We have designed this website to share information about the Altria family of companies, our growth and development, and issues of interest to our stakeholders. Therefore, although we are very proud of our tobacco companies, we have not included any cigarette brand advertising in this online version of the 2005 Annual Report, because it is not our intention to market, advertise or promote their cigarette brands on this site.

Philip Morris USA Inc.

Domestic Tobacco

Philip Morris USA Inc. (PM USA) achieved a record 50.0% total retail share in a highly competitive environment during 2005, and produced solid income gains for the year.

Shipment volume was down 0.8% to 185.5 billion units, but was estimated to be essentially flat when adjusted for the timing of promotional shipments and trade inventory changes, and two fewer shipping days versus 2004. Premium mix increased 0.2 percentage points to 91.6%.

Operating companies income increased 4.0% to $4.6 billion, primarily driven by lower wholesale promotional allowance rates and aided by the reversal of a 2004 accrual related to tobacco quota buy-out legislation, partially offset by lower volume, charges for the disposition of pool tobacco stock, higher R&D expenses and a $56 million accrual for the Boeken case.

Total retail share for PM USA increased 0.2 share points to a record 50.0%, driven by Marlboro. Retail share for Marlboro increased 0.5 share points to a record 40.0% in 2005, while retail share was essentially stable for PM USA’s other focus premium brands. Parliament held a 1.7% retail share in 2005, while Virginia Slims’ retail share was down 0.1 share point to 2.3%.

PM USA’s retail share of the premium category was stable at 62.1%, while its share of the declining discount category increased 0.2 share points to 16.3%, reflecting the performance of Basic, its major discount brand. Retail share was flat at 11.8% for the deep-discount segment of the industry, which includes both major manufacturers’ private label brands and all other manufacturers’ discount brands. Retail share amounts and records mentioned above are based on 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.

During 2005, a number of efforts contributed to a decline in illegal cigarette sales over the Internet, which historically has been a conduit for federal and state excise tax avoidance and illegal imports. Importantly, major credit card and package delivery companies agreed to take steps to prohibit the use of their services for illegal Internet cigarette sales. PM USA continued to support criminal prosecution of counterfeit importer and distributor networks by law enforcement agencies, and pursued civil litigation against counterfeiters of its Marlboro brand. Additionally, it supported federal and state legislation aimed at stopping the illegal trade in cigarettes. During 2005, 17 states passed legislation that takes positive steps to curb this illegal activity. In early 2006, PM USA joined with 37 attorneys general to establish protocols aimed at combating illegal sales of its cigarettes over the Internet or by mail, telephone or fax.

PM USA continued to invest for the future and to explore opportunities for growth. Several new cigarette products that incorporate novel filter technology, including Marlboro UltraSmooth, were introduced into test markets during 2005 to gauge adult smoker acceptance of their taste. In addition, PM USA announced a tobacco category adjacency growth strategy to develop new revenue and income sources for the future. It will make significant investments in product development, consumer research and other areas to develop this strategy. For example, it is investing an estimated $350 million for a Center for Research and Technology in Richmond, Virginia. The Center will be dedicated to enhancing scientific research, new product development and commercialization of products that might help address the harm caused by smoking.

PM USA continued to address societal concerns about smoking by, among other things, communicating about the health effects of cigarette smoking, helping to prevent youth smoking and helping to connect adult smokers who have decided to quit smoking with expert quitting information. More information and resources are available in both English and Spanish at www.philipmorrisusa.com. PM USA’s website also includes the Parent Resource Center and QuitAssist^TM. The Parent Resource Center provides parents with tips and tools to help them talk to their kids about not smoking. QuitAssist^TM is an information resource designed to help connect smokers who have decided to quit with expert quitting information from public health authorities and others.