The announcement was made before Smoltz started for the Braves and beat Colorado on Thursday night. It came one day after the Braves agreed on a $6.5 million, one-year extension with closer Bob Wickman.
"I'm happy I know I'm going to be playing here next year," Smoltz said before the game.
General manager John Schuerholz said he told Smoltz on Wednesday of the team's plans to exercise the option.
"John has been a constant for this organization, both with his pitching and his leadership, and our plan to exercise this contract option for next season was never in question," Schuerholz said.
Smoltz, 39, had expressed frustration earlier in the season that the team had waited this long to exercise the 2007 option.
He was 14-9 with a 3.72 ERA after Thursday's win over the Rockies.
The 1996 NL Cy Young Award winner has a 191-137 career record with 154 saves in 18 seasons, all with the Braves. He's the only player who was with the team for each of its 14 straight division titles.
"It was going to get done," manager Bobby Cox said of Smoltz's deal.
Cox said the same thing about Wickman, who is 16-for-17 in saves since arriving from Cleveland on July 20. Cox didn't want to lose him.
"He looks better in a Braves [uniform] than others, for sure," Cox said. "He's a great guy. He would fit on any team."