HALF YEAR HIGHLIGHTS

The income statement, cash flow statement and balance sheet from which this information is extracted are set out on pages 16 to 22.

¹Before specific items which are material one off or unusual items as defined in note 4 on page 26.

²DSL and LLU connections.

Chairman’s statement

Sir Christopher Bland, Chairman, commenting on the half year results said:

“These strong half year results show sustained momentum across the business with revenues up 3 per cent and earnings per share before specific items up 19 per cent.

“I am pleased to report that we will be paying an interim dividend of 5.1 pence, up 19 per cent on last year, showing our continued commitment to improving shareholder returns andourconfidence for the future.”

Chief Executive’s statement

Ben Verwaayen, Chief Executive, commenting on the second quarter results, said:

"These second quarter results show another strong team performance with every part of the business playing its part.  We have announced today that BT Retail has passed 3 million broadband connections in a fast growing market.We have now reached 1 million LLU connections.21CN is going live in the Cardiff area this month.The business continues to win major transformational contracts, including PepsiCo and Vodafone.

“Revenue has increased for eleven consecutive quarters and earnings per share¹ were up 13 per cent, the eighteenth consecutive quarter of growth. EBITDA¹ continues to grow and was up 2.4 per cent.

“These results underpin our confidence in our ability to grow our revenue, EBITDA, earnings per share and dividends this year." 

¹Before specific items and leaver costs.

The commentary focuses on the results before specific items and leaver costs.This is consistent with the way that financial performance is measured by management and we believe allows a meaningful analysis to be made of the trading results of the group.Specific items are defined in note 4 on page 26.

The income statement, cash flow statement and balance sheet are provided on pages 16 to 22.A reconciliation of EBITDA before specific items to group operating profit is provided on page 31. A definition and reconciliation of free cash flow and net debt are provided on pages 28 to 30.

GROUP RESULTS

Revenue was 4 per cent higher at £4,941 million in the quarter with continued strong growth in new wave revenue more than offsetting the decline in traditional revenue. EBITDA before specific items and leaver costs grew by 2.4 per cent. This is the third quarter of growth and builds on the 1.7 per cent growth reported last quarter. Earnings per share before specific items and leaver costs increased by 13 per cent to 6.0 pence, the eighteenth consecutive quarter of year on year growth.

The strong growth in new wave revenue continued and at £1,736 million was 21 per cent higher than last year.New wave revenue accounted for 35 per cent of the group’s revenue compared to 30 per cent in the second quarter of last year. New wave revenue is mainly generated from networked IT services, broadband and mobility.Networked IT services revenue grew by 10 per cent to £1,001 million, broadband revenue increased by 39 per cent to £486 million and mobility revenue increased by 4 per cent to £72 million.

Networked IT services contract wins were £0.7 billion in the second quarter, with £4.0 billion achieved over the last twelve months.

BT had 9.3 million wholesale broadband connections at September 30, 2006, including 838,000 local loop unbundled lines, an increase of 2.8 million connections year on year and 626,000 connections in the quarter. Over 46 per cent of all UK homes now subscribe to broadband services, comprising both DSL and cable services (Source: Informa, Telecoms Market, September 2006).

Revenue

Revenue from the group’s traditional businesses declined by 4 per cent continuing recent trends. This reflects regulatory intervention, competition, price reductions and also technological changes that we are using to drive customers from traditional services to new wave services.

Major corporate (UK and international) revenue showed growth of 5 per cent, with 11 per cent growth in new wave revenue more than offsetting the decline in traditional services.Migration from traditional voice only services to networked IT services continued with new wave revenue representing 60 per cent of all major corporate revenue.

Revenue from smaller and medium sized (SME) UK businesses grew by 2 per cent year on year. New wave revenue grew by 23 per cent driven by continued growth in broadband and other new wave services.In the declining UK calls market, BT has gained market share in the SME sector through innovative pricing plans and a focus on propositions that bring together IT, broadband and communications to allow business people to concentrate on running their business.

Consumer revenue in the second quarter was 6 per cent lower, primarily due to wholesale line rental (WLR) substitution. Growth in new wave revenue of 44 per cent continues to reduce our dependence on traditional revenue which has declined by 12 per cent with the strategic shift towards new wave products and services. New wave revenue now represents 17 per cent of the total consumer revenue.

The 12 month rolling average revenue per consumer household (net of mobile termination charges) of £254 increased by £1 compared to last quarter, the third successive quarter of growth. Improvements in the proportion of customers upgrading from the basic broadband package and more new customers subscribing for higher value packages has more than offset the lower call revenues.BT Total Broadband reflects our strategy to drive value into the broadband market and we reached 3 million BT Retail broadband connections in October.Contracted revenues increased by 1 percentage point to 69 per cent compared to last quarter, 3 percentage points higher than last year.

Wholesale (UK and Global Carrier) revenue increased by 14 per cent driven by WLR and LLU. UK Wholesale new wave revenue increased by 41 per cent to £339 million, mainly driven by broadband.

Operating results

Group operating costs before specific items increased by 4 per cent year on year to £4,311 million.Staff costs before leaver costs increased by £64 million to £1,274 million due mainly to the additional staff needed to support networked IT services contracts, increased levels of activity in the network and 21CN activities (including capital work) as well as cost inflation.Leaver costs were £33 million in the quarter (£37 million last year).Payments to other telecommunication operators increased by £45 million to £1,034 million. Other operating costs before specific items of £1,442 million increased by £47 million mainly due to increased costs of sales from growth in networked IT and other new wave services which were partly offset by cost savings from our efficiency programmes.Depreciation and amortisation increased by 2 per cent year on year to £703 million.

Group operating profit before specific items and leaver costs increased by 3 per cent to £715 million.Operating profit margin before specific items remained flat year on year at 14 per cent.

Earnings

Net finance costs were £55 million, an improvement of £45 million against last year.This includes net finance income associated with the group’s defined benefit pension scheme which was £105 million in the second quarter, £41 million higher than last year.Repayment of maturing debt last year, fair value movements on derivatives that are economic hedges but are not fully effective hedges under the IAS 39 definitions and lower average net debt have also contributed to the reduction in net finance costs.This reduction was offset by a £31 million net gain last year on the early redemption of the US dollar 2008 LG Telecom convertible bond.

Profit before taxation, specific items and leaver costs of £665 million increased by 12 per cent.

The effective tax rate on the profit before specific items was 24.5 per cent (24.9 per cent last year) reflecting the continued focus on tax efficiency within the group.

Earnings per share before specific items and leaver costs increased by 13 per cent to 6.0 pence.

Specific items

Specific items are defined in note 4 on page 26. There was a net charge before taxation of £3 million in the quarter (£70 million charge last year). Costs of £23 million relating to the further rationalisation of the group’s office portfolio were incurred in the quarter (£nil last year). This was partly offset by a profit of £20 million arising from the group’s disposal of 6 per cent of its equity interest in Tech Mahindra Limited, an associated undertaking, reducing the group’s holding to 36 per cent. In the prior year, a provision of £70 million was recognised relating to the incremental and directly attributable costs in connection with creating the Openreach line of business.

Earnings per share after specific items were 5.7 pence in the quarter (4.4 pence last year).

Cash flow and net debt

Net cash inflows from operating activities in the second quarter amounted to £1,191 million compared to £1,263 million last year, largely due to higher working capital outflows.

Free cash flow was a net inflow of £338 million in the second quarter compared to £503 million last year mainly reflecting the higher working capital outflows and increased capital expenditure.The year on year deterioration reflects the timing of receipts and payments and is expected to reverse in the second half of the year. The share buyback programme continued with the repurchase of 48 million shares for £102 million during the quarter.Net debt was £8,079 million at September 30, 2006, £54 million below the level at September 30, 2005.Free cash flow and net debt are defined and reconciled in notes 8 and 9 on pages 28 to 30.

Pensions

The IAS 19 net pension obligation at September 30, 2006 was a deficit of £2.0 billion, net of tax, being £0.6 billion lower than the level at September 30, 2005. The BT Pension Scheme had assets of £35.9 billion at September 30, 2006.The triennial funding valuation as at December 31, 2005 is currently being performed and we expect this exercise to conclude by December 31, 2006.

21^st Century Network

BT’s 21st Century Network programme made significant progress during the quarter. The construction of 10 per cent of the UK’s core communications infrastructure is in place and fully operational.Site planning and preparation has been completed in all core and metro nodes in South Wales, and at a further 100 sites across the country.Nine new fibre rings, totalling 2,100 kilometres, have been installed in South Wales and 1,500 man years of IT systems development work has been carried out.All of this preparatory work is required to support the migration of the first end user customers to 21CN.This is scheduled to take place near Cardiff at the end of November.

Readiness testing of the network, systems, services and customer premises equipment (CPE) is well advanced.A test facility in Swansea, where other communications providers can test their services, was opened on October 25, 2006.Live voice calls have already been carried over the new 21CN network, built using 21CN hardware and software, in South Wales.

BT and representatives from across industry have agreed a single end user communications programme to help consumers and single site small and medium enterprises understand better what next generation networks are and to provide a single source of detail and further information. The programme, which launched in October, operates under a single independent brand – “Switched-On”.

Shareholder distributions

An interim dividend of 5.1 pence per share, an increase of 19 per cent on last year, will be paid on February 12, 2007 to shareholders on the register on December 29, 2006. The ex dividend date is December 27, 2006. During the first half year 69 million shares were repurchased for £167 million under the group’s share buyback programme.

Prospects

Our performance underpins our confidence that we will continue to grow revenue, EBITDA, earnings per share and dividends this financial year. Revenue growth will continue to be fuelled by new wave services; the EBITDA improvement will be driven by the continued growth in BT Retail’s profitability and an acceleration through the year of the EBITDA growth in BT Global Services.

We are confident in our ability to improve shareholder returns and accelerate the strategic transformation of the business.

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The half year report, which contains the independent review report of the auditors, will be published in The Times on November 10, 2006.

The third quarter results are expected to be announced on February 8, 2007.

LINE OF BUSINESS RESULTS

Openreach, a new line of business created in accordance with the regulatory framework agreed with Ofcom (the Undertakings), was launched on January 21, 2006. It is responsible for ensuring that all communications providers have transparent and equivalent access to the BT local network, and comprises a work force of approximately 30,000 people. Its primary products are wholesale line rental (WLR) and local loop unbundling (LLU).

In order to assist readers in understanding the year on year performance, we have restated the comparative line of business results. These restatements also reflect the impact of the new internal trading arrangements that have been implemented due to the creation of Openreach. There is no change to the overall group reported results.

BT Global Services

*Restated to reflect changes in intra-group trading arrangements.

BT Global Services revenue grew in the second quarter by 3 per cent to £2,157 million. New wave and non UK revenue was £1,661 million, an increase of 6 per cent year on year. UK traditional revenues decreased 8 per cent year on year, with continuing falls experienced in voice related and dial IP revenues. MPLS revenue rose by 33 per cent to £134 million, with the growth split evenly between the UK and overseas. Our IP network infrastructure currently extends to 128 countries.

Order intake remained firm with networked IT services contract orders of £0.7 billion, which included a 7 year agreement with PepsiCo to provide and manage an integrated portfolio of services for their international division. Total orders in the quarter amounted to £1.6 billion, £0.1 billion higher than last year, taking the value of total orders achieved over the last twelve months to £8.1 billion. Over 40 per cent of the total order intake was generated outside the UK. During the quarter 223 new customers were signed, bringing the total for the year to 453.

EBITDA before leaver costs increased year on year by £9 million to £229 million, growth of 4 per cent year on year.Gross profit improved by £26 million to £638 million, an increase of 4 per cent, while gross profit margin improved by 0.5 percentage points to 30 per cent. SG&A costs rose 4 per cent reflecting pay inflation, increased IP networking costs and also transformation costs incurred in creating a single global services organisation. Depreciation charges fell by £1 million compared with the previous year to £157 million while leaver costs were £17 million lower at £5 million. Overall, this contributed to operating profit of £67 million, 68 per cent higher than last year.

BT continues to make good progress on its NHS National Programme for Information Technology contracts. For N3, the broadband network that underpins the programme, we have installed more than 15,500 connections and are on schedule to complete the 18,000 rollout by March 2007. BT now has more than 287,000 registered users on Spine, one of the world’s largest transactional database and messaging services. In London, where we are the Local Service Provider, BT has delivered capability to 40 per cent of trusts.