Management's Discussion and Analysis of Financial Condition and Results of Operations

Description of the Company

Altria Group, Inc. (“ALG”), through its wholly-owned subsidiaries, Philip Morris USA Inc. (“PM USA”), Philip Morris International Inc. (“PMI”) and its majority-owned (84.6%) subsidiary, Kraft Foods Inc. (“Kraft”), is engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese and convenient meals. Philip Morris Capital Corporation (“PMCC”), another wholly-owned subsidiary, is primarily engaged in leasing activities. ALG’s former wholly-owned subsidiary, Miller Brewing Company (“Miller”), was merged into South African Breweries plc (“SAB”) on July 9, 2002 (see Note 3 to the consolidated financial statements). Throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, the term “Altria Group, Inc.” refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies and the term “ALG” refers solely to the parent company. ALG’s access to the operating cash flows of its subsidiaries consists of cash received from the payment of dividends and interest, and the repayment of amounts borrowed from ALG by its subsidiaries.

Executive Summary

The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.

Consolidated Operating Results—The change in Altria Group, Inc.’s net earnings and diluted earnings per share (“EPS”) for the year ended December 31, 2003 from the year ended December 31, 2002 was due primarily to the following (in millions, except per share data):

	Net		Diluted
	Earnings		EPS
For the year ended December 31, 2002	$11,102		$  5.21
2002 Gain on Miller Brewing Company transaction	(1,697	)	(0.81	)
2002 Gains on sales of businesses	(44	)	(0.02	)
2002 Provision for airline industry exposure	187		0.09
2002 Asset impairment, exit and integration costs	189		0.10
Subtotal 2002 items	(1,365	)	(0.64	)
2003 Domestic tobacco legal settlement	(132	)	(0.06	)
2003 Domestic tobacco headquarters
relocation charges	(45	)	(0.02	)
2003 Gains on sales businesses	17		0.01
2003 Asset impairment, exit and integration costs	(48	)	(0.03	)
Subtotal 2003 items	(208	)	(0.10	)
Currency	363		0.17
Lower effective tax rate	90		0.04
Lower shares outstanding			0.20
Operations	(778	)	(0.36	)
For the year ended December 31, 2003	$  9,204		$  4.52

See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.

The favorable currency impact on earnings is due primarily to the weakness of the U.S. dollar versus the euro.

During 2003, the effective tax rate decreased by 0.6 percentage points to 34.9% reflecting favorable state tax rulings and the mix of foreign versus domestic pre-tax earnings.

Lower shares outstanding during 2003 reflect the impact of share repurchases during 2002 and the first quarter of 2003.

The decrease in results from operations was due primarily to the following:

• Lower domestic tobacco income reflecting PM USA’s programs to narrow price gaps with competition and enhance its selling and promotional programs. The programs had their intended effect as PM USA’s retail share of the market increased sequentially during the year.
• Lower North American food income reflecting higher commodity and benefit costs, increased promotional programs and unfavorable volume/mix.
• Lower international food income reflecting higher benefit costs and unfavorable volume/mix reflecting the impact of an unusually hot summer in Europe on confectionery and coffee.

Partially offset by:

• Higher pricing in PMI.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

Liquidity—Following a $10.1 billion judgment against PM USA in the Price case, the major rating agencies reduced ALG’s credit ratings in March 2003, temporarily eliminating its access to the commercial paper market. This lack of borrowing flexibility resulted in borrowings against ALG’s revolving credit agreements and the maintenance of higher cash balances. Following the actions of the credit rating agencies, ALG suspended its repurchase of common stock. Beginning in November 2003, ALG regained limited access to the commercial paper market. For further details, see the Debt and Liquidity section of the following Discussion and Analysis.

2004 Projected Results—In January 2004, Altria Group, Inc. announced that it expects projected 2004 full-year diluted EPS in a range of $4.57 to $4.67, including anticipated charges of $0.23 for costs related to a restructuring at Kraft and the relocation of PM USA’s headquarters from New York City to Richmond, Virginia. The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this projection.