Philip Morris USA Inc.

Domestic Tobacco

Philip Morris USA Inc. (PM USA) delivered strong retail share and income performance in a highly competitive environment during 2004, driven by Marlboro. For the full year 2004, PM USA’s shipment volume was down 0.1% to 187.1 billion units. Operating companies income increased 13.3% to $4.4 billion, primarily driven by savings resulting from changes to its 2004 trade programs, including lower Wholesale Leaders program discounts, as well as the absence of an inventory buydown in 2003 and charges related to the 2003 tobacco growers’ settlement, partially offset by increased costs under state settlement agreements.

PM USA’s total retail share improved by 1.1 share points in 2004, reaching 49.8%. PM USA’s retail share of the premium segment increased 0.9 share points to 62.1% and its share of the discount segment increased 0.4 share points to 16.1%. The deep-discount segment, comprised of all other manufacturers’ discount brands and major manufacturers’ private label brands, decreased 0.2 points to 11.8% in 2004.

Marlboro’s retail share increased 1.5 share points to 39.5% in 2004, while retail share was stable for PM USA’s other focus brands. Parliament held a 1.7% retail share in 2004, while Virginia Slims’ retail share was unchanged at 2.4% and Basic, PM USA’s major discount brand, held a 4.2% retail share. All retail share amounts are measured by the IRI/Capstone Total Retail Panel, which was developed to measure market share in retail stores selling cigarettes. It is not designed to capture Internet or direct mail sales.

New products contributed to PM USA’s share growth in 2004. PM USA continued to enhance Marlboro’s brand equity with the March 2004 national launch of Marlboro Menthol 72mm, which contributed to incremental share growth for the Marlboro family. During the third quarter, PM USA expanded distribution of Parliament Lights 100mm round-corner box, and launched Virginia Slims Ultra Lights 120mm box. Both met PM USA’s expectations for 2004. In January 2005, PM USA began shipping Marlboro Red and Lights 72mm in commemorative 50th Anniversary packs for launch in the first quarter of the year. It also announced that it will begin test-marketing Marlboro UltraSmooth in several markets to evaluate consumer acceptance of its taste.

PM USA has a well-established and disciplined program of cost management that drives its cost-reduction initiatives and helps enhance its income. It continually evaluates every element of its cost base to find areas for improvement, including benchmarking its manufacturing operations and installing higher-speed equipment. During 2004, it completed the move of its headquarters to Richmond, Virginia, and announced that it will invest about $200 million over the next three years to modernize and improve the efficiency of its Cabarrus County, North Carolina, cigarette manufacturing facility.

During 2004, PM USA continued to take aggressive action to defend the integrity of its brands, both on its own and working with others, and continued to bring legal actions against retailers, wholesalers, importers and Internet sellers who illegally use its trademarks. PM USA works with law enforcement agencies at the local, state and federal levels to support seizure of counterfeit cigarettes, and is supporting state and federal legislation to address the problem of contraband cigarettes, including illegal Internet sales. Anti-contraband legislation was enacted in a number of states in 2004, and several states significantly stepped up enforcement efforts.

PM USA continued to communicate about the serious health effects of cigarette smoking, to help prevent youth smoking and to offer information for those who have decided to quit smoking. In September 2004, PM USA began offering QuitAssist,™ a new information resource to help connect smokers who have decided to quit with expert quitting information from public health authorities and others. More information on PM USA’s responsibility initiatives is available at www.philipmorrisusa.com.

Philip Morris USA is committed to balancing share and income growth over the long term, and continues to invest in its people through leadership development programs at all levels. Going forward, strong brand performance, new products, cost reduction and successfully managing the value equation of its brands will drive its growth.