The tests are currently limited to around 100 BT employees in the London area, but could lead to a commercial rollout as early as summer 2005.
Technical details of the device aren't yet available, but it is understood that it will support 'time-lapsed' viewing, in which a programme would be available over BT's broadband network some time after its original transmission.
BT also hopes to make films available over the service.
BT has long been keen to use its high-speed ADSL network to transmit television footage that could be viewed on a home TV. At present, its network isn't fast enough to support real-time video-streaming, as the maximum speed available to consumers is a one megabit per second (Mbps) service.
A spokesman explained that BT had calculated that a successful video-on-demand service would need 2Mbps connections.
"Our view is that you don't need a four megabits per second link. Everything a residential customer needs you can do with two megabits per second," said the BT spokesman, in a sideswipe at Cable & Wireless which is rolling out a 4Mbps service through its Bulldog subsidiary.
Reports in national papers over the weekend and on Monday claimed that BT was going into battle against Rupert Murdoch's BSkyB, but this has been denied by BT.
"There won't be a war with BSkyB. They'll hopefully be one of our content partners," said the BT spokesman.
BT also says that it isn't planning to manufacture set-top boxes itself, but is hoping that manufacturers of such devices will include support for its TV service.
BT was granted a broadcasting licence in March 2002, giving it the right to transmit TV and video in the UK.
City investors reacted badly in early 2002 in the past to the suggestion that BT would attempt to turn itself into a broadcaster. Since then, the telco has made big strides in the broadband space, so broadcasting may now be seen as less of a distraction.