Compensation expense for stock options for 2008, 2007 and 2006 was $168 ($109 after tax), $146 ($95 after tax) and $125 ($81 after tax), respectively. In addition, compensation expense for stock appreciation rights, performance units and restricted stock units was $132 ($86 after tax), $205 ($133 after tax) and $113 ($73 after tax) for 2008, 2007 and 2006, respectively. No significant stock-based compensation cost was capitalized at December 31, 2008 and 2007.

Cash received in payment for option exercises under all share-based payment arrangements for 2008, 2007 and 2006 was $404, $445 and $444, respectively. Actual tax benefits realized for the tax deductions from option exercises were $103, $94 and $91 for 2008, 2007 and 2006, respectively.

Cash paid to settle performance units and stock appreciation rights was $136, $88 and $68 for 2008, 2007 and 2006, respectively.

Chevron Long-Term Incentive Plan (LTIP)

Awards under the LTIP may take the form of, but are not limited to, stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and nonstock grants. From April 2004 through January 2014, no more than 160 million shares may be issued under the LTIP, and no more than 64 million of those shares may be in a form other than a stock option, stock appreciation right or award requiring full payment for shares by the award recipient.

Texaco Stock Incentive Plan (Texaco SIP)

On the closing of the acquisition of Texaco in October 2001, outstanding options granted under the Texaco SIP were converted to Chevron options. These options, which have 10-year contractual lives extending into 2011, retained a provision for being restored. This provision enables a participant who exercises a stock option to receive new options equal to the number of shares exchanged or who has shares withheld to satisfy tax withholding obligations to receive new options equal to the number of shares exchanged or withheld. The restored options are fully exercisable six months after the date of grant, and the exercise price is the market value of the common stock on the day the restored option is granted. Beginning in 2007, restored options were granted under the LTIP. No further awards may be granted under the former Texaco plans.

Unocal Share-Based Plans (Unocal Plans)

When Chevron acquired Unocal in August 2005, outstanding stock options and stock appreciation rights granted under various Unocal Plans were exchanged for fully vested Chevron options and appreciation rights. These awards retained the same provisions as the original Unocal Plans. If not exercised, these awards will expire between early 2009 and early 2015.

The fair market values of stock options and stock appreciation rights granted in 2008, 2007 and 2006 were measured on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions:

Year ended December 31
2008 2007 2006
1

Expected term is based on historical exercise and post-vesting cancellation data.
2

Volatility rate is based on historical stock prices over an appropriate period, generally equal to the expected term.
Stock Options
Expected term in years1 6.1 6.3 6.4
Volatility2 22.0% 22.0% 23.7%
Risk-free interest rate based on zero coupon U.S. treasury note 3.0% 4.5% 4.7%
Dividend yield 2.7% 3.2% 3.1%
Weighted-average fair value per option granted $15.97 $15.27 $12.74
Restored Options
Expected term in years1 1.2 1.6 2.2
Volatility2 23.1% 21.2% 19.6%
Risk-free interest rate based on zero coupon U.S. treasury note 1.9% 4.5% 4.8%
Dividend yield 2.7% 3.2% 3.3%
Weighted-average fair value per option granted $10.01 $8.61 $7.72

A summary of option activity during 2008 is presented below:

Shares
(Thousands)		 Weighted-
Average
Exercise
Price		 Weighted-
Average
Remaining
Contractual
Term		 Aggregate
Intrinsic
Value
Outstanding at January 1, 2008 57,357 $54.50
Granted 12,391 $84.98
Exercised (10,758) $53.69
Restored 1,196 $94.53
Forfeited (1,173) $79.53
Outstanding at December 31, 2008 59,013 $61.36 6.5 yrs. $883
Exercisable at December 31, 2008 36,934 $51.51 5.2 yrs. $838

The total intrinsic value (i.e., the difference between the exercise price and the market price) of options exercised during 2008, 2007 and 2006 was $433, $423 and $281, respectively. During this period, the company continued its practice of issuing treasury shares upon exercise of these awards.

As of December 31, 2008, there was $179 of total unrecognized before-tax compensation cost related to nonvested share-based compensation arrangements granted or restored under the plans. That cost is expected to be recognized over a weighted-average period of 1.9 years.

At January 1, 2008, the number of LTIP performance units outstanding was equivalent to 2,225,015 shares. During 2008, 888,300 units were granted, 652,897 units vested with cash proceeds distributed to recipients and 59,863 units were forfeited. At December 31, 2008, units outstanding were 2,400,555, and the fair value of the liability recorded for these instruments was $201. In addition, outstanding stock appreciation rights and other awards that were granted under various LTIP and former Texaco and Unocal programs totaled approximately 1.4 million equivalent shares as of December 31, 2008. A liability of $35 was recorded for these awards.

Broad-Based Employee Stock Options

In addition to the plans described above, Chevron granted all eligible employees stock options or equivalents in 1998. The options vested in February 2000 and expired in February 2008. A total of 9,641,600 options were awarded with an exercise price of $38.16 per share.

The fair value of each option on the date of grant was estimated at $9.54 using the Black-Scholes model for the preceding 10 years. The assumptions used in the model, based on a 10-year average, were: a risk-free interest rate of 7 percent, a dividend yield of 4.2 percent, an expected life of seven years and a volatility of 24.7 percent.

At January 1, 2008, the number of broad-based employee stock options outstanding was 652,715. Through the conclusion of the program in February 2008, 396,875 shares were exercised and 255,840 shares were forfeited. The total intrinsic value of these options exercised during 2008, 2007 and 2006 was $18, $30, and $10, respectively.