The group provides telecommunication services, principally in the United Kingdom, essentially operating as a unitary business. Its main services and products are local and national telephone calls in the United Kingdom, the provision of telephone exchange lines to homes and businesses, international telephone calls made to and from the United Kingdom, the provision of private circuits to businesses, the supply of mobile communication services and equipment to businesses and individuals and the supply of telecommunication equipment for customers' premises.

Turnover included income from UK and overseas telecommunications operators of £1,269m (1997 - £1,165m, 1996 - £1,166m). Approximately 4% (1997 - 3%, 1996 - 2%) of total operating revenues arose from operations outside the United Kingdom. There were no discontinued operations or acquisitions in the years ended 31 March 1996, 1997 and 1998 that require disclosure under Financial Reporting Standard 3.

Unaudited information concerning the group's classified directory business in the UK is shown below.

(a) The company received US$465 million on 12 November 1997 from WorldCom, Inc as a break up fee and partial reimbursement of expenses ("the MCI merger break up fee") following the termination of the BT/MCI merger agreement on 9 November 1997 (note 15 (b).

(a) Amount set aside for the year for allocation of ordinary shares in the company to eligible employees.

(b) Compensation for employees holding share options on 15 August 1997 in respect of the September 1997 special dividend.

(c) Redundancy charges for the year ended 31 March 1997 included £258m (1996 - £266m) being the cost of providing incremental pension benefits for employees taking early retirement. No charge for these pension benefits was made in the year ended 31 March 1998 in view of the surplus in the BT pension scheme disclosed by the most recent actuarial valuation as at 31 December 1996; the previous valuation had shown a deficit.

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. Other operating income, previously presented within operating costs, is now shown separately on the face of the group profit and loss account because of its greater materiality in the year ended 31 March 1998.

In the years ended 31 March 1998, 31 March 1997 and 31 March 1996 the subsidiary undertakings disposed of had a negligible effect on the group's operating profit and cash flows and their net assets were immaterial to the group's financial position.

7. Premium on repurchase of bonds

In August 1996, the company repurchased two of the three series of HM Government held bonds then outstanding for £422m at an effective premium of £60m. The final bond series with a face value of £140m was repaid on maturity on 31 March 1997.

The company's charge to the UK windfall tax, imposed on certain privatised companies on 2 July 1997, is payable in two equal instalments, the first of which was paid on 2 December 1997. The second instalment is payable on 1 December 1998. The charge is based on the group's profit for the financial years ended 31 March 1986 to 31 March 1989.

Total tax on profit on ordinary activities, excluding the windfall tax, varied 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:

Deferred taxation of £30m (1997 - £28m, 1996 - £30m) arising on excess capital allowances and £nil (1997 - £19m, 1996 - £11m) on profits of associated undertakings was not provided in the year ended 31 March 1998.

The deferred taxation charge (credit) was mainly the result of the tax effect of timing differences as follows:

(a) Reclassification between deferred and current taxation on the profit on ordinary activities for prior years.

Earnings per share are calculated by dividing the profit for the financial year ended 31 March 1998, amounting to £1,706m (1997 - £2,077m, 1996 - £1,986m), by 6,394 million shares, the weighted average number of shares in issue during the financial year (1997 - 6,336 million, 1996 - 6,283 million). The fully diluted earnings per share are based on share options outstanding.

The exceptional items in the calculation of the earnings per share before exceptional items in the year ended 31 March 1998 and the individual earnings per share effects are: