The allotted, called up and fully paid share capital of the company was £1,603m at 31 March 1998 (1997 - £1,589m), representing 6,411,214,670 ordinary shares (1997 - 6,355,115,816 ordinary shares and one special rights redeemable preference share).

Certain special rights, set out in the company's articles of association, were attached to the special rights redeemable preference share issued to HM Government. The share, which carried no right to capital or profits beyond its nominal value, was redeemed at par by HM Government on 10 September 1997.

Of the authorised but unissued share capital at 31 March 1998, 261 million ordinary shares were reserved to meet options granted under the employee share option schemes described in note 28.

Ordinary shares allotted during the year were as follows:

(a) Consideration excludes contributions from group undertakings as described in note 23(d).

During the year ended 31 March 1998 a number of shareholders elected to take all or part of their interim dividend in shares at a value of £18m. The nominal value of the shares issued has been funded out of the capital redemption reserve and the amount of the dividend has been added back to the profit and loss reserve.

(a) The share premium account, representing the premium on allotment of shares and the capital redemption reserve are not available for distribution.

(b) Aggregate goodwill at 31 March 1998 in respect of acquisitions in the current and earlier years of £3,603m (1997 - £2,671m, 1996 - £2,477m) has been written off against retained earnings. The goodwill written off in the year ended 31 March 1998 mainly arose in connection with the acquisition of the interest in Cegetel; that written off in the year ended 31 March 1997 mainly arose in connection with the acquisition of shares not already owned in BT Telecomunicaciones SA and the acquisition of Syntegra Groep BV; that written off in the year ended 31 March 1996 mainly arose in connection with an acquisition made by MCI.

(c) The cumulative foreign currency translation adjustment, which decreased retained earnings at 31 March 1998, was £130 million (1997 - £56m decrease, 1996 - £20m increase).

(d) During the year ended 31 March 1998 the company issued shares at a market value of £203m in respect of the exercise of options awarded under its principal savings-related share option scheme. Employees paid £118m to the group for the issue of these shares and the balance of £85m comprised contributions to the qualifying employee share ownership trust from group undertakings.

(e) 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 £2,150m (1997 - £1,475m, 1996 - £2,339m). As permitted by Section 230 of the Companies Act 1985, no profit and loss account of the company is presented.

Future minimum operating lease payments for the group at 31 March 1998 were as follows:

Payable in the year ending 31 March:

Operating lease commitments were mainly in respect of leases of land and buildings.

At 31 March 1998, 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 company has guaranteed certain borrowings of subsidiary undertakings amounting to £1,330m (1997 - £1,577m).

Satellite consortia, in which the company has participating interests, are organisations without limited liability. At 31 March 1998, the company's share of the aggregate borrowings of these consortia amounted to £188m (1997 - £179m).

Outstanding at 31 March 1998 and 1997 were warrants entitling the holders to subscribe in 1999 for US dollar 8.765% guaranteed bonds at par, repayable in 2009, to be issued by the group with a total principal value equivalent to £119m (1997 - £123m).

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.

As explained in note 15(b), the company's merger agreement with MCI (the BT/MCI merger) was terminated on 9 November 1997. Individuals purporting to represent classes of MCI shareholders have now filed seventeen complaints in the Court of Chancery in the State of Delaware (the "Delaware Shareholder Class Actions"), asserting claims in connection with the original and renegotiated terms of the then-proposed BT/MCI merger. MCI and certain of its officers and directors, including officers of the company who served as MCI directors, are named as defendants in all seventeen Delaware Shareholder Class Actions. The company is named as a defendant in fifteen of these cases. The original and amended complaints filed in these fifteen cases collectively allege that the company breached and aided and abetted breaches of fiduciary duties owed to MCI shareholders in connection with the then-proposed BT/MCI merger. In addition, amended complaints in five of the Delaware Shareholder Class Actions assert claims in connection with the pending WorldCom/MCI merger, including challenges to the merger termination fee paid to the company and the company's right to receive cash in exchange for its Class A common shares in MCI. Four of these amended complaints name the company as a defendant. The court, having issued an order consolidating fifteen of the Delaware

Shareholder Class Actions, subsequently directed the plaintiffs to submit a proposed order vacating that consolidation order and to submit a new proposed order of consolidation. The parties have agreed that the defendants are not obligated to respond to the complaints filed in these fifteen cases until the consolidation issue has been resolved and the plaintiffs serve the defendants with a consolidated and amended complaint. In the two Delaware Shareholder Class Actions that were not included in the court's initial consolidation order, neither the company nor its officers who served as MCI directors have been served, and have therefore not responded to the complaints.

In addition, after the renegotiation of the terms of the BT/MCI merger, an MCI shareholder filed a derivative action on behalf of MCI in the Court of Chancery in the State of Delaware. The complaint names the company and certain officers and directors of MCI, including officers of the company who served as MCI directors, as defendants. Among the claims asserted in the complaint is the allegation that the company aided and abetted breaches of fiduciary duty in connection with the proposed BT/MCI merger. The complaint does not take into account the subsequent WorldCom/MCI merger agreement. The parties have agreed that defendants need not respond to the complaint until the plaintiffs serve an amended complaint. No such complaint has yet been served.

In addition, individuals purporting to represent a class of persons who purchased MCI shares during the period 11 July 1997 to 21 August 1997 have filed a consolidated amended class action complaint (the "Complaint") under the caption In Re MCI Communications Corp Securities Litigation, now pending in the federal district court for the District of the District of Columbia. The Complaint supersedes certain earlier federal securities class action complaints. The Complaint alleges that MCI, the company and certain MCI officers and directors, including officers of the company who served as MCI directors, violated the federal securities laws by failing timely to disclose that MCI was renegotiating the terms of the merger with the company.

The company believes that it will prevail in the foregoing actions.

The total pension cost of the group expensed within staff costs was £177m (1997 - £291m, 1996 - £284m), of which £169m (1997 - £281m, 1996 - £275m) related to the group's main pension scheme, the BT Pension Scheme (BTPS). The reduction in the cost in the year ended 31 March 1998 was mainly attributable to the greater than assumed return on the BTPS assets in the three year period to 31 December 1996, i.e. between the last two actuarial valuations. The increase in the charge in the year ended 31 March 1997 was mainly attributable to the increase in interest on the pension provisions in the balance sheet which had risen by £311m to £1,291m in the year ended 31 March 1997.

The pension cost for the year ended 31 March 1998 was based on the valuation of the BTPS at 31 December 1996. The pension cost for the years ended 31 March 1996 and 1997 were based on the valuation of the BTPS at 31 December 1993. The valuations, carried out by professionally qualified independent actuaries, used the projected unit method. The valuations were determined using the following long-term assumptions:

At 31 December 1996, the assets of the BTPS had a market value of £19,879m and were sufficient to cover 100.3% of the benefits that had accrued to members 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 taking early retirement under release schemes since that date. This cost, which amounted to £224m in the year ended 31 March 1998, will be taken into account at the next planned actuarial valuation at 31 December 1999. The incremental pension costs of employees taking early retirement in the years ended 31 March 1997 and 1996, £258m and £266m, respectively were included in redundancy costs charged to the profit and loss account in those years.

In the year ended 31 March 1998, the group made regular contributions of £238m (1997 - £232m, 1996 - £234m).

Certain activities of the BTPS are carried out at the company's pension centre, all costs of which are borne by the company. These costs have not been apportioned for accounting purposes between those attributable to the BTPS and those attributable to the company because functions maintained for both entities cannot be meaningfully divided between them. The company occupies eight properties owned by the scheme on which an annual rental of £3m 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 1998, the UK equities included 42 million (1997 - 56 million) ordinary shares of the company with a market value of £270m (1997 - £250m).

The emoluments of the directors for the year ended 31 March 1998 and the gains made by them on the exercise of share options were, in summary, as follows:

(a) Comparative figures have been restated.

(b) Payments to non-executive directors include fees paid to their principal employer of £38,000 (1997 - £31,000, 1996 - £24,000).

More detailed information concerning directors' remuneration, shareholdings, options and long-term incentive plans is shown in the Report on directors' remuneration.

The company has a share ownership scheme used for employee share allocations (profit sharing), savings-related share option schemes for its employees and those of participating subsidiaries and further share option schemes for selected group employees. It also has a performance share plan and a long-term remuneration plan.

The major share option scheme, the BT 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 overseas. Under the other share option schemes, share options are normally exercisable between the third and tenth anniversaries of the date of grant. Options outstanding under these share option schemes at 31 March, together with their exercise prices and dates, were as follows:

During the year ended 31 March 1998, BT granted 60 million options (1997 - 79 million, 1996 - nil) under the employee sharesave schemes. The weighted average fair value of share options granted during the year ended 31 March 1998 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 growth rates of approximately 5%; risk free interest rates of 7% on options exercisable three years after the date of grant and 8% on options exercisable five years after the date of grant; and expected volatility of approximately 18%.

The weighted average fair value of the share options granted in the year ended 31 March 1998 was 80p (1997 - 85p) for options exercisable three years after the date of grant and 120p (1997 - 107p) for options exercisable five years after the date of grant. The total value of share options granted by BT in the year ended 31 March 1998 was £70m (1997 - £83m) . In accordance with UK accounting practices, no compensation expense is recognised for the fair value of options granted. See note 30 for the treatment under US GAAP.

Options granted, exercised and lapsed under these share option schemes during the years ended 31 March 1996, 1997 and 1998 and options exercisable at 31 March 1996, 1997 and 1998 were as follows:

Long-term remuneration and performance share plans
A long-term remuneration plan (LTRP) and a performance share plan (PSP) were introduced for employees of the group in 1994 and 1995, respectively. Under the plans, company shares are acquired by an employee share ownership trust and are conditionally awarded to participants, although participants will only be entitled to these shares in full at the end of a five-year period under the LTRP and the end of a three-year period, which may be extended to four or five years, under the PSP if, at the end of the applicable period, the company has met the relevant pre-determined corporate performance measure and normally, if the participants are still employed by the group. Awards of shares were granted in each of the years from 1994 to 1997 under the LTRP and from 1995 to 1997 under the PSP. 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 Financial Times (the FT-SE 100 index), at the beginning of the relevant performance period.

At 31 March 1998, 5.8 million shares in the company (1997 - 3.5 million) were held in trust for the PSP and 4.6 million shares (1997 - 2.7 million) were held in trust for the LTRP. Dividends 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:

The values of possible future transfers of shares under the plans were based on the company's share price at 31 March 1998 of 650.0p (1997 - 445.5p). The provisions for the costs of the plans were based on best estimates of the company's performance over the plans' performance periods, relating to those portions of the plan performance periods from commencement up to the financial year end.

The auditors' remuneration for the year ended 31 March 1998 for the group was £2,396,000 (1997 - £2,135,000, 1996 - £2,138,000), including £1,216,000 (1997 - £1,167,000, 1996 - £1,170,000) for the company.

The following fees were paid or are payable to the company's auditors, Coopers & Lybrand, in the UK for the year ended 31 March 1998:

In addition, fees of £1,295,000 (1997 - £1,888,000, 1996 - £1,395,000) were paid or are payable to other members of Coopers & Lybrand International for the year ended 31 March 1998 in respect of audit and other services to the company's overseas subsidiary undertakings and in respect of other services to the group.

The group's consolidated financial statements are prepared in accordance with accounting principles generally accepted in the UK (UK GAAP), which differ in certain significant respects from those applicable in the US (US GAAP).

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) 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.

(b) Accounting for redundancies
Under UK GAAP, the group generally charges to profit and loss direct severance costs, primarily severance payments and payments in lieu of notice, in the period in which employees leave the group. The cost of providing incremental pension benefits in respect of workforce reductions are taken into account in determining current and future pension costs, unless the most recent actuarial valuation under UK actuarial conventions shows a deficit. In this case, the costs of providing incremental pension benefits are included in redundancy charges in the year in which the employees leave the group.

Under US GAAP, if employees are encouraged to leave voluntarily by the use of special termination benefits, then the termination benefits, primarily severance payments, payments in lieu of notice and the associated cost of providing incremental pension benefits, are charged against profits in the period in which the termination terms are agreed with the employees. If staff terminations are likely to be enforced, then the termination benefits are charged against profits at the time when the group is committed to the staff terminations and the associated costs can be reasonably estimated.

(c) 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. The amount of interest capitalised is determined by reference to the average interest rates on outstanding borrowings. At 31 March 1998 under US GAAP, gross capitalised interest of £525m (1997 - £722m) with regard to the company and its subsidiary companies was subject to depreciation generally over periods of 3 to 25 years.

(d) Goodwill
Under UK GAAP, the group writes off goodwill arising from the purchase of subsidiary and associated undertakings 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, or when recognising a permanent diminution in value. Under US GAAP, such goodwill is held as an intangible asset in the balance sheet and amortised over its useful life and only the unamortised portion is included in the gain or loss recognised at the time of divestment. Gross goodwill under US GAAPat 31 March 1998 of £925m (1997 - £1,986m)was subject to amortisation over periods of 3 to 40 years. Goodwill relating to MCI has been unchanged since 31 October 1997 when the investment ceased to have associated company status. The value of goodwill is reviewed annually and the net asset value is written down if a permanent diminution in value has occurred.

(e) Mobile cellular telephone licences, software and other intangible assets
Certain intangible fixed assets recognised under US GAAPpurchase 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.

(f) Investments
Under UK GAAP, investments are held on the balance sheet at historical cost. 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 shareholder's equity, respectively. The net unrealised holding gain on available-for-sale securities for the year ended 31 March 1998 which related primarily to the investment in MCI was £1,315m (1997 - £nil, 1996 - £nil).

(g) Deferred taxation
Under UK GAAP, provision for deferred taxation is generally only made for timing differences which are expected to reverse. Under US GAAP, deferred taxation is provided on a full liability basis on all temporary differences, as defined in SFASNo. 109.

At 31 March 1998, the adjustment of £2,095m (1997 - £1,942m) reconciling ordinary shareholders' equity under UK GAAP to the approximate amount under US GAAP included the tax effect of other US GAAP adjustments. This comprised an adjustment decreasing non-current assets by £76m (1997 - £138m decrease); an adjustment increasing current assets by £68m (1997 - £408m decrease); an adjustment decreasing current liabilities by £184m (1997 - £191m decrease); an adjustment decreasing minority interests by £3m (1997 - £nil) and an adjustment increasing non-current deferred tax liabilities by £2,274m (1997 - £1,587m increase).

(h) 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.

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.