Note N – Stock-Based Compensation Under Con Edison’s Stock Option Plan (the Plan), options may be granted to officers and key employees of Con Edison and its subsidiaries for up to a total of 10 million shares of Con Edison’s common stock. Generally options vest three years after the grant date and expire 10 years from the grant date. As permitted by SFAS No. 123, the Companies elected to fol- low APB No. 25 and related interpretations in accounting for their employee stock options. Under the intrinsic value method of APB No. 25, no compensation expense is recognized because the exercise price of Con Edison’s employee stock options equals the market price of the underlying stock on the date of grant. Under the Plan, exercise of Con Edison’s employee stock options requires payment in full of the exercise price, unless the committee of Con Edison’s Board of Directors that administers the Plan determines that options may be settled by paying to the option holder the difference between the fair market value of the common stock subject to the option and the exercise price (cash settlement). In 2002, to ensure that the exercise of currently exercisable options would comply with certain techni- cal requirements of the Sarbanes-Oxley Act of 2002 applicable to certain officers of the Companies, the committee determined that 1996 and 1997 stock options covering 295,500 shares of common stock held by those officers may be settled by the cash settlement method. Charges to expense are recognized with respect to these options to the extent the fair market value of the common shares changes.  The following table summarizes the expense recognized  in relation to the stock options subject to cash settlement: Disclosure of pro forma information regarding net income and earnings per share is required by SFAS No. 123. See “Stock- Based Compensation” in Note A for an illustration of the effect on net income and earnings per share if the Companies had applied the fair value recognition provisions of SFAS No. 123 to their stock-based employee compensation. The fair values of options granted in 2003, 2002 and 2001 are $4.30, $6.37 and $5.23 per share, respectively. These values were estimated at the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: 2003 2002 2001 Risk-fr ee interest rate 3.35% 5.08% 5.22% Expected life 6 years 6 years 8 years Expected stock volatility 21.44% 21.43% 21.32% Expected dividend yield 5.66% 5.22% 5.83% Con Edison  Con Edison of New York O&R (Millions of Dollars) 2003 2002 2001 2003 2002 2001 2003 2002 2001 Compensation expense – stock options $- $4 $- $- $3 $- $- $- $- 80 Con Edison Annual Report 2003