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, deferred stock, 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, 2007, options to purchase 29,536,591 shares of Altria Group, Inc.’s common stock were outstanding. Shares available to be granted under the 2005 Plan and the 2005 Directors Plan at December 31, 2007 were 43,360,958 and 945,798, respectively.

As more fully described in Note 1. Background and Basis of Presentation, certain modifications were made to stock options, restricted stock and deferred stock as a result of the Kraft spin-off.

Altria Group, Inc. has not granted stock options to employees since 2002. Under certain circumstances, senior executives who exercised outstanding stock options using shares to pay the option exercise price and taxes received EOSOs equal to the number of shares tendered. EOSOs were granted at an exercise price of not less than fair market value on the date of the grant, and became exercisable six months after the grant date. This feature ceased during 2007.

Stock Option Plan

In connection with the Kraft spin-off, Altria Group, Inc. employee stock options were modified through the issuance of Kraft employee stock options and the adjustment of the stock option exercise prices for the Altria Group, Inc. awards. For each employee stock option outstanding the aggregate intrinsic value of the option immediately after the spin-off was not greater than the aggregate intrinsic value of the option immediately before the spin-off. Due to the fact that the Black-Scholes fair values of the awards immediately before and immediately after the spin-off were equivalent, as measured in accordance with the provisions of SFAS No. 123(R), no incremental compensation expense was recorded as a result of the modification of the Altria Group, Inc. awards.

Pre-tax compensation cost and the related tax benefit for stock option awards totaled $9 million and $3 million, respectively, for the year ended December 31, 2007. 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. 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, 2007:

As more fully described in Note 1. Background and Basis of Presentation, the weighted average exercise prices shown in the table above were reduced as a result of the Kraft spin-off.

The aggregate intrinsic value shown in the table above was based on the December 31, 2007 closing price for Altria Group, Inc.’s common stock of $75.58. The weighted-average grant date fair value of options granted during the years ended December 31, 2007, 2006 and 2005 was $15.55, $14.53 and $14.41, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 was $454 million, $456 million and $756 million, respectively.

Restricted Stock Plans

Altria Group, Inc. may grant shares of restricted stock and deferred 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. Such shares are subject to forfeiture if certain employment conditions are not met. Restricted and deferred stock generally vests on the third anniversary of the grant date.

The fair value of the restricted shares and deferred shares 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 deferred stock for the years ended December 31, 2007, 2006 and 2005 of $135 million, $114 million and $115 million, respectively. The deferred tax benefit recorded related to this compensation expense was $50 million, $42 million and $42 million for the years ended December 31, 2007, 2006 and 2005, respectively. The pre-tax compensation expense for the year ended December 31, 2006 includes the pre-tax cumulative effect gain of $5 million from the adoption of SFAS No. 123(R). The unamortized compensation expense related to Altria Group, Inc. restricted stock and deferred stock was $163 million at December 31, 2007 and is expected to be recognized over a weighted average period of 2 years. Altria Group, Inc. restricted stock and deferred stock activity was as follows for the year ended December 31, 2007:

In January 2007, Altria Group, Inc. issued 1.7 million shares of deferred stock to eligible U.S.-based and non-U.S. employees. Restrictions on these shares lapse in the first quarter of 2010. The market value per share was $87.36 on the date of grant. Recipients of these Altria Group, Inc. deferred shares did not receive restricted stock or deferred stock of Kraft upon the Kraft spin-off. Rather, they received 0.6 million additional deferred shares of Altria Group, Inc. to preserve the intrinsic value of the original award, and accordingly, the grant date fair value per share, in the table above, related to this grant was reduced.

The grant price information for restricted stock and deferred stock awarded prior to January 31, 2007 reflects historical market prices which are not adjusted to reflect the Kraft spin-off. As discussed more fully in Note 1. Background and Basis of Presentation, as a result of the Kraft spin-off, holders of restricted stock and deferred stock awarded prior to January 31, 2007 retained their existing award and received restricted stock or deferred stock of Kraft Class A common stock.

The weighted–average grant date fair value of Altria Group, Inc. restricted stock and deferred stock granted during the years ended December 31, 2007, 2006 and 2005 was $150 million, $146 million and $137 million, respectively, or $65.62, $74.21 and $62.05 per restricted or deferred share, respectively. The total fair value of Altria Group, Inc. restricted stock and deferred stock vested during the years ended December 31, 2007, 2006 and 2005 was $184 million, $215 million and $4 million, respectively.