2005 Results

Net revenues for the full year 2005 increased 9.2% to $97.9 billion, including favorable currency, the impact of acquisitions and the benefit of an extra shipping week at Kraft versus 2004.

Operating income increased 9.3% to $16.6 billion, reflecting favorable currency, the impact of acquisitions, the absence of the upfront expense related to the 2004 agreement PMI entered into with the European Community (E.C.), lower charges for asset impairment, implementation and exit costs, gains on sales of businesses, the reversal of a 2004 accrual related to tobacco quota buy-out legislation, higher results from operations for domestic and international tobacco, and the impact of the extra week at Kraft. These were partially offset by a larger provision in 2005 for airline industry exposure at Philip Morris Capital Corporation, a charge for PM USA’s portion of the losses incurred by the federal government on the disposition of its pool tobacco stock and lower results at Kraft.

Earnings from continuing operations increased 13.2% to $10.7 billion, reflecting the items mentioned above and a lower tax rate, partially offset by higher minority interest and lower equity income from SABMiller.

Net earnings, including discontinued operations, increased 10.8% to $10.4 billion. Diluted earnings per share, including discontinued operations, increased 9.4% to $4.99.

Domestic Tobacco

In our domestic tobacco business, PM USA delivered another solid year in 2005 as it benefited from continued improvement in the U.S. cigarette industry’s fundamental dynamics, principally characterized by a lack of vitality in the deep-discount segment and reductions in illegal imports.

Net revenues increased 3.6% to $18.1 billion and operating companies income increased 4.0% to $4.6 billion, primarily driven by lower wholesale promotional allowance rates and aided by reversal of a 2004 accrual related to tobacco quota buy-out legislation, partially offset by lower volume, charges for disposition of pool tobacco stock, higher R&D expenses and the accrual for the Boeken case.

Marlboro achieved a record retail market share of 40% in 2005, supported by numerous special events around its year-long 50th anniversary celebration and 72mm line extensions. The revamped Retail Leaders merchandising program was successfully launched, while PM USA continued at the same time to reduce costs with improved manufacturing systems and higher productivity.

PM USA took a number of actions to preserve and protect the legitimate cigarette market in the United States. These include specific actions, many in support of law enforcement and regulatory agency efforts, to address illegal sales of cigarettes over the Internet, as well as efforts to reduce the incidence of counterfeit and contraband cigarettes.

PM USA also continues to invest in developing reduced-exposure products, and to support the enactment of federal legislation to grant the Food and Drug Administration (FDA) regulatory authority over all tobacco products. Legislation was reintroduced in both the House of Representatives and the Senate in 2005, but regrettably has not been acted upon.

As it pursues its commitment to balance market share and income growth over the long term, I am confident that PM USA has the human, financial and brand wherewithal necessary to drive growth in a highly competitive industry, while exploring expansion into adjacent tobacco categories.