Share option schemes
The major share option scheme, the BT Employee Sharesave Scheme, is savings related and the share options are normally exercisable on completion of a three or five year Save As You Earn contract. A similar savings related scheme exists for group employees based outside the UK. Following BT’s rights issue in 2001, the option prices under these schemes were reduced and the number of shares under option was increased, by a factor of approximately 11.3%. The table below sets out the adjusted figures.

Following the rights issue, options under the BT Share Option Scheme, the BT US Stock Option Plan, the BT Worldwide Share Option Scheme, and the BT Global Share Option Plan (the ‘Executive Option Plans’) were adjusted in the same way as the options under the Sharesave schemes.

Following the scheme of arrangement and demerger in November 2001, all options under the savings related schemes became exercisable for a period of six months. On expiry of this period, these options lapsed to the extent to which they had not been exercised. Shortly before the scheme of arrangement, 57 million shares were allotted to a special purpose trust to satisfy options which were likely to be exercised during that six month period.

Participants in the Executive Option Plans were given the opportunity to (i) conditionally on the scheme of arrangement being sanctioned by the Court, release their options over British Telecommunications plc shares in consideration for the grant of options in their employer’s new holding company (BT Group plc or mmO2 plc); or (ii) if their options were already exercisable, exercise their options over ordinary shares irrespective of whether the scheme of arrangement was sanctioned by the Court; or (iii) if their options were not already exercisable, conditionally on the scheme of arrangement being sanctioned by the Court, exercise their options immediately following that time but prior to the reduction of BT Group’s share capital.

To the extent that they had not already been exercised, these options lapsed on 16 November 2001, the effective date of the scheme of arrangement.

On 17 December 2001, replacement unapproved options over BT Group shares were granted under the BT Group Legacy Option Plan to all participants in the Executive Option Plans who had released their options over British Telecommunications plc shares. The value of the replacement options was determined by averaging the combined prices of BT Group plc and mmO2 plc shares over the 20 dealing days following the demerger on 19 November 2001. This resulted in a factor of 1.3198 being applied to the former option over British Telecommunications plc shares in order to give the number of BT Group shares under the new option. The option prices of the original options were also adjusted to take account of the different number of shares under option.

Options outstanding under these share option schemes at 31 March 2002 and 2001, together with their exercise prices and dates, were as follows:

Normal dates of exercise	2002 Option price per share (adjusted)	2002 millions (adjusted)	2001 Option price per share	2001 millions
Savings-related schemes
British Telecommunications plc shares
2001	240p	-	267p	58
2001	523p	-	583p	3
2002	322p	26	359p	44
2002	852p	2	949p	3
2003	465p	30	518p	35
2003	734p	3	818p	5
2004	757p	13	844p	23
2005	653p	18	727p	32
Total		92		203
BT Group Legacy Option Plan
British Telecommunications plc shares
1993-2009	-	-	289p-1206p	5
2001-2010	-	-	885p	2
2002-2011	-	-	885p	3
2003-2011	-	-	885p	3
2004-2011	-	-	-	-
BT Group plc shares
1993-2009	231p-727p	4	-	-
2001-2010	602p	3	-	-
2002-2011	602p	6	-	-
2003-2011	602p	6	-	-
2004-2011	318p	3	-	-
Total		22		13

On the demerger, BT’s share option plans ceased to operate and were replaced by similar BT Group Employee Sharesave schemes and the BT Group Global Share Option Plan.

During the year ended 31 March 2002, BT Group granted options over 186 million shares (2001 - 49 million, 2000 - 34 million) of which 160 million were under employee sharesave schemes and 24 million were under the BT Group Legacy Option Plan. Options over 2 million shares were granted under the BT Group Global Share Option Plan in February 2002.

Options outstanding under the BT Group Employee Sharesave schemes and the BT Group Global Share Option Plan as at 31 March 2002 were as follows:

Normal dates of exercise	Option price per share	Number of ordinary shares millions
BT Group Employee Sharesave schemes
2005	218p	56
2007	218p	104
Total	160
BT Group Global Share Option Plan
2005-2012	263p	2
Total	162

The weighted average fair value of share options granted during the year ended 31 March 2002 has been estimated on the date of grant using the Black-Scholes option pricing model. The following weighted average assumptions were used in that model: an expected life extending one month later than the first exercise date; estimated annualised dividend yield of approximately 5% (2001 - 2%, 2000 - 2%); risk free interest rates of approximately 6% (2001 - 7%, 2000 - 6%); and expected volatility of approximately 34% (2001 - 41%, 2000 - 40%).

The weighted average fair value of the share options granted in the year ended 31 March 2002 was 55p (2001 - 329p, 2000 - 413p) for options exercisable three years after the date of grant and 55p (2001 - 424p, 2000 - 524p) for options exercisable five years after the date of grant. The total value of share options granted by BT in the year ended 31 March 2002 was £88 million (2001 - £168 million, 2000 - £170 million).

In accordance with UK accounting practices, no compensation expense is recognised for the fair value of options granted. See United States Generally Accepted Accounting Principles - IV Accounting for share options for the treatment under US GAAP.

BT Group Employee Share Investment Plan
From December 2001 the new BT Group Share Investment Plan (ESIP) was in operation. This plan, which has been approved by the Inland Revenue, gives UK employees an opportunity to purchase shares monthly out of pre-tax salary up to a maximum of £125 per month. During the year ended 31 March 2002, 667,000 shares were purchased by the trustee of the ESIP on behalf of employees at a total cost of £1.8 million.

Options granted, exercised and lapsed under these share option schemes during the years ended 31 March 2000, 2001 and 2002 and options exercisable at 31 March 2000, 2001 and 2002 were as follows:

	Savings related schemes millions		Executive option plans millions		Total millions		Exercise price range	Weighted average exercise price
Outstanding, 31 March 1999	237		6		243		267p-1053p	356p
Granted	33		1		34		844p-1206p	862p
Exercised	(36	)	(1	)	(37	)	267p-949p	333p
Lapsed	(8	)	-		(8	)	267p-1043p	366p
Outstanding, 31 March 2000	226		6		232		267p-1206p	432p
Granted	41		8		49		534p-885p	751p
Exercised	(46	)	(1	)	(47	)	168p-1315p	319p
Lapsed	(17	)	(1	)	(18	)	168p-1351p	619p
Outstanding, 31 March 2001	204		12		216		168p-1351p	564p
Rights issue adjustment	21		2		23		-	-
Granted	-		6		6		420p	420p
Exercised	(83	)	(1	)	(84	)	240p-523p	259p
Lapsed	(50	)	-		(50	)	240p-852p	622p
Outstanding pre demerger	92		19		111
Lapsed at demerger	-		(19	)	(19	)	299p-959p	595p
Outstanding at demerger	92		-		92
Granteda	-		26		26		231p-727p	413p
Exerciseda	-		(1	)	(1	)	231p-292p	232p
Lapseda	-		(1	)	(1	)	318p-602p	358p
Outstanding, 31 March 2002 (adjusted for rights issue)b	92		24		116
Exercisable, 31 March 1999	-		4		4		289p-460p	369p
Exercisable, 31 March 2000	-		3		3		289p-460p	369p
Exercisable, 31 March 2001	-		3		3		289p-460p	369p
Exercisable, 31 March 2002	47		7		54		218p-852p	395p
aThe options granted, lapsed and exercised post demerger under the Executive option plans relate to options over BT Group shares under the BT Group Legacy Option Plan and the BT Group Global Share Option Plan. All other options are in respect of British Telecommunications plc shares. bIn addition, as shown above, options over 160 million shares were granted under the BT Group Employee Sharesave Scheme during the year. This resulted in outstanding options over BT Group shares totalling 184 million and outstanding options over British Telecommunications plc shares totalling 92 million as at 31 March 2002.

BT Incentive Share Plan and BT Retention Share Plan
The BT Incentive Share Plan (ISP) and the BT Retention Share Plan (RSP) were introduced for employees of the group in 2001. Under the plans, company shares are acquired by an employee share ownership trust and are conditionally awarded to participants. Under the ISP participants are normally only entitled to these shares in full at the end of a three-year period if the company has met the relevant pre-determined corporate performance measure and if the participants are still employed by the group. If the company has exceeded the pre-determined corporate performance measure the participants may be awarded up to double the shares conditionally awarded. The corporate performance measure assesses the company’s overall performance against those top 100 companies listed on the London Stock Exchange, as rated by the Financial Times (the FTSE 100 index), at the beginning of the relevant performance period. Under the RSP the length of retention period before awards vest is flexible. Awards may vest in annual tranches. The shares are transferred at the end of a specified period, only if the individual is still employed by the group. During the year, 162,772 shares vested in 12 participants in the RSP.

BT Executive Share Plan, BT Performance Share Plan and BT Deferred Bonus Plan
The BT Executive Share Plan (ESP) and the BT Performance Share Plan (PSP) were introduced for employees of the group in 1994 and 1995 respectively. Under the plans, company shares are acquired by an employee share ownership trust and are conditionally awarded to participants. Participants are only entitled to these shares in full at the end of a five-year period under the ESP and the end of a three-year period, under the PSP if, at the end of the applicable period, the company has met the relevant pre-determined corporate performance measure. Awards of shares were granted in each of the years from 1994 to 1999 under the ESP and from 1995 to 1997 under the first performance cycle of the PSP.

In 1994, 1995 and 1996 ESP participants could invest 50% of their annual bonus in the ESP for the purchase of shares. These invested shares were matched by the company.

Further awards of shares were granted in 1998 and 1999 under the second three-year performance cycle of the PSP. The corporate performance measure assesses the company’s overall performance against those top 100 companies listed on the London Stock Exchange, as rated by the Financial Times (the FTSE 100 index), at the beginning of the relevant performance period.

The third five-year performance cycle of the ESP ended on 31 July 2001 and on the basis of the corporate measure, the company’s Total Shareholder Return (TSR) target relative to the other companies in the FTSE 100, 85% (2001: 100%) of the shares vested on 1 August 2001 in 62 participants (2000: 54 participants) and 1.2 million shares (2000: 0.7 million shares) were transferred to those participants.

The first three-year performance cycle of the PSP ended on 31 July 1998 and on the basis of the corporate measure, the company’s Total Shareholder Return target relative to the other companies in the FTSE 100, 90% of the shares vested on 19 August 1998 in 745 participants and 5.0 million shares were transferred to those participants.

The second and final three-year performance cycle of the PSP ended on 31 March 2001 and on the basis of the corporate measure, the company’s TSR target relative to other companies in the FTSE 100, 80% of the shares vested on 1 August 2001 to 1,436 participants and 1.6 million shares were transferred to those participants.

The BT Deferred Bonus Plan (DBP) was established in 1998 and awards were granted to employees of the group in July 1998, 1999, 2000 and June 2001. Under this plan, shares in the company are acquired by an employee share ownership trust and transferred to participants at the end of three years if he or she has continued to be employed by the group throughout that period. On 1 August 2001, 303,326 shares were transferred to 154 participants at the end of the three-year deferred period.

At 31 March 2002, 24.6 million BT Group plc shares (2001 - 19.1 million British Telecommunications plc shares) in the company were held in trust for employee share schemes, of which 16.5 million BT Group plc shares (2001 - 9.7 million British Telecommunications plc shares) were held for the ISP, 1.1 million BT Group plc shares (2001 - 0.4 million British Telecommunications plc shares) were held for the RSP, 4.4 million BT Group plc shares (2001 - 5.4 million British Telecommunications plc shares) were held for the ESP, no shares (2001 - 2.0 million British Telecommunications plc shares) were held for the PSP and 2.7 million BT Group plc shares (2001 - 1.6 million British Telecommunications plc shares) were held for the DBP. Dividends or dividend equivalents earned on the shares during the conditional periods are reinvested in company shares for the potential benefit of the participants. The Trustees sold sufficient rights during the rights issue to enable it to take up the remainder. The additional shares were added to the contingent awards of participants.

All awards of British Telecommunications plc shares were, following the scheme of arrangement and demerger, converted into awards of shares in the employer’s holding company (BT Group plc or mmO2 plc). The value of the awards was determined by combining the prices of BT Group and mmO2 shares over the 20 dealing days following the demerger on 19 November 2001. This gave a factor for the adjustment of awards of British Telecommunications plc shares into BT Group shares of 1.3198. For awards which were subject to TSR, the TSR of British Telecommunications plc was measured up to 20 days following the demerger and, after that date, the TSR of BT Group will be measured for the remainder of the performance period.

For awards under the ESP which were granted in 1997, the TSR of BT was measured at the date 20 days following the demerger and the awards of shares will vest on the basis of the TSR position on 17 December 2001. BT’s TSR was at 57th position against the FTSE 100 on that date and, as a result, 32.5% of the shares will vest on 1 August 2002.

Following the demerger, the BT plans were replaced by the BT Group Incentive Share Plan, the BT Group Deferred Bonus Plan and the BT Group Retention Share Plan.

Additional information relating to the plans is as follows:

Year ended 31 March 2002			ISP £m	RSP £m	ESP £m		DBP £m	Total £m
Value of range of possible future transfers: nil to			46.0	3.0	12.3		7.5	68.8
Provision for the costs of the plans charged (credited) to the profit and loss account in year			-	5.4	(9.2	)	2.1	(1.7	)
Nominal value of shares held in trust			0.8	0.1	0.2		0.1	1.2
Market value of shares held in trust			46.0	3.0	12.3		7.5	68.8
Year ended 31 March 2001	PSP £m		ISP £m	RSP £m	ESP £m		DBP £m	Total £m
Value of range of possible future transfers: nil to	10.2		25.2	2.2	24.7		6.7	69.0
Provision for the costs of the plans charged (credited) to the profit and loss account in year	(1.7	)	-	1.5	5.8		2.5	8.1
Nominal value of shares held in trust	0.5		2.4	0.1	1.4		0.4	4.8
Market value of shares held in trust	10.2		49.7	2.2	27.3		8.3	97.7

The values of possible future transfers of shares under the plans were based on the BT Group plc's share price at 31 March 2002 of 280p (2001 - BT plc share price of 510p). The provisions for the costs of the ISP, RSP, ESP and PSP were based on best estimates of the company's performance over the plans' conditional periods, relating to those portions of the plan conditional periods from commencement up to the financial year end.

Employee Stock Purchase Plan
The BT Employee Stock Purchase Plan (ESPP) operated from December 2000 to 30 June 2001 for employees in the US. Under this plan employees could purchase American Depositary Shares (ADSs) on a monthly basis at a price equal to the lower of (i) 85% of the average trading price of the ADSs on the New York Stock Exchange on the date of which the purchase rights are granted and, (ii) 85% of the average trading price of the ADSs on the date of purchase. During the period from 31 March 2001 to 5 July 2001, the discounted price ranged between US$49.02 and US$72.89 (2001 - US$65.98 and US$154.88) per ADS and 0.7 million shares (2001 - 0.1 million) were issued under the plan.

The BT ESPP ceased to operate in June 2001 prior to the demerger of mmO2. The first offer under the BT Group Employee Stock Purchase Plan was made in December 2001. The BT Group ESPP enables participants to purchase ADSs quarterly at a price which is 85% of the market price of an ADS at the start of the offer (and in the case of employees who have joined after the start of the offer, 85% of the market price on that date, whichever is higher). 29,000 shares have been issued under the BT Group ESPP.