Total operating costs from continuing activities were reduced by 3% in the 2004 financial year to £15,823 million after reducing by 13% in the 2003 financial year. As a percentage of group turnover from continuing activities, operating costs from continuing activities, excluding goodwill amortisation and exceptional items, reduced from 87% in the 2002 financial year, to 86% in the 2003 financial year and 85% in the 2004 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 £7 million, £198 million and £2,696 million in the 2004, 2003 and 2002 financial years, respectively. These exceptional costs are considered separately in the discussion which follows.

Staff costs from continuing activities increased by 4% to £4,412 million in the 2004 financial year after being broadly flat in the 2003 financial year. In the 2004 financial year, the number of staff employed in the continuing activities decreased by 4,800 to 99,900 at 31 March 2004 after decreasing by 3,900 in the 2003 financial year. Increased pay rates and national insurance and a £141 million increase in the pension charge offset the impact of the lower headcount and leaver costs in the 2004 financial year. The increased leaver costs and salary increases offset the impact of lower headcount in the 2003 financial year.
     The allocation for the employee profit share scheme, included within staff costs, was £20 million in the 2004 financial year. The allocation for the 2003 and 2002 financial years was £36 million and £25 million, respectively.
     Early leaver costs from continuing activities before exceptional items of £202 million were incurred in the 2004 financial year, compared with £276 million in the 2003 financial year and £186 million in the 2002 financial year. This reflects BT’s continued focus on reducing headcount and improving operational efficiencies. Leaver costs include the cost of enhanced pension benefits provided to leavers which amounted to £1 million, £60 million and £21 million in the 2004, 2003 and 2002 financial years, respectively. In the 2002 financial year 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 financial year amounted to £140 million.
     The depreciation charge from continuing activities decreased by 3% in the 2004 financial year to £2,921 million after increasing by 1% in the 2003 financial year. The decrease in the 2004 financial year reflects more efficient capital expenditure over recent years. 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 financial year also reflects a reduction in the estimated asset lives, due to BT’s continuing investment in its networks and broadband.
     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 £15 million in the 2004 financial year compared with £24 million in the 2003 financial year and £124 million in the 2002 financial year. The low charge in the 2004 and 2003 financial years reflect the impact of the demerger of mmO₂ and the impairment of goodwill in the 2002 financial year which significantly reduced the carrying value of goodwill. Goodwill on acquisitions before 1 April 1998 was written off directly to reserves.
     Payments to other telecommunications operators from continuing activities increased by 1% in the 2004 financial year to £3,963 million after reducing by 8% in the 2003 financial year. The increase in the payments for the 2004 financial year reflects the increase in both UK and overseas payments. The payments in the 2002 financial year 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 following the re-integration of Concert.
     Other operating costs before goodwill amortisation and exceptional items, which reduced by 6% in the 2004 financial year to £5,182 million after increasing by 8% in the 2003 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 decrease in the 2004 financial year was largely due to efficiency cost savings offset by the adverse impact of currency movements. 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 and the costs associated with the re-integrated activities of the former Concert global venture.
     The exceptional items within operating costs for the 2004, 2003 and 2002 financial years are shown in the table below.

In the 2004 financial year, net exceptional operating costs are the estimated rectification costs relating to a major incident offset by the £23 million release of the surplus exceptional bad debt provisions made in the 2002 financial year.      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.       Other exceptional items in the 2002 financial year included:
	costs of £172 million associated with the unwind of the Concert global venture, discussed further in Associates and joint ventures
	charges of £68 million in relation to BT Retail’s call centre rationalisation programme, reducing the number of call centres from 104 to 30 over two years
	bad 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 year
	costs of £98 million associated with the demerger of mmO2
	other charges of £77 million including impairment of payphone assets.

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