Kraft Foods Inc.

A separate Kraft Foods Inc. Annual Report is available at www.kraft.com.

Kraft Foods Inc. (Kraft), the world’s second-largest packaged food and beverage company, achieved higher revenues and operating income in a challenging environment in 2005.

Net revenues increased 6.0% to $34.1 billion for the full year, reflecting pricing, positive mix, favorable currency and the impact of an extra shipping week in 2005. Ongoing constant-currency revenues were up approximately 3% on a 52-week basis, and increased approximately 8% in developing markets, with particularly strong growth in Russia. Ongoing volume was up approximately 2%, but was essentially flat on a comparable 52-week basis, including a 0.7 point benefit from acquisitions. Factors contributing to the volume softness included Kraft’s focus on mix improvement, its stock keeping unit (SKU) reduction program and the impact of pricing.

Strong new product results produced revenues of approximately $1.5 billion in 2005. Launch of the South Beach Diet line exceeded Kraft’s expectations and achieved revenues of approximately $170 million in 2005.

Operating income increased 3.0% to $4.8 billion, driven by positive mix, productivity and restructuring savings, lower restructuring and impairment costs, favorable currency, gains on sales of businesses and brands, and the extra week. These were partially offset by significantly higher commodity costs (net of pricing), increased benefit costs and increased consumer marketing support.

Commodity costs increased more than $800 million in 2005, with pricing actions only partially offsetting the impact of higher costs. Kraft expects many of the cost pressures faced in 2005 to continue, and in January 2006 announced plans to expand its cost restructuring program. Additional organizational streamlining and facility closures will continue to build on the success of the program. The expanded initiatives are expected to add approximately $700 million in cumulative annualized cost savings by 2009, for a total of $1.15 billion. The expanded program will add approximately $2.5 billion in costs for total estimated costs of $3.7 billion by 2009.

Kraft is focusing on new product ideas that address large, unmet consumer needs and offer the potential for geographic expansion. It also is investing in leadership initiatives including product reformulations to enhance nutrition and reduce fat, and an approach to advertising to children that addresses consumers’ concerns.

North American Food

Kraft North America Commercial (KNAC) net revenues grew 5.6% to $23.3 billion, reflecting positive mix, net pricing, the benefit of the extra week and favorable currency. Ongoing volume increased 2.8%, or approximately 1% adjusted for the extra week, with market shares up across several of Kraft’s top 25 U.S. categories. Operating companies income declined 1.0% to $3.8 billion, with increased post-employment benefit costs, higher commodity costs, net of pricing, and increased marketing spending, partially offset by productivity and restructuring savings, volume growth, positive mix, lower restructuring and impairment charges, the benefit of the extra week and favorable currency.

International Food

Kraft International Commercial (KIC) net revenues increased 7.0% to $10.8 billion, reflecting growth in both Europe, Middle East & Africa, and Latin America & Asia Pacific, as well as favorable currency and the extra week. Ongoing volume was down 0.6%, or approximately 3% adjusted for the impact of the extra week. Operating companies income increased 20.3% to $1.1 billion, benefiting from lower restructuring and impairment charges, a gain on sale of brands and related assets, positive mix, favorable currency and the extra week, partially offset by higher commodity costs, net of pricing, increased developing market infrastructure costs and lost income from divestitures.