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

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Discussion and Analysis Consolidated Operating Results

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Integration Costs and a Loss on Sale of a Food Factory—Altria Group, Inc.’s consolidated statements of earnings disclose the following items as integration costs, which are costs incurred by Kraft as it integrated the operations of Nabisco Holdings Corp. (“Nabisco”), and a loss on sale of a food factory. During 2003, Kraft reversed $13 million related to the previously recorded integration charges.

(in millions)

	For the years ended December 31,			2003			2002		2001
	Closing a facility and other consolidation programs	North American food		$(13	)		$ 98		$ 53
	Consolidation of production lines and distribution     networks in Latin America	International food					17
	Loss on sale of a food factory	North American food					(4	)	29
	Total			$(13	)		$111		$82

Asset Impairment and Exit Costs—For the years ended December 31, 2003, 2002 and 2001, asset impairment and exit costs were comprised of the following:

	(in millions)			2003			2002		2001
	Voluntary separation program	Domestic tobacco		$13
	Voluntary early retirement	North American food					$135
	Voluntary early retirement	International food					7
	Separation program	International tobacco					58
	Separation program	Beer					8
	Separation program	General corporate*		26
	Asset impairment	International food		6
	Asset impairment	Beer					15		$19
	Asset impairment	General corporate*		41
	Total			$86			$223		$19

* During January 2004, Altria Group, Inc. announced plans to sell its office facility in Rye Brook, New York. Approximately 1,000 employees currently working at the facility will either be relocated to other office facilities or their positions will be eliminated. In 2003, Altria Group, Inc. recorded a pre-tax charge of $41 million to write down the facility and the related fixed assets to fair value. During 2003, Altria Group, Inc. also recorded a pre-tax charge of $26 million, primarily for severance benefits related to the streamlining of various corporate functions.

Provision for Airline Industry Exposure—As discussed in Note 7. Finance Assets, net, during 2002, in recognition of the economic downturn in the airline industry, PMCC increased its allowance for losses by $290 million.

Litigation Related Expense—As discussed in Note 18. Contingencies, in connection with obtaining a stay of execution in May 2001 in the Engle class action, PM USA placed $500 million into a separate interest-bearing escrow account that, pursuant to the terms of a court approved stipulation and agreed order, will be paid to the court regardless of the outcome of the appeal, and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, PM USA recorded a $500 million pre-tax charge in its operating results for the year ended December 31, 2001.

Miller Transaction—As more fully discussed in Note 3. Miller Brewing Company Transaction, on July 9, 2002, Miller was merged into SAB to form SABMiller plc (“SABMiller”). The transaction resulted in a pre-tax gain of $2.6 billion, or $1.7 billion after-tax.

Amortization of Intangibles—As previously discussed, Altria Group, Inc. stopped recording the amortization of goodwill and indefinite life intangible assets as a charge to earnings as of January 1, 2002.

Businesses Previously Held for Sale—During 2001, certain small Nabisco businesses were reclassified to businesses held for sale, including their estimated results of operations through anticipated dates of sales. These businesses have subsequently been sold, with the exception of one business that had been held for sale since the acquisition of Nabisco. This business, which is no longer held for sale, has been included in the 2003 and 2002 consolidated operating results of Kraft Foods North America, Inc. (“KFNA”).

Kraft IPO—On June 13, 2001, Kraft completed an initial public offering (“IPO”) of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. As of December 31, 2003, 2002 and 2001, Altria Group, Inc. held approximately 98% of the combined voting power of Kraft’s outstanding capital stock. At December 31, 2003, Altria Group, Inc. owned approximately 84.6% of the outstanding shares of Kraft’s capital stock.

As discussed in Note 14. Segment Reporting, management reviews operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.