Note 8
The performance period for the January 2002 grant ended on 31 December 2004. HBOS’s TSR over the performance period exceeded the weighted average of the comparator group by 7.44% p.a., as illustrated in Chart 1, so a maximum 200% of share grants will be released to grant recipients, subject to Note 5 on page 73. Without a maximum payout limit of 200%, the plan would have released 248% of share grants.

In addition, dividend reinvestment shares will be released to grant recipients as provided for under the rules of the plans. The dividend reinvestment shares are the additional shares which would have accrued on the overall share grants actually released had dividends due during the performance period been reinvested in shares.

Full details concerning these shares, which will be released to the Chairman and the Executive Directors in March 2005, will be set out in the 2005 Annual Report and Accounts.

In respect of this January 2002 grant, the Committee decided retrospectively to remove

Abbey National from the comparator group of companies with effect from the end of June 2004, (immediately before bid activity started) and to replace them with Alliance & Leicester, Bradford & Bingley and Northern Rock from the start of July 2004. Had Abbey National been replaced at November 2004 (the date when the Company ceased to be independently listed), the plan would still have released a maximum 200% of share grants to grant recipients.

The performance periods for the January 2003 and January 2004 grants (where there have been equivalent adjustments in respect of Abbey National) do not end until 31 December 2005 and 31 December 2006, respectively. So far, HBOS’s TSR over the two year and one year elapsed periods exceeds the weighted average of the comparator group by 9.55% and 4.91%, respectively.

Chart 1

Note 9

The second grant effective from January 2002 for Andy Hornby relates to a different arrangement which applies only to him. Early in 2003, the Committee became aware of activity, principally from the retail sector, to secure Andy Hornby’s services. Specifically, he had received an approach to become Group Chief Executive of a major FTSE company. The Committee decided that, at that point in time, it would clearly be in the interests of shareholders to secure Andy Hornby’s continued services but to do it on a basis where additional reward was performance contingent.

The Committee therefore decided to introduce a special incentive arrangement which gives Andy Hornby the opportunity to receive up to 260,000 shares in April 2005, dependent on growth in the profitability of the Retail division over 2002 to 2004. In broad terms, the maximum release under this special arrangement is delivered in April 2005 subject to an increase of at least 60% in the profitability of the Retail division, using a like for like comparison, over the three year period, and provided that Andy Hornby is in the service of the Group at 31 March 2005 having not given notice on or before that date. The Committee established that the incentive would accrue in three equivalent tranches based on profitability performance to the ends of 2002, 2003 and 2004. At the time of establishment of the incentive, the satisfaction of performance criteria to the end of 2002 established an immediate retention feature within the scheme. Since then, performance criteria to the ends of 2003 and 2004 have also been satisfied. Full details concerning these shares, which may be released to Andy Hornby in April 2005, will be set out in the 2005 Annual Report & Accounts.

If Andy Hornby were to leave employment as a qualifying leaver or in the event of a change of control before April 2005, the accrued shares would vest. If he were to leave in certain other circumstances, he would not receive any shares. Changes to certain key terms of the arrangement, in future, will require shareholder approval.

The special incentive is not pensionable. At maturity in April 2005 it will be eligible for the 50% sharekicker enhancement, which will be released if Andy Hornby retains the shares and remains in the service of the Group until 31 March 2008 (or ranks as a qualifying leaver before that date).

Taken overall, this special incentive increases the maximum annual overall reward value for Andy Hornby by about 25% in each of the three years to the end of 2004 and by about 12.5% in each of the subsequent three years to the end of 2007.

13.3.4 Long Term Incentive Plan - Former Bank of Scotland Directors
Approved share options granted between 1995 and 2000 under Bank of Scotland’s plans were subject to a performance pre-condition that options were not capable of being exercised unless growth in diluted earnings per share exceeded the growth in the Retail Prices Index over a period of at least three consecutive financial years by not less than 2% p.a.

No performance target applied in respect of unapproved share options following the third anniversary of grant, as agreed by Bank of Scotland stockholders at the time of the merger with Halifax.

The performance target in respect of approved share options was satisfied on 31 December 2002 for all grants and consequently all options are exercisable in accordance with the rules of the plans.

No further share options have been or will be granted under any of these plans.

Details of the options outstanding under the plans in respect of Executive Directors are set out below:

Table 7	Grant effective from	At 31.12.03/ 01.01.04	Granted (G), Exercised (E) or| Lapsed (L) in year	At 31.12.04	Share option price £	Exercisable
Colin Matthew	Oct 95	48,000	-	48,000	2.5983	Jan 05 - Oct 05
	Oct 96	50,000	-	50,000	2.7367	Jan 05 - Oct 06
	Oct 97	28,000	-	28,000	5.3533	Jan 05 - Oct 07
	Oct 98	5,223	-	5,223	5.7433	Jan 05 - Oct 08
	Oct 98	29,777	-	29,777	5.8350	Jan 05 - Oct 08
	May 00	40,000	-	40,000	5.5150	Jan 05 - May 10
	Oct 00	40,000	-	40,000	6.1000	Jan 05 - Oct 10
		241,000		241,000
George Mitchell	Oct 96	50,000	-	50,000	2.7367	Jan 05 - Oct 06
	Oct 97	35,000	-	35,000	5.3533	Jan 05 - Oct 07
	Oct 98	40,000	-	40,000	5.8350	Jan 05 - Oct 08
	May 00	5,572	-	5,572	5.3833	Jan 05 - May 10
	May 00	39,428	-	39,428	5.5150	Jan 05 - May 10
	Oct 00	50,000	-	50,000	6.1000	Jan 05 - Oct 10
		220,000		220,000

Notes to Table 7
Note 1
No Executive Director’s share options lapsed in the period 1 January 2005 to 1 March 2005, the date of approval of this Annual Report and Accounts.

Note 2
On 23 February 2004, Gordon McQueen, who retired as an Executive Director on 31 December 2003, exercised options over 29,777, 35,000 and 40,000 shares granted effective from October 1998, May 2000 and October 2000, respectively; on 1 March 2004 he exercised options over 48,000, 45,000 and 32,000 shares granted effective from October 1995, October 1996 and October 1997, respectively; and on 2 June 2004, he exercised options over 5,223 shares granted effective from October 1998. He has no remaining options under the plan.

The closing market prices on the dates of exercise were £7.555, £7.34 and £7.12, respectively.

Full details of these options were set out in last year’s Report.

Note 3
Details of the market price of the Group’s ordinary shares during 2004 are given in Section 13.3.7.