Notes to Consolidated Financial Statements

(Continued)

Note 12.
Stock Plans:

Under the Altria Group, Inc. 2005 Performance Incentive Plan (the “2005 Plan”), Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, restricted and deferred stock units, and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 50 million shares of common stock may be issued under the 2005 Plan. 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 2005 Stock Compensation Plan for Non-Employee Directors (the “2005 Directors Plan”). At December 31, 2006, employees held options to purchase 40,093,392 shares of Altria Group, Inc.’s common stock, of which 14,525,177 shares were held by Kraft employees. Shares available to be granted under the 2005 Plan and the 2005 Directors Plan at December 31, 2006 were 45,912,082 and 962,948, respectively.

Altria Group, Inc. has not granted stock options to employees since 2002. 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. EOSOs are granted at an exercise price of not less than fair market value on the date of the grant, and become exercisable six months after the grant date. This feature will cease during 2007.

In addition, Kraft may grant stock options, stock appreciation rights, restricted stock, restricted and deferred units, and other awards of its Class A common stock to its employees under the terms of the Kraft 2005 Performance Incentive Plan (the “Kraft Plan”). Up to 150 million shares of Kraft’s Class A common stock may be issued under the Kraft Plan, of which no more than 45 million shares may be awarded as restricted stock. At December 31, 2006, Kraft’s employees held options to purchase 12,978,151 shares of Kraft’s Class A common stock. Shares available to be granted under the Kraft Plan at December 31, 2006 were 143,669,750. Restricted shares available for grant under the Kraft Plan at December 31, 2006 were 38,669,750.

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, 2006, employees held options to purchase approximately 1.3 million shares of Kraft’s Class A common stock from Altria Group, Inc.

Stock Option Plan

Pre-tax compensation cost and the related tax benefit for stock option awards totaled $17 million and $6 million, respectively, for the year ended December 31, 2006. These amounts included $3 million and $1 million, respectively, related to Kraft. The fair value of the awards was determined using a modified Black-Scholes methodology using the following weighted average assumptions:

Altria Group, Inc. stock option activity was as follows for the year ended December 31, 2006:

The aggregate intrinsic value shown in the table above was based on the December 31, 2006 closing price for Altria Group, Inc.’s common stock of $85.82. The weighted-average grant date fair value of options granted during the years ended December 31, 2006, 2005 and 2004 was $14.53, $14.41 and $11.09, respectively. The total intrinsic value of options exercised during the years ended December 31, 2006, 2005 and 2004 was $456 million, $756 million and $441 million, respectively.

Restricted Stock Plans

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. Restricted stock generally vests on the third anniversary of the grant date.

The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period, which is generally three years. Altria Group, Inc. recorded pre-tax compensation expense related to restricted stock and rights for the years ended December 31, 2006, 2005 and 2004 as follows:

The deferred tax benefit recorded related to this compensation expense was $93 million, $97 million and $68 million for the years ended December 31, 2006, 2005 and 2004. The pre-tax compensation expense for the year ended December 31, 2006 includes the pre-tax cumulative effect gain of $14 million from the adoption of SFAS No. 123(R) ($9 million of which related to Kraft). The unamortized compensation expense related to Altria Group, Inc. and Kraft restricted stock and rights was $341 million at December 31, 2006. This amount included $184 million related to Kraft and $157 million related to Altria Group, Inc. The unamortized compensation expense is expected to be recognized over a weighted average period of 2 years.

Altria Group, Inc. restricted stock and rights activity was as follows for the year ended December 31, 2006:

The weighted-average grant date fair value of Altria Group, Inc. restricted stock and rights granted during the years ended December 31, 2006, 2005 and 2004 was $146 million, $137 million and $133 million, respectively, or $74.21, $62.05 and $55.42 per restricted share or right, respectively. The total fair value of Altria Group, Inc. restricted stock and rights vested during the years ended December 31, 2006, 2005 and 2004 was $215 million, $4 million and $8 million, respectively.

Kraft’s restricted stock and rights activity was as follows for the year ended December 31, 2006:

The weighted-average grant date fair value of restricted stock and rights granted at Kraft during the years ended December 31, 2006, 2005 and 2004 was $200 million, $200 million and $195 million, respectively, or $29.16, $33.26 and $32.23 per restricted share or right, respectively. The total fair value of Kraft restricted stock and rights vested during the years ended December 31, 2006, 2005 and 2004 was $123 million, $2 million and $1 million, respectively.