act 1984, British Telecommunications plc was incorporated in England and Wales under the Companies Acts 1948 to 1981 on 1 April 1984 as a public limited company wholly owned by the UK Government. The transfer of
property, rights and liabilities of the corporation to British Telecommunications plc was made on 6 August 1984.

In November 1984, the UK Government offered 3,012 million ordinary shares (50.2% of the total issued ordinary shares) to the public. The share sale was fully
subscribed. British Telecom shares made their debut on the London Stock Exchange on 3 December 1984. From April 1991, British Telecommunications plc traded as BT.

In December 1991, the UK Government sold over half its remaining shares in BT, retaining a holding of about 22%. It sold this residual holding in July 1993.
Subsequently, in September 1997, the UK Government redeemed at par a special rights redeemable preference share to which certain special rights attached.

In 1985, Cellnet was launched as a joint venture between British Telecom and Securicor, which held 40%
of the company. BT acquired full control of Cellnet (now O2UK  part of mmO2 plc) by acquiring
Securicors minority holding in November 1999.

In January 2000, BT and AT&T established Concert as a 50/50 joint venture serving customers around the world and transferred their trans-border assets and
operations to Concert. On 1 April 2002, BT completed the unwind of Concert, which involved the return of Concerts businesses, customer accounts and networks to the two parent companies.

BT
  Group was formed when the mmO2business, comprising what
  had been BTs mobile activities in the UK, the Netherlands, Germany and
  the Republic of Ireland, was demerged on 19 November 2001. British Telecommunications
  plcs shares ceased trading on the London, New York and Tokyo stock exchanges
  on 16 November 2001. BT Group plcs shares commenced trading on the London
  and New York stock exchanges on 19 November 2001.

BT
  Group was incorporated in England and Wales on 30 March 2001 as Newgate Telecommunications
  Limited with the registered number 4190816. The company changed its name to
  BT Group plc on 11 September

142BT Annual Report and Form 20-F 2003

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2001. Following the demerger
  of mmO2 in November 2001, the continuing activities of BT were transferred
  to BT Group.

BT
  Groups registered office address is 81 Newgate Street, London EC1A 7AJ.

ListingsThe 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 the New 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 BTY.

|Share
      and ADS pricesa        | Pence
      perordinary share |  | US$
      perADS | 
|---------------------------------- | ----------------------------- |  | ---------------- | 
|                                   |                               |  |                  | 
|                                   | Highpence                     |  | Lowpence         | 
|                                   |                              
|Year
      ended 31 March          |                               |  |                  | 
|1999                               | 784.27                        |  | 441.74           | 
|2000                               | 1,060.88                      |  | 623.35           | 
|2001                               | 821.78                        |  | 328.85           | 
|2002                               | 420.71                        |  | 215.75           | 
|2003                               | 286.25                        |  | 141.00           | 
|                                   |                              
|Year
      ended 31 March 2002     |                               |  |                  | 
|1 April  30 June
      2001       | 420.71                        |  | 320.17           | 
|1 July  30 September
      2001   | 389.08                        |  | 253.01           | 
|1 October  31 December
      2001 | 292.84                        |  | 242.27           | 
|1 January  31 March
      2002    | 285.00                        |  | 215.75           | 
|                                   |                              
|Year
      ended 31 March 2003     |                               |  |                  | 
|1 April  30 June
      2002       | 286.25                        |  | 241.00           | 
|1 July  30 September
      2002   | 255.00                        |  | 154.00           | 
|1 October  31 December
      2002 | 219.00                        |  | 154.00           | 
|1 January  31 March
      2003    | 209.00                        |  | 141.00           | 
|                                   |                              
|Month                              |                               |  |                  | 
|November 2002                      | 219.00                        |  | 181.00           | 
|December 2002                      | 212.50                        |  | 186.50           | 
|January 2003                       | 209.00                        |  | 167.25           | 
|February 2003                      | 184.25                        |  | 152.50           | 
|March 2003                         | 177.00                        |  | 141.00           | 
|April 2003                         | 186.00                        |  | 162.00           | 
|May 2003                           | 189.50                        |  | 175.00           | 
|                                   |                              

|aThe 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 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 mmO2 in November 2001 adjusted the value for
  capital gains tax purposes of BT shares.

Rights issueAn 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 155).

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Demerger ofmmO2 capital gains tax calculationThe confirmed official opening
  prices for BT Group and mmO2 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 mmO2. Accordingly, for CGT calculations, the base cost of your
  BT Group shares and mmO2 shares is calculated by multiplying the
  acquisition cost of your BT shareholding by 77.544% and 22.456%, respectively.

|Analysis
      of shareholdings  | Ordinary
      sharesof 5p each | 
|-------------------------------- | ------------------------------- | 
|                                
|                                 |                                 | 
|Range                            | Number
      ofholdings         | 
|                                 |                                
|1 
      399                    | 676,885                         | 
|400 
      799                  | 486,283                         | 
|800 
      1,599                | 301,526                         | 
|1,600 
      9,999              | 182,742                         | 
|10,000
       99,999            | 5,281                           | 
|100,000
       999,999          | 1,153                           | 
|1,000,000
       4,999,999      | 424                             | 
|5,000,000
      and abovea,b,c,d | 236                             | 
|                                 |                                
|Total                            | 1,654,530                       | 
|                                 |                                

|a | 32
      million shares were held in trust by Ilford Trustees (Jersey) Limited for
      allocation to employees under the employee share schemes.                                                                                                                                                                                                                                                                    | 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|b | Under
      the BT Employee Share Ownership Scheme and the BT Group Employee Share Investment
      Plan, 15 million and 12 million shares respectively were held in trust on
      behalf of 115,757 and 89,529 participants respectively who were beneficially
      entitled to the shares. 137 million shares were held in the corporate nominee
      BT Group EasyShare on behalf of 122,628 beneficial owners. | 
|c | 185
      million shares were represented by ADSs. Analysis by size of holding is
      not available for this holding.                                                                                                                                                                                                                                                                                               | 
|d | 16
      million shares were held in trust by The Royal Bank of Scotland Trust Company
      (Jersey) Limited for allocation to employees under the employee share schemes.                                                                                                                                                                                                                                           | 
|e | 14.5%
      of the shares were in 1,618,274 individual holdings, of which 142,206 were
      joint holdings, and 85.5% of the shares were in 36,256 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 which may at a subsequent date result in a change in control of the company.

At 15 May 2003, there were 8,670,849,554 ordinary shares outstanding. At the same date, approximately 18.5 million ADSs (equivalent to 185.2 million ordinary
shares, or approximately 2.1% of the total number of ordinary shares outstanding on that date) were outstanding and were held by 2,346 record holders of ADRs. At 31 March 2003, there were 3,460 shareholders with a US address on the register of
shareholders.

DividendsSince 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 for the year ended 31 March 2002 was paid to shareholders.

A final dividend in respect of the year ended 31 March 2002, was paid on 9 September 2002 to shareholders on the register on 9 August 2002, and an interim
dividend in respect of the year ended 31 March 2003 was paid on 10 February 2003 to shareholders on the register on 31 December 2002.

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 on or after 6 April 1999 seeTaxation of
dividendsbelow. The dividends on the ADSs paid before 5 April 1999 include the associated UK tax credit available to certain beneficial owners who are resident in the United States or
Canada for tax purposes, but before deduction of UK withholding taxes. Dividends have been translated from pounds sterling into US dollars using exchange rates prevailing on the date the ordinary dividends were paid.

144BT Annual Report and Form 20-F 2003

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|                             |  | Per ordinary
        share |  | Per ADS |  | Per ADS | 
|---------------------------- |  | -------------------------- |  | ------- |  | ------- | 
|                             |  |                            |  |         |  |         | 
|                             |  | Interim                    |  | Final   |  | Total   | 
|Years ended
        31 March |  | pence                      |  | pence   |  | pence   | 
|                             | 
|1999                         |  | 8.10                       |  | 12.30   |  | 20.40   | 
|2000                         |  | 8.70                       |  | 13.20   |  | 21.90   | 
|2001                         |  | 8.70                       |  |        |  | 8.70    | 
|2002                         |  |                           |  | 2.00    |  | 2.00    | 
|2003                         |  | 2.25                       |  | 4.25    |  | 6.50    | 
|                             | 

|a | Qualifying
      holders of ADSs on record as of 8 August 2003 are entitled to receive the
      final dividend which will be paid on 15 September 2003, subject to approval
      at the annual general meeting. The US dollar amount of the final dividend
      of 42.5 pence per ADS to be paid to holders of ADSs will be based on the
      exchange rate in effect on 8 September 2003, 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
  mandateAny shareholder wishing dividends
  to be paid directly into a bank or building society account should contact the
  Registrar for a dividend mandate form. Dividends paid in this way will be paid
  through the Bankers Automated Clearing System (BACS). Alternatively, a form
  may be downloaded from the internet atwww.bt.com/investorcentre.

Dividend investment planThe 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 | 
|------------ | ----------------------- | ----------------------------- | 
|             |                        
|1999 final   | 20
      September 1999 | 970.1                         | 
|2000 interim | 14
      February 2000  | 991.5                         | 
|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                        | 
|             |                        

Global Invest
  DirectDetails 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
749 1687 (toll free within the USA) or +1 781 575 4328 (from outside the USA), or on written request to the ADR Depositary.

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Total
  shareholder returnTotal 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 last five years (as shown in the TSR chart below), BT initially performed very strongly, but, like many stocks in the telecoms, media and technology
(TMT) sector, suffered falls in its share price during the decline of the past three years. BTs TSR (as adjusted for the rights issue and demerger) over the last five years was negative 63% compared to a FTSE 100 TSR fall of negative 32%.
Substantially all of the five-year negative FTSE performance has occurred over the past year (negative 29%) whereas BTs TSR in the last 12 months was negative 43%.

In the period between the demerger on 19 November 2001 and 31 March 2003, BTs share price was roughly in line with the European telecommunications sector
after outperforming for most of the period. BT and the European telecommunications sector have both under-performed the FTSE 100 index by around 10% (as shown in the share price performance chart), over the 16 month period.

|BTs
      total shareholder return (TSR) performance 
      over five financial years to 31 March 20031 April 1998 = 100. Source:
      Datastream
      The graph shows our TSR performance (adjusted for the rights issue and  demerger
      of our
      mobile business in the 2002 financial year) relative to the FTSE 100. |  | BT
      and European Telco Sector
      Performance vs FTSE 100 since DemergerSource: Bloomberg
      The graph shows relative price performance of BT and European Telco Sector
      using the FTSE100 as a base. | 
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 

Results
  announcementsExpected announcements of results:

|                                               
|-----------------------------------------------
|1st quarter                                    
|2nd quarter and half year                      
|3rd quarter and nine months                    
|4th quarter and full year                      
|2004 annual report and
      accounts published
|                                               

Individual savings accounts (ISAs)Information about investing in BT Group 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.

ShareGiftThe 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 atwww.sharegift.orgor telephone 020 7337 0501, or can be obtained from the Shareholder
Helpline.

Unclaimed
  Assets RegisterBT is among a growing number of companies who 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 via ShareGift. For further information on the Unclaimed Assets Register, visitwww.uar.co.ukor telephone 0870 241 1713.

146BT Annual Report and Form 20-F 2003

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Exchange ratesBT 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 customs purposes by the Federal Reserve Bank of New York (the Noon Buying Rate).

|Years ended
        31 March |          |  | 1999     |  | 2000    |  | 2001     |  | 2002  |  | 2003  | 
|---------------------------- | -------- |  | -------- |  | ------- |  | -------- |  | ----- |  | ----- | 
|                             |         
|Period
      end             |          |  | 1.61     |  | 1.59    |  | 1.42     |  | 1.43  |  | 1.57  | 
|Averagea                     |          |  | 1.65     |  | 1.61    |  | 1.47     |  | 1.43  |  | 1.55  | 
|High                         |          |  | 1.72     |  | 1.68    |  | 1.60     |  | 1.48  |  | 1.65  | 
|Low                          |          |  | 1.60     |  | 1.55    |  | 1.40     |  | 1.37  |  | 1.43  | 
|                             |         
|                             | Month    | 
|                             |          | 
|                             | November |  | December |  | January |  | February |  | March |  | April | 
|                             | 2002     |  | 2002     |  | 2003    |  | 2003     |  | 2003  |  | 2003  | 
|                             |         
|High                         | 1.59     |  | 1.61     |  | 1.65    |  | 1.65     |  | 1.61  |  | 1.60  | 
|Low                          | 1.54     |  | 1.56     |  | 1.60    |  | 1.57     |  | 1.56  |  | 1.55  | 
|                             |         

|aThe average of the Noon Buying Rates in effect on the last day of each month during the relevant
period.
|---------------------------------------------------------------------------------------------------------

On 16 May 2003, the most recent practicable date for this annual report, the Noon Buying Rate was US$1.63 to £1.00.

Memorandum and Articles of AssociationThe 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.

MemorandumThe Memorandum provides that its 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.

ArticlesIn 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 by share 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) and who 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 (which confers 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 the date 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).

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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 priority over 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 such payments, 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 make this offer.

Any dividend which has not been claimed for 10 years after it was declared or became due for payment will be forfeited and will belong to the company unless the
directors decide otherwise.

(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 the assets 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
could give them 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 will be 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:

nwhich
  is in favour of more than four joint holders; or

nunless 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 evidence which 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, they 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.

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(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 10 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 to the 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 which they may be sent.

(j) DirectorsDirectors remunerationExcluding remuneration referred
  to below, each director will be paid such fees 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-month period 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 in connection 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 the company 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.

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 other securities. 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 which he 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 decidedby 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.

BT Annual Report and Form 20-F 2003149

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Additional information for shareholders

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 general meeting. 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 security for 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 aggregate amount 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 contractsThe following contracts (not being contracts entered into in the ordinary course of business) have been entered into in the two years preceding the date of this document by BT or another
member of the group and are, or may be, material to the group or have been entered into by BT or another member of the group and contain a provision under which a member of the group has an obligation or entitlement which is, or may be, material to
BT or such other member of the group.

AirtelA sale and purchase agreement
  dated 2 May 2001 between BT (Netherlands) Holdings BV, a subsidiary of BT and
  Vodafone, under which the BT subsidiary agreed to sell its entire interest in
  Airtel Móvil, S.A. to Vodafone. The sale was completed on 29 June 2001
  for a consideration of £1.1 billion (paid in Euros).

YellOn 25 May 2001, the following agreements were entered into, under which BT agreed to sell its classified advertising directory businesses in the UK and the USA:

|(i)   | umbrella agreement
      between Yell Ltd, BT Holdings Ltd, Yellow Pages BV, Marchprobe Ltd, Castaim
      Ltd, Yasmin Two (US) Inc. and BT;                                                                                                                                  
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii)  | UK share sale
      agreement between BT Holdings Ltd and Marchprobe Ltd under which BT Holdings
      Ltd agreed to sell the share capital of Yellow Pages Sales Ltd to Marchprobe
      Ltd;                                                                                
|(iii) | UK business
      sale agreement between Yell Ltd, Castaim Ltd and Yasmin Two (US) Inc. under
      which Yell Ltd agreed to sell Yell Ltds business and assets to Castaim
      Ltd and to sell Yell Ltds US intellectual property rights to Yasmin
      Two (US) Inc; and
|(iv)  | US share sale
      agreement between Yellow Pages BV and Yasmin Two (US) Inc. under which Yellow
      Pages BV agreed to sell the share capital of Yellow Book USA, Inc. to Yasmin
      Two (US) Inc.                                                                      

The umbrella agreement sets out the common terms which apply to the UK share sale agreement, the UK business sale agreement and the US share sale agreement. The umbrella agreement contains
covenants restricting any member of the group from carrying on a competing printed classified directories business for twelve months from completion.

The share sale and business agreements contain standard warranties and indemnities in favour of Marchprobe Ltd, Castaim Ltd and Yasmin Two (US) Inc. The
warranties expired on 30 June 2002.

As part of the consideration under the UK business sale agreement, Castaim Ltd also assumed responsibility for certain liabilities and obligations of the Yell
business.

The sale of Yell was completed on 22 June 2001 for a consideration of £2.14 billion, comprising (i) £2 million as consideration for the issued shares
of Yellow Pages Sales Ltd; (ii) £1,288 million in cash plus £100 million in interest bearing vendor loan notes and £100 million in deferred consideration (subject to reduction on ascertainment of the net assets) as consideration
for the assets of Yell Ltd; (iii) £1 as consideration for the US intellectual property rights; and (iv) £650 million as consideration for the issued shares of Yellow Book USA, Inc. (subject to adjustment in respect of certain intra-group
indebtedness and pursuant to the terms of the first amending agreement).

Following completion, Yell Ltd agreed a net asset adjustment with Castaim Ltd in respect of the assets of Yell Ltd, and Yellow Pages BV agreed a net asset
adjustment with Yasmin Two (US) Inc. in respect of Yellow Book USA, Inc, which together resulted in the total purchase consideration received being reduced by approximately £140 million.

150BT Annual Report and Form 20-F 2003

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Additional information for shareholders

Demerger AgreementOn 18 September 2001, BT Group
  plc, British Telecommunications plc and mmO2
plc entered into a demerger agreement (the Demerger
  Agreement) which set out the obligations of the parties in implementing
  the steps to achieve the demerger of mmO2
(the Demerger).

Under
  this agreement, mmO2
agreed to transfer BT Group Investments to BT
  Group plc and, in exchange for that transfer, BT Group agreed to allot and issue
  BT Group shares to the mmO2
shareholders
  in satisfaction of the Demerger dividend (being the dividend declared by mmO2
of
  an amount equal to the book value of its shareholding in BT Group Investments)
  so that each mmO2
shareholder
  at the Demerger record time was entitled to receive one BT Group share for each mmO2
share then held. No party to the Demerger Agreement gave any representation, warranty or indemnity to the others and no party had any right to rescind the agreement.

Separation AgreementOn 18 September 2001, British
  Telecommunications plc, BT Group plc, mmO2
plc and O2Limited entered into a
  separation agreement (the Separation Agreement) relating
  to the Demerger. Under the Separation Agreement, it was agreed that mmO2
would have net debt (excluding
  trading balances) of approximately £500 million on 19 November 2001 (the
  Demerger Effective Date), including loan indebtedness
  to BT Group.

BT Group and mmO2
  also agreed to allocate certain assets and liabilities and rights and obligations,
  in each case relating to the mmO2 business, between their respective
  groups and agreed, subject to certain limited exceptions, to indemnify each
  other against certain actual and contingent liabilities to the extent arising
  directly or indirectly out of their respective businesses. Furthermore, BT Group
  and mmO2 agreed to indemnify one another against certain liabilities
  arising from certain incomplete, false or misleading information provided by
  either of BT Group or mmO2, or their respective groups, for inclusion
  in public documents. These indemnities apply indefinitely and are not subject
  to any financial limit.

mmO2
plc agreed that, after
  the Demerger Effective Date, it would seek to obtain a full and effective release
  of each relevant member of the BT Group from any guarantees, undertakings and
  indemnities which the BT Group member may have given in respect of the mmO2
group, including an undertaking of support in
  respect of Viag Interkoms licence obligations.

The Separation Agreement sets out the parties agreement for the separation of the pensions arrangements of the BT Group and the mmO2
Group and also sets
out an informal, non-binding dispute resolution procedure which BT Group and mmO2
have agreed shall be
applied to resolve key disputes which may arise between them and their respective groups in connection with their continuing relationship and the Demerger.

Under the Separation Agreement, BT Group and mmO2
agreed that certain costs of the Demerger would be apportioned between them as they may agree in writing.

Under a separate arrangement,
  BT Group and mmO2
agreed that mmO2
would pay the remaining
  amount of approximately US$20 million in respect of the 1,500,000 non-voting
  shares in Esat Digifone Limited (now called O2Communications (Ireland)) acquired in April
2000.

Property Sale and LeasebackOn 13 December 2001, BT sold to Telereal Group Limited (Telereal) a substantial part of BTs property portfolio together with the BT property division. Around
6,700 properties comprising offices, telephone exchanges, vehicle depots, warehouses, call centres and computer centres were transferred. The transaction also included the transfer of approximately 350 employees from BT to Land Securities Trillium
(Telecom). Telereal will be responsible for providing accommodation and estates management services to BT. In return, we pay Telereal around £190 million of annual rental, increasing at 3% a year, for use of the freeholds. In addition, BT has
transferred the economic risk on a large portion of its leased properties to Telereal in return for an annual rental commencing at approximately £90 million per annum.

BT will have the flexibility to vacate approximately 35% by rental value of the estate over the contract term at no extra cost.

Telereal, defined above, is a 50/50 joint venture between Land Securities Trillium Limited (a wholly-owned subsidiary of Land Securities plc) and William Pears
Family Holdings Limited. The transaction raised approximately £2.38 billion for BT.

Concert Unwind AgreementOn 15 October 2001, AT&T, BT and Concert entered into binding agreements to terminate the Concert joint venture. The termination was completed on 1 April 2002, whereupon Concert ceased to
exist as a joint venture. In connection with the termination, the assets, liabilities, contracts, customers and other operational items were allocated between BT and AT&T with appropriate true up payment mechanisms to reflect the allocation of
assets. The assets and liabilities were allocated between AT&T and BT with the majority of items originally contributed by each of AT&T and BT in connection with the formation of the Concert joint venture being returned to the relevant
parent.

Following termination of the joint venture, Concert BV was renamed BT Global Networks Holdings (Netherlands) BV.

BT Annual Report
  and Form 20-F 2003151

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Additional information for shareholders

BT has entered into a number of ongoing commercial agreements with AT&T in order to allow it to continue its global operations, and offer telecommunication services, in various geographic
regions where BT may no longer have infrastructure as a result of the transfer of certain assets to AT&T.

In connection with the termination of the Concert joint venture, AT&T has acquired BTs minority interest in AT&T Canada and BT no longer has any
interest or obligation in relation to AT&T Canada.

CegetelOn 5 December 2002, Vivendi Universal
  (Vivendi) served a notice exercising its pre-emption
  rights under the Shareholders Agreement in respect of Cegetel Groupe SA
  (Cegetel) to acquire BTs entire shareholding 
  a 26% interest  in Cegetel from Cegetel Holdings I BV Sarl (Cegetel
  Holdings), a BT group company for €4.0
  billion (£2.6 billion) in cash. This pre-emption right became exercisable
  as a result of Cegetel Holdings having entered into a share purchase agreement
  for the sale of its shareholding in Cegetel to Vodafone AG for €4.0
  billion in cash, in October 2002.

Vivendi
  paid €2.7 billion
  of the consideration to Cegetel Holdings on 17 January 2003 and the transaction
  was completed when Vivendi paid the balance of €1.3 billion on 22 January 2003.

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 does not 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, financial institutions, securities broker-dealers, persons subject to alternative minimum tax, investors that actually or constructively own 10% or more of our outstanding share capital,
persons holding their shares or ADSs as part of a straddle, hedging transaction or conversion transaction, persons who acquired their shares or ADSs pursuant to the exercise of options or similar derivative securities 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 those set 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:
an individual citizen or resident of the United States, a corporation or certain other entities created or organised in or under the laws of the United States or any state thereof, an estate whose income 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 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 activities of the partnership. If a US Holder is a partner in a partnership that holds ordinary shares or ADSs, such Holder is urged to
consult its own tax adviser regarding the specific tax consequences of owning and disposing of the ordinary shares or 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 (the Code), Treasury regulations, rulings, judicial decisions and administrative practice, all as currently in effect, (ii) the
United KingdomUnited States Income Tax Convention that entered into force on 25 April 1980 as in effect on 1 January 2003 (the 1980 Convention), and (iii) the United KingdomUnited States Convention relating to
estate and gift taxes 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 a new United KingdomUnited States Income Tax Convention entered into force on 31 March 2003 (the New
Convention) and generally will have effect in respect of dividends paid on or after 1 May 2003. However, a US Holder entitled to benefits under the 1980 Convention may elect to have the provisions of the 1980 Convention continue for an
additional twelve months if the election to apply the 1980 Convention would result in greater benefits to the Holder. If a US Holder were to make an effective election, the discussion below with respect to dividend payments made pursuant to the 1980
Convention would continue to 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 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 New Convention 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 dividendsFor dividends paid on or before 5 April 1999, US Holders were generally entitled to receive the cash dividend plus a Treaty payment from the Inland Revenue of one quarter of the dividend,
subject to a UK withholding tax of 15% of the aggregate amount paid. As an example for illustration purposes only, a US Holder who was entitled to a dividend of £80 was also entitled to a Treaty payment of £20, reduced by the withholding
tax of 15% on

152BT Annual Report and Form 20-F 2003

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Additional information for shareholders

the gross amount of £100, i.e. £15, leaving a net cash payment of £85. The full dividend plus the full Treaty payment including the UK tax withheld was taxable income for US
purposes, and the UK tax withheld generally was available as a US credit or deduction.

For dividends paid on or after 6 April 1999 and subject to the 1980 Convention as described above, the Treaty payment reduces to one ninth of the dividend (i.e.
one tenth of the gross payment). As a result of the UK withholding tax (which cannot exceed the amount of the hypothetical Treaty payment), US Holders will no longer receive any Treaty payment. In the above example, the cash dividend would be
£80, and the hypothetical Treaty payment would be £8.89 (one ninth of £80). However, since the UK withholding tax (15% of £88.89), would exceed the amount of the hypothetical Treaty payment, no Treaty payment will be made and
the US Holder will receive only the cash dividend (here, £80). A US holder will be taxable in the US on the full dividend and full hypothetical Treaty payment (£88.89), and will be treated as having paid a foreign tax equal to the
hypothetical Treaty payment (here, £8.89).

The foreign tax deemed paid generally will be available as a US credit or deduction. A US Holder 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 Under Section 6114 or 7701(b)). A US Holder will be denied a foreign tax credit (and instead allowed a deduction) for the hypothetical Treaty payment unless
the US Holder has held the shares upon which the dividend was received for at least 16 days during the 30-day holding period beginning on the date which is 15 days before the ex-dividend date. Any days during which a US Holder has a substantially
diminished risk of loss on the shares are not counted toward meeting the 16-day holding period requirement. Also, a US Holder that is under an obligation to make related payments with respect to the shares (or substantially similar or related
property) is not entitled to claim a foreign tax credit with respect to a foreign tax imposed on a dividend.

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 to the 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 a tax credit. The
deduction, however, is not subject to the limitations described above.

There will be no hypothetical Treaty payment 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 on or after 1 May 2003 (or 1 May 2004 in the case of a Holder who effectively elects to extend the applicability of the 1980 Convention as
described above).

The
  UK does not currently 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 above) will be
treated as ordinary dividend income to the extent paid out of our current or accumulated earnings and profits, as determined for US tax purposes, based on the US dollar value of the distribution 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. Distributions by us in excess of our current and accumulated earnings and profits will be treated first as
a tax-free return of capital to the extent of the US Holders basis in the ordinary shares or ADSs, and thereafter as capital gain. Dividends paid by us will not be eligible for the US dividends received deduction.

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,
whether, and to what extent, a foreign tax credit will be available with respect to dividends received from BT, whether it may be advisable in light of the Holders particular circumstances to elect to have the provisions of the 1980 Convention
continue in force until 1 May 2004, and the treatment of any foreign currency gain or loss on any pounds sterling received with respect to ordinary shares that are not converted into US dollars on the date the pounds sterling are actually or
constructively received.

Taxation of capital gainsUnless a US resident carries on a trade through a branch or agency in the UK, and the disposal of ordinary shares and/or ADSs is related to the activities of that trade, UK capital gains tax
is not charged on US 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 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 tax basis (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. The deductibility of capital losses is subject to significant limitations. Capital gains of
an individual US Holder are subject to US federal income tax at preferential rates if specified holdings periods are met.

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US information reporting and backup withholdingDividends paid on and proceeds received from the sale or disposition of ordinary shares or ADSs may be subject to information reporting to the IRS and backup withholding at a current rate of
30%. Certain exempt recipients (such as corporations) are not subject to these information reporting 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 generally must 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 received in the United States or through
certain US-related financial intermediaries.

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 filing the appropriate claim for refund with the IRS and furnishing any required information.

UK stamp dutyA 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 depository system gives rise to a 1.5% charge of either the amount of the consideration 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 ADSsWhere 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 gift is subject to US federal gift tax. Similarly, 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. The rules 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 holdersThere 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s ordinary shares, except as otherwise described in Taxation (US
Holders)above and except in respect of the government of, or any resident of, Iraq or any person treated as so resident. 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 displayAll reports and other information that BT files with the US Securities and Exchange Commission 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 atwww.sec.gov.

PublicationsBT 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 atwww.bt.com/investorcentre. More detailed disclosures on BTs implementation of social,
ethical and environmental policies and procedures are available online through our fully and independently verified social and environment report atwww.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 Oftel) | December                                
|Social and Environment
      Report                                                                                                            | June                                    
|Statement of Business
      Practice                                                                                                           | September
        2002                  
|                                                                                                                                              

For printed copies, when available, contact the Shareholder Helpline on Freefone 0808100 4141or, alternatively, contact the Registrar in the UK, at the address on page 155.

154BT Annual Report and Form 20-F 2003

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Additional information for shareholders

Electronic communicationShareholders can now choose to receive their shareholder documents electronically rather than by post. Shareholders may elect to receive documents in this way by going towww.bt.com/signupand following the online instructions, or by calling the Shareholder Helpline.

Shareholder communicationBT is committed to communicating openly with each of its stakeholder audiences in the manner most appropriate to their requirements.

All investors can visit our Investor Centre atwww.bt.com/investorcentrefor additional information regarding quarterly results and major announcements.

An
  electronic copy of this document is available atwww.bt.com/annualreport.

Private
  shareholdersIf 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 and BT Employee Share Ownership Scheme registers. They also
provide a Shareholder Helpline service on Freefone 0808100 4141.

Institutional
  investors and analystsInstitutional investors and equity
  research analysts may contact Investor Relations on: 
  Tel (020) 7356 5065 
  Fax (020) 7356 5270 
  e-mail: investorrelations@bt.com

Industry analysts may contact:
  Tel (020) 7356 5378 
  Fax (020) 7356 6630 
  e-mail: industryenquiry@bt.com



|
|

Shareholder
  HelplineTel Freefone 0808100
  4141Fax 01903 833371 
  Textphone Freefone 0800169
  6907From outside the UK: 
  Tel +44 121 433 4404 
  Fax +44 1903 833371 
  Textphone +44 121 415 7004 
  e-mail: bt@lloydstsb-registrars.co.uk

|The
      Registrar                | ADR
        Depositary                         
|---------------------------------- | -----------------------------------------------
|Lloyds TSB Registrars
      (2450) | JPMorgan
      Chase Bank                      
|The Causeway                       | JPMorgan
      Service Centre                  
|Worthing, West Sussex              | P.O. Box
      43013                           
|BN99 6DA                           | Providence,
      RI 02940-3013                
|United Kingdom                     | United States                                  
|Website:                           | Tel 1 800
      634 8366 (toll free)           
|www.lloydstsb-registrars.co.uk     | or +1 781
      575 4328 (from outside the USA)
|                                   | e-mail: adr@jpmorgan.com                       
|                                   | Website:www.adr.com                            

General
  enquiriesBT Group plc
  BT Centre
81 Newgate Street
London EC1A 7AJ
United Kingdom
Tel (020) 7356 5000
Fax (020) 7356 5520
From overseas:
Tel +44 20 7356 5000
Fax +44 20 7356 5520

A full list of BT contacts, and an electronic feedback facility, is available atwww.bt.com/talk.

BT Annual Report and Form 20-F 2003155

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Glossary of terms and US equivalents

|Term used in UK annual
      report                                             | US
      equivalent or definition                                                                                                
|------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------
|                                                                                |                                                                                                                                  
|Accounts                                                                        | Financial statements                                                                                                             
|                                                                                |                                                                                                                                  
|Advance corporation tax
      (ACT)                                             | No direct US
      equivalent. Tax payable on cash dividends treated as advance payments on
      the companys UK income tax due
|                                                                                |                                                                                                                                  
|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 schemes                                                          | Employee stock
      benefit plans                                                                                               
|                                                                                |                                                                                                                                  
|Employment costs                                                                | Payroll costs                                                                                                                    
|                                                                                |                                                                                                                                  
|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 asset 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
      (under capital and reserves in balance sheet) | Retained earnings                                                                                                                
|                                                                                |                                                                                                                                  
|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                                                                                                       
|                                                                                |                                                                                                                                  
|Redundancy charges                                                              | Early release
      scheme expenses                                                                                              
|                                                                                |                                                                                                                                  
|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                                                                                                                         

156BT Annual Report and Form 20-F 2003

Table
  of contents

---



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                                         | 2627  
|                                 |                                                             | Additional
      information for shareholders                             |        
|                                 |                                                             | Exchange
      rates                                                      | 147    
|3B                               | Capitalisation
      and indebtedness                       | Not applicable                                                            |        
|3C                               | Reasons for
      the offer and use of proceeds             | Not applicable                                                            |        
|3D                               | Risk factors                                                | Risk factors                                                              | 140    
|                                 |                                                             |                                                                           |        
|4                                | Information
      on the company                            |                                                                           |        
|4A                               | History and
      development of the company                | Additional
      information for shareholders                             |        
|                                 |                                                             | Background                                                                | 142143
|                                 |                                                             | Business review                                                           |        
|                                 |                                                             | Introduction                                                              | 8      
|                                 |                                                             | Restructuring                                                             | 9      
|                                 |                                                             | Demerger
      of mmO2                                                    | 9      
|                                 |                                                             | Acquisitions
      and disposals                                          | 910   
|                                 |                                                             | Concert                                                                   | 10     
|                                 |                                                             | Financial review                                                          |        
|                                 |                                                             | Capital
      expenditure                                                 | 44     
|4B                               | Business overview                                           | Business review                                                           | 823   
|                                 |                                                             | Our commitment
      to society                                           | 2425  
|                                 |                                                             | Financial review                                                          |        
|                                 |                                                             | Geographical
      information                                            | 4647  
|                                 |                                                             | Financial statistics                                                      | 138    
|                                 |                                                             | Operational
      statistics                                              | 139    
|                                 |                                                             | Notes to the
      financial statements                                   |        
|                                 |                                                             | People
      employed                                                     | 117    
|                                 |                                                             | Additional
      information for shareholders                             |        
|                                 |                                                             | Cautionary
      statement regarding forward-looking statements           | 142    
|4C                               | Organisational
      structure                              | Business review                                                           |        
|                                 |                                                             | Introduction                                                              | 8      
|                                 |                                                             | Subsidiary
      undertakings, joint ventures and associates              | 135    
|4D                               | Property, plant
      and equipment                         | Business review                                                           |        
|                                 |                                                             | Property                                                                  | 10     
|                                 |                                                             | Financial review                                                          |        
|                                 |                                                             | Profit
      on sale of property fixed assets                             | 3940  
|                                 |                                                             |                                                                           |        
|5                                | Operating
      and financial review and prospects          |                                                                           |        
|5A                               | Operating results                                           | Financial review                                                          | 2849  
|                                 |                                                             | Additional
      information for shareholders                             |        
|                                 |                                                             | Cautionary
      statement regarding forward-looking statements           | 142    
|5B                               | Liquidity and
      capital resources                       | Financial review                                                          | 2849  
|                                 |                                                             | Additional
      information for shareholders                             |        
|                                 |                                                             | Cautionary
      statement regarding forward-looking statements           | 142    
|                                 |                                                             | Notes to the
      financial statements                                   |        
|                                 |                                                             | Loans
      and other borrowings                                          | 108109
|                                 |                                                             | Financial
      commitments, contingent liabilities and subsequent events | 111    
|                                 |                                                             | Financial
      instruments and risk management                           | 121125
|5C                               | Research and
      development, patents and licences        | Business review                                                           |        
|                                 |                                                             | Research
      and development and IT support                             | 1617  
|                                 |                                                             | Financial statistics                                                      | 138    
|5D                               | Trend information                                           | Financial review                                                          | 2849  
|                                 |                                                             | Additional
      information for shareholders                             |        
|                                 |                                                             | Cautionary
      statement regarding forward-looking statements           | 142    
|                                 |                                                             |                                                                           |        
|6                                | Directors,
      senior management and employees            |                                                                           |        
|6A                               | Directors and
      senior management                       | Board of directors
      and Operating Committee                          | 5051  

BT Annual Report and Form 20-F 2003157

Table
  of contents

---



Cross reference
  to Form 20-F

|Required
      Item in Form 20-F | Where
      information can be found in this Annual Report    |                                                                           |        
|-------------------------------- | ------------------------------------------------------------- | ------------------------------------------------------------------------- | -------
|Item                             |                                                               | Section                                                                   | Page   
|6B                               | Compensation                                                  | Report on directors
      remuneration                                   | 5872  
|                                 |                                                               | Notes to the
      financial statements                                   |        
|                                 |                                                               | Pension
      costs                                                       | 112116
|                                 |                                                               | Directors                                                                 | 116    
|                                 |                                                               |                                                                           |        
|                                 |                                                               |                                                                           |        
|6C                               | Board practices                                               | Board of directors
      and Operating Committee                          | 5051  
|                                 |                                                               | Report of the
      directors                                             |        
|                                 |                                                               | Directors                                                                 | 52     
|                                 |                                                               | Corporate governance                                                      | 5357  
|                                 |                                                               | Report on directors
      remuneration                                   | 5872  
|                                 |                                                               | Statement of
      directors responsibility                              | 73     
|6D                               | Employees                                                     | Business review                                                           |        
|                                 |                                                               | Lines
      of business                                                   | 10     
|                                 |                                                               | Our
      people                                                          | 1718  
|                                 |                                                               | Notes to the
      financial statements                                   |        
|                                 |                                                               | People
      employed                                                     | 117    
|                                 |                                                               | Operational
      statistics                                              | 139    
|6E                               | Share ownership                                               | Report on directors
      remuneration                                   | 5872  
|                                 |                                                               | Notes to the
      financial statements                                   |        
|                                 |                                                               | Employee
      share schemes                                              | 117120
|                                 |                                                               |                                                                           |        
|7                                | Major
      shareholders and related party transactions       |                                                                           |        
|7A                               | Major shareholders                                            | Report of the
      directors                                             |        
|                                 |                                                               | Substantial
      shareholdings                                           | 52     
|                                 |                                                               | Additional
      information for shareholders                             |        
|                                 |                                                               | Analysis
      of shareholdings                                           | 144    
|7B                               | Related party
      transactions                              | Report of the
      directors                                             |        
|                                 |                                                               | Interest
      of management in certain transactions                      | 52     
|                                 |                                                               | Report on directors
      remuneration                                   | 5872  
|                                 |                                                               | Notes to the
      financial statements                                   |        
|                                 |                                                               | Related
      party transactions                                          | 111    
|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                                                   | 23     
|                                 |                                                               | Additional
      information for shareholders                             |        
|                                 |                                                               | Dividends                                                                 | 144145
|8B                               | Significant
      changes                                     | Financial review                                                          |        
|                                 |                                                               | Capital
      resources                                                   | 43     
|                                 |                                                               | Notes to the
      financial statements                                   |        
|                                 |                                                               | Financial
      commitments, contingent liabilities and subsequent events | 111    
|                                 |                                                               |                                                                           |        
|9                                | The
      offer and listing                                   |                                                                           |        
|9A                               | Offer and listing
      details                               | Additional
      information for shareholders                             |        
|                                 |                                                               | Share
      and ADS prices                                                | 143    
|9B                               | Plan of distribution                                          | Not applicable                                                            |        
|9C                               | Markets                                                       | Additional
      information for shareholders                             |        
|                                 |                                                               | Listings                                                                  | 143    
|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                             |        
|                                 |                                                               | Background                                                                | 142143
|                                 |                                                               | Memorandum
      and Articles of Association                              | 147150
|10C                              | Material contracts                                            | Additional
      information for shareholders                             |        
|                                 |                                                               | Material contracts                                                        | 150152
|10D                              | Exchange controls                                             | Additional
      information for shareholders                             |        
|                                 |                                                               | Exchange
      controls and other limitations affecting security holders  | 154    
|10E                              | Taxation                                                      | Additional
      information for shareholders                             |        
|                                 |                                                               | Taxation
      (US Holders)                                               | 152154

158BT Annual Report and Form 20-F 2003

Table
  of contents

---



Cross reference
  to Form 20-F

|Required
      Item in Form 20-F | Where
      information can be found in this Annual Report                         |                                                              |        
|-------------------------------- | ---------------------------------------------------------------------------------- | ------------------------------------------------------------ | -------
|Item                             |                                                                                    | Section                                                      | Page   
|10F                              | Dividends and
      paying agents                                                  | Not applicable                                               |        
|10G                              | Statement by
      experts                                                         | Not applicable                                               |        
|10H                              | Documents on
      display                                                         | Additional
      information for shareholders                |        
|                                 |                                                                                    | Documents
      on display                                   | 154    
|10I                              | Subsidiary
      information                                                       | Not applicable                                               |        
|                                 |                                                                                    |                                                              |        
|11                               | Quantitative
      and qualitative disclosures about market risk                   | Financial
      review                                       |        
|                                 |                                                                                    | Treasury
      policy                                        | 43     
|                                 |                                                                                    | Foreign
      currency and interest rate exposure            | 4344  
|                                 |                                                                                    | Notes to the
      financial statements                      |        
|                                 |                                                                                    | Financial
      instruments and risk management              | 121125
|                                 |                                                                                    |                                                              |        
|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 governance                                         | 5357  
|                                 |                                                                                    |                                                              |        
|16                               | [Reserved]                                                                         |                                                              |        
|                                 |                                                                                    |                                                              |        
|17                               | Financial
      statements                                                         | Not applicable                                               |        
|                                 |                                                                                    |                                                              |        
|18                               | Financial
      statements                                                         | Report of the
      independent auditors                     | 74     
|                                 |                                                                                    | Accounting
      policies                                    | 7678  
|                                 |                                                                                    | Consolidated
      financial statements                      | 75126 
|                                 |                                                                                    | United States
      generally accepted accounting principles | 127134
|                                 |                                                                                    |                                                              |        
|                                 |                                                                                    | Quarterly analysis
      of turnover and profit              | 136137

BT Annual Report and Form 20-F 2003159

Table
  of contents

---



Index

Accounting and presentation
  changes85

Accounting policies4748,
  7678

Additional information for
  shareholders141155

Auditors remuneration121

Auditors report to shareholders74

Background142143

Balance sheet27,
  45, 84, 126

Broadband1,
  2, 5, 6, 7, 8, 9, 11, 12, 1415, 3233, 34, 51, 140, 142

BT Deferred Bonus Plan59,
  71, 107, 119120

BT Exact1617

BT Executive Share Plan6061,
  107, 119120

BT Global Services6,
  1516, 3435, 86

BT Ignite15

BT Incentive Share Plan60,
  107, 119120

BT Openworld9,
  12, 13, 86

BT Retention Share Plan60,
  107, 119120

BT Retail1113,
  3133, 86

BT Wholesale6,
  1315, 3334, 86

Business practice, statement
  of56

Business review823

Call volume growth32,
  139

Capital expenditure3,
  7, 27, 31, 33, 34, 35, 44, 83, 87, 105, 138

Capital gains tax143

Cash flow statement27,
  42, 83

Cautionary statement142

Chairmans message45

Chief Executives statement67

Commitment to society2425

Community24,
  25

Competition and the UK economy46

Concert global venture9,
  10, 16, 28, 30, 37, 38, 9192, 99100, 142, 151152

Contact details155

Contingent liabilities111

Corporate governance5357

Corporate identity7,
  8

Creditors52,
  84, 109

Cross reference to Form 20-F157159

Customer satisfaction2,
  6, 9, 14

Debtors77,
  84, 107

Demerger9,
  28, 33, 37, 44, 60, 80, 85, 8687, 9193, 97, 103, 104, 110, 111,
  117, 122, 142143, 151

Depreciation31,
  36, 77, 8687, 9193, 105

Disposals4,
  5, 910, 28, 3839, 9495

Directors5051

Emoluments116

Interests in shares6364,
  6871

Proposed for election or
  re-election at AGM52

Remuneration, report on5872

Report52

Responsibility statement73

Disclosure committee5657

Dividend investment plan145

Dividends3,
  4, 10, 26, 41, 7981, 97, 109, 110, 126, 144145, 148

Earnings (loss) per share3,
  4, 26, 29, 30, 41, 7981, 9798, 138

Economic and Monetary Union48

Electronic communication155

Employee share schemes117120

Employees1718,
  33, 35, 117, 139

Environment24,
  25, 46, 154

Exchange controls154

Exchange lines1,
  11, 32, 46, 139, 140

Financial calendar154

Financial commitments111

Financial headlines3

Financial instruments78,
  121125

Financial ratios138

Financial review2849

Financial statistics138

Financing4142

Five-year financial summary2627

Foreign currencies43,
  76, 9193, 122, 125

Going concern43,
  73

Goodwill26,
  29, 30, 76, 9193, 104, 106, 128

Glossary of terms and US
  equivalents156

Group strategy89

Intangible assets76,
  77, 84, 9193, 104, 128

Interest26,
  29, 40, 76, 7981, 83, 95, 108, 122

Internal control and risk
  management55

Internet1,
  6, 8, 11, 12, 13, 32, 35, 140

Investments27,
  39, 77, 84, 9495, 106107, 108

Joint ventures and associates26,
  3738, 86, 87, 89, 90, 94, 101102, 106107, 111, 135

Legal proceedings23,
  111

Licence1823

Listings143

Loans and other borrowings27,
  84, 108109

Management Council53,
  54, 55

Management of liquid resources83,
  99

Material contracts150152

Memorandum and Articles of
  Association147150

Minority interests26,
  27, 29, 7981, 84, 97, 131

mmO29,
  28, 33, 37, 44, 60, 80, 85, 86, 87, 9193, 97, 103, 104, 110, 111, 117,
  122, 142, 144, 151

Mobile communications9,
  12

Net debt3,
  4, 9, 10, 27, 40, 83, 104, 121, 122

New wave4,
  1113, 32

Other operating income26,
  29, 35, 7981, 90

Operating Committee50,
  51, 5354, 59, 72

Operating costs3,
  26, 29, 3537, 7981, 9193

Operating profit (loss)3,
  26, 29, 30, 37, 38, 7981

Operational statistics139

Optical fibre13

Pensions4,
  10, 17, 4546, 56, 7778, 9193, 112116, 128, 132133,
  140

Price control18,
  2123, 46

Profit (loss) after tax3,
  26, 29, 7981

Profit (loss) before tax3,
  26, 29, 4041, 7981

Profit and loss account26,
  29, 7981

Provisions for liabilities
  and charges27,
  84, 109

Publications154

Quarterly analysis of turnover
  and profit136137

Reconciliation of movement
  in shareholders funds110

Reconciliation of operating
  profit (loss) to operating cash flows99

Redundancy costs77,
  9193

Regulation, competition and
  prices18,
  46

Research and development1617,
  76, 9193, 138

Restructuring9,
  10, 28, 3839, 85, 142143

Return on capital employed45,
  138

Rights issue9,
  28, 110, 119

Risk factors140

Risk management121125

Sarbanes-Oxley Act54,
  55, 5657

Segmental analysis8689

Share and ADS prices143

Share capital27,
  84, 110, 126

Share option schemes110,
  117120

Shareholder communication155

Shareholdings analysis144

Staff costs34,
  36, 9193

Statement of total recognised
  gains and losses82

Stocks77,
  84

Strategy statement2

Subsidiary undertakings76,
  77, 9495, 99103, 111, 135

Substantial shareholdings52

Suppliers payment policy52

Tangible fixed assets77,
  84, 105

Taxation26,
  29, 41, 78, 96, 109, 129

Taxation (US Holders)152154

Total shareholder return60,
  64, 68, 69, 70, 120, 146

Treasury policy43

Turnover3,
  10, 26, 29, 30, 76, 7981, 8690

US GAAP27,
  4849, 127134

Viag Interkom10,
  28, 44, 91, 93, 101

Yell10,
  28, 85, 94, 103, 150

160BT Annual Report and Form 20-F 2003

Table
  of contents

---



EXHIBIT
  12.(a)2

CERTIFICATION
  PURSUANT TO

18
  U.S.C. SECTION 1350,

AS ADOPTED
  PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Bernardus Johannes Maria Verwaayen, certify that to the best of my knowledge:

1.    this annual report on Form 20-F of BT Group plc fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.    the information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of BT Group plc.

|Date: May 21 2003 | /s/ B. Verwaayen
      Name: Bernardus
        VerwaayenTitle: Chief
        Executive
|----------------- | --------------------------------------------------------------------------------------

















A signed original of this written statement required by Section 906 has been provided to BT Group plc and will be retained by BT Group plc and furnished to the Securities and
Exchange Commission or its staff upon request.

* *
  *

In accordance with the interim guidance for Section 906 certification issued by the United States Securities and Exchange Commission on March 21, 2003 in Release No. 33-8212, this
certification will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into
any filing under the Securities Act 1933 or the Securities Exchange Act of 1934, except to the extent that BT  Group plc specifically incorporates it by reference.

---



CERTIFICATION PURSUANT TO

18
  U.S.C. SECTION 1350,

AS ADOPTED
  PURSUANT TO

SECTION
  906 OF THE SARBANES-OXLEY ACT OF 2002

I, Ian
  Paul Livingston, certify that to the best of my knowledge:

1. this annual report on Form 20-F of BT Group plc fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. the information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of BT Group plc.

|Date: May 21 2003 | /s/ I. Livingston
      Name: Ian
        LivingstonTitle: Group
        Finance Director
|----------------- | -----------------------------------------------------------------------------------------

















A signed original of this written statement required by Section 906 has been provided to BT Group plc and will be retained by BT Group plc and furnished to the Securities and
Exchange Commission or its staff upon request.

* *
  *

In accordance with the interim guidance for Section 906 certification issued by the United States Securities and Exchange Commission on March 21, 2003 in Release No. 33-8212, this
certification will not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into
any filing under the Securities Act 1933 or the Securities Exchange Act of 1934, except to the extent that BT  Group plc specifically incorporates it by reference.

---



EXHIBIT
  12.(a)3

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 33-44600, 33-84600, 333-8790, 3339024, 333-13064 and 333-14214) of BT Group plc of our
report dated May 21, 2003 relating to the financial statements, which appears in the Annual Report and Form 20-F 2003, which is incorporated in this Annual Report on Form 20-F for the year ended March 31, 2003.

/s/ PricewaterhouseCoopers
  LLP1 Embankment Place 
  London, WC2N 6RH
  United Kingdom

June 2, 2003

---