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

(Continued)

Discussion and Analysis 2003 compared with 2002

Net revenues for 2003 increased $1.4 billion (1.8%) over 2002, due primarily to favorable currency and higher net revenues from the food and international tobacco businesses, partially offset by the impact of the Miller transaction and a decrease in net revenues from the domestic tobacco business.

Operating income for 2003 decreased $691 million (4.2%) from 2002, due primarily to lower operating results from the domestic tobacco and food businesses, the impact of the Miller transaction, and the 2003 pre-tax charges for the domestic tobacco legal settlement and headquarters relocation, partially offset by higher operating results from the international tobacco business, the favorable impact of currency, a 2002 provision for airline industry exposure and the impact of the 2002 pre-tax charges for asset impairment and exit costs, and integration costs.

Currency movements increased net revenues by $3.4 billion ($1.8 billion, after excluding the impact of currency movements on excise taxes) and operating income by $563 million over 2002. Increases in net revenues and operating income are due primarily to the weakness versus prior year of the U.S. dollar against the euro and other currencies, partially offset by the impact of certain Latin American currencies.

Interest and other debt expense, net, of $1.2 billion for 2003 increased $16 million over 2002. This increase was due primarily to higher average debt outstanding during 2003, partially offset by lower average interest rates during 2003 and higher interest income.

During 2003, Altria Group, Inc.’s effective tax rate decreased by 0.6 percentage points to 34.9%, due primarily to favorable state tax rulings, as well as the mix of foreign versus domestic pre-tax earnings.

Net earnings of $9.2 billion for 2003 decreased $1.9 billion (17.1%) from 2002, due primarily to the $1.7 billion after-tax gain from the Miller transaction in 2002 and lower operating income in 2003. Diluted and basic EPS of $4.52 and $4.54, respectively, for 2003, decreased by 13.2% and 13.7%, respectively, from 2002, as the adverse impact of lower operating income and the impact of the gain from the Miller transaction in 2002 were partially offset by the favorable impact of share repurchases and a lower effective tax rate.

2002 compared with 2001

Net revenues for 2002 decreased $471 million (0.6%) from 2001, due primarily to the impact of the Miller transaction and a decrease in net revenues from the domestic tobacco business, partially offset by higher net revenues from the North American food and international tobacco businesses.

Operating income for 2002 increased $899 million (5.7%) over 2001, due primarily to the cessation of intangible asset amortization in 2002, the 2001 pre-tax Engle litigation related expense, higher operating results from the food and international tobacco businesses, lower corporate expenses and gains on sales of businesses, partially offset by lower operating results from the domestic tobacco business, the 2002 provision for airline industry exposure, the impact of the pre-tax charges for integration costs, and asset impairment and exit costs, and the exclusion of Miller’s operating results during the second half of 2002.

Currency movements decreased net revenues by $850 million ($530 million, after excluding the impact of currency movements on excise taxes) and operating income by $235 million from 2001. Declines in net revenues and operating income were due primarily to the strength of the U.S. dollar against the Japanese yen, the Russian ruble and certain Latin American currencies, partially offset by the weakness of the U.S. dollar against the euro.

Interest and other debt expense, net, of $1.1 billion for 2002 decreased $284 million from 2001. This decrease was due primarily to higher average debt outstanding in 2001, as a result of the Nabisco acquisition, and lower average interest rates in 2002. The net proceeds of the Kraft IPO of $8.4 billion were used to retire a portion of the Nabisco acquisition debt in June 2001.

During 2002, Altria Group, Inc.’s effective tax rate decreased by 2.4 percentage points to 35.5%. This change was due primarily to the adoption of SFAS No. 141 and SFAS No. 142, under which Altria Group, Inc. is no longer required to amortize goodwill and indefinite life intangible assets as a charge to earnings.

Net earnings of $11.1 billion for 2002 increased $2.5 billion (29.7%) over 2001, due primarily to the $1.7 billion after-tax gain from the Miller transaction and higher operating income. Diluted and basic EPS of $5.21 and $5.26, respectively, for 2002, increased by 34.6% and 34.2%, respectively, over 2001, due primarily to higher operating income, the after-tax gain from the Miller transaction and the favorable impact of share repurchases during 2002.