Notes to Consolidated Financial Statements

(Continued)

Note 12.
Stock Plans:

Under the Altria Group, Inc. 2000 Performance Incentive Plan (the “2000 Plan”), Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, reload options and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 110 million shares of common stock may be issued under the 2000 Plan, of which no more than 27.5 million shares may be awarded as restricted stock. In addition, Altria Group, Inc. may grant up to one million shares of common stock to members of the Board of Directors who are not employees of Altria Group, Inc. under the 2000 Stock Compensation Plan for Non-Employee Directors (the “2000 Directors Plan”). Shares available to be granted under the 2000 Plan and the 2000 Directors Plan at December 31, 2004, were 85,966,916 and 808,915, respectively.

Stock options are granted at an exercise price of not less than fair value on the date of the grant. Stock options granted under the 2000 Plan or the 2000 Directors Plan (collectively, “the Plans”) generally become exercisable on the first anniversary of the grant date and have a maximum term of ten years.

In addition, Kraft may grant stock options, stock appreciation rights, restricted stock, reload options and other awards of its Class A common stock to its employees under the terms of the Kraft Performance Incentive Plan. Up to 75 million shares of Kraft’s Class A common stock may be issued under the Kraft plan. At December 31, 2004, Kraft’s employees held options to purchase 16,188,864 shares of Kraft’s Class A common stock.

Concurrent with Kraft’s Initial Public Offering (“IPO”) in June 2001, certain Altria Group, Inc. employees received a one-time grant of options to purchase shares of Kraft’s Class A common stock held by Altria Group, Inc. at the IPO price of $31.00 per share. At December 31, 2004, employees held options to purchase approximately 1.5 million shares of Kraft’s Class A common stock from Altria Group, Inc. In order to completely satisfy the obligation, Altria Group, Inc. purchased 1.6 million shares of Kraft’s Class A common stock in open market transactions during 2002.

Altria Group, Inc. and Kraft apply the intrinsic value-based methodology in accounting for the various stock plans. Accordingly, no compensation expense has been recognized other than for restricted stock awards. In December 2004, the FASB issued SFAS No. 123R, which requires companies to measure compensation cost for share-based payments at fair value. Altria Group, Inc. will adopt this new standard prospectively, on July 1, 2005.

Had compensation cost for stock option awards been determined by using the fair value at the grant date, Altria Group, Inc.’s net earnings and basic and diluted EPS would have been $9,404 million, $4.59 and $4.56, respectively, for the year ended December 31, 2004; $9,185 million, $4.53 and 4.51, respectively, for the year ended December 31, 2003; and $10,965 million, $5.19 and $5.15, respectively, for the year ended December 31, 2002. The foregoing impact of compensation cost was determined using a modified Black-Scholes methodology and the following assumptions for Altria Group, Inc. and Kraft Class A common stock:

		Risk-Free Interest Rate					Weighted Average Expected Life					Expected Volatility					Expected Dividend Yield					Fair Value at Grant Date
2004 Altria
Group, Inc.		2.96%					4 years					37.01%					5.22%					$11.09
2003 Altria
Group, Inc.		2.72					4					37.33					6.26					8.20
2002 Altria
Group, Inc.		3.89					5					31.73					4.54					10.17
2002 Kraft		4.27					5					28.72					1.41					10.65

Altria Group, Inc. has not granted stock options to employees since 2002. The amount included above as stock-based compensation expense in 2004 relates primarily to EOSOs. Under certain circumstances, senior executives who exercise outstanding stock options using shares to pay the option exercise price and taxes, receive EOSOs equal to the number of shares tendered. During the years ended December 31, 2004, 2003 and 2002, Altria Group, Inc. granted 1.7 million, 1.3 million and 2.6 million EOSOs, respectively.



Altria Group, Inc. stock option activity was as follows for the years ended December 31, 2002, 2003 and 2004:

		Shares  Subject  to Option					Weighted Average Exercise Price					Options Exercisable
Balance at January 1, 2002		137,134,837					$35.98					103,155,954
Options granted		3,245,480					53.08
Options exercised		(24,115,829)					30.33
Options canceled		(1,941,148)					38.22
Balance at December 31, 2002		114,323,340					37.62					105,145,417
Options granted		1,317,224					42.72
Options exercised		(15,869,797)					28.57
Options canceled		(3,072,139)					47.91
Balance at December 31, 2003		96,698,628					38.85					95,229,316
Options granted		1,678,420					53.32
Options exercised		(22,810,009)					36.26
Options canceled		(275,956)					43.75
Balance at December 31, 2004		75,291,083					39.93					74,548,371

The weighted average exercise prices of Altria Group, Inc. stock options exercisable at December 31, 2004, 2003 and 2002, were $39.82, $38.78 and $36.57, respectively.

The following table summarizes the status of Altria Group, Inc. stock options outstanding and exercisable as of December 31, 2004, by range of exercise price:

		Options Outstanding				Options Exercisable
Range of Exercise Prices		Number Outstanding	Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$21.34-$31.90		11,619,986	4 years	$21.89		11,619,986	$21.89
33.58- 50.35		60,546,946	4	42.62		60,115,583	42.58
50.43- 65.00		3,124,151	5	54.95		2,812,802	54.74
		75,291,083				74,548,371

Altria Group, Inc. and Kraft may grant shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares and rights. Such shares and rights are subject to forfeiture if certain employment conditions are not met. During 2004, 2003 and 2002, Altria Group, Inc. granted 1,392,380; 2,327,320; and 6,000 shares, respectively, of restricted stock to eligible U.S.-based employees and Directors, and during 2004 and 2003, also issued to eligible non-U.S. employees and Directors rights to receive 1,011,467 and 1,499,920 equivalent shares, respectively. The market value per restricted share or right was $55.42 and $36.61 on the respective dates of the 2004 and 2003 grants. At December 31, 2004, restrictions on such stock and rights, net of forfeitures, lapse as follows: 2005–39,000 shares; 2006–3,153,130 shares; 2007–2,370,040 shares; 2008–262,600 shares; and 2009 and thereafter–189,007 shares. During 2004 and 2003, Kraft granted 4,129,902 and 3,659,751 restricted Class A shares to eligible U.S.-based employees and issued rights to receive 1,939,450 and 1,651,717 restricted Class A equivalent shares to eligible non-U.S. employees, respectively. Restrictions on the Kraft Class A shares lapse as follows: 2005–13,719 shares; 2006–4,520,120 shares; 2007–5,532,500 shares; 2009–150,000 shares; and 2012–100,000 shares.

The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period. Altria Group, Inc. recorded compensation expense related to restricted stock and other stock awards of $185 million (including $106 million related to Kraft awards), $99 million (including $57 million related to Kraft awards) and $13 million for the years ended December 31, 2004, 2003 and 2002, respectively. The unamortized portion related to Altria Group, Inc. restricted stock, which is reported as a reduction of earnings reinvested in the business, was $140 million and $101 million at December 31, 2004 and 2003, respectively.