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

(Continued)

Discussion and Analysis > 2005 compared with 2004

The following discussion compares consolidated operating results for the year ended December 31, 2005, with the year ended December 31, 2004.

Net revenues, which include excise taxes billed to customers, increased $8.2 billion (9.2%). Excluding excise taxes, net revenues increased $5.0 billion (7.7%), due primarily to increases from both the tobacco and food businesses (including the impact of acquisitions at international tobacco and the extra week of shipments at Kraft), and favorable currency.

Operating income increased $1.4 billion (9.3%), due primarily to higher operating results from the tobacco businesses, the favorable impact of currency, the 2004 charge for the international tobacco E.C. agreement, lower asset impairment and exit costs in 2005, primarily related to the Kraft restructuring program, gains on sales of food businesses and the reversal of a 2004 accrual related to tobacco quota buy-out legislation. These items were partially offset by an increase in the provision for airline industry exposure at PMCC, a charge for PM USA’s portion of the losses incurred by the federal government on disposition of its pool tobacco stock and lower operating results from the food and financial services businesses.

Currency movements increased net revenues by $2.0 billion ($1.1 billion, after excluding the impact of currency movements on excise taxes) and operating income by $421 million. Currency related increases in net revenues and operating income were due primarily to the weakness versus prior year of the U.S. dollar against the euro, Japanese yen and Central and Eastern European currencies.

Altria Group, Inc.’s effective tax rate decreased by 2.5 percentage points to 29.9%. The 2005 effective tax rate includes a $372 million benefit related to dividend repatriation under the Jobs Act in 2005, the reversal of $82 million of tax accruals no longer required at Kraft, as well as other benefits, including the impact of the domestic manufacturers’ deduction under the Jobs Act and lower repatriation costs. The 2004 effective tax rate includes the reversal of $355 million of tax accruals that are no longer required due to foreign tax events that were resolved during 2004 and an $81 million favorable resolution of an outstanding tax item at Kraft.

Minority interest in earnings from continuing operations, and equity earnings, net, was $149 million of expense for 2005, compared with $44 million of expense for 2004. The change primarily reflected ALG’s share of SABMiller’s gains from sales of investments in 2004.

Earnings from continuing operations of $10.7 billion increased $1.2 billion (13.2%), due primarily to higher operating income and a lower effective tax rate, partially offset by lower equity earnings from SABMiller. Diluted and basic EPS from continuing operations of $5.10 and $5.15, respectively, increased by 11.6% and 12.0%, respectively.

Loss from discontinued operations, net of income taxes and minority interest, was $233 million for 2005, compared with a loss of $4 million for 2004, due primarily to the recording of a loss on sale of Kraft’s sugar confectionery business in the second quarter of 2005.

Net earnings of $10.4 billion increased $1.0 billion (10.8%). Diluted and basic EPS from net earnings of $4.99 and $5.04, respectively, increased by 9.4% and 9.6%, respectively.

2004 compared with 2003

The following discussion compares consolidated operating results for the year ended December 31, 2004, with the year ended December 31, 2003.

Net revenues, which include excise taxes billed to customers, increased $8.3 billion (10.2%). Excluding excise taxes, net revenues increased $3.8 billion (6.3%), due primarily to increases from the tobacco and North American food businesses and favorable currency.

Operating income decreased $579 million (3.7%), due primarily to asset impairment and exit costs, primarily related to the Kraft restructuring program, the 2004 pre-tax charges for the international tobacco E.C. agreement and the provision for airline industry exposure, and lower operating results from the food businesses. These decreases were partially offset by the favorable impact of currency, 2003 pre-tax charges for the domestic tobacco legal settlement and higher operating results from the tobacco businesses.

Currency movements increased net revenues by $3.3 billion ($1.9 billion, after excluding the impact of currency movements on excise taxes) and operating income by $638 million. Increases in net revenues and operating income were due primarily to the weakness versus prior year of the U.S. dollar, primarily against the euro, Japanese yen and Russian ruble.

Altria Group, Inc.’s effective tax rate decreased by 2.5 percentage points to 32.4%. This decrease was due primarily to the reversal of $355 million of tax accruals that are no longer required due to foreign tax events that were resolved during the year and the $81 million favorable resolution of an outstanding tax item at Kraft.

Minority interest in earnings from continuing operations, and equity earnings, net, was $44 million of expense for 2004, compared with $391 million of expense for 2003. The change from 2003 was due to lower 2004 net earnings at Kraft and higher equity earnings from SABMiller, which included $111 million of gains from the sales of investments.

Earnings from continuing operations of $9.4 billion increased $299 million (3.3%), due primarily to the favorable impact of currency, a lower effective tax rate, 2003 pre-tax charges for the domestic tobacco legal settlement, higher equity earnings from SABMiller and higher operating income from the tobacco businesses, partially offset by the 2004 pre-tax charges for asset impairment and exit costs, primarily related to the Kraft restructuring program, the international tobacco E.C. agreement and a provision for airline industry exposure, and lower operating income from the food businesses. Diluted and basic EPS from continuing operations of $4.57 and $4.60, respectively, increased by 2.0% and 2.2%, respectively.

(Loss) earnings from discontinued operations, net of income taxes and minority interest, was a loss of $4 million for 2004 compared to earnings of $83 million for 2003, due primarily to a pre-tax non-cash asset impairment charge of $107 million in 2004.

Net earnings of $9.4 billion increased $212 million (2.3%). Diluted and basic EPS from net earnings of $4.56 and $4.60, respectively, increased by 0.9% and 1.3%, respectively.