Options Exercisable T. Income Taxes The components of income from continuing operations before taxes on income were: Options to purchase 56 million shares of common stock at an average exercise price of $38 per share were outstanding as of December 31, 2004 but were not included in the computa- tion of diluted EPS because the option exercise price was greater than the average market price of the common shares. Range of exercise price Number Weighted average exercisable price $ 0.125 0.1 $0.125 $ 4.38–$12.15 0.7 10.97 $12.16–$19.93 1.9 16.56 $19.94–$27.71 8.3 22.56 $27.72–$35.49 16.8 31.69 $35.50–$45.59 45.7 38.69 Total 73.5 34.39 Preferred stock Common stock Issued Treasury Net outstanding Balance at end of 2001 557,649 924,574,538 (76,992,662) 847,581,876 Treasury shares purchased (11,625) (6,313,100) (6,313,100) Stock issued: compensation plans 3,550,686 3,550,686 Balance at end of 2002 546,024 924,574,538 (79,755,076) 844,819,462 Stock issued: Alcoa Aluminio minority interest acquisition (F) 17,773,541 17,773,541 Stock issued: compensation plans 5,897,683 5,897,683 Balance at end of 2003 546,024 924,574,538 (56,083,852) 868,490,686 Treasury shares purchased (1,777,354) (1,777,354) Stock issued: compensation plans 4,266,751 4,266,751 Balance at end of 2004 546,024 924,574,538 (53,594,455) 870,980,083 Share Activity (number of shares) In addition to stock option awards, there are 1 million unvested stock awards and 500,000 unvested performance share awards (targeted amount) as of December 31, 2004. There are 10.5 million shares reserved for future grants. Compensation expense recognized on these awards in 2004 was $9 (after tax). S. Earnings Per Share Basic earnings per common share (EPS) amounts are computed by dividing earnings after the deduction of preferred stock dividends by the average number of common shares outstanding. Diluted EPS amounts assume the issuance of common stock for all potentially dilutive equivalents outstanding. The information used to compute basic and diluted EPS on income from continuing operations follows. (shares in millions) The provision for taxes on income from continuing operations consisted of: 2004 2003 2002 Income from continuing operations $1,402 $1,055 $518 Less: preferred stock dividends 2 2 2 Income from continuing operations available to common shareholders $1,400 $1,053 $516 Average shares outstanding—basic 869.9 853.4 845.4 Effect of dilutive securities: Shares issuable upon exercise of dilutive stock options 7.5 3.2 4.4 Average shares outstanding—diluted 877.4 856.6 849.8 2004 2003 2002 Current: U.S. federal* $190 $ (34) $ 111 Foreign 448 306 356 State and local 14 17 17 652 289 484 Deferred: U.S. federal* (161) 132 (193 ) Foreign 54 (4) 11 State and local 12 — 15 (95) 128 (167 ) Total $557 $417 $ 317 2004 2003 2002 U.S. federal statutory rate 35.0% 35.0% 35.0% Taxes on foreign income (9.4) (7.3) (5.8) State taxes net of federal benefit 0.7 0.9 2.4 Minority interests 0.5 1.1 1.4 Permanent differences on asset disposals (1.1) (0.1) 2.6 Goodwill impairment and amortization — — 0.2 Adjustments to prior years’ accruals 0.7 (4.1) (3.8) Other (1.1) (1.1) (0.5) Effective tax rate 25.3% 24.4% 31.5% 2004 2003 2002 U.S. $ 301 $ 369 $ (302 ) Foreign 1,903 1,341 1,309 $2,204 $1,710 $1,007 Reconciliation of the U.S. federal statutory rate to Alcoa’s effective tax rate for continuing operations follows. 57 Included in discontinued operations is a tax benefit of $24 in 2004, $39 in 2003, and $75 in 2002. The exercise of employee stock options generated a tax benefit of $21 in 2004, $23 in 2003, and $34 in 2002. This amount was credited to additional capital and reduced current taxes payable. *Includes U.S. taxes related to foreign income