BT's push for growth from new areas such as broadband internet access to offset competition in its core telephony market finally seemed to be bearing fruit yesterday as the company reported a 10% jump in annual profits.

Sir Christopher Bland, BT's chairman, said the company's drive for new revenues from broadband, large IT projects and mobile services was paying off. "We were comfortable before, we are even more comfortable now," he said. "But not complacent."

Analysts had feared that increasing competition from companies such as Carphone Warehouse, Tesco Telecom and Centrica's One.Tel would eat into BT's traditional revenues faster than the company could gain new sources.

BT is hurting in its core residential market. It is losing a net 100,000 customers a month and its share of the market is now 69%. The company hopes new price tariffs on July 1 will help arrest that decline.

But "new wave" revenues are the big hope. In the three months to end March, the company's fourth quarter, revenues from areas such as broadband increased 38% to just over £1bn, offsetting a 6% drop in core income to £3.7bn. Total turnover for the quarter, at more than £4.7bn, was slightly higher than the previous year.

For the year as a whole BT saw revenues from its new businesses increase 30% to £3.4bn, helping to keep total sales flat at £18.5bn. An extensive cost-cutting regime helped annual pre-tax profits increase 10% to just over £2bn and the group boosted its dividend by almost a third to 8.5p. The company, which was struggling with debts of almost £30bn three years ago, reduced its borrowings by 12% in the year to under £8.5bn.

The results were warmly welcomed by the market and BT's shares were the second-biggest riser in the FTSE 100, up 5.25p at 178.75p.

The management refused to give any guidance about whether performance in the fourth quarter would continue into the current year. Just over a year ago, chief executive Ben Verwaayen was forced to admit that the company had missed revenue targets and since then he has been reticent about setting new goals.

Since Mr Verwaayen took over he has made broadband internet access a central plank of the company's transformation. Broadband revenues increased 112% to £165m in the three months to end March and by 107% to £491m in the year as a whole.

The company has close to 2.5 million customers using its lines to get fast, always-on access to the internet and is adding 35,000 a week. Its own internet service provider business has about a million customers with half of those on the top-of-the-range BT Yahoo Broadband offering.

Later this year BT will launch a phone service aimed at tying broadband customers even closer to the company.

Known as Bluephone, the service is aimed at the mobile phone market but when a user is at home it will switch to the BT fixed-line network and calls will be considerably cheaper.

Brandishing one of the new Motorola handsets which BT will be selling when it launches the service, Mr Verwaayen proclaimed: "It's everything you want in a mobile phone and the price of a BT line, with the quality of a BT product. The best of both worlds in one."

· Separately, Hong Kong based conglomerate Hutchison Whampoa yesterday said its 3 mobile phone service has 1.73 million customers across its seven regions.

The company refused to say how many are in each country, but 3 UK, which launched over a year ago, is believed to have about 500,000 customers.