We have built partnerships or established distributorships in each of the markets that are opening up. Typically, our partners have not been other telecoms operators but local companies with strong reputations and experience which complements our own. In Germany, our main partner is Viag, a major energy and industrial group with whom we have formed Viag Interkom; in France, we have teamed up with a group headed by Vivendi to form Cegetel. In Italy, we have partnered with energy group ENI, media organisation Mediaset, and Banca Nazionale del Lavoro to form Albacom; and in the Netherlands we have formed Telfort in partnership with the state railway company Nederlandse Spoorwegen.

In total, our ventures cover 85 per cent of the EU market. We have already invested almost £2 billion in European ventures and expect to make further substantial investments over the next few years.

In Germany, France, Italy, the Netherlands, Switzerland, Ireland and Sweden we, alone or in partnership, already have licences to run fixed line services, and we will benefit from mobile network licences in Germany, France, the Netherlands, and Spain too. In other countries, bidding for licences is still in progress.

In February 1998, it was announced that Telfort had won one of two new national Dutch mobile licences, to go with the fixed line licence it already holds. Initial coverage, which will start at the end of this year, will be confined to metropolitan areas, but we aim for 99 per cent national geographic coverage by the end of 1999.

BT's new joint venture in Switzerland, Newtelco, won no fewer than 25,000 customers in the first month when its Sunrise service opened for business in January 1998. Jointly owned by BT, TeleDanmark, Swiss railways, Union Bank of Switzerland and the retail giant Migros, Sunrise means that, for the first time, Swiss customers have a choice of telecoms supplier for some of the calls they make outside Switzerland.

In September 1997, we completed our deal to take a 26 per cent stake in Cegetel, the new French telecommunications group which, in 1997, had revenues of over £1 billion. Cegetel will provide the full range of telecommunications services - both fixed and mobile - and is already positioned to be the main competitor to France Telecom. Cegetel's fixed network service was launched at the beginning of February 1998 and, in the first two months, attracted around 140,000 customers. It also holds a majority stake in SFR, the number two mobile operator in France, with more than 2.5 million customers and a market share of approximately 40 per cent of new subscribers.

In Spain, our fixed line operator - BT Telecomunicaciones - has the second largest data network and has trebled its revenues since it was set up in 1994. And Airtel, in which BT has a 16 per cent stake, has more than a million mobile customers and 40 per cent of the Spanish digital market.

In December 1997, BT and the Electricity Supply Board in the Republic of Ireland announced that they had reached agreement in principle to form a joint venture to offer communications services in Ireland, one of western Europe's fastest growing economies.

Asia-Pacific
The Asia-Pacific telecommunications market is one of the fastest growing in the world, and BT already has offices or ventures in Japan, China, Taiwan, South Korea, Malaysia, Singapore, Indonesia, Thailand, the Philippines, Australia, New Zealand and India.

In April 1997, BT•NIS (a joint venture between BT and Marubeni) began trading in Japan as a Concert distributor, Internet service provider and supplier of advanced voice and data services. In February 1998, BT•NIS announced its intention to apply for a licence to take advantage of the newly-liberalised telecoms market in Japan.

China is one of the most exciting markets in the region and, potentially, one of the largest in the world. For the last few years that market has grown at a rate of about 20 million lines a year.

In March 1998, BT took a further step into this market by signing a Memorandum of Understanding (MoU) with the state-owned operator, China Telecom. Although the MoU does not involve investment, it will foster co-operation and understanding between the two companies, and enable us to swap technology and examine mutually beneficial business opportunities.

And, in Singapore, BT is part of a consortium which has recently won a fixed and a mobile licence, enabling it to compete with Singapore Telecom from April 2000.

In the UK
BT's UK network is one of the most advanced in the world, and we have invested nearly £30 billion since we were privatised in 1984. Investment at this level ensures that we can continue to deliver reliable and innovative services to all our customers.

There are more than 3.5 million kilometres of optical fibre in the UK network, 7,500 local exchanges and 69 main switching units.

Business communications
One of the key growth areas for BT has been the increase in business lines, mainly due to new ISDN lines. These are now also being used in the home for Internet access.

Among our larger business customers, there is a growing realisation that they can gain significant competitive advantage by using a single supplier to provide them with integrated communications solutions. BT's Syncordia Solutions is at the forefront of this rapidly growing outsourcing market.

And, as the value of transactions in the world's capital markets is expected to continue to increase rapidly, BT - through its systems integration business Syntegra - has become the global market leader in the design and provision of dealing rooms and trading systems. Syntegra has a global market share of 25 per cent of dealing boards and our systems are used by 45,000 financial traders around the world.

Currently, only a third of small and medium-sized businesses use electronic mail, compared with two-thirds of large firms; and only a quarter use the Internet, compared with around half of large corporations. But the market for information technology and communications in this sector is expected to grow by around 50 per cent in the next five years and we believe that this is a market of huge importance to BT.

BT and the Confederation of British Industry are jointly sponsoring the Information Society Forum, which focuses in particular on the impact of new technology on the small business market. We are also working closely with the British Chambers of Commerce, offering Internet access to all their members. And, in South Wales, BT and the European Commission are financing the work of the world's first chair of electronic commerce at Cardiff University. The University has become the hub of the South Wales "virtual business community", in which a number of small businesses are discovering how technologies such as the Internet and videoconferencing can help them find new ways to market themselves, cut down on travel costs, get closer to their customers and suppliers, and trade internationally.

We have also teamed up with Comet, a leading UK retailer of consumer electronic equipment, to test a new concept in retailing. Called I.T. Works, this is a store dedicated to the information technology and communications needs of smaller businesses. Personal computers, software and peripherals are on sale along with the latest in communications technology. If the trial proves successful, I.T. Works stores will be opened across the UK.

Quality of service
BT places great emphasis on quality of service and our customers' satisfaction with the service we provide. We conduct over 22,000 interviews every month with our residential customers and with the general public, as well as over 10,000 interviews with our business customers.

For the period October 1997 to March 1998, 83 per cent of our residential customers and 88 per cent of our business customers said they were satisfied with the services we provide. Satisfaction with inland calls was 95 per cent.

Some residential customers were badly hit by the weather problems in late December and early January - the number of faults cleared in nine working hours or by successful appointment dropped to just under 80 per cent. However, for our business customers, the number of faults cleared in five working hours or by successful appointment increased to over 89 per cent.

Ninety two per cent of customers are satisfied with our Operator Assistance Service (100) and 90 per cent are satisfied with our Directory Assistance Service (192).

BT is investing £84 million in new technology to improve the standards of its directory enquiries service, including an expansion of the database so that, by 2000, it will also be able to provide the numbers for mobile phones, radiopagers and fax machines.

Network reliability remains consistently high - less than one call in 200 fails because of the network, and a customer is unlikely to experience a network fault more than once every seven years on any one of his or her lines.

The number of BT payphones in the UK has grown to just over 138,000.

Regulation
Since August 1997, BT has operated under a price cap formula - agreed with Oftel - of the Retail Price Index (RPI) minus 4.5, covering the services used by those residential customers whose bill size was in the lowest 80 per cent. Under the formula, the price cap applies to less than 20 per cent of BT's total revenues, in contrast to the previous formula of RPI minus 7.5 which ran for the four years until the end of July 1997 and applied to about 50 per cent of revenues.

In March 1998, Oftel instigated a Monopolies and Mergers Commission (MMC) reference on the issue of the pricing of calls made to mobile phones. The enquiry is still underway and will report to Oftel in early September. BT believes that the prices of its services reflect the competitive nature of the UK market and are fully justified. However, we acknowledge the objective approach that an MMC referral will bring and we are co-operating fully with the MMC's investigation.

We are making constructive progress in obtaining regulatory approval for the British Interactive Broadcasting venture, which we are seeking to launch in conjunction with BSkyB, Matsushita and Midland Bank. Scheduled to be launched later in 1998, it will provide a range of services, including home shopping, home banking, home education and information services, as well as Internet, e-mail access and computer games, through a television set-top box.

Internet
The Internet is a key market for BT - our Internet business is currently growing faster than 100 per cent per annum and BT Internet is one of the largest UK Internet service providers.

In March 1998, United News & Media joined BT and News International as an equal partner in LineOne, the Internet-based information and entertainment service for residential customers. LineOne brings customers news, sport, entertainment, business information and home shopping and is the only UK-focused on-line service of its kind.

For businesses, BT WebWorld is a quick, easy and cost-effective web hosting service for creating and operating Internet sites. BT WebWorld offers a full range of web hosting functions, together with web site design packages. Customer support is available seven days a week by e-mail, fax or telephone. Features include high availability systems, regular back-ups and high capacity connections to the Internet.

In addition to the Internet, private corporate intranets have emerged as a source of new business. For example, BT Intranet Complete is a "ready-to-go" solution for companies keen to get started on their own intranet. And BT Intranet Builder offers a "one-stop-shop" for companies wishing to develop their own intranets, providing a comprehensive range of the best components and support services.

Multimedia
In the last 12 months, BT has stepped up its research into, and trials of, interactive multimedia services. Multimedia embraces the Internet, interactive television, and video and audio material delivered over networks to the home or office.

Multimedia is already growing fast, with 10 million e-mails sent each day in the UK and 30 new web pages set up on the Internet every minute. Around five per cent of local call traffic carried by BT is now Internet-related.

Multimedia's popularity is set to increase rapidly. BT trials show that 60 per cent of people would prefer their television service to feature interactivity and the ability to call up videos on demand.

The network
Multimedia's uptake will depend on the capacity of networks to deliver its material and to provide return channels through which consumers can respond to what is broadcast or distributed. BT is therefore working to provide the best possible networks, while keeping costs within affordable limits.

During the year, we announced that we would spend an additional £300 million on upgrading our network to enable it to carry more data at faster speeds. Such an upgrade will help the network support new services such as Home Highway. Home Highway is a new digital communications service that will transform a customer's existing home telephone line into a high-speed Internet and multimedia connection.

Much of our current network investment is focused on the ways that technology can make our existing network investment carry all the latest services by - for example - delivering video services over the existing copper network. This will enable us to provide new services at the most affordable price.

BT is carrying out trials of ADSL (asymmetric digital subscriber loop) technology, which uses compression techniques to increase the capacity of a phone line 30-fold, giving high-speed Internet access, TV-quality video and CD-quality audio.

Variants on this theme are also in development, including the highly economical DSL Lite and the more expensive VDSL (very high-speed digital subscriber loop).

In March 1998, it was announced that BT will be working with Microsoft subsidiary WebTV Networks in a trial of the WebTV service, for which BT will be the Internet service provider.

Mobility solutions
BT is also enhancing and sharpening its focus on the mobile telecommunications market, expanding the way it has traditionally thought of customers' mobility requirements.

Analysts predict that, within five years, the mobile communications market will account for 30 per cent of all telecommunications revenues, with some 12 to 14 million people in the UK having a mobile phone, compared with nine million today.

Cellnet
BT has a 60 per cent stake in Cellnet, the mobile telecommunications network operator, and - through BT Mobile - offers customers a range of integrated and innovative mobility solutions, enabling them to stay in touch wherever they are.

Cellnet has more than three million customers, the vast majority of whom are connected to the digital GSM network.

Cellnet was the first UK network to offer a full, two-way digital fax and data service. In effect, a fax number is assigned to an individual rather than a machine. Mobile phone users can now receive and send data securely while on the move in many of the countries with which Cellnet has "roaming" agreements.

September 1997 saw the launch of Cellnet Genie, a world first and one of the UK's most comprehensive free information sources on the Internet. The Genie website brings together the very latest information on news and current affairs, sport, finance, entertainment, travel and careers on one web site. Customers accessing the site can ask for information to be delivered to their mobile phone via text messages or to an e-mail address.

Cellnet plans to launch a radio-on-demand service, allowing people to access personalised news and sports voice reports - beginning with football - at the touch of a button on a Cellnet digital phone.

Card Services
BT's Card Services have developed and launched Concert Card, BT's first truly international calling card for the global marketplace. Launched initially in three European markets in association with our joint venture partners in Italy and Germany, Concert Card combines local tailoring with BT's global capacity to offer a seamless service to international customers outside of the UK. It is positioned specifically to appeal to business travellers from abroad who have a need to call internationally.

Pricing
Since December 1993, BT has cut call prices by more than £2 billion.

At the same time, we have introduced a wide range of flexible optional discount schemes tailored to suit the needs of all our business and residential customers.

BT has a minimum call charge of 5p at basic rates - 3.8p with PremierLine and Friends & Family discounts.

The biggest reduction in the year came in May 1997 when BT cut the price of national daytime calls by ten per cent. At the same time, regional daytime calls were cut by 3.8 per cent.

In September 1997, the pricing structure of BT payphones was simplified. The 10p minimum fee remains unchanged and customers now receive up to 50 per cent more time for their money on UK long-distance daytime calls.

And the cost of calling has continued falling since the year end. On 29 April 1998, the cost of local calls made in the evening and overnight, Monday to Friday, came down by more than ten per cent - from 1.7p a minute to 1.5p.

In December 1997, BT welcomed a High Court decision to lift a temporary injunction preventing us from circulating a report which compared our prices favourably with those of Cable & Wireless Communications.

BT recognises that customers need to compare what each supplier has to offer and assess which is best for them. But, to make a realistic comparison between BT and other suppliers, customers need to be able to compare like with like. In competitors' advertising activity, it is often their best call discounts that are compared with BT's base call rates and no account is taken of our discount packages.

Marketing
Marketing campaigns have played a key role in relaying the message that BT is committed to cutting prices and to changing the way people in the UK regard the telephone.

Thanks to campaigns such as It's good to talk and discount packages such as Friends & Family, average residential telephone usage has increased by more than two minutes per day since 1994, to a level which is still only around 60 per cent of that in the USA. Usage per line per day has increased by more than 42 seconds in the past 12 months.

Last year saw the launch of several new marketing campaigns aimed at increasing the number of residential customers connected to BT.

Our Acquisition campaign, involving a mailing to all UK households not benefiting from a telephone service, has resulted in over 45,000 new customers choosing to connect to BT.

Our Reconnection campaign has been even more successful, attracting a further 100,000 customers who had previously given up BT service to reconnect for just £9.99. This campaign includes mailings, telemarketing, a new field marketing operation and television advertising.

Finally, nearly 300,000 BT customers opted for a second line during the year, encouraged by marketing special offers promoting half-price installation and other incentives.

Regional dimension
The regional dimension of UK business is becoming increasingly important and BT is working in close partnership with customers in all regions to aid social and economic development.

Examples include some of the more remote parts of the Scottish Highlands and Islands. Since distance is no obstacle, and location is no longer a constraint, the vast majority of 999 calls on the UK mobile network are handled in Inverness, bringing much needed local employment.

And, in Thurso, BT has recently opened a state-of-the-art call centre which is helping us to build those all-important relationships with our customers, and enabling us to treat them in a more responsive and customer-friendly manner.

In February 1998, the Secretary of State for Northern Ireland opened BT's new £9 million call centre in south west Belfast, a project on which we worked with the Northern Ireland Industrial Development Board.

And, in April 1998, BT announced the creation of 800 new jobs over the next 12 months in a new £6 million call centre in Dundee.

As well as using call centres to contact our customers on a regular basis to tell them about BT's products and services, we are increasingly using them to run telemarketing operations on behalf of other companies. In fact, BT now runs more than 100 call centres in the UK.

BT people
At BT, we understand the link between being our customers' "supplier of choice" and our people's "employer of choice". That is why we have such a deep commitment to our people and why we are backing it up by seeking accreditation as an Investors in People company.

By the end of March 1998, around 124,700 people were employed by BT, compared with 227,000 seven years ago. However, during the year, there were increases in certain parts of the business as we have been building on people-intensive activities such as telemarketing and delivering our commitment to world-class quality of service.

We recruited over 500 high-calibre graduates and 500 modern apprentices in the year. BT is a key supporter of the UK Government's New Deal welfare-to-work initiative and plans to help 250 unemployed people get back to work during 1998. We encourage our people to gain appropriate National Vocational Qualifications.

Through our leading-edge policies and programmes, we seek to promote real equality of opportunity throughout the company and actively encourage the employment, training and career development of people with disabilities. We also try to continue to employ any of our people who develop a disability in the course of their career.

In March 1998, BT won top prize in the Opportunity 2000 Awards scheme. These awards recognise UK employers who demonstrate innovative working practices to further women's development at work.

At the 1997 UK Quality Awards, both BT Business Division and BT Northern Ireland were recognised for achievements that led to success for themselves and their customers.

BT is the largest company ever to have won a European Quality Awards prize, and we did so in both 1996 and 1997.

We also run a comprehensive in-house Quality Award scheme. This year's winners included the team which won the bid for the supply and management of an advanced services network for Halifax plc, and the team responsible for a nationwide updating of payphones and phonecard technology.

We conduct a wide-ranging programme of employee opinion research, including an annual company-wide survey. Managers are required to put in place an action plan to address the issues raised by their teams.

The allocation of shares to employees under the BT Employee Share Ownership Scheme amounts to two per cent of annual pre-tax profits.

BT continues to consult and negotiate with recognised unions in the UK as an integral part of our employee relations strategy. We have also set up a European Consultative Council which provides the opportunity for dialogue with representatives from the UK and all our other European operations. The Council is chaired by Chief Executive Sir Peter Bonfield and meets annually.

Corporate citizenship
BT is committed to being a good corporate citizen.

We were a founder member of the Per Cent Club in 1986, and we continue to commit a minimum of 0.5 per cent of our UK pre-tax profits to activities in support of society through our Community Partnership Programme. Our expenditure has grown from £10 million in 1987 to £15 million in 1998, including total donations to charity of £2.6 million. No contributions were made to any political party.

BT's Community Partnership Programme is the largest of its kind in the UK and concentrates its efforts in the areas of health and welfare, education, regeneration, arts and sports, disability, supporting the community activities of BT people, and the environment. We place particular emphasis on education and training, the improvement of communication skills, support for people with disabilities, and the involvement of BT people.

BT is the lead sponsor of the Department for Education and Employment's "out-of-school-hours clubs" project, which was launched in February 1998. Our funding of £150,000 will enable eight consortia of schools, youth and community organisations across England to establish homework clubs, with adult supervision, for disadvantaged children.

And, every year, 50,000 swimmers take part in the UK's largest participative sporting event, the BT Swimathon, which is also our most successful event for generating media coverage. In eight years, it has raised over £10 million for national charities.

In the last year, we have put in place a programme to enable charities and voluntary groups to make more effective use of communications technology. As part of this, we are collaborating with the charity OneWorld On Line to offer training and support for small charities to help them run their own Internet sites.

BT is also bringing the benefits of the new technology it is developing to the people who need it most. For example, BT and the Anchor Trust are developing remote health monitoring systems to help older people continue to live independently. And, as part of the BT Hear for All programme, we have been working with the Royal National Institute for Deaf People to improve deaf people's access to arts venues around the country.

In March 1998, we announced that BT would be one of the corporate sponsors of the Millennium celebrations, not just at the Dome in Greenwich but throughout the country. Because we want to make a contribution that will touch everyone's lives in 2000, we will be launching "Mill-e-Mail" - a free electronic mail address service. This means that everyone in the UK over the age of nine will have his or her own e-mail account.

Education
BT has been a key player in the establishment of a "national grid for learning" in the UK. The aim of the grid is to provide networked access to learning resources for pupils and students of all ages, largely via personal computers located in schools, colleges and libraries.

The development of the grid has been influenced by the Bristol Education Online Network project, in which BT, working with ICL, has been a major participant.

The project, benefiting a group of schools in the Bristol area, has demonstrated the gains which can be made by pupils who are given access to leading-edge computers, servers, software and networks. As well as improvements in academic attainments, the schools reported a decline in vandalism and an increase in parental involvement.

In October 1997, the Prime Minister announced a public/private partnership to provide schools with affordable access to the Internet. He said it would mean that, by 2002, all of the UK's 32,000 schools would have "modern computers, education programmes to go on them, teachers skilled to teach on them, pupils skilled to use them, connected to the superhighway for free and with phone bills as low as £1 per pupil per year."

CampusWorld, BT's Internet-based resource of more than 20,000 pages of educational material, receives more than 100,000 page requests every school day.

BT has one of the most wide-ranging programmes of community support in the education sector and invests around £3 million each year through, amongst other things, award schemes for schools, colleges and universities.

Environment
A company of BT's size inevitably has an impact on the environment through its significant use of energy and other resources, as well as its waste streams. Since an initial review in 1989, we have developed a whole lifecycle approach to environmental management in line with the international environmental management system standard (ISO14001). Targets are set in line with ISO14001 and industry best practice.

Our policy, first published in 1990 and regularly reviewed, covers all significant environmental impacts: procurement, fuel and energy, emissions to air, local impacts, and wastes.

BT now trades electronically with 90 per cent of its largest suppliers, and we have saved at least £10 million as a result. In the majority of these transactions, our supplier does not print or post orders or invoices - everything is done electronically. We aim to expand our electronic trading to include all of our smaller, localised purchasing, covering around 400,000 orders a year and around 1.5 million invoices.

New targets for environmental improvement are set each year and progress is documented in our award-winning Environmental Performance Report.

Later this year, we shall publish a comprehensive set of reports that describe BT's social, environmental and technological interactions with society. Through these reports, we aim to stimulate a wider debate into how BT can contribute to an improved quality of life for all.