The Foreign Office said the first meeting between Jose Ramos Horta, the principal leader in exile of the Fretilin movement, and Mr Goodlad had been "cordial". A spokesman said Britain wanted to listen to all sides on the Timor question, but did not intend to signal recognition of Fretilin or an independent East Timor.
Indonesia seized the territory in 1975, shortly after the withdrawal of Portugal, the former colonial power. As many as 200,000 people may have been killed during the annexation.
The annual world review of human rights by the US State Department said this week that despite a superficial adherence to democracy, Indonesia was a "strongly authoritarian" state with numerous human rights abuses.
Britain has been accused of supporting oppression in East Timor through arms sales to Indonesia, but the Foreign Office said Mr Horta had not mentioned it at yesterday's meeting.