Around 350,000 phone users in south Wales will be the first in the UK to benefit from the latest internet-based technology.
Old-style phone systems are being phased out
Homes in Cardiff, Pontypridd and Bridgend areas are being switched across to 21CN (21st Century Network).
BT plans to replace the old phone network with a broadband-based connection.
Up to £10bn is being spent over five years, and eventually every exchange in the UK will be updated.
Paul Reynolds, BT Wholesale's chief executive, said 21CN promised "a more simple, seamless, integrated communications experience for everyone".
When complete, it will give the UK one of the most advanced and flexible communications infrastructures in the world.
Full details of the project were revealed on Monday, in the company of First Minister Rhodri Morgan and Welsh Secretary Peter Hain.
BT believes it is ahead of all other telecommunications companies in the world in taking the latest step towards transforming its network.
Three "super exchanges" are to be developed in Cardiff, Swansea and Newport, with a further 10 new transmission sites to be established across the region.
The eventual plan is to move all BT subscribers from the traditional PSTN (public switched telephone network) to a new IP (internet protocol) network.
Broadband is still not available in all areas
Customers in the pilot scheme area in south Wales will be transferred to the new network in 2006, with the remainder of subscribers moving by the end of the decade.
"In 10 years time there will be no phone connection in any of our customers' homes," Mr Reynolds told the BBC news website recently.
"There will be a broadband connection connecting our customers to a world of service possibilities."
Those possibilities will include the ability to download entertainment on demand.
In the meantime, some areas of Wales are still waiting for the chance to experience broadband.
Last month, extra cash to bridge the "digital divide" between areas of Wales with broadband and those without was approved by the European Commission.
Although broadband is available to 98% of Wales, there are still 35 "blackspot" areas which cannot access it.