10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Fiscal Year Ended December 31, 2002 OR
[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from                to        COMMISSION FILE NUMBER 1-8940

ALTRIA GROUP, INC.

(Exact name of registrant as specified in its charter)

Virginia
(State or other jurisdiction of
incorporation or organization)

120 Park Avenue,
New York, N.Y.
(Address of principal executive offices) 13-3260245
(I.R.S. Employer
Identification No.)

10017
(Zip Code)

Registrant's telephone number, including area code: 917-663-4000
Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, $0.331/3 par value	New York Stock Exchange

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [ ]

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X]   No [ ]

      The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on June 28, 2002, was approximately $93 billion. As of February 28, 2003, there were 2,033,459,440 shares of the registrant's Common Stock outstanding.

      Documents Incorporated by Reference

      Portions of the registrant's annual report to shareholders for the year ended December 31, 2002 (the ''2002 Annual Report''), are incorporated in Part I, Part II and Part IV hereof and made a part hereof. Portions of the registrant's definitive proxy statement for use in connection with its annual meeting of shareholders to be held on April 24, 2003, filed with the Securities and Exchange Commission on March 17, 2003, are incorporated in Part III hereof and made a part hereof.

 

PART I

Item 1. Businesses.

(a) General Development of Business

General

      In April 2002, the stockholders of Philip Morris Companies Inc. approved changing the name of the parent company from Philip Morris Companies Inc. to Altria Group, Inc. (''ALG''). The name change became effective on January 27, 2003.

      ALG's wholly-owned subsidiaries, Philip Morris USA Inc. (''PM USA''), Philip Morris International Inc. (''PMI'') and its majority-owned (84.2%) subsidiary, Kraft Foods Inc. (''Kraft''), are engaged in the manufacture and sale of various consumer products, including cigarettes and foods and beverages. Philip Morris Capital Corporation (''PMCC''), another wholly-owned subsidiary, is primarily engaged in leasing activities. ALG's former wholly-owned subsidiary, Miller Brewing Company (''Miller''), was engaged in the manufacture and sale of various beer products prior to the merger of Miller into South African Breweries plc (''SAB'') on July 9, 2002. As used herein, unless the context indicates otherwise, Altria Group, Inc. refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies. ALG's family of companies forms the largest consumer packaged goods business in the world.*

      PM USA, which conducts business under the trade name ''Philip Morris USA,'' is engaged in the manufacture and sale of cigarettes. PM USA is the largest cigarette company in the United States. PMI is a holding company whose subsidiaries and affiliates and their licensees are engaged primarily in the manufacture and sale of tobacco products (mainly cigarettes) internationally. Marlboro, the principal cigarette brand of these companies, has been the world's largest-selling cigarette brand since 1972.

      Kraft is engaged in the manufacture and sale of branded foods and beverages in the United States, Canada, Europe, the Middle East and Africa, Latin America and Asia Pacific. Kraft conducts its global business through its subsidiaries: Kraft Foods North America, Inc. (''KFNA'') and Kraft Foods International, Inc. (''KFI''). Kraft has operations in 68 countries and sells its products in more than 150 countries.

      Prior to June 13, 2001, Kraft was a wholly-owned subsidiary of ALG. 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. At December 31, 2002, ALG owned approximately 84.2% of the outstanding shares of Kraft's capital stock through its ownership of 50.2% of Kraft's Class A common stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has one vote per share while Kraft's Class B common stock has ten votes per share. Therefore, at December 31, 2002, ALG held approximately 98% of the combined voting power of Kraft's outstanding capital stock.

      On May 30, 2002, ALG announced an agreement with SAB to merge Miller into SAB. The transaction closed on July 9, 2002 and SAB changed its name to SABMiller plc (''SABMiller''). At closing, ALG received 430 million shares of SABMiller valued at approximately $3.4 billion, based upon a share price of 5.12 British pounds per share, in exchange for Miller, which had $2.0 billion of existing debt. The shares in SABMiller owned by ALG resulted in a 36% economic interest and a 24.9% voting interest. The transaction resulted in a pre-tax gain of approximately $2.6 billion, or approximately $1.7 billion after-tax. The gain was recorded in the third quarter of 2002. Beginning with the third quarter of 2002, ALG's ownership interest in SABMiller is being accounted for under the equity method. Accordingly, ALG records its share of SABMiller's net earnings, based on its economic ownership percentage, in minority interest in earnings and o ther, net, on the consolidated statement of earnings.

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* References to the competitive ranking of ALG's subsidiaries in their various businesses are based on sales data or, in the case of cigarettes, shipments, unless otherwise indicated.

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Source of Funds—Dividends

      Because ALG is a holding company, its principal sources of funds are from the payment of dividends and repayment of debt from its subsidiaries. Except for minimum net worth requirements, ALG's principal wholly-owned and majority-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.

(b) Financial Information About Industry Segments

      Altria Group, Inc.'s reportable segments are domestic tobacco, international tobacco, North American food, international food, beer (prior to July 9, 2002) and financial services. Net revenues and operating companies income* (together with a reconciliation to operating income) attributable to each such segment for each of the last three years (along with total assets for each of tobacco, food, beer and financial services at December 31, 2002, 2001 and 2000) are set forth in Note 14 to Altria Group, Inc.'s consolidated financial statements (''Note 14'') which is incorporated herein by reference to the 2002 Annual Report.

      The relative percentages of operating companies income attributable to each reportable segment were as follows:

	2002			2001			2000
Domestic tobacco		29.0	%		30.1	%		33.0	%
International tobacco		32.8			30.9			32.1
North American food		28.6			27.4			21.9
International food		7.7			7.1			7.4
Beer		1.6			2.8			4.0
Financial services		0.3			1.7			1.6
		100.0	%		100.0	%		100.0	%

      The decrease in the relative percentage attributable to domestic tobacco reflects lower volume and higher promotions in the intensely competitive U.S. cigarette industry. The decrease in the relative percentage attributable to beer from 2001 to 2002 is the result of the merger of Miller into SABMiller, while the decrease in the relative percentage attributable to financial services reflects a $290 million provision for exposure to the U.S. airline industry.

(c) Narrative Description of Business

Tobacco Products

      PM USA manufactures, markets and sells cigarettes in the United States and its territories, and exports tobacco products from the United States. Subsidiaries and affiliates of PMI and their licensees manufacture, market and sell tobacco products outside the United States.

Domestic Tobacco Products

      PM USA is the largest tobacco company in the United States, with total cigarette shipments in the United States of 191.6 billion units in 2002, a decrease of 7.5% from 2001. PM USA accounted for 48.9% of the domestic cigarette industry's total shipments in 2002 (a decrease of 2.1 share points from 2001). The domestic industry's cigarette shipments decreased by 3.7% in 2002. The industry's volume

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* Management reviews operating companies income, which is defined as operating income before corporate expenses and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to assist investors with analyzing business performance and trends. This measure should not be considered in isolation or as a substitute for operating income prepared in accordance with accounting principles generally accepted in the United States of America (''U.S. GAAP'').

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decrease during 2002 was due primarily to weak economic conditions, increases in state excise taxes and the increased incidence of counterfeit product. In addition to these factors, PM USA's volume decrease was also attributable to the growth of deep-discount cigarettes and competitive promotional activity. The following table sets forth the industry's cigarette shipments in the United States, PM USA's shipments and its share of domestic industry shipments:

Years Ended December 31	Industry*		PM USA		PM USA Share of Industry
	(in billions of units)				(%)
2002		391.4		191.6		48.9
2001		406.3		207.1		51.0
2000		419.8		211.9		50.5

      PM USA's major premium brands are Marlboro, Virginia Slims and Parliament. Its principal discount brand is Basic. All of its brands are marketed to take into account differing preferences of adult smokers. Marlboro is the largest-selling cigarette brand in the United States, with shipments of 148.6 billion units in 2002 (down 5.8% from 2001), equating to 37.9% of the domestic market (down 0.9 share points from 2001).

      In 2002, the premium and discount segments accounted for approximately 73% and 27%, respectively, of the domestic cigarette industry volume. In 2001, the premium and discount segments accounted for approximately 74% and 26%, respectively, of the domestic cigarette industry volume. PM USA's share of the premium segment was 60.7% in 2002, a decrease of 0.9 share points from 2001. Shipments of premium cigarettes accounted for 90.2% of PM USA's 2002 volume, up from 89.3% in 2001. In 2002, industry shipments within the discount category increased 0.4% from 2001 levels; PM USA's 2002 shipments within this category decreased 15.6%, resulting in a share of 17.6% of the discount category (down 3.3 share points from 2001).

      PM USA cannot predict future changes or rates of change in domestic tobacco industry volume, in the relative sizes of the premium and discount segments or in PM USA's shipments, shipment market share or retail market share; however, it believes that PM USA's results have been and may continue to be materially adversely affected by price increases related to increased excise taxes and tobacco litigation settlements, as well as by the other tobacco legislation discussed below.

      As set forth in Note 18 to Altria Group, Inc.'s consolidated financial statements (''Note 18''), which is incorporated herein by reference to the 2002 Annual Report, on May 7, 2001, the trial court in the Engle class action approved a stipulation among PM USA, certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded in the operating companies income of the domestic tobacco business during the first quarter of 2001. In July 2001, PM USA also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM USA should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2002 and 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly.

* Source: Management Science Associates.
It should be noted that Management Science Associates' current measurements of the domestic cigarette industry's total shipments and related share data do not include all shipments of some manufacturers that Management Science Associates is presently unable to monitor effectively. Accordingly, it should also be noted that the discussion herein of PM USA's performance within the industry is based upon Management Science Associates' estimates of total industry volume.

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International Tobacco Products

      PMI's total cigarette shipments increased 3.5% in 2002 to 723.1 billion units. PMI estimates that its share of the international cigarette market (which is defined as worldwide cigarette volume excluding the United States and duty-free shipments) was approximately 14.7% in 2002, up from 14.1% in 2001. PMI estimates that international cigarette market shipments were approximately 4.8 trillion units in 2002, a slight decrease from 2001. PMI's leading brands—Marlboro, L&M, Philip Morris, Bond Street, Chesterfield, Parliament, Lark, Merit and Virginia Slims—collectively accounted for approximately 11.4% of the international cigarette market, up from 10.8% in 2001. Shipments of PMI's principal brand, Marlboro, decreased 0.6% in 2002, and represented more than 6% of the international cigarette market in 2002 and 2001.

      PMI has a cigarette market share of at least 15% and, in a number of instances substantially more than 15%, in more than 60 markets, including Argentina, Austria, Belgium, Brazil, the Czech Republic, Finland, France, Germany, Greece, Hong Kong, Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Spain, Switzerland, Turkey and the Ukraine.

      In 2002, PMI continued to invest in and expand its international manufacturing base, including significant investments in facilities located in Germany, Korea, the Netherlands, the Philippines, Poland, Portugal and Russia.

Distribution, Competition and Raw Materials

      PM USA sells its tobacco products principally to wholesalers (including distributors), large retail organizations, including chain stores, and the armed services. Subsidiaries and affiliates of PMI and their licensees sell their tobacco products worldwide to distributors, wholesalers, retailers and state-owned enterprises and other customers.

      The market for tobacco products is highly competitive, characterized by brand recognition and loyalty, with product quality, price, marketing and packaging constituting the significant methods of competition. Promotional activities include, in certain instances and where permitted by law, allowances, the distribution of incentive items, price reductions and other discounts. The tobacco products of ALG's subsidiaries, affiliates and their licensees are advertised and promoted through various media, although television and radio advertising of cigarettes is prohibited in the United States and is prohibited or restricted in many other countries. In addition, as discussed below under Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking—State Settlement Agreements, PM USA and other domestic tobacco manufacturers have agreed to other marketing re strictions in the United States as part of the settlements of state health care cost recovery actions.

      During 2002, weak economic conditions with resultant consumer frugality and higher state excise taxes have resulted in intense price competition in the U.S. cigarette industry. These factors have significantly affected shipments of PM USA's products, which compete predominantly in the premium category. PM USA has planned significant promotional activities in 2003 to address these issues. The cost of these programs is expected to reduce operating companies income for PM USA during 2003 as compared with 2002.

      In the United States, PM USA purchases burley and flue-cured leaf tobaccos of various grades and styles. In 2000, PM USA began a pilot partnering program with burley tobacco growers and extended the program to flue-cured tobacco growers in 2001. Under the terms of the program, PM USA agrees to purchase all of the tobacco that participating growers may sell without penalty under the federal tobacco program. PM USA also purchases its United States tobacco requirements at auction and through other sources.

      Tobacco production in the United States is subject to government controls, including the tobacco-price support and production control programs administered by the United States Department of Agriculture (the ''USDA''). Oriental, flue-cured and burley tobaccos are also purchased outside the United States. Tobacco production outside the United States is subject to a variety of controls and external factors, which may include tobacco subsidies and tobacco production control programs. All of

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those controls and programs in the United States and internationally may substantially affect market prices for tobacco.

      PM USA and PMI believe there is an adequate supply of tobacco in the world markets to satisfy their current and anticipated production requirements.

Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking

      The tobacco industry, both in the United States and foreign jurisdictions, has faced, and continues to face, a number of issues that may adversely affect the business, volume, results of operations, cash flows and financial position of PM USA, PMI and Altria Group, Inc.

      These issues, some of which are more fully discussed below, include:

• a $74.0 billion punitive damages verdict against PM USA in the Engle smoking and health class action case, a compensatory and punitive damages verdict totaling approximately $10.1 billion against PM USA in the Price Lights/Ultra Lights class action and punitive damages verdicts against PM USA in individual smoking and health cases discussed below in Item 3. Legal Proceedings (''Item 3'');

• the civil lawsuit filed by the United States federal government seeking disgorgement of approximately $289 billion from various cigarette manufacturers, including PM USA, and others discussed in Item 3;

• pending and threatened litigation and bonding requirements as discussed in Item 3 and in ''Cautionary Factors that May Affect Future Results;''

• legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects caused by both smoking and exposure to environmental tobacco smoke (''ETS'');

• price increases in the United States related to the settlement of certain tobacco litigation, and the effect of any resulting cost advantage of manufacturers not subject to these settlements;

• actual and proposed excise tax increases in the United States and foreign markets;

• diversion into the United States market of products intended for sale outside the United States;

• the sale of counterfeit cigarettes by third parties;

• price disparities and changes in price disparities between premium and lowest price brands;

• the outcome of proceedings and investigations involving contraband shipments of cigarettes;

• governmental investigations;

• actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information;

• governmental and private bans and restrictions on smoking;

• actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States;

• actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales inside and outside the United States;

• the diminishing prevalence of smoking and increased efforts by tobacco control advocates to further restrict smoking; and

• actual and proposed tobacco legislation both inside and outside the United States.

      Excise Taxes: Cigarettes are subject to substantial federal, state and local excise taxes in the United States and to similar taxes in most foreign markets. In general, such taxes have been increasing. The United States federal excise tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the United States, state and local sales and excise taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may currently be as high as $4.10 per pack of 20 cigarettes. Further tax increases in various jurisdictions are currently under consideration or pending. In 2002, 20

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states, the District of Colombia and the Commonwealth of Puerto Rico enacted excise tax increases, ranging from $0.07 per pack in Tennessee to as much as $1.81 per pack in New York. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and significant increases in excise and other cigarette-related taxes have been proposed or enacted at the state and local levels within the United States and in many jurisdictions outside the United States. In the European Union (the ''EU''), taxes on cigarettes vary considerably and currently may be as high as the equivalent of $5.69 per pack of 20 cigarettes on the most popular brands (using an exchange rate at January 2, 2003 of a  €1.00 = $1.0446). In Germany, where total tax on cigarettes is currently equivalent to $2.50 per pack of 19 cigarettes on the most popular brands, the excise tax increased by the equivalent of $0.20 per pack of 19 cigarettes in January 2003. In the opinion of PM USA and PMI, increases in excise and similar taxes have had an adverse impact on sales of cigarettes, particularly the legitimate sales of cigarettes, and create an incentive for smokers to turn to untaxed or lower-taxed products. Any future increases, the extent of which cannot be predicted, may result in volume declines for the cigarette industry, including PM USA and PMI, and might also cause sales to shift from the premium segment to the non-premium, including the discount, segment.

      Each of the countries currently anticipated to join the EU by 2004 will be required to increase excise tax levels on cigarettes to EU standards by a date negotiated with the EU, in all cases to levels that may produce the results described above.

      Tar and Nicotine Test Methods and Brand Descriptors: Several jurisdictions have questioned the utility of standardized test methods to measure tar and nicotine yields of cigarettes. In 1997, the United States Federal Trade Commission (''FTC'') issued a request for public comment on its proposed revision of its tar and nicotine test methodology and reporting procedures established by a 1970 voluntary agreement among domestic cigarette manufacturers. In 1998, the FTC requested assistance from the Department of Health and Human Services (''HHS'') in developing a testing program for the tar, nicotine, and carbon monoxide content of cigarettes. In 2001, the National Cancer Institute issued a report stating that there was no meaningful evidence of a difference in smoke exposure or risk to smokers between cigarettes with different machine-measured tar and nicotine yields. In September 2002, PM USA petitioned the FTC to promulgate new rules governing the disclosure of average tar and nicotine yields of cigarette brands. PM USA asked the FTC to take action in response to evolving scientific evidence about machine-measured low-yield cigarettes, including the National Cancer Institute's Monograph 13, which represents a fundamental departure from the scientific and public health community's prior thinking about the health effects of low-yield cigarettes. Public health officials in other countries and the EU have stated that the use of terms such as ''lights'' to describe low-yield cigarettes is misleading. Some jurisdictions have questioned the relevance of the method for measuring tar, nicotine, and carbon monoxide yields established by the International Organization for Standardization. The EU Commission has been directed to establish a committee to address, among other things, alternative methods for measuring tar, nicotine and carbon monoxide yields. In addition, public healt h authorities in the United States, the EU, Brazil and other countries have prohibited or called for the prohibition of the use of brand descriptors such as ''Lights'' and ''Ultra Lights.'' See Item 3, which describes pending litigation concerning the use of brand descriptors.

      Food and Drug Administration (''FDA'') Regulations: In 1996, the FDA promulgated regulations asserting jurisdiction over cigarettes as ''drugs'' or ''medical devices'' under the provisions of the Food, Drug and Cosmetic Act (''FDCA''). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, record keeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in 2000. PM USA has stated that while it continues to oppose FDA regulation over cigarettes as ''drugs'' or ''medical devices'' under the provisions of the FDCA, it would support new legislation that would provide for reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there are bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products; PM USA has expressed support for certain of the bills. The bills take a variety of approaches to the issue, ranging from codification of the original FDA regulations under the ''drug'' and ''medical device'' provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in

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substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of any Congressional action regarding the pending bills cannot be predicted.

      Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose the ingredients used in the manufacture of cigarettes and, in certain cases, to provide toxicological information. The Commonwealth of Massachusetts enacted legislation to require cigarette manufacturers to report the flavorings and other ingredients used in each brand-style of cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the district court granted the plaintiffs' motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand-specific information on ingredients in their products, and defendants appealed. In December 2002, the United States Court of Appeals for the First Circuit, sitting en banc, affirmed the district court's entry of summary judgment. The deadline for the Commonwealth to file a petition for certiorari in the U.S. Supreme Court was March 3, 2003, and the Commonwealth did not file such a petition. Ingredient disclosure legislation has been enacted or proposed in other states and in jurisdictions outside the United States, including the EU. Under an EU tobacco product directive, tobacco companies are now required to disclose ingredients and toxicological information to each Member State. In December 2002, PMI submitted this information to all EU Member States in a form it believes complies with the directive. PMI has also voluntarily disclosed the ingredients in its brands in a number of other countries. Other jurisdictions have also enacted or proposed legislation that wo uld require the submission of information about ingredients and would permit governments to prohibit the use of certain ingredients.

      Health Effects of Smoking and Exposure to ETS: Reports with respect to the health risks of cigarette smoking have been publicized for many years, and sale, promotion, and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of HHS have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommended various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focused on the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particu larly the addictive nature of cigarette smoking during adolescence.

      Studies with respect to the health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States, and the National Academy of Sciences reported that nonsmokers were at increased risk of lung cancer and respiratory illness due to ETS. Since then, a number of government agencies around the world have concluded that ETS causes diseases—including lung cancer and heart disease—in nonsmokers. In 2002, the International Agency for Research on Cancer concluded that ETS is carcinogenic and that exposure to ETS causes diseases in non-smokers.

      It is the policy of each of PM USA and PMI to support a single, consistent public health message on the health effects of cigarette smoking in the development of diseases in smokers and on smoking and addiction. It is also their policy to defer to the judgment of public health authorities as to the content of warnings in advertisements and on product packaging regarding the health effects of smoking, addiction and exposure to ETS.

      In 1999, PM USA and PMI established web sites that include, among other things, views of public health authorities on smoking, disease causation in smokers, addiction and ETS. In October 2000, the sites were updated to reflect PM USA's and PMI's agreement with the overwhelming medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. The web sites advise smokers, and those considering smoking, to rely on the messages of public health authorities in making all smoking-related decisions.

      The sites also state that public health officials have concluded that ETS causes or increases the risk of disease—including lung cancer and heart disease—in non-smoking adults, and causes conditions in children such as asthma, respiratory infections, cough, wheeze, otitis media (middle ear infection) and

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Sudden Infant Death Syndrome. The sites also state that public health officials have concluded that secondhand smoke can exacerbate adult asthma and cause eye, throat and nasal irritation. The site also states that the public should be guided by the conclusions of public health officials regarding the health effects of ETS in deciding whether to be in places where ETS is present or, if they are smokers, when and where to smoke around others. In addition, PM USA and PMI state on their web sites that they believe that particular care should be exercised where children are concerned, and adults should avoid smoking around children. PM USA and PMI also state that the conclusions of the public health officials concerning ETS are sufficient to warrant measures that regulate smoking in public places, and that where smoking is permitted, the government should require the posting of warning notices that communicate public health officials' conclusions that second-hand smoke cause s diseases in non-smokers.

      The World Health Organization's Framework Convention for Tobacco Control: The World Health Organization (''WHO'') and its member states are negotiating a proposed Framework Convention for Tobacco Control. The proposed treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things:

• establish specific actions to prevent youth smoking;

• restrict and gradually eliminate tobacco product marketing;

• inform the public about the health consequences of smoking and the benefits of quitting;

• regulate the ingredients of tobacco products;

• impose new package warning requirements that would include the use of pictures or graphic images;

• eliminate cigarette smuggling and counterfeit cigarettes;

• restrict smoking in public places;

• increase cigarette taxes;

• prohibit the use of terms that suggest one brand of cigarettes is safer than another;

• phase out duty-free tobacco sales; and

• encourage litigation against tobacco product manufacturers.

      PM USA and PMI have stated that they would support a treaty that member states could consider for ratification, based on the following four principles:

• smoking-related decisions should be made on the basis of a consistent public health message;

• effective measures should be taken to prevent minors from smoking;

• the right of adults to choose to smoke should be preserved; and

• all manufacturers of tobacco products should compete on a level playing field.

      The sixth round of treaty negotiations was recently concluded and the WHO has indicated that the draft treaty will be presented for ratification to the World Health Assembly in May 2003. The outcome of the treaty negotiations cannot be predicted.

      Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would:

• subject cigarettes to various regulations under the HHS or regulation under the Consumer Products Safety Act;

• establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities;

• further restrict the advertising of cigarettes;

• require additional warnings, including graphic warnings, on packages and in advertising;

• eliminate or reduce the tax deductibility of tobacco advertising;

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• provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law; and

• allow state and local governments to restrict the sale and distribution of cigarettes.

      Legislative initiatives affecting the regulation of the tobacco industry have also been considered or adopted in a number of jurisdictions outside the United States. In 2001, the EU adopted a directive on tobacco product regulation requiring EU Member States to implement regulations that:

• reduce maximum permitted levels of tar, nicotine and carbon monoxide yields to 10, 1 and 10 milligrams, respectively;

• require manufacturers to disclose ingredients and toxicological data on ingredients;

• require rotational health warnings that cover no less than 30% of the front panel of each pack of cigarettes and warnings that cover no less than 40% of the back panel;

• require the health warnings to be surrounded by a black border;

• require the printing of tar, nicotine and carbon monoxide numbers on the side panel of the pack at a minimum size of 10% of the side panel; and

• prohibit the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others.

      EU Member States are in the process of implementing these regulations over the course of 2003 and 2004. The European Commission is currently working on guidelines for graphic warnings on cigarette packaging which are expected to be issued in 2003. The EU is also considering a new directive that would restrict radio, press and Internet tobacco marketing and advertising that cross Member State borders. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions.

      In August 2000, New York State enacted legislation that requires the State's Office of Fire Prevention and Control to promulgate by January 1, 2003, fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. On December 31, 2002, the New York State Office of Fire Prevention and Control published a proposed regulation to implement this legislation. PM USA plans to submit comments concerning the proposed regulation, and will continue to participate in the public comment process. It is, however, not possible to predict the impact of the New York State law until the regulation is promulgated. Similar le gislation is being considered in other states and localities, at the federal level, and in jurisdictions outside the United States.

      It is not possible to predict what, if any, additional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM USA, PMI and Altria Group, Inc. could be materially adversely affected.

      Governmental Investigations: Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters, including those discussed below. ALG believes that Canadian authorities are contemplating a legal proceeding based on an investigation of PMI and its subsidiary, Philip Morris Duty Free Inc., relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s. During 2001, the competition authorities in Italy and Turkey initiated investigations into the pricing activities by participants in those cigarette markets. The investigation in Turkey was closed after that country's Competition Board issued a ruling that there was insufficient evidence to conclude that the Turkish affiliate of PMI had violated competition laws. In March 2003, the Italian competition authority issued its findings, and imposed fines totaling €50 million on certain affiliates of PMI. The parties will have the right to

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appeal the authority's findings and any fines before the administrative court and thereafter before the supreme administrative court, and PMI's affiliates intend to appeal. In 2002, the Italian authorities, at the request of a consumer group, initiated an investigation into the use of descriptors for Marlboro Lights. The investigation is directed at PMI's German and Dutch affiliates, which manufacture product for sale in Italy. The competition authority issued its decision in September 2002, finding that the use of the term ''lights'' on the packaging of the Marlboro Lights brand is misleading advertising under Italian law, but that it was not necessary to take any action because the use of the term ''lights'' will be prohibited as of October 2003 under the EU directive on tobacco product regulation. The consumer group that requested the investigation indicated that it would appeal the decision, but did not do so within the permitted time period. The group has also requested that the public prosecutor in Naples, Italy investigate whether a crime has been committed under Italian law with regard to the use of the term ''lights.'' In October 2002, the consumer group filed new requests with the competition authority asking for investigation of the use of descriptors for additional low-yield brands, including Merit Ultra Lights and certain brands manufactured by other companies. In 2001, authorities in Australia initiated an investigation into the use of descriptors, alleging that their use was false and misleading. The investigation is directed at one of PMI's Australian affiliates and other cigarette manufacturers. PMI cannot predict the outcome of these investigations or whether additional investigations may be commenced.

      Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and certain foreign jurisdictions. See Item 3 for a discussion of such litigation.

      State Settlement Agreements: As discussed in Item 3, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements provide for substantial annual payments. They also place numerous restrictions on the tobacco industry's business operations, including restrictions on the advertising and marketing of cigarettes. Among these are restrictions or prohibitions on the following:

• targeting youth;

• use of cartoon characters;

• use of brand name sponsorships and brand name non-tobacco products;

• outdoor and transit brand advertising;

• payments for product placement; and

• free sampling.

      In addition, the settlement agreements require companies to affirm corporate principles directed at:

• reducing underage use of cigarettes;

• imposing requirements regarding lobbying activities;

• mandating public disclosure of certain industry documents;

• limiting the industry's ability to challenge certain tobacco control and underage use laws; and

• providing for the dissolution of certain tobacco-related organizations and placing restrictions on the establishment of any replacement organizations.

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Food Product

Acquisitions and Divestitures

   Nabisco Acquisition

      On December 11, 2000, Kraft acquired all of the outstanding shares of Nabisco Holdings Corp. (''Nabisco''). The purchase of the outstanding shares, retirement of employee stock options and other payments totaled approximately $15.2 billion. In addition, the acquisition included the assumption of approximately $4.0 billion of existing Nabisco debt. For a discussion of the Nabisco acquisition, see Note 5 to Altria Group, Inc.'s consolidated financial statements, which is incorporated herein by reference to the 2002 Annual Report.

      The integration of Nabisco into Kraft has continued throughout 2001 and 2002. The closure of a number of Nabisco domestic and international facilities resulted in severance and other exit costs of $379 million, which are included in the adjustments for the allocation of the purchase price. The closures will result in the termination of approximately 7,500 employees and will require total cash payments of $373 million, of which approximately $190 million has been spent through December 31, 2002. Substantially all of the closures were completed as of December 31, 2002, and the remaining payments relate to salary continuation payments for severed employees and lease payments.

      The integration of Nabisco into the operations of Kraft also resulted in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the consolidated statement of earnings to close or reconfigure facilities and integrate Nabisco were originally estimated to be in the range of $200 million to $300 million. During 2002, Kraft recorded pre-tax integration related charges of $115 million to consolidate production lines and close facilities, and for other consolidated programs. In addition, during 2001, Kraft incurred pre-tax integration costs of $53 million for site reconfigurations and other consolidation programs in the United States. The integration related charges of $168 million included $27 million relating to severance, $117 million relating to asset write-offs and $24 million relating to other cash exit costs. Cash payments relating to these charges will approximate $51 million, of which $21 million has been paid through December 31, 2002. In addition, during 2002, approximately 700 salaried employees elected to retire or terminate employment under voluntary retirement programs. As a result, Kraft recorded a pre-tax charge of $142 million related to these programs. As of December 31, 2002, the aggregate pre-tax charges to close or reconfigure Kraft's facilities and integrate Nabisco, including charges for early retirement programs, were $310 million, slightly above the original estimate. No additional pre-tax charges are expected to be recorded for these programs.

      By combining Nabisco's operations with the operations of KFNA and KFI, Kraft achieved annualized net cost synergy savings of $425 million through 2002 from the pre-acquisition cost structures of continuing businesses, expects to generate annualized additional net cost synergies of $140 million to $150 million in 2003 and expects to achieve its target of annualized net cost synergies of $600 million by 2004.

   Other Acquisitions and Divestitures

      During 2002, KFI acquired a snacks business in Turkey and a biscuits business in Australia. The total cost of these and other smaller acquisitions was $122 million. During 2001, KFI purchased coffee businesses in Romania, Morocco and Bulgaria and also acquired confectionery businesses in Russia and Poland. The total cost of these and other smaller acquisitions was $194 million. During 2000, KFNA purchased Balance Bar Co. and Boca Burger, Inc. The total cost of these and other smaller acquisitions was $365 million.

      During 2002, Kraft sold several small North American food businesses, some of which were previously classified as businesses held for sale. In addition, Kraft sold its Latin American yeast and industrial bakery ingredients business for $110 million and recorded a pre-tax gain of $69 million. The aggregate proceeds received from sales of businesses during 2002 were $219 million, on which Kraft recorded pre-tax gains of $80 million. During 2001, Kraft sold several small food businesses. The aggregate proceeds received in these transactions were $21 million, on which Kraft recorded pre-tax

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gains of $8 million. During 2000, Kraft sold a French confectionery business for proceeds of $251 million, on which a pre-tax gain of $139 million was recorded. Several small international and North American food businesses were also sold in 2000. The aggregate proceeds received from sales of businesses during 2000 were $300 million, on which Kraft recorded pre-tax gains of $172 million.

      The impact of these acquisitions and divestitures, excluding Nabisco, has not had a material effect on Altria Group, Inc.'s consolidated results of operations.

North American Food

      KFNA's principal brands span five consumer sectors and include the following:

      Snacks: Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter, Stella D'Oro and SnackWell's cookies; Ritz, Premium, Triscuit, Wheat Thins, Cheese Nips, Better Cheddars, Honey Maid Grahams and Teddy Grahams crackers; Planters nuts and salted snacks; Life Savers, Creme Savers, Altoids, Gummi Savers and Fruit Snacks sugar confectionery products; Terry's and Toblerone chocolate confectionery products; Handi-Snacks two-compartment snacks; Balance nutrition and energy snacks; and Jell-O refrigerated gelatin and pudding snacks and Handi-Snacks shelf-stable pudding snacks.

      Beverages: Maxwell House, General Foods International Coffees, Starbucks, Yuban, Sanka, Nabob and Gevalia coffees; Capri Sun, Tang, Kool-Aid and Crystal Light aseptic juice drinks; and Kool-Aid, Tang, Capri Sun, Crystal Light and Country Time powdered beverages.

      Cheese: Kraft and Cracker Barrel natural cheeses; Philadelphia cream cheese; Kraft and Velveeta process cheeses; Kraft grated cheeses; Cheez Whiz process cheese sauce; Easy Cheese aerosol cheese spread; and Knudsen and Breakstone's cottage cheese and sour cream.

      Grocery: Jell-O dry packaged desserts; Cool Whip frozen whipped topping; Post ready-to-eat cereals; Cream of Wheat and Cream of Rice hot cereals; Kraft and Miracle Whip spoonable dressings; Kraft salad dressings; A.1. steak sauce; Kraft and Bull's-Eye barbecue sauces; Grey Poupon premium mustards; Shake 'N Bake coatings; and Milk-Bone pet snacks.

      Convenient Meals: DiGiorno, Tombstone, Jack's, California Pizza Kitchen and Delissio frozen pizzas; Kraft macaroni & cheese dinners; Taco Bell, It's Pasta Anytime and Stove Top Oven Classics meal kits; Lunchables lunch combinations; Oscar Mayer and Louis Rich cold cuts, hot dogs and bacon; Boca soy-based meat alternatives; Stove Top stuffing mix; and Minute rice.

International Food

      KFI's principal brands within the five consumer sectors include the following:

      Snacks: Milka, Suchard, Cote d'Or, Marabou, Toblerone, Freia, Terry's, Daim, Figaro, Korona, Poiana, Prince Polo, Alpen Gold, Siesta, Lacta and Gallito chocolate confectionery products; Estrella, Maarud, Kar Gida, Cipso and Lux salted snacks; Oreo, Chips Ahoy!, Ritz, Terrabusi, Canale, Club Social, Cerealitas, Trakinas and Lucky biscuits; and Sugus and Artic s ugar confectionery products.

      Beverages: Jacobs, Gevalia, Carte Noire, Jacques Vabre, Kaffee HAG, Grand' Mère, Kenco, Saimaza, Maxim, Maxwell House, Dadak, Onko, Samar and Nova Brasilia coffees; Suchard Express, O'Boy, and Kaba chocolate drinks; Tang, Clight, Kool-Aid, Royal, Verao, Fresh, Frisco, Q-Refres-Ko and Ki-Suco powdered beverages; and Maguary juice concentrate.

      Cheese: Philadelphia cream cheese; Sottilette, Kraft, Dairylea, El Casèrio and Invernizzi cheeses; Kraft and Eden process cheeses; and Cheese Whiz process cheese spread.

      Grocery: Kraft spoonable and pourable salad dressings; Miracel Whip spoonable dressing; Royal dry packaged desserts; Kraft and ETA peanut butters; and Vegemite yeast spread.

      Convenient Meals: Lunchables lunch combinations; Kraft macaroni & cheese dinners; Kraft and Mirácoli pasta dinners and sauces; and Simmenthal canned meats.

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   Distribution, Competition and Raw Materials

      KFNA's products are generally sold to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, gasoline stations and other retail food outlets. In general, the retail trade for food products is consolidating. Food products are distributed through distribution centers, satellite warehouses, company-operated and public cold-storage facilities, depots and other facilities. Most distribution in North America is in the form of warehouse delivery, but biscuits and frozen pizza are distributed through two direct-store-delivery systems. Selling efforts are supported by national and regional advertising on television and radio as well as outdoor media such as billboards and in magazines and newspapers, as well as by sales promotions, product displays, trade incentives, informative material offered to customers and other promotional activities. Subsidiaries and affiliates of KFI sell their food products primarily in the same manner and also engage the services of independent sales offices and agents.

      Kraft is subject to competitive conditions in all aspects of its business. Competitors include large national and international companies and numerous local and regional companies. Some competitors may have different profit objectives and some competitors may be more or less susceptible to currency exchange rates. In addition, certain international competitors benefit from government subsidies. Its food products also compete with generic products and private-label products of food retailers, wholesalers and cooperatives. Kraft competes primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. Substantial advertising and promotional expenditures are required to maintain or improve a brand's market position or to introduce a new product.

      Kraft is a major purchaser of milk, cheese, nuts, green coffee beans, cocoa, corn products, wheat, rice, pork, poultry, beef, vegetable oil, and sugar and other sweeteners. It also uses significant quantities of glass, plastic and cardboard to package its products. Kraft continuously monitors worldwide supply and cost trends of these commodities to enable it to take appropriate action to obtain ingredients and packaging needed for production.

      Kraft purchases a substantial portion of its milk requirements from independent agricultural cooperatives and individual producers, and a substantial portion of its cheese requirements from independent sources. The prices for milk and other dairy product purchases are substantially influenced by government programs, as well as by market supply and demand. Dairy commodity costs on average were lower in 2002 than those seen in 2001.

      The most significant cost item in coffee products is green coffee beans, which are purchased on world markets. Green coffee bean prices are affected by the quality and availability of supply, trade agreements among producing and consuming nations, the unilateral policies of the producing nations, changes in the value of the United States dollar in relation to certain other currencies and consumer demand for coffee products. Coffee bean prices during 2002 were lower than in 2001.

      A significant cost item in chocolate confectionery products is cocoa, which is purchased on world markets, and the price of which is affected by the quality and availability of supply and changes in the value of the British pound sterling and the United States dollar relative to certain other currencies. Cocoa bean prices during 2002 were higher than in 2001.

      The prices paid for raw materials and agricultural materials used in food products generally reflect external factors such as weather conditions, commodity market fluctuations, currency fluctuations and the effects of governmental agricultural programs. Although the prices of the principal raw materials can be expected to fluctuate as a result of these factors, Kraft believes such raw materials to be in adequate supply and generally available from numerous sources. Kraft uses hedging techniques to minimize the impact of price fluctuations in its principal raw materials. However, Kraft does not fully hedge against changes in commodity prices and these strategies may not protect Kraft from increases in specific raw material costs.

Regulation

      All of KFNA's United States food products and packaging materials are subject to regulations administered by the FDA or, with respect to products containing meat and poultry, the USDA. Among

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other things, these agencies enforce statutory prohibitions against misbranded and adulterated foods, establish safety standards for food processing, establish ingredients and manufacturing procedures for certain foods, establish standards of identity for certain foods, determine the safety of food additives and establish labeling standards and nutrition labeling requirements for food products.

      In addition, various states regulate the business of KFNA's operating units by licensing dairy plants, enforcing federal and state standards of identity for selected food products, grading food products, inspecting plants, regulating certain trade practices in connection with the sale of dairy products and imposing their own labeling requirements on food products.

      Many of the food commodities on which KFNA's United States businesses rely are subject to governmental agricultural programs. These programs have substantial effects on prices and supplies and are subject to Congressional and administrative review.

      Almost all of the activities of Kraft's operations outside of the United States are subject to local and national regulations similar to those applicable to KFNA's United States businesses and, in some cases, international regulatory provisions, such as those of the EU relating to labeling, packaging, food content, pricing, marketing and advertising and related areas.

      The EU and certain individual countries require that food products containing genetically modified organisms or classes of ingredients derived from them be labeled accordingly. Other countries may adopt similar regulations. The FDA has concluded that there is no basis for similar mandatory labeling under current United States law.

Financial Services

      PMCC is primarily engaged in leasing activities. Total assets of PMCC were $9.2 billion at December 31, 2002, up from $8.9 billion at December 31, 2001, reflecting an increase in finance assets, net. PMCC's finance asset portfolio includes leases in the following investment categories: aircraft, electrical power, real estate, manufacturing, surface transportation and energy industries. Finance assets, net, are comprised of total lease payments receivable and the residual value of assets under lease, reduced by non-recourse third-party debt and unearned income. PMCC has no obligation for the payment of the non-recourse third-party debt issued to purchase the assets under lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is non-recourse to all other assets of PMCC or Altria Group, Inc. As required by U.S. GAAP, the non-recourse third-party debt has been offset agains t the related rentals receivable and has been presented on a net basis, within finance assets, net, in Altria Group, Inc.'s consolidated balance sheets.

      Among other leasing activities, PMCC leases a number of aircraft, predominantly to major United States carriers. At December 31, 2002, approximately 27%, or $2.6 billion of PMCC's investment in finance leases related to aircraft.

      On August 11, 2002, US Airways Group, Inc. (''US Air'') filed for Chapter 11 bankruptcy protection. PMCC currently leases 16 Airbus A319 aircraft to US Air under long-term leveraged leases, which expire in 2018 and 2019. The aircraft were leased in 1998 and 1999 and represent an investment in finance leases of $150 million at December 31, 2002.

      On December 9, 2002, United Air Lines Inc. (''UAL'') filed for Chapter 11 bankruptcy protection. At that time, PMCC leased 24 Boeing 757 aircraft to UAL, 22 under long-term leveraged leases and 2 under long-term single investor leases. Subsequently, PMCC purchased $239 million of senior non-recourse debt on 16 of the aircraft under leveraged leases following which those leases were treated as single investor leases for accounting purposes. As of February 28, 2003, PMCC entered into an agreement with UAL to amend those 16 leases as well as the 2 single investor leases. Among other modifications, the subordinated debt outstanding on these 16 leveraged leases was cancelled. As of February 28, 2003, PMCC's aggregate exposure to UAL totaled $625 million.

      PMCC continues to evaluate the effect of the US Air and UAL bankruptcy filings, while seeking to negotiate with US Air and UAL in their efforts to restructure and emerge from bankruptcy. In this regard, PMCC has entered into an agreement with US Air whereby all of PMCC's leases to US Air are expected to be affirmed when US Air emerges from bankruptcy. PMCC ceased recording income on the leases as of the date of the bankruptcy filings.

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      In recognition of the recent economic downturn in the airline industry, PMCC increased its allowance for losses by $290 million in the fourth quarter of 2002. It is possible that further adverse developments in the airline industry may occur, which might require PMCC to record an additional allowance for losses in future periods.

Other Matters

Customers

      None of the business segments of the ALG family of companies is dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on Altria Group, Inc.'s consolidated results of operations.

Employees

      At December 31, 2002, ALG and its subsidiaries employed approximately 166,000 people worldwide.

Trademarks

      Trademarks are of material importance to ALG's consumer products subsidiaries and are protected by registration or otherwise in the United States and most other markets where the related products are sold.

Environmental Regulation

      ALG and its subsidiaries are subject to various federal, state, local and foreign laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as ''Superfund''), which imposes joint and several liability on each responsible party. In 2002, subsidiaries (or former subsidiaries) of ALG were involved in approximately 105 active matters subjecting them to potential remediation costs under Superfund or otherwise. ALG's subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. Although it is not possible to predict precise levels of environmental-related expenditures, compliance with such laws and regulations, including the payment of any remediation costs and the making of such expenditures, has not had, and is not expected to have, a material adverse effect on Altria Group, Inc.'s consolidated results of operations, capital expenditures, financial position, earnings and competitive position.

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

      We* may from time to time make written or oral forward-looking statements, including statements contained in filings with the United States Securities and Exchange Commission (''SEC''), in reports to shareholders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as ''strategy,'' ''expects,'' ''continues,'' ''plans,'' ''anticipates,'' ''believes,'' ''will,'' ''estimates,'' ''intends,'' ''projects,'' ''goals,'' ''targets'' and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

      We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize,

——————
* This section uses the term ''we,'' ''our'' and ''us'' when it is not necessary to distinguish among ALG and its various operating subsidiaries or when any distinction is clear from the context.

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or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in Altria Group, Inc.'s securities. In connection with the ''safe harbor'' provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in Item 1. Businesses—(c) Narrative Description of Business and Item 3, as well as in the ''Business Environment'' sections of the Management's Discussion and Analysis of Financial Condition a nd Results of Operations, on pages 22 to 42 of the 2002 Annual Report, which are incorporated herein by reference to the 2002 Annual Report. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time.

      Tobacco Related Litigation. There is substantial litigation pending in the United States and in foreign jurisdictions arising out of the tobacco businesses of PM USA and PMI. We anticipate that new cases will continue to be filed. In some cases, plaintiffs claim damages, including punitive damages, ranging into the billions of dollars. Although, to date, our tobacco subsidiaries have never had to pay a judgment in a tobacco related case, there are presently 11 cases in various post-trial stages in which verdicts were returned against PM USA, including a $74 billion verdict in the Engle case in Florida, a compensatory and punitive damages verdict totaling approximately $10.1 billion in the Price case in Illinois and four verdicts in California in the aggregate amount of $31.1 billion. The trial courts in the California cases subsequently reduced the punitive damages awards to an aggregate of $163 million and these cases are being appealed. In order to prevent a plaintiff from seeking to collect a judgment while the verdict is being appealed, the defendant must post an appeal bond, frequently in the amount of the judgment or more, or negotiate an alternative arrangement with plaintiffs. The judge in the Price case set bond in the amount of $12 billion, due on April 20, 2003. It is not possible for PM USA to post such a bond and, absent judicial or legislative relief, PM USA would not be able to stay enforcement of the judgment in Illinois. In the event of future losses at trial, the defendant may not always be able to obtain the required bond or to negotiate an acceptable alternative arrangement.

      The present litigation environment is substantially uncertain, and it is possible that our business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome of pending litigation, including certain of the verdicts against us that are on appeal. We intend to continue vigorously defending all tobacco related litigation, although we may enter into settlement discussions in particular cases if we believe it is in the best interest of our shareholders to do so. Please see Note 18 to Altria Group, Inc.'s consolidated financial statements, which is incorporated herein by reference to the 2002 Annual Report, and Item 3 for a detailed discussion of tobacco related litigation.

      Anti-Tobacco Action in the Public and Private Sectors. Our tobacco subsidiaries face significant governmental action aimed at reducing the incidence of smoking and seeking to hold us responsible for the adverse health effects associated with both smoking and exposure to ETS. Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volume, and we expect this decline to continue.

      Excise Taxes. Substantial excise tax increases have been and continue to be imposed on cigarettes in the United States at the federal, state and local levels, as well as in foreign jurisdictions. The resulting price increases have caused, and may continue to cause, consumers to shift from premium to non-premium, including discount brands and to cease or reduce smoking.

      Increasing Competition in the Domestic Tobacco Market. Settlements of certain tobacco litigation in the United States, combined with excise tax increases, have resulted in substantial cigarette price increases. PM USA faces increased competition from lowest priced brands sold by domestic and foreign manufacturers that enjoy cost advantages because they are not making payments under the settlements or related state escrow legislation. Additional competition results from diversion into the domestic market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by

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third parties and increasing imports of foreign lowest priced brands. Recently, the competitive environment has become even more challenging, characterized by weak economic conditions, erosion of consumer confidence, a continued influx of cheap products, and higher prices due to higher state excise taxes and list price increases. As a result, the lowest priced products of manufacturers of numerous small share brands have increased their market share, putting pressure on the industry's premium segment. If these competitive factors continue and if the disparity in price between our premium brands and our competitors' lowest priced brands continues to increase, sales from the premium segment, PM USA's most profitable category, may continue to shift to the discount segment. Steps that PM USA may take to reduce the price disparity, such as increasing promotional spending, may reduce the profitability of its premium brands or may not be successful.

      Governmental Investigations. From time to time, our tobacco subsidiaries are subject to governmental investigations on a range of matters. Ongoing investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain international markets and allegations of false and misleading usage of the terms ''Lights'' and ''Ultra Lights'' in brand descriptors. We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our business could be materially affected by an unfavorable outcome of pending or future investigations.

      New Tobacco Product Technologies. Our tobacco subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the risk of smoking. Their goal is to reduce harmful constituents in tobacco smoke while continuing to offer adult smokers products that meet their taste expectations. We cannot guarantee that our tobacco subsidiaries will succeed in these efforts. If they do not succeed, but one or more of their competitors do, our tobacco subsidiaries may be at a competitive disadvantage.

      Foreign Currency. Our international food and tobacco subsidiaries conduct their businesses in local currency and, for purposes of financial reporting, their results are translated into U.S. dollars based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar, our reported net revenues and operating companies income will be reduced because the local currency will translate into fewer U.S. dollars.

      Competition and Economic Downturns. Each of our consumer products subsidiaries is subject to intense competition, changes in consumer preferences and local economic conditions. To be successful, they must continue:

• to promote brand equity successfully;

• to anticipate and respond to new consumer trends;

• to develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products in a consolidating environment at the retail and manufacturing levels;

• to improve productivity; and

• to respond effectively to changing prices for their raw materials.

      The willingness of consumers to purchase premium cigarette brands and premium food and beverage brands depends in part on local economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label and other economy brands and the volume of our consumer products subsidiaries could suffer accordingly.

      Our finance subsidiary, PMCC, invests in finance leases, principally in transportation, power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If counterparties to PMCC's leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our profitability.

      Grocery Trade Consolidation. As the retail grocery trade continues to consolidate and retailers grow larger and become more sophisticated, they demand lower pricing and increased promotional programs. Further, these customers are reducing their inventories and increasing their emphasis on private label products. If Kraft fails to use its scale, marketing expertise, branded products and category

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leadership positions to respond to these trends, its volume growth could slow or it may need to lower prices or increase promotional support of its products, any of which would adversely affect profitability.

      Continued Need to Add Food and Beverage Products in Faster Growing and More Profitable Categories. The food and beverage industry's growth potential is constrained by population growth. Kraft's success depends in part on its ability to grow its business faster than populations are growing in the markets that it serves. One way to achieve that growth is to enhance its portfolio by adding products that are in faster growing and more profitable categories. If Kraft does not succeed in making these enhancements, its volume growth may slow, which would adversely affect our profitability.

      Strengthening Brand Portfolios Through Acquisitions and Divestitures. One element of the growth strategies of Kraft and PMI is to strengthen their brand portfolios through active programs of selective acquisitions and divestitures. These subsidiaries are constantly investigating potential acquisition candidates and from time to time sell businesses that are outside their core categories or that do not meet their growth or profitability targets. Acquisition opportunities are limited and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to continue to acquire attractive businesses on favorable terms or that all future acquisitions will be quickly accretive to earnings.

      Raw Material Prices. The raw materials used by our consumer products subsidiaries are largely commodities that experience price volatility caused by external conditions, commodity market fluctuations, currency fluctuations and changes in governmental agricultural programs. Commodity price changes may result in unexpected increases in raw material and packaging cost, and our operating subsidiaries may be unable to increase their prices to offset these increased costs without suffering reduced volume, net revenue and operating companies income. We do not fully hedge against changes in commodity prices and our hedging procedures may not work as planned.

      Food Safety and Quality Concerns. We could be adversely affected if consumers in Kraft's principal markets lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, like the recent publicity about genetically modified organisms and ''mad cow disease'' in Europe, whether or not valid, may discourage consumers from buying Kraft's products or cause production and delivery disruptions. In addition, Kraft may need to recall some of its products if they become adulterated or misbranded. Kraft may also be liable if the consumption of any of its products causes injury. A widespread product recall or a significant product liability judgment could cause products to be unavailable for a period of time and a loss of consumer confidence in Kraft's food products and could have a material adverse effect on Kraft's busines s.

(d) Financial Information About Foreign and Domestic Operations and Export Sales

      The amounts of net revenues and long-lived assets attributable to each of Altria Group, Inc.'s geographic segments and the amount of export sales from the United States for each of the last three fiscal years are set forth in Note 14.

      Subsidiaries of ALG export tobacco and tobacco-related products, coffee products, grocery products, cheese and processed meats. In 2002, the value of all exports from the United States by these subsidiaries amounted to approximately $4 billion.

(e) Available Information

      ALG is required to file annual, quarterly and special reports, proxy statements and other information with the SEC. Investors may read and copy any document that ALG files, including this Annual Report on Form 10-K, at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access ALG's SEC filings.

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      ALG makes available free of charge on or through its web site (www.altria.com), its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after ALG electronically files such material with, or furnishes it to, the SEC. Investors can access ALG's filings with the SEC by visiting www.altria.com/secfilings.

      The information on ALG's web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filings ALG makes with the SEC.

Item 2. Properties.

Tobacco Products

      PM USA owns and operates five tobacco manufacturing and processing facilities—four in the Richmond, Virginia area and one in Cabarrus County, North Carolina. Subsidiaries and affiliates of PMI own, lease or have an interest in 56 cigarette or component manufacturing facilities in 32 countries outside the United States, including cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands, Berlin, Germany and St. Petersburg, Russia.

Food Products

      Kraft has 207 manufacturing and processing facilities, 69 of which are located in the United States. Outside the United States, Kraft has 138 manufacturing and processing facilities located in 46 countries. Kraft owns 196 and leases 11 of these facilities. In addition, Kraft has 419 distribution centers and depots, of which 79 are located outside the United States. Kraft owns 82 distribution centers and depots, with the remainder being leased.

      The integration of Nabisco into the operations of Kraft has resulted in the closure of seven Nabisco facilities during 2001 and ten Nabisco facilities during 2002.

General

      The plants and properties owned and operated by ALG's subsidiaries are maintained in good condition and are believed to be suitable and adequate for present needs.

Item 3. Legal Proceedings.

      Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against ALG, its subsidiaries and affiliates, including PM USA and PMI, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.

Overview of Tobacco-Related Litigation

Types and Number of Cases

      Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms ''Lights'' and ''Ultra Lights'' constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages resulting from the allegedly illegal importation of

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cigarettes into various jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and various antitrust suits. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. Plaintiffs' theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below. Exhibit 99.1 hereto lists the smoking and health class actions, health care cost recovery and certain other actions pending as of February 14, 2003, and discusses certain developments in such cases since November 13, 2002.

      As of February 14, 2003, there were approximately 1,400 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM USA and, in some instances, ALG, compared with approximately 1,500 such cases on December 31, 2001 and on December 31, 2000. In certain jurisdictions, individual smoking and health cases have been aggregated for trial in a single proceeding; the largest such proceeding aggregates 1,100 cases in West Virginia and is currently scheduled for trial in June 2003. An estimated 15 of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke (''ETS''). In addition, approximately 2,800 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of an ETS smoking a nd health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages.

      As of February 14, 2003, there were an estimated 37 smoking and health putative class actions pending in the United States against PM USA and, in some cases, ALG (including two that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 25 such cases on December 31, 2001, and approximately 36 such cases on December 31, 2000.

      As of February 14, 2003, there were an estimated 41 health care cost recovery actions, including the suit discussed below under ''Federal Government's Lawsuit'' filed by the United States government, pending in the United States against PM USA and, in some instances, ALG, compared with approximately 45 such cases pending on December 31, 2001, and 52 such cases on December 31, 2000. In addition, health care cost recovery actions are pending in Israel, the Province of British Columbia, Canada, France and Spain.

      There are also a number of other tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries, including an estimated 89 smoking and health cases brought on behalf of individuals (Argentina (43), Australia, Brazil (28), Czech Republic, Germany, Ireland, Israel (2), Italy (5), Japan, the Philippines, Poland, Scotland, Spain (2) and Venezuela), compared with approximately 64 such cases on December 31, 2001, and 68 such cases on December 31, 2000. In addition, as of February 14, 2003, there were eight smoking and health putative class actions pending outside the United States (Brazil, Canada (4), and Spain (3)), compared with 11 such cases on December 31, 2001 and nine such cases on December 31, 2000.

Pending and Upcoming Trials

      Trial is currently underway in an individual smoking and health case in which PM USA is a defendant in Florida (Eastman v. Brown & Williamson et al.). Trial is also currently underway in a smoking and health class action in Louisiana in which PM USA is a defendant and in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs (Scott, et al. v. The American Tobacco Company, Inc. et al.).

      As set forth in Exhibit 99.2 hereto, additional cases against PM USA and, in some instances, ALG, are scheduled for trial through the end of 2003. They include a class action in California in which plaintiffs seek restitution under the California Business and Professions Code for the costs of cigarettes purchased by class members during the class period, a case in West Virginia that aggregates 1,100 individual smoking and health cases, a Lights/Ultra Lights class action in Ohio and a class action in Kansas in which plaintiffs allege that defendants,

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including PM USA, conspired to fix cigarette prices in violation of antitrust laws. An estimated 12 individual smoking and health cases are scheduled for trial through the end of 2003, including two trials scheduled to begin in April in California and Florida and two trials scheduled to begin in May in Illinois and Missouri. In addition, 12 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by ETS are scheduled for trial through the end of 2003; one of the cases brought by flight attendants is scheduled to begin trial in May. Cases against other tobacco companies are also scheduled for trial through the end of 2003. Trial dates, however, are subject to change.

Recent Trial Results

      Since January 1999, jury verdicts have been returned in 30 smoking and health, Lights/Ultra Lights and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 19 of the 30 cases. These 19 cases were tried in California, Pennsylvania, Rhode Island, West Virginia, Ohio (2), New Jersey, Florida (6), New York (3), Mississippi and Tennessee (2). Plaintiffs' appeals or post-trial motions challenging the verdicts are pending in West Virginia, Ohio and Florida; a motion for a new trial has been granted in one of the cases in Florida. In December 2002, the court in an individual smoking and health case in California dismissed the case at the end of trial after ruling that plaintiffs had not introduced sufficient evidence to support their claims, and plaintiffs have appealed. In addition, in May 2002, a mistrial was declared in a case brought by a flight attendant claiming personal injuries allegedly caused by ETS, and the case was subsequently dismissed. In 2001, a mistrial was declared in New York in an asbestos contribution case, and plaintiffs subsequently voluntarily dismissed the case. The chart below lists the verdicts and post-trial developments in the 11 cases that have gone to trial since January 1999 in which verdicts were returned in favor of plaintiffs.

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Date	Location of Court/Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
March 2003	Illinois/ Price (formerly, Miles)	Lights/Ultra Lights	$7.1005 billion in compensatory damages and $3 billion in punitive damages.	At the request of PM USA, the judge stayed enforcement of the judgment for 30 days. Thereafter, under the judgment, enforcement will be stayed only if an appeal bond in the amount of $12 billion is presented and approved. PM USA believes that requiring a bond in such an amount, in order to stay execution pending appeal, would be unconstitutional and would also violate Illinois law. It is not possible for PM USA to post such a bond, and, absent judicial or legislative relief, PM USA would not be able to stay enforcement of the judgment in Illinois. PM USA will take all appropriate steps to seek to prevent this from occurring.
October 2002	California/ Bullock	Individual Smoking & Health	$850,000 in compensatory damages and $28 billion in punitive damages against PM USA.	In December 2002, the trial court reduced the punitive damages award to $28 million; PM USA and plaintiff have appealed.
June 2002	Florida/French	Flight Attendant ETS Litigation	$5.5 million in compensatory damages against all defendants, including PM USA.	In September 2002, the court reduced the damages award to $500,000; plaintiff and defendants have appealed.
June 2002	Florida/ Lukacs	Individual Smoking and Health	$37.5 million in compensatory damages against all defendants, including PM USA.	Defendants have filed post-trial motions challenging the verdict.

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Date	Location of Court/Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
March 2002	Oregon/ Schwarz	Individual Smoking and Health	$168,500 in compensatory damages and $150 million in punitive damages against PM USA.	In May 2002, the trial court reduced the punitive damages award to $100 million, and in July 2002, the trial court denied PM USA's post-trial motions challenging the verdict. PM USA and plaintiff have appealed.
June 2001	California/ Boeken	Individual Smoking and Health	$5.5 million in compensatory damages, and $3 billion in punitive damages against PM USA.	In August 2001, the trial court reduced the punitive damages award to $100 million; PM USA and plaintiff have appealed.
June 2001	New York/Empire Blue Cross and Blue Shield	Health Care Cost Recovery	$17.8 million in compensatory damages against all defendants, including $6.8 million against PM USA.	In February 2002, the trial court awarded plaintiffs $38 million in attorneys' fees. Defendants have appealed.
July 2000	Florida/Engle	Smoking and Health Class Action	$145 billion in punitive damages against all defendants, including $74 billion against PM USA.	See ''Engle Class Action,'' below.
March 2000	California/ Whitely	Individual Smoking and Health	$1.72 million in compensatory damages against PM USA and another defendant, and $10 million in punitive damages against PM USA and $10 million in punitive damages against the other defendant.	Defendants have appealed.

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Date	Location of Court/Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
March 1999	Oregon/ Williams	Individual Smoking and Health	$800,000 in compensatory damages, $21,500 in medical expenses and $79.5 million in punitive damages against PM USA.	The trial court reduced the punitive damages award to $32 million, and PM USA appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. The Oregon Supreme Court refused to hear PM USA's appeal in December 2002. PM USA will petition the United States Supreme Court for further review. In view of these developments, although PM USA intends to continue to defend this case vigorously, it has recorded a provision of $32 million in the consolidated financial statements as its best estimate of the probable loss in this case.
February 1999	California/ Henley	Individual Smoking and Health	$1.5 million in compensatory damages and $50 million in punitive damages against PM USA.	The trial court reduced the punitive damages award to $25 million and PM USA appealed. A California District Court of Appeals affirmed the trial court's ruling, and PM USA appealed to the California Supreme Court. In October 2002, the California Supreme Court vacated the decision of the District Court of Appeals and remanded the case back to the District Court of Appeals for further consideration. In March 2003, the District Court of Appeals again affirmed the trial court's ruling. PM USA intends to appeal to the California Supreme Court.

With respect to certain adverse verdicts currently on appeal, excluding amounts relating to the Engle case, PM USA has posted various forms of security totaling $324 million to obtain stays of judgments pending appeals.

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      In addition, since January 1999, jury verdicts have been returned in 13 tobacco-related cases in which neither ALG nor any of its subsidiaries were defendants. Verdicts in favor of defendants were returned in eight of the 13 cases in cases tried in Connecticut, Texas, South Carolina, Mississippi, Louisiana, Missouri and Tennessee (2). Plaintiffs' appeal is pending in Mississippi. Verdicts in favor of plaintiffs were returned in 5 of the 13 cases in cases tried in Australia, Kansas, Florida (2) and Puerto Rico. Defendants' appeals or post-trial motions are pending. In December 2002, the appellate court reversed the ruling in favor of plaintiff in the case in Australia. In October 2002, the court granted defendants' motion for judgment as a matter of law in the case in Puerto Rico, and entered judgment in favor of defendant. In addition, in a case in France the trial court found in favor of plaintiff; however, the appellate court reverse d the trial court's ruling and dismissed plaintiff's claim.

Engle Class Action

      Verdicts have been returned and judgment has been entered against PM USA and other defendants in the first two phases of this three-phase smoking and health class action trial in Florida. The class consists of all Florida residents and citizens, and their survivors, ''who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine.''

      In July 1999, the jury returned a verdict against defendants in phase one of the trial concerning certain issues determined by the trial court to be ''common'' to the causes of action of the plaintiff class. Among other things, the jury found that smoking cigarettes causes 20 diseases or medical conditions, that cigarettes are addictive or dependence-producing, defective and unreasonably dangerous, that defendants made materially false statements with the intention of misleading smokers, that defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes, and that defendants were negligent and engaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional distress.

      During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs.

      In July 2000, the same jury returned a verdict assessing punitive damages on a lump sum basis for the entire class totaling approximately $145 billion against the various defendants in the case, including approximately $74 billion severally against PM USA. PM USA believes that the punitive damages award was determined improperly and that it should ultimately be set aside on any one of numerous grounds. Included among these grounds are the following: under applicable law, (i) defendants are entitled to have liability and damages for each plaintiff tried by the same jury, an impossibility due to the jury's dismissal; (ii) punitive damages cannot be assessed before the jury determines entitlement to, and the amount of, compensatory damages for all class members; (iii) punitive damages must bear a reasonable relationship to compensatory damages, a determination that cannot be made before compensatory damages are assessed for all class members; and (iv) punitive damages can ''punish'' but cannot ''destroy'' the defendant. In March 2000, at the request of the Florida legislature, the Attorney General of Florida issued an advisory legal opinion stating that ''Florida law is clear that compensatory damages must be determined prior to an award of punitive damages'' in cases such as Engle. As noted above, compensatory damages for all but three members of the class have not been determined.

      Following the verdict in the second phase of the trial, the jury was dismissed, notwithstanding that liability and compensatory damages for all but three class members have not yet been determined. According to the trial plan, phase three of the trial will address other class members' claims, including issues of specific causation, reliance, affirmative defenses and other individual-specific issues regarding entitlement to damages, in individual trials before separate juries.

      It is unclear how the trial plan will be further implemented. The trial plan provides that the punitive damages award should be standard as to each class member and acknowledges that the actual size of the class will not be known until the last class member's case has withstood appeal, i.e., the punitive damages amount would be divided equally among those plaintiffs who, in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal.

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      Following the jury's punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature.

      The trial judge in the state court, without a hearing, then immediately denied the defendants' post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM USA and ALG believe that the entry of judgment by the trial court is unconstitutional and violates Florida law. PM USA has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM USA has also posted a $100 million bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages (''bond cap legislation'').

      Plaintiffs had previously indicated that they believe the bond cap legislation is unconstitutional and might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM USA to post a bond in the full amount of the judgment and, absent appellate relief, PM USA would not be able to stay any attempted execution of the judgment in Florida. PM USA and ALG will take all appropriate steps to seek to prevent this worst-case scenario from occurring. In May 2001, the trial court approved a stipulation (the ''Stipulation'') among PM USA, certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the Stipulation and in addition to the $100 million bond it previously posted, PM USA placed $1.2 billion into an interest-bearing escrow account for the benefit of the Engle class. Should PM USA prevail in its appeal of the case, both amounts are to be returned to PM USA. PM USA also placed an additional $500 million into a separate interest-bearing escrow account for the benefit of the Engle class. If PM USA prevails in its appeal, this amount will be paid to the court, and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. In connection with the Stipulation, ALG recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001.

      PM USA and ALG remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. PM USA has filed an appeal challenging the class certification and the compensatory and punitive damages awards, as well as numerous other reversible errors that it believes occurred during the trial to date. The appellate court heard oral argument on defendants' appeals in November 2002.

Smoking and Health Litigation

      Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. In May 1996, the United States Court of Appeals for the Fifth Circuit held that a class consisting of all ''addicted'' smokers nationwide did not meet the standards and requirements of the federal rules governing class actions. Since this class decertification, lawyers for plaintiffs have filed numerous

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putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise ''addiction'' claims and, in many cases, claims of physical injury as well. As of February 14, 2003, smoking and health putative class actions were pending in Alabama, Florida, Illinois, Kentucky, Louisiana, Massachusetts, Missouri, Nevada, New Jersey, Oregon, Utah and West Virginia, as well as in Brazil, Canada, Israel and Spain. Class certification has been denied or reversed by courts in 30 smoking and health class actions involving PM USA in Arkansas, the District of Columbia (2), Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while classes remain certified in the < i>Engle case in Florida (discussed above) and a case in Louisiana in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs for class members. In May 1999, the United States Supreme Court declined to review the decision of the United States Court of Appeals for the Third Circuit affirming a lower court's decertification of a class. In November 2001, in the first medical monitoring class action case to go to trial, a West Virginia jury returned a verdict in favor of all defendants, including PM USA, and plaintiffs have appealed. In February 2003, the West Virginia Supreme Court agreed to hear plaintiffs' appeal.

      Exhibit 99.1 hereto lists the smoking and health class actions pending as of February 14, 2003, and discusses certain developments on such cases since November 13, 2002.

Health Care Cost Recovery Litigation

Overview

      In certain pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds (''unions''), Native American tribes, insurers and self-insurers such as Blue Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs.

      The claims asserted in the health care cost recovery actions include the equitable claim that the tobacco industry was ''unjustly enriched'' by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes.

      Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, ''unclean hands'' (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to ''set off'' any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by ''standing in the shoes'' of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.

      Exhibit 99.1 hereto lists the health care cost recovery cases pending as of February 14, 2003, and discusses developments in such cases since November 13, 2002.

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      Although there have been some decisions to the contrary, most courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In addition, eight federal circuit courts of appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia circuits, as well as California, Florida, New York and Tennessee intermediate appellate courts, relying primarily on grounds that plaintiffs' claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs' appeals from the cases decided by the courts of appeals for the Second, Third, Fifth, Ninth and District of Columbia circuits. As of February 14, 2003, there were an estimated 41 health care cost recovery cases pending in the United States against PM USA, and in some instances, AL G, including the case filed by the United States government, which is discussed below under ''Federal Government's Lawsuit.'' The cases brought in the United States include actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11 Brazilian states and 11 Brazilian cities. The actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. The district court dismissed the cases brought by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and the dismissals are now final. The district court has remanded to state courts the remaining cases, except for the ca ses brought by Bolivia and Panama. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the cases brought by Venezuela and the Brazilian state of Espirito Santo were dismissed by the state court, and Venezuela appealed. In September 2002, the appellate court affirmed the dismissal of the case brought by Venezuela, and Venezuela has petitioned the state supreme court for further review. In addition to cases brought in the United States, health care cost recovery actions have also been brought in Israel, the Marshall Islands (dismissed), the Province of British Columbia, Canada, France and Spain (dismissed for lack of jurisdiction; appeal pending), and other entities have stated that they are considering filing such actions.

      In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In June 2001, a New York jury returned a verdict awarding $6.83 million in compensatory damages against PM USA and a total of $11 million against four other defendants in a health care cost recovery action brought by a Blue Cross and Blue Shield plan. In February 2002, the court awarded plaintiff approximately $38 million for attorneys' fees. Defendants, including PM USA, have appealed.

Settlements of Health Care Cost Recovery Litigation

      In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the ''MSA'') with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the ''State Settlement Agreements''). The MSA has received final judicial approval in all 52 settling jurisdictions. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional annual payments of $250 million through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM USA's portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USA records its portions of ongoing settlement payments as part of cost of sales as product is shipped.

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      The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.

      As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM USA, and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (2003 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM USA records its portion of these pay ments as part of cost of sales as product is shipped.

      The State Settlement Agreements have materially adversely affected the volumes of PM USA and may adversely affect future volumes. ALG believes that they may also materially adversely affect the results of operations, cash flows or financial position of PM USA and Altria Group, Inc. in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in United States cigarette sales in the premium and discount segments, PM USA's share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements.

      Certain litigation, described in Exhibit 99.1, has arisen challenging the validity of the MSA and alleging violations of antitrust laws.

Federal Government's Lawsuit

      In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers and others, including PM USA and ALG, asserting claims under three federal statutes, the Medical Care Recovery Act (''MCRA''), the Medicare Secondary Payer (''MSP'') provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act (''RICO''). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants' fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans' health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of what it alleges to be equitable and declaratory relief, including disgorgement, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government's future costs of providing health care resulting from defendants' alleged past tortious and wrongful conduct. PM USA and ALG moved to dismiss this lawsuit on numerous grounds, including that the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government's MCRA and MSP claims, but permitted discovery to proceed on the government's claims for relief under RICO. In October 2000, the government moved for reconsideration of the trial court's order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. In February 2001, the government filed an amended complaint attempting to replead the MSP claims. In July 2001, th e court denied the government's motion for reconsideration of the dismissal of the MCRA claims and dismissed the government's amended MSP claims. In January 2003, the government and defendants submitted preliminary proposed findings of fact and conclusions of law; rebuttals are due in April. The government's January filing included the government's allegation that disgorgement by defendants of approximately $289 billion is an appropriate remedy in the case. Trial of the case is currently scheduled for September 2004.

29

Certain Other Tobacco-Related Litigation

      Lights/Ultra Lights Cases: As of February 14, 2003, there were 13 putative class actions pending against PM USA and, in some instances, ALG in California, Florida, Illinois, Massachusetts, Minnesota, Missouri, New Hampshire (2), Ohio (2), Oregon, Tennessee and West Virginia on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plainti ffs in these cases allege, among other things, that the use of the terms ''Lights'' and/or ''Ultra Lights'' constitutes deceptive and unfair trade practices, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. Classes have been certified in Illinois, Massachusetts and Florida.

      Trial in the Illinois class action (the Price case, formerly known as Miles) in which PM USA is the defendant, commenced in January 2003 and was tried before a judge rather than a jury. On March 21, 2003, the judge found in favor of the plaintiff class and awarded approximately $7.1 billion in compensatory damages and $3 billion in punitive damages. PM USA believes that the Price case should not have been certified as a class action and that the judgment should ultimately be set aside on any one of a number of legal and factual grounds that it intends to pursue on appeal. At the request of PM USA, the judge stayed enforcement of the judgment for 30 days. Thereafter, under the judgment, enforcement will be stayed only if an appeal bond in the amount of $12 billion is presented and approved. PM USA believes that requiring a bond in such an amount, in order to stay execution pending appeal, would be unconstitutional and would also violate Illinois law. It is not possible for PM USA to post such a bond and, absent judicial or legislative relief, PM USA would not be able to stay enforcement of the judgment in Illinois. PM USA will take all appropriate steps to seek to prevent this from occurring.

      While class certification has not yet been granted, trial in one of the Ohio cases is scheduled for August 2003.

      Cigarette Contraband Cases: As of February 14, 2003, the European Community and ten member states, various Departments of Colombia, Ecuador, Belize and Honduras had filed suits in the United States against ALG and certain of its subsidiaries, including PM USA and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into various jurisdictions. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In February 2002, the courts granted defendants' motions to dismiss all of the actions. In the Colombia and European Community actions, however, the RICO and fraud claims predicated on allegations of money laundering claims were dismissed without prejudice. Plaintiffs in each of the cases have appealed. In October 2001, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a cigarette contraband case filed against another cigarette manufacturer. Plaintiff in that case petitioned the United States Supreme Court for further review, and in October 2002, the Supreme Court denied plaintiff's petition.

      Asbestos Contribution Cases: As of February 14, 2003, an estimated seven suits were pending on behalf of former asbestos manufacturers and affiliated entities against domestic tobacco manufacturers, including PM USA. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages.

      Retail Leaders Case: Three domestic tobacco manufacturers filed suit against PM USA seeking to enjoin the PM USA ''Retail Leaders'' program that became available to retailers in October 1998. The complaint alleged that this retail merchandising program is exclusionary, creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiffs sought unspecified treble damages, attorneys' fees, costs and interest. In May 2002, the court granted PM USA's motion for summary judgment and dismissed all of plaintiffs' claims with prejudice. Plaintiffs have appealed.

      Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM USA has violated the Robinson-Patman Act in connection

30

with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. The initial complaint was amended to bring the total number of plaintiffs to 211, but by stipulated orders, all claims were stayed, except those of ten plaintiffs that proceeded to pre-trial discovery. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys' fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs' motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. In August 2001, the court granted PM USA's motion for summary judgment and dismissed, with prejudice, the claims of the ten plaintiffs. In October 2001, the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following the stipulation of all plaintiffs that the district court's dismissal would, if affirmed, be bin ding on all plaintiffs.

      Tobacco Price Cases: As of February 14, 2003, there were 39 putative class actions and one additional case pending against PM USA and other domestic tobacco manufacturers, as well as, in certain instances, ALG and PMI, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. The cases are listed in Exhibit 99.1. Seven of the putative class actions were filed in various federal district courts by direct purchasers of tobacco products, and the remaining 33 were filed in 14 states and the District of Columbia by retail purchasers of tobacco products. The seven federal class actions were consolidated in the United States District Court for the Northern District of Georgia. In November 2001, plaintiffs' motion for class certification was granted in a case pending in state court in Kansas, and trial in this case is scheduled fo r September 2003. In November 2001, plaintiffs' motion for class certification was denied in a case pending in state court in Minnesota. In June 2002, plaintiffs' motion for class certification was denied in a case pending in Michigan, and plaintiffs' motion for reconsideration of this ruling was denied. In May 2002, the Arizona Court of Appeals reversed the trial court's decision to dismiss an action. Defendants appealed to the Arizona Supreme Court, which has accepted defendants' appeal. In July 2002, the court hearing the seven consolidated cases granted defendants' motion for summary judgment dismissing the consolidated case in its entirety. Plaintiffs have appealed. In February 2003, defendants' motion to dismiss the case pending in state court in Florida was granted.

      Cases Under the California Business and Professions Code: In June 1997 and July 1998, two suits were filed in California courts alleging that domestic cigarette manufacturers, including PM USA and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted as to plaintiffs' claims that defendants violated sections 17200 and/or 17500 of California Business and Professions Code pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. In September 2002, the court granted defendants' motions for summary judgment as to all claims in one of the cases. Plaintiffs have appealed. Trial in the other case is scheduled for August&n bsp;2003.

      Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a purported class of tobacco growers and quota-holders, and amended complaints were filed in May 2000 and in August 2000. The second amended complaint alleges that defendants, including PM USA, violated antitrust laws by bid-rigging and allocating purchases at tobacco auctions and by conspiring to undermine the tobacco quota and price-support program administered by the federal government. In October 2000, defendants filed motions to dismiss the amended complaint and to transfer the case, and plaintiffs filed a motion for class certification. In November 2000, the court granted defendants' motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amende d complaint to add tobacco leaf buyers as defendants. This motion was granted, and the additional parties were served in February 2001. In March 2001, the leaf buyer defendants filed a motion to dismiss the case. In July 2001, the court denied the manufacturer and leaf buyer defendants' motions to dismiss the case, and in April 2002 granted plaintiffs' motion for class certification. Defendants' petition for interlocutory review of the class certification order was denied in June 2002. Trial is scheduled for April 2004.

      Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court in the Eastern District of New York that purported to consolidate punitive damages claims in ten tobacco-related actions then pending in federal district courts in New York and

31

Pennsylvania. In July 2002, plaintiffs filed an amended complaint and a motion seeking certification of a punitive damages class of persons residing in the United States who smoke or smoked defendants' cigarettes, and who have been diagnosed by a physician with an enumerated disease from April 1993 through the date notice of the certification of this class is disseminated. The following persons are excluded from the class: (1) those who have obtained judgments or settlements against any defendants; (2) those against whom any defendant has obtained judgment; (3) persons who are part of the certified Engle class; (4) persons who should have reasonably realized that they had an enumerated disease prior to April 9, 1993; and (5) those whose diagnosis or reasonable basis for knowledge predates their use of tobacco. In September 2002, the court granted plaintiffs' motion fo r class certification. Defendants petitioned the United States Court of Appeals for the Second Circuit for review of the trial court's ruling, and the Second Circuit has agreed to hear defendant's petition. Trial of the case has been stayed pending resolution of defendants' petition.

Certain Other Actions

      Italian Tax Matters: Two hundred tax assessments, that allege nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and income taxes for the years 1987 to 1996) have been served upon certain affiliates of ALG. The aggregate amount of alleged unpaid taxes assessed to date is the euro equivalent of $2.5 billion. In addition, the euro equivalent of $4.1 billion in interest and penalties has been assessed. ALG anticipates that value-added and income tax assessments may also be received with respect to subsequent years. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 188 of the assessments, and the tax authorities have appealed to the regional appellate court in Milan. To date, the regional appellate court has rejected 84 of the appeals filed by the tax authorities. The tax authorities have appealed 48 of the 84 decisions of the regional appellate court to the Italian Supreme Court, and a hearing on 45 of the 48 cases was held in December 2001. Six of the 84 decisions were not appealed and are now final. In March, May, July and December 2002, the Italian Supreme Court issued its decisions in the 45 appeals that were heard in December 2001. The Italian Supreme Court rejected 12 of the 45 appeals and these 12 cases are now final. The Italian Supreme Court vacated the decisions of the regional appellate court in 33 of the cases and remanded these cases back to the regional appellate court for further hearings on the merits. In a separate proceeding in October 1997, a Naples court dismissed charges of criminal association against certain present and former officers and directors of affiliates of ALG, but permitted tax evasion and related charges to remain pending. In February 1998, the criminal court in Naples determined that jurisdiction was not proper, and the case file was tran smitted to the public prosecutor in Milan. In March 2002, after the Milan prosecutor's investigation into the matter, these present and former officers and directors received notices that an initial hearing would take place in June 2002 at which time the ''preliminary judge'' hearing the case would evaluate whether the Milan prosecutor's charges should be sent to a criminal judge for a full trial. At the June 2002 hearing, the ''preliminary judge'' ruled that there was no legal basis for the prosecutor's charges and acquitted all of the defendants; the prosecutor has appealed. ALG, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings.

      It is not possible to predict the outcome of the litigation pending against ALG and its subsidiaries. Litigation is subject to many uncertainties. As discussed above under ''Recent Trial Results,'' unfavorable verdicts awarding substantial damages against PM USA have been returned in 11 cases in recent years and these cases are in various post-trial stages. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. In the event of an adverse trial result in certain pending litigation, the defendant may not be able to obtain a required bond or obtain relief from bonding requirements in order to prevent a plaintiff from seeking to collect a judgment while an adverse verdict is being appealed. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. There have also been a number of adverse legislative, regulatory, political and

32

other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation.

      ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed elsewhere in this Item 3. Legal Proceedings: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.

      The present legislative and litigation environment is substantially uncertain, and it is possible that the business and volume of ALG's subsidiaries, as well as Altria Group, Inc.'s consolidated results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. ALG and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, ALG and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of ALG's stockholders to do so.

      Reference is made to Note 18 for a description of certain pending legal proceedings. Reference is also made to Exhibit 99.1 to this Form 10-K for a list of pending smoking and health class actions, health care cost recovery actions, and certain other actions, and for a description of certain developments in such proceedings; and Exhibit 99.2 for a schedule of the case under the California Business and Professions Code and the consolidated individual smoking and health cases, as well as the health care cost recovery, Lights/Ultra Lights and Tobacco Price cases, which are currently scheduled for trial through the end of 2003. Copies of Note 18 and Exhibits 99.1 and 99.2 are available upon written request to the Corporate Secretary, Altria Group, Inc., 120 Park Avenue, New York, NY 10017.

Item 4. Submission of Matters to a Vote of Security Holders.

      None.

33

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

      The information called for by this Item is hereby incorporated by reference to the paragraph captioned ''Quarterly Financial Data (Unaudited)'' on page 73 of the 2002 Annual Report and made a part hereof.

Item 6. Selected Financial Data.

      The information called for by this Item is hereby incorporated by reference to the information with respect to 1998-2002 appearing under the caption ''Selected Financial Data'' on page 43 of the 2002 Annual Report and made a part hereof.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

      The information called for by this Item is hereby incorporated by reference to the paragraphs captioned ''Management's Discussion and Analysis of Financial Condition and Results of Operations'' (''MD&A'') on pages 22 to 42 of the 2002 Annual Report and made a part hereof.

      Following a $10.1 billion judgment on March 21, 2003 against PM USA in the Price litigation described in Item 3, the judge granted PM USA's request for a stay of enforcement of the judgment for a period of 30 days. Thereafter, under the judgment, enforcement will be stayed only if an appeal bond in the amount of $12 billion is presented and approved. PM USA believes that requiring a bond in such an amount, in order to stay execution pending appeal, would be unconstitutional and would also violate Illinois law. It is not possible for PM USA to post such a bond and, absent judicial or legislative relief, PM USA would not be able to stay enforcement of the judgment in Illinois. PM USA will take all appropriate steps to seek to prevent this from occurring.

      As a result of these developments, the three major credit rating agencies placed ALG's credit ratings on watch with negative implications. While Kraft is not a party to, and has no exposure to, this litigation, its credit ratings are affected by those of ALG and, accordingly, its ratings were also placed on watch with negative implications. The rating agencies' actions are expected to result in higher short-term borrowing costs for ALG and Kraft. None of ALG's or Kraft's debt agreements require accelerated repayment in the event of a decrease in credit ratings.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

      The information called for by this Item is hereby incorporated by reference to the paragraphs in the MD&A captioned ''Market Risk'' and ''Value at Risk'' on pages 39 to 40 of the 2002 Annual Report and made a part hereof.

Item 8. Financial Statements and Supplementary Data.

      The information called for by this Item is hereby incorporated by reference to the 2002 Annual Report as set forth under the caption ''Quarterly Financial Data (Unaudited)'' on page 73 and in the Index to Consolidated Financial Statements and Schedules (see Item 15) and made a part hereof.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

      None.

34

PART III

Item 10. Directors and Executive Officers of the Registrant.

Executive Officers as of February 28, 2003:

Name	Office	Age
Bruce S. Brown	Vice President, Corporate Taxes		63
André Calantzopoulos	President and Chief Executive Officer of Philip Morris International Inc.		46
Louis C. Camilleri	Chairman of the Board and Chief Executive Officer		48
Nancy J. De Lisi	Senior Vice President, Mergers and Acquisitions		52
Roger K. Deromedi	Co-Chief Executive Officer of Kraft Foods Inc.; and President and Chief Executive Officer of Kraft Foods International, Inc.		49
Dinyar S. Devitre	Senior Vice President and Chief Financial Officer		55
Amy J. Engel	Vice President and Treasurer		46
David I. Greenberg	Senior Vice President and Chief Compliance Officer		48
Betsy D. Holden	Co-Chief Executive Officer of Kraft Foods Inc.; and President and Chief Executive Officer of Kraft Foods North America, Inc.		47
G. Penn Holsenbeck	Vice President, Associate General Counsel and Corporate Secretary		56
Kenneth F. Murphy	Senior Vice President, Human Resources and Administration		47
Steven C. Parrish	Senior Vice President, Corporate Affairs		52
Michael E. Szymanczyk	Chairman and Chief Executive Officer of Philip Morris USA Inc.		54
Joseph A. Tiesi	Vice President and Controller		44
Charles R. Wall	Senior Vice President and General Counsel		57

      With the exception of Dinyar S. Devitre, all of the above-mentioned officers have been employed by ALG or its subsidiaries in various capacities during the past five years. Dinyar S. Devitre was appointed Senior Vice President and Chief Financial Officer of ALG effective April 25, 2002. From April 2001 to March 2002, he acted as a private business consultant. From January 1998 to March 2001, Mr. Devitre was Executive Vice President at Citigroup Inc. in Europe.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

      The number of shares to be issued upon exercise and the number of shares remaining available for future issuance under ALG's equity compensation plans at December 31, 2002 were as follows:

	Number of Shares to be Issued Upon Exercise of Outstanding Options and Restricted Stock		Weighted Average Exercise Price of Outstanding Options		Number of Shares Remaining Available for Future Issuance under Equity Compensation Plans
Equity compensation plans approved by stockholders		114,468,840	$	37.62		94,305,259

Item 13. Certain Relationships and Related Transactions.

      Except for the information relating to executive officers set forth above in Item 10 and the information relating to equity compensation plans set forth in Item 12, the information

35

called for by Items 10-13 is hereby incorporated by reference to ALG's definitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 24, 2003, filed with the SEC on March 17, 2003, and, except as indicated therein, made a part hereof.

Item 14. Controls and Procedures

      Within the 90 days prior to the filing date of this report, Altria Group, Inc. carried out an evaluation, under the supervision and with the participation of Altria Group, Inc.'s management, including ALG's Chairman and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of the design and operation of Altria Group, Inc.'s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, ALG's Chairman and Chief Executive Officer and Chief Financial Officer concluded that Altria Group, Inc.'s disclosure controls and procedures are effective in timely alerting them to material information relating to Altria Group, Inc.'s (including its consolidated subsidiaries) required to be included in ALG's periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Altria Group, Inc.'s internal controls or in other factors that could significantly affect the controls.

36

PART IV

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

      (a) Index to Consolidated Financial Statements and Schedules

	Reference
	Form 10-K Annual Report Page		2002 Annual Report Page
Data incorporated by reference to Altria Group, Inc.'s 2002 Annual Report:
Consolidated Balance Sheets at December 31, 2002 and 2001		—		44-45
Consolidated Statements of Earnings for the years ended December 31,          2002, 2001 and 2000		—		46
Consolidated Statements of Stockholders' Equity for the years ended         December 31, 2002, 2001 and 2000		—		47
Consolidated Statements of Cash Flows for the years ended December 31,          2002, 2001 and 2000		—		48-49
Notes to Consolidated Financial Statements		—		50-73
Report of Independent Accountants		—		74
Data submitted herewith:
Report of Independent Accountants on Financial Statement Schedule		S-1		—
Financial Statement Schedule—Valuation and Qualifying Accounts		S-2		—

      Schedules other than those listed above have been omitted either because such schedules are not required or are not applicable.

(b)	Reports on Form 8-K: The Registrant filed a Current Report on Form 8-K on January 29, 2003 containing the Registrant's consolidated financial statements for the year ended December 31, 2002. The Registrant filed a Current Report on Form 8-K on January 29, 2003 relating to the name change from Philip Morris Companies Inc. to Altria Group, Inc.
(c)	The following exhibits are filed as part of this Report (Exhibit Nos. 10.1-10.16 and Exhibits 10.27 and 10.28 are management contracts, compensatory plans or arrangements):

3	.1	—	Articles of Amendment to the Restated Articles of Incorporation of ALG and Restated Articles of Incorporation of ALG
3	.2	—	By-Laws, as amended, of ALG
4	.1	—	Indenture dated as of August 1, 1990, between ALG and JPMorgan Chase Bank, Trustee.(1)
4	.2	—	First Supplemental Indenture dated as of February 1, 1991, to Indenture dated as of August 1, 1990, between ALG and JPMorgan Chase Bank (formerly known as Chemical Bank) Trustee.(2)
4	.3	—	Second Supplemental Indenture dated as of January 21, 1992, to Indenture dated as of August 1, 1990, between ALG and JPMorgan Chase Bank (formerly known as Chemical Bank) Trustee.(3)
4	.4	—	Indenture dated as of December 2, 1996, between ALG and JPMorgan Chase Bank, Trustee.(4)
4	.5	—	Indenture dated as of October 17, 2001, between Kraft Foods Inc. and JPMorgan Chase Bank, Trustee.(20)

37

 

4	.6	—	The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries to the Commission upon request.
10	.1	—	Financial Counseling Program.(5)
10	.2	—	Benefit Equalization Plan, as amended.(6)
10	.3	—	Form of Employee Grantor Trust Enrollment Agreement.(7)
10	.4	—	Automobile Policy.(5)
10	.5	—	Form of Employment Agreement between ALG and its executive officers.(8)
10	.6	—	Supplemental Management Employees' Retirement Plan of ALG, as amended.(5)
10	.7	—	1992 Incentive Compensation and Stock Option Plan.(5)
10	.8	—	1992 Compensation Plan for Non-Employee Directors, as amended.(9)
10	.9	—	Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996.(7)
10	.10	—	Form of Executive Master Trust between ALG, JPMorgan Chase Bank and Handy Associates.(8)
10	.11	—	1997 Performance Incentive Plan.(10)
10	.12	—	Long-Term Disability Benefit Equalization Plan, as amended.(5)
10	.13	—	Survivor Income Benefit Equalization Plan, as amended.(5)
10	.14	—	2000 Performance Incentive Plan.(18)
10	.15	—	2000 Stock Compensation Plan for Non-Employee Directors, as amended.
10	.16	—	Post-Retirement Consulting Agreement between ALG and Geoffrey C. Bible.(21)
10	.17	—	Comprehensive Settlement Agreement and Release dated October 17, 1997, related to settlement of Mississippi health care cost recovery action.(5)
10	.18	—	Settlement Agreement dated August 25, 1997, related to settlement of Florida health care cost recovery action.(11)
10	.19	—	Comprehensive Settlement Agreement and Release dated January 16, 1998, related to settlement of Texas health care cost recovery action.(12)
10	.20	—	Settlement Agreement and Stipulation for Entry of Judgment, dated May 8, 1998, regarding the claims of the State of Minnesota.(13)
10	.21	—	Settlement Agreement and Release, dated May 8, 1998, regarding the claims of Blue Cross and Blue Shield of Minnesota.(13)
10	.22	—	Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order, dated July 2, 1998, regarding the settlement of the Mississippi health care cost recovery action.(14)
10	.23	—	Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated July 24, 1998, regarding the settlement of the Texas health care cost recovery action.(14)
10	.24	—	Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated September 11, 1998, regarding the settlement of the Florida health care cost recovery action.(15)
10	.25	—	Master Settlement Agreement relating to state health care cost recovery and other claims.(16)
10	.26	—	Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related Matters.(19)
10	.27	—	Agreement between ALG and William H. Webb.(22)
10	.28	—	Agreement among ALG, PM USA and Michael E. Szymanczyk.(22)
12		—	Statements re: computation of ratios.(17)
13		—	Pages 21 to 74 of the 2002 Annual Report, but only to the extent set forth in Items 1, 3, 5-7, 7A, 8 and 15 hereof. With the exception of the aforementioned information incorporated by reference in this Annual Report on Form 10-K, the 2002 Annual Report is not to be deemed ''filed'' as part of this Report.
21		—	Subsidiaries of ALG.

38

 

23		—	Consent of independent accountants.
24		—	Powers of attorney.
99	.1	—	Certain Pending Litigation Matters and Recent Developments.
99	.2	—	Trial Schedule.
99	.3	—	Additional Exhibits.

(1)	Incorporated by reference to ALG's Registration Statement on Form S-3 (No. 33-36450) dated August 22, 1990.
(2)	Incorporated by reference to ALG's Registration Statement on Form S-3 (No. 33-39059) dated February 21, 1991.
(3)	Incorporated by reference to ALG's Registration Statement on Form S-3 (No. 33-45210) dated January 22, 1992.
(4)	Incorporated by reference to ALG's Registration Statement on Form S-3/A (No. 333-35143) dated January 29, 1998.
(5)	Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 1-08940).
(6)	Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 1996 (File No. 1-08940).
(7)	Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).
(8)	Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-08940).
(9)	Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-08940).
(10)	Incorporated by reference to ALG's proxy statement dated March 10, 1997 (File No. 1-08940).
(11)	Incorporated by reference to ALG's Current Report on Form 8-K dated August 25, 1997 (File No. 1-08940).
(12)	Incorporated by reference to ALG's Current Report on Form 8-K dated January 16, 1998 (File No. 1-08940).
(13)	Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended March 31, 1998.
(14)	Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended June 30, 1998.
(15)	Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended September 30, 1998.
(16)	Incorporated by reference to ALG's Current Report on Form 8-K dated November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.
(17)	Incorporated by reference to ALG's Current Report on Form 8-K dated January 29, 2003.
(18)	Incorporated by reference to ALG's proxy statement dated March 10, 2000.
(19)	Incorporated by reference to ALG's Current Report on Form 8-K dated May 8, 2001.
(20)	Incorporated by reference to Kraft Foods Inc.'s Registration Statement on Form S-3 (No. 333-67770) dated August 16, 2001.
(21)	Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 2001.
(22)	Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended June 30, 2002.

39

SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ALTRIA GROUP, INC.
By:	/s/ LOUIS C. CAMILLERI (Louis C. Camilleri, Chairman of the Board and Chief Executive Officer)

Date: March 27, 2003

      Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:

Signature	Title	Date
/s/ LOUIS C. CAMILLERI(Louis C. Camilleri)	Director, Chairman of the Board and    Chief Executive Officer	March 27, 2003
/s/ DINYAR S. DEVITRE(Dinyar S. Devitre)	Senior Vice President and Chief    Financial Officer	March 27, 2003
/s/ JOSEPH A. TIESI(Joseph A. Tiesi)	Vice President and Controller	March 27, 2003
*ELIZABETH E. BAILEY,     HAROLD BROWN,     MATHIS CABIALLAVETTA,     JANE EVANS,     J. DUDLEY FISHBURN,     ROBERT E. R. HUNTLEY,     THOMAS W. JONES,     BILLIE JEAN KING,     JOHN D. NICHOLS,     LUCIO A. NOTO,     JOHN S. REED,     CARLOS SLIM HELÚ,     STEPHEN M. WOLF	Directors
*BY:            /s/ LOUIS C. CAMILLERI                 (Louis C. Camilleri, Attorney-in-fact)		March 27, 2003

40

CERTIFICATIONS

I, Louis C. Camilleri, Chairman and Chief Executive Officer of Altria Group, Inc., certify that:
1.	I have reviewed this annual report on Form 10-K of Altria Group, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the ''Evaluation Date''); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

      

Date: March 27, 2003	/s/ LOUIS C. CAMILLERI
	Louis C. Camilleri,          Chairman and Chief Executive Officer

41

CERTIFICATIONS

I, Dinyar S. Devitre, Senior Vice President and Chief Financial Officer of Altria Group, Inc., certify that:
1.	I have reviewed this annual report on Form 10-K of Altria Group, Inc.;
2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.	The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
	b)	evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the ''Evaluation Date''); and
	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.	The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 27, 2003 /s/ DINYAR S. DEVITRE    Dinyar S. Devitre,
      Senior Vice President and Chief
      Financial Officer

42

REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of
ALTRIA GROUP, INC.:

      Our audits of the consolidated financial statements referred to in our report dated January 27, 2003 appearing in the 2002 Annual Report to Shareholders of Altria Group, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 15(a) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/S/ PRICEWATERHOUSECOOPERS LLP

New York, New York
January 27, 2003

S-1

ALTRIA GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 2002, 2001 and 2000
(in millions)

Col. A	Col. B		Col. C					Col. D		Col. E
			Additions
Description	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts			Deductions		Balance at End of Period
					(a)			(b)
2002:
CONSUMER PRODUCTS:
Allowance for discounts	$	13	$	710	$	2		$	713	$	12
Allowance for doubtful accounts		207		32		(51	)		32		156
Allowance for returned goods		7		166		—			157		16
	$	227	$	908	$	(49	)	$	902	$	184
FINANCIAL SERVICES:
Allowance for losses	$	132	$	324	$	—		$	12	$	444
2001:
CONSUMER PRODUCTS:
Allowance for discounts	$	9	$	709	$	4		$	709	$	13
Allowance for doubtful accounts		210		27		5			35		207
Allowance for returned goods		8		145		—			146		7
	$	227	$	881	$	9		$	890	$	227
FINANCIAL SERVICES:
Allowance for losses	$	121	$	11	$	—		$	—	$	132
2000:
CONSUMER PRODUCTS:
Allowance for discounts	$	7	$	815	$	—		$	813	$	9
Allowance for doubtful accounts		180		3		62			35		210
Allowance for returned goods		8		111		—			111		8
	$	195	$	929	$	62		$	959	$	227
FINANCIAL SERVICES:
Allowance for losses	$	118	$	3	$	—		$	—	$	121

Notes:

 (a) Primarily related to divestitures, acquisitions and currency translation.

 (b) Represents charges for which allowances were created.

S-2

  EX-3 3 ex3-1.htm EXHIBIT 3.1

Exhibit 3.1

ARTICLES OF AMENDMENT
to the
RESTATED ARTICLES OF INCORPORATION
of
PHILIP MORRIS COMPANIES INC.

These Articles of Amendment are filed in accordance with Section 13.1-710 of the Virginia Stock Corporation Act:

A.The name of the corporation (which is hereinafter referred to as the “Corporation”) is Philip Morris Companies Inc.

B.The amendment to the Corporation’s Restated Articles of Incorporation is as follows:

1.Article I of said Articles of Incorporation is deleted and is replaced by the following:

“ARTICLE I

The name of the Corporation is Altria Group, Inc.”

C.The Articles of Amendment were adopted by a majority of the Corporation’s Board of Directors on December 11, 2002.

D.The Articles of Amendment were proposed by the Board of Directors and submitted to the shareholders in accordance with Section 13.1-707 of the Virginia Stock Corporation Act.

E.There were outstanding and entitled to vote on the Articles of Amendment 2,147,219,848 shares of Common Stock of the Corporation as of the record date for the shareholders’ meeting held on Apri1 25, 2002, of which 1,707,959,012 shares were voted for, 83,947,731 shares were voted against and 15,194,074 shares abstained from voting on, respectively, the Articles of Amendment. There were no outstanding shares of Preferred Stock of the Corporation as of the record date for the shareholders’ meeting held on Apri1 25, 2002. The number of shares cast for the Articles of Amendment was sufficient for approval by the shareholders. No shares were entitled to vote on the Articles of Amendment as a class.

F.Pursuant to Section 13.1-606 of the Virginia Stock Corporation Act, these Articles of Amendment shall become effective at 8 o’clock a.m. on January 27, 2003.

Dated: January 24, 2003

PHILIP MORRIS COMPANIES INC.
By:
Name:	G. Penn Holsenbeck
Title:	Vice President, Associate General Counsel and Corporate Secretary

RESTATED
ARTICLES OF INCORPORATION
of
PHILIP MORRIS COMPANIES INC.

ARTICLE I

The name of the Corporation is “PHILIP MORRIS COMPANIES INC.”

ARTICLE II

The purpose for which the Corporation is organized is to transact any lawful business not required to be specifically stated in the Articles of Incorporation.

ARTICLE III

The Corporation shall have authority to issue twelve billion (12,000,000,000) shares of Common Stock, $0.33_ par value, and ten million (10,000,000) shares of Serial Preferred Stock, $1 par value.

A. SERIAL PREFERRED STOCK

1.Issuance in Series.         The Board of Directors is hereby empowered to cause the Serial Preferred Stock of the Corporation to be issued in series with such of the variations permitted by clauses (a) - (h), both inclusive, of this Section 1 as shall have been fixed and determined by the Board of Directors with respect to any series prior to the issue of any shares of such series.

The shares of the Serial Preferred Stock of different series may vary as to:

(a)the number of shares constituting such series, and the designation of such series, which shall be such as to distinguish the shares thereof from the shares of all other series and classes;

(b)the rate of dividend, the time of payment and, if cumulative, the dates from which dividends shall be cumulative, and the extent of participation rights, if any;

(c)any right to vote with holders of shares of any other series or class and any right to vote as a class, either generally or as a condition to specified corporate action;

(d)the price at and the terms and conditions on which shares may be redeemed;

(e)the amount payable upon shares in event of involuntary liquidation;

(f)the amount payable upon shares in event of voluntary liquidation;

(g)any sinking fund provisions for the redemption or purchase of shares; and

(h)the terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion.

The shares of all series of Serial Preferred Stock shall be identical except as, within the limitations set forth above in this Section 1, shall have been fixed and determined by the Board of Directors prior to the issuance thereof.

2.Dividends.        The holders of the Serial Preferred Stock of each series shall be entitled to receive, if and when declared payable by the Board of Directors, dividends at the dividend rate for such series, and not exceeding such rate except to the extent of any participation right. Such dividends shall be payable on such dates as shall be fixed for such series. Dividends, if cumulative and in arrears, shall not bear interest.

No dividends shall be declared or paid upon or set apart for the Common Stock or for stock of any other class hereafter created ranking junior to the Serial Preferred Stock in respect of dividends or assets (hereinafter called Junior Stock), and no shares of Serial Preferred Stock, Common Stock or Junior Stock shall be purchased, redeemed or otherwise reacquired for a consideration, nor shall any funds be set aside for or paid to any sinking fund therefor, unless and until (i) full dividends on the outstanding Serial Preferred Stock at the dividend rate or rates therefor, together with the full additional amount required by any participation right, shall have been paid or declared and set apart for payment with respect to all past dividend periods, to the extent that the holders of the Serial Preferred Stock are entitled to dividends with respect to any past dividend period, and the current dividend period, and (ii) all mandatory sinking fund payments that shall have become due in respect of any series of the Serial Preferred Stock shall have been made. Unless full dividends with respect to all past dividend periods on the outstanding Serial Preferred Stock at the dividend rate or rates therefor, to the extent that holders of the Serial Preferred Stock are entitled to dividends with respect to any particular past dividend period, together with the full additional amount required by any participation right, shall have been paid or declared and set apart for payment and all mandatory sinking fund payments that shall have become due in respect of any series of the Serial Preferred Stock shall have been made, no distributions shall be made to the holders of the Serial Preferred Stock of any series unless distributions are made to the holders of the Serial Preferred Stock of all series then outstanding in proportion to the aggregate amounts of the deficiencies in payments due to the respective series, and all payments shall be applied, first, to dividends accrued and in arrears, next, to any amount required by any participation right, and, finally, to mandatory sinking fund payments. The terms “current dividend period” and “past dividend period” mean, if two or more series of Serial Preferred Stock having different dividend periods are at the time outstanding, the current dividend period or any past dividend period, as the case may be, with respect to each such series.

3.Preference on Liquidation.        In the event of any liquidation, dissolution or winding up of the Corporation, the holders of the Serial Preferred Stock of each series shall be entitled to receive, for each share thereof, the fixed liquidation price for such series, plus, in case such liquidation, dissolution or winding up shall have been voluntary, the fixed liquidation premium for such series, if any, together in all cases with a sum equal to all dividends accrued or in arrears thereon and the full additional amount required by any participation right, before any distribution of the assets shall be made to holders of the Common Stock or Junior Stock; but the holders of the Serial Preferred Stock shall be entitled to no further participation in such distribution. If, upon any such liquidation, dissolution or winding up, the assets distributable among the holders of the Serial Preferred Stock shall be insufficient to permit the payment of the full preferential amounts aforesaid, then such assets shall be distributed among the holders of the Serial Preferred Stock then outstanding ratably in proportion to the full preferential amounts to which they are respectively entitled. For the purposes of this Section 3, the expression “dividends accrued or in arrears” means, in respect of each share of the Serial Preferred Stock of any series at a particular time, an amount equal to the product of the rate of dividend per annum applicable to the shares of such series multiplied by the number of years and any fractional part of a year that shall have elapsed from the date when dividends on such shares became cumulative to the particular time in question less the total amount of dividends actually paid on the shares of such series or declared and set apart for payment thereon; provided, however, that, if the dividends on such shares shall not be fully cumulative, such expression shall mean the dividends, if any, cumulative in respect of such shares for the period stated in the articles of serial designation creating such shares less all dividends paid in or with respect to such period.

B. COMMON STOCK

1.Subject to the provisions of law and the rights of holders of shares at the time outstanding of Serial Preferred Stock, the holders of Common Stock at the time outstanding shall be entitled to receive such dividends at such times and in such amounts as the Board of Directors may deem advisable.

2.In the event of any liquidation, dissolution or winding up (whether voluntary or involuntary) of the Corporation, after the payment or provision for payment in full for all debts and other liabilities of the Corporation and all preferential amounts to which the holders of shares at the time outstanding of Serial Preferred Stock shall be entitled, the remaining net assets of the Corporation shall be distributed ratably among the holders of the shares at the time outstanding of Common Stock.

3.The holders of Common Stock shall be entitled to one vote per share on all matters as to which a stockholder vote is taken.

ARTICLE IV

No holder of capital stock of the Corporation of any class shall have any preemptive right to subscribe to or purchase (i) any shares of capital stock of the Corporation, (ii) any securities convertible into such shares or (iii) any options, warrants or rights to purchase such shares or securities convertible into any such shares.

ARTICLE V

The number of directors shall be fixed by the By-Laws or, in the absence of a By-Law fixing the number, the number shall be three.

ARTICLE VI

1.In this Article:

(a)“eligible person” means a person who is or was a director, officer or employee of the Corporation or a person who is or was serving at the request of the Corporation as a director, trustee, partner, officer or employee of another corporation, affiliated corporation, partnership, joint venture, trust, employee benefit plan or other enterprise. A person shall be considered to be serving an employee benefit plan at the Corporation’s request if his duties to the Corporation also impose duties on, or otherwise involve services by, him to the plan or to participants in or beneficiaries of the plan;

(b)“expenses” includes, without limitation, counsel fees;

(c)“liability” means the obligation to pay a judgment, settlement, penalty, fine (including any excise tax assessed with respect to an employee benefit plan), or reasonable expenses incurred with respect to a proceeding;

(d)“party” includes, without limitation, an individual who was, is, or is threatened to be made a named defendant or respondent in a proceeding; and

(e)“proceeding” means any threatened, pending, or completed action, suit, or proceeding whether civil, criminal, administrative, or investigative and whether formal or informal.

2.To the full extent that the Virginia Stock Corporation Act, as it exists on the date hereof or as hereafter amended, permits the limitation or elimination of the liability of directors, officers or other eligible persons, no director or officer of the Corporation or other eligible person made a party to any proceeding shall be liable to the Corporation or its stockholders for monetary damages arising out of any transaction, occurrence or course of conduct, whether occurring prior or subsequent to the effective date of this Article.

3.To the full extent permitted by the Virginia Stock Corporation Act, as it exists on the date hereof or as hereafter amended, the Corporation shall indemnify any person who was or is a party to any proceeding, including a proceeding brought by or in the right of the Corporation or brought by or on behalf of stockholders of the Corporation, by reason of the fact that such person is or was an eligible person against any liability incurred by him in connection with such proceeding. To the same extent, the Corporation is empowered to enter into a contract to indemnify any eligible person against liability in respect of any proceeding arising from any act or omission, whether occurring before or after the execution of such contract.

4.The termination of any proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the eligible person did not meet any standard of conduct that is or may be a prerequisite to the limitation or elimination of liability provided in Section 2 or to his entitlement to indemnification under Section 3 of this Article.

5.The Corporation shall indemnify under Section 3 of this Article any eligible person who prevails in the defense of any proceeding. Any other indemnification under Section 3 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification is proper in the circumstances because the eligible person has met any standard of conduct that is a prerequisite to his entitlement to indemnification under Section 3 of this Article.

The determination shall be made:

(a)by the Board of Directors by a majority vote of a quorum consisting of directors not at the time parties to the proceeding;

(b)if a quorum cannot be obtained under clause (a) of this Section 5, by majority vote of a committee duly designated by the Board of Directors (in which designation directors who are parties may participate), consisting solely of two or more directors not at the time parties to the proceeding;

(c)by special legal counsel:

(i)selected by the Board of Directors or its committee in the manner prescribed in clause (a) or (b) of this Section 5; or

(ii)if a quorum of the Board of Directors cannot be obtained under clause (a) of this Section 5 and a committee cannot be designated under clause (b) of this Section 5, selected by a majority vote of the full Board of Directors, in which selection directors who are parties may participate; or

(d)by the holders of Common Stock, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination.

Authorization of indemnification and evaluation as to reasonableness of expenses shall be made in the same manner as the determination that indemnification is appropriate, except that if the determination is made by special legal counsel, such authorizations and evaluations shall be made by those entitled under clause (c) of this Section 5 to select counsel.

Notwithstanding the foregoing, in the event there has been a change in the composition of a majority of the Board of Directors after the date of the alleged act or omission with respect to which indemnification, an advance or reimbursement is claimed, any determination as to such indemnification, advance or reimbursement shall

be made by special legal counsel agreed upon by the Board of Directors and the eligible person. If the Board of Directors and the eligible person are unable to agree upon such special legal counsel, the Board of Directors and the eligible person each shall select a nominee, and the nominees shall select such special legal counsel.

6.The Corporation may pay for or reimburse the reasonable expenses incurred by any eligible person (and for a person referred to in Section 7 of this Article) who is a party to a proceeding in advance of final disposition of the proceeding or the making of any determination under Section 3 if any such person furnishes the Corporation:

(a)a written statement, executed personally, of his good faith belief that he has met any standard of conduct that is a prerequisite to his entitlement to indemnification pursuant to Section 3 or 7 of this Article; and

(b)a written undertaking, executed personally or on his behalf, to repay the advance if it is ultimately determined that he did not meet such standard of conduct.

The undertaking required by clause (b) of this Section 6 shall be an unlimited general obligation but need not be secured and may be accepted without reference to financial ability to make repayment.

Authorizations of payments under this Section shall be made by the person specified in Section 5.

7.The Corporation is empowered to indemnify or contract to indemnify any person not specified in Section 3 of this Article who was, is or may become a party to any proceeding, by reason of the fact that he is or was an agent of or consultant to the Corporation, to the same or a lesser extent as if such person were specified as one to whom indemnification is granted in Section 3. The provisions of Sections 4, 5 and 6 of this Article, to the extent set forth therein, shall be applicable to any indemnification provided hereafter pursuant to this Section.

8.The provisions of this Article shall be applicable to all proceedings commenced after it becomes effective, arising from any act or omission, whether occurring before or after such effective date. No amendment or repeal of this Article shall impair or otherwise diminish the rights provided under this Article (including those created by contract) with respect to any act or omission occurring prior to such amendment or repeal. The Corporation shall promptly take all such actions and make all such determinations and authorizations as shall be necessary or appropriate to comply with its obligation to make any indemnity against liability, or to advance any expenses, under this Article and shall promptly pay or reimburse all reasonable expenses incurred by any eligible person or by a person referred to in Section 7 of this Article in connection with such actions and determinations or proceedings of any kind arising therefrom.

9.The Corporation may purchase and maintain insurance to indemnify it against the whole or any portion of the liability assumed by it in accordance with this Article and may also procure insurance, in such amounts as the Board of Directors may determine, on behalf of any eligible person (and for a person referred to in Section 7 of this Article) against any liability asserted against or incurred by him whether or not the Corporation would have power to indemnify him against such liability under the provisions of this Article.

10.Every reference herein to directors, officers, trustees, partners, employees, agents or consultants shall include former directors, officers, trustees, partners, employees, agents or consultants and their respective heirs, executors and administrators. The indemnification hereby provided and provided hereafter pursuant to the power hereby conferred by this Article shall not be exclusive of any other rights to which any person may be entitled, including any right under policies of insurance that may be purchased and maintained by the Corporation or others, with respect to claims, issues or matters in relation to which the Corporation would not have the power to indemnify such person under the provisions of this Article.

11.Nothing herein shall prevent or restrict the power of the Corporation to make or provide for any further indemnity, or provisions for determining entitlement to indemnity, pursuant to one or more indemnification agreements, By-Laws, or other arrangements (including without limitation, creation of trust funds or security interests funded by letters of credit or other means) approved by the Board of Directors (whether or not any of the directors of the Corporation shall be a party to or beneficiary of any such agreements, By-Laws or other arrangements); provided, however, that any provision of such agreements, By-Laws or other arrangements shall not be effective if and to the extent that it is determined to be contrary to this Article or applicable laws of the Commonwealth of Virginia, but other provisions of any such agreements, By-Laws or other arrangements shall not be affected by any such determination.

12.Each provision of this Article shall be severable, and an adverse determination as to any such provision shall in no way affect the validity of any other provision.

ARTICLE VII

Except as otherwise required by the Virginia Stock Corporation Act, by the Articles of Incorporation, or by the Board of Directors acting pursuant to subsection C of §13.1-707 of the Virginia Stock Corporation Act or any successor provision, the vote required to approve an amendment or restatement of these Articles of Incorporation, other than an amendment or restatement that amends or affects the shareholder vote required by the Virginia Stock Corporation Act to approve a merger, share exchange, sale of all or substantially all of the Corporation’s property or the dissolution of the Corporation, shall be a majority of all votes entitled to be cast by each voting group entitled to vote on the amendment or restatement.

Dated:   March 18, 1997

EX-3

Exhibit 3.2

BY-LAWS
of
PHILIP MORRIS COMPANIES INC.

ARTICLE I

Meetings of Stockholders

Section 1.Annual Meetings. - The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting, and any postponement or adjournment thereof, shall be held on such date and at such time as the Board of Directors may in its discretion determine.

Section 2.Special Meetings. - Unless otherwise provided by law, special meetings of the stockholders may be called by the chairman of the Board of Directors, or in the chairman’s absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, an executive vice president or by order of the Board of Directors, whenever deemed necessary.

Section 3.Place of Meetings. - All meetings of the stockholders shall be held at such place in the Commonwealth of Virginia as from time to time may be fixed by the Board of Directors.

Section 4.Notice of Meetings. - Notice, stating the place, day and hour and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting (except as a different time is specified herein or by law), to each stockholder of record having voting power in respect of the business to be transacted thereat.

Notice of a stockholders’ meeting to act on an amendment of the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of all, or substantially all of the Corporation’s assets, otherwise than in the usual and regular course of business, or the dissolution of the Corporation shall be given not less than twenty-five nor more than sixty days before the date of the meeting and shall be accompanied, as appropriate, by a copy of the proposed amendment, plan of merger or share exchange or sale agreement.

September 1, 2002

-1-

Notwithstanding the foregoing, a written waiver of notice signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A stockholder who attends a meeting shall be deemed to have (i) waived objection to lack of notice or defective notice of the meeting, unless at the beginning of the meeting heor she objects to holding the meeting or transacting business at the meeting, and (ii) waived objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless he or she objects to considering the matter when it is presented.

Section 5.Quorum. - At all meetings of the stockholders, unless a greater number or voting by classes is required by law, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, action on a matter is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation, and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Less than a quorum may adjourn.

Section 6.Organization and Order of Business. - At all meetings of the stockholders, the chairman of the Board of Directors or, in the chairman’s absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the most senior executive vice president, shall act as chairman. In the absence of all of the foregoing officers or, if present, with their consent, a majority of the shares entitled to vote at such meeting, may appoint any person to act as chairman. The secretary of the Corporation or, in the secretary’s absence, an assistant secretary, shall act as secretary at all meetings of the stockholders. In the event that neither the secretary nor any assistant secretary is present, the chairman may appoint any person to act as secretary of the meeting.

The chairman shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the dismissal of business not properly presented, the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls.

At each annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who shall be entitled to

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vote at such meeting and who complies with the notice procedures set forth in this Section 6. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder’s notice must be given, either by personal delivery or by United States certified mail, postage prepaid, and received at the principal executive offices of the Corporation (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation’s proxy statement in connection with the last annual meeting of stockholders or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year’s proxy statement, not less than 60 days before the date of the applicable annual meeting. A stockholder’s notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation’s stock transfer books, of such stockholder proposing such business, (c) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to bring the business before the meeting specified in the notice, (d) the class and number of shares of stock of the Corporation beneficially owned by the stockholder and (e) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 6. The chairman of an annual meeting shall, if the facts warrant, determine that the business was not brought before the meeting in accordance with the procedures prescribed by this Section 6. If the chairman should so determine, heor she shall so declare to the meeting and the business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 6, a stockholder seeking to have a proposal included in the Corporation’s proxy statement shall comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended (including, but not limited to, Rule 14a-8 or its successor provision). The secretary of the Corporation shall deliver each such stockholder’s notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review.

Section 7.Voting. - A stockholder may vote his or her shares in person or by proxy. Any proxy shall be delivered to the secretary of the meeting at or prior to the time designated by the chairman or in the order of business for so delivering such proxies. No proxy shall be valid after eleven months from its date, unless otherwise provided in the proxy. Each holder of record of stock of any class shall, as to all matters in respect of which stock of such class has voting power, be entitled to such vote as is provided in the Articles of Incorporation for each share of stock of such class standing

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in the holders’s name on the books of the Corporation. Unless required by statute or determined by the chairman to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting or by such stockholder’s proxy, if there be such proxy.

Section 8.Written Authorization. - A stockholder or a stockholder’s duly authorized attorney-in-fact may execute a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the stockholder or such stockholder’s duly authorized attorney-in-fact or authorized officer, director, employee or agent signing such writing or causing such stockholder’s signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature.

Section 9.Electronic Authorization. - The secretary or any vice president may approve procedures to enable a stockholder or a stockholder’s duly authorized attorney-in-fact to authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram, internet transmission, telephone transmission or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such transmission must either set forth or be submitted with information from which the inspectors of election can determine that the transmission was authorized by the stockholder or the stockholder’s duly authorized attorney-in-fact. If it is determined that such transmissions are valid, the inspectors shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 9 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.

Section 10.Inspectors. - At every meeting of the stockholders for election of directors, the proxies shall be received and taken in charge, all ballots shall be received and counted and all questions concerning the qualifications of voters, the validity of proxies, and the acceptance or rejection of votes shall be decided, by two or more inspectors. Such inspectors shall be appointed by the chairman of the meeting. They shall be sworn faithfully to perform their duties and shall in writing certify to the returns. No candidate for election as director shall be appointed or act as inspector.

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ARTICLE II

Board of Directors

Section 1.General Powers. - The business and affairs of the Corporation shall be managed under the direction of the Board of Directors.

Section 2.Number. - The number of directors shall be fourteen (14).

Section 3.Term of Office and Qualification. - Each director shall serve for the term for which he or she shall have been elected and until a successor shall have been duly elected.

Section 4.Nomination and Election of Directors. - At each annual meeting of stockholders, the stockholders entitled to vote shall elect the directors. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. Nominations of persons for election to the Board of Directors may be made by the Board of Directors or any committee designated by the Board of Directors or by any stockholder entitled to vote for the election of directors at the applicable meeting of stockholders who complies with the notice procedures set forth in this Section 4. Such nominations, other than those made by the Board of Directors or any committee designated by the Board of Directors, may be made only if written notice of a stockholder’s intent to nominate one or more persons for election as directors at the applicable meeting of stockholders has been given, either by personal delivery or by United States certified mail, postage prepaid, to the secretary of the Corporation and received (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation’s proxy statement in connection with the last annual meeting of stockholders, or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year’s proxy statement, not less than 60 days before the date of the applicable annual meeting, or (iii) with respect to any special meeting of stockholders called for the election of directors, not later than the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such stockholder’s notice shall set forth (a) as to the stockholder giving the notice, (i) the name and address, as they appear on the Corporation’s stock transfer books, of such stockholder, (ii) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to nominate the person or persons specified in the notice, (iii) the class and number of shares of stock of the Corporation beneficially owned by such stockholder, and (iv) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder; and (b) as to each person whom the stockholder proposes to nominate for

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election as a director, (i) the name, age, business address and, if known, residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, and (v) the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected. The secretary of the Corporation shall deliver each such stockholder’s notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Any person nominated for election as director by the Board of Directors or any committee designated by the Board of Directors shall, upon the request of the Board of Directors or such committee, furnish to the secretary of the Corporation all such information pertaining to such person that is required to be set forth in a stockholder’s notice of nomination. The chairman of the meeting of stockholders shall, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by this Section 4. If the chairman should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded.

Section 5.Organization. - At all meetings of the Board of Directors, the chairman of the Board of Directors or, in the chairman’s absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the senior most executive vice president, shall act as chairman of the meeting. The secretary of the Corporation or, in the secretary’s absence, an assistant secretary, shall act as secretary of meetings of the Board of Directors. In the event that neither the secretary nor any assistant secretary shall be present at such meeting, the chairman of the meeting shall appoint any person to act as secretary of the meeting.

Section 6.Vacancies. - Any vacancy occurring in the Board of Directors, including a vacancy resulting from amending these By-Laws to increase the number of directors by thirty percent or less, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors.

Section 7.Place of Meeting. - Meetings of the Board of Directors, regular or special, may be held either within or without the Commonwealth of Virginia.

Section 8.Organizational Meeting. - The annual organizational meeting of the Board of Directors shall be held immediately following adjournment of the annual meeting of stockholders and at the same place, without the requirement of any notice other than this provision of the By-Laws.

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Section 9.Regular Meetings: Notice. - Regular meetings of the Board of Directors shall be held at such times and places as it may from time to time determine. Notice of such meetings need not be given if the time and place have been fixed at a previous meeting.

Section 10.Special Meetings. - Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if any) or two of the directors. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each director, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held.

Section 11.Waiver of Notice. - Whenever any notice is required to be given to a director of any meeting for any purpose under the provisions of law, the Articles of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A director’s attendance at or participation in a meeting waives any required notice to him or herof the meeting unless at the beginning of the meeting or promptly upon the director’s arrival, he or sheobjects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

Section 12.Quorum and Manner of Acting. - Except where otherwise provided by law, a majority of the directors fixed by these By-Laws at the time of any regular or special meeting shall constitute a quorum for the transaction of business at such meeting, and the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of those present may adjourn the meeting from time to time until a quorum be had. Notice of any such adjourned meeting need not be given.

Section 13.Order of Business. - At all meetings of the Board of Directors business may be transacted in such order as from time to time the Board of Directors may determine.

Section 14.Committees. - In addition to the executive committee authorized by Article III of these By-Laws, other committees, consisting of two or more directors, may be designated by the Board of Directors by a resolution adopted by the greater number of (i) a majority of all directors in office at the time the action is being taken or (ii) the number of directors required to take action under Article II, Section 12 hereof.

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Any such committee, to the extent provided in the resolution of the Board of Directors designating the committee, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except as limited by law.

ARTICLE III

Executive Committee

Section 1.How Constituted and Powers. - The Board of Directors, by resolution adopted pursuant to Article II, Section 14 hereof, may designate, in addition to the chairman of the Board of Directors, one or more directors to constitute an executive committee, who shall serve during the pleasure of the Board of Directors. The executive committee, to the extent provided in such resolution and permitted by law, shall have and may exercise all of the authority of the Board of Directors.

Section 2.Organization, Etc. - The executive committee may choose a chairman and secretary. The executive committee shall keep a record of its acts and proceedings and report the same from time to time to the Board of Directors.

Section 3.Meetings. - Meetings of the executive committee may be called by any member of the committee. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each member of the committee, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held.

Section 4.Quorum and Manner of Acting. - A majority of the executive committee shall constitute a quorum for transaction of business, and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the executive committee. The members of the executive committee shall act only as a committee, and the individual members shall have no powers as such.

Section 5.Removal. - Any member of the executive committee may be removed, with or without cause, at any time, by the Board of Directors.

Section 6.Vacancies. - Any vacancy in the executive committee shall be filled by the Board of Directors.

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ARTICLE IV

Officers

Section 1.Number. - The officers of the Corporation shall be a chairman of the Board of Directors, a deputy chairman of the Board of Directors (if elected by the Board of Directors), a president (if elected by the Board of Directors), one or more vice chairmen of the Board of Directors (if elected by the Board of Directors), a chief operating officer (if elected by the Board of Directors), one or more vice presidents (one or more of whom may be designated executive vice president or senior vice president), a treasurer, a controller, a secretary, one or more assistant treasurers, assistant controllers and assistant secretaries and such other officers as may from time to time be chosen by the Board of Directors. Any two or more offices may be held by the same person.

Section 2.Election, Term of Office and Qualifications. - All officers of the Corporation shall be chosen annually by the Board of Directors, and each officer shall hold office until a successor shall have been duly chosen and qualified or until the officer resigns or is removed in the manner hereinafter provided. The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) and the vice chairmen of the Board of Directors (if any) shall be chosen from among the directors.

Section 3.Vacancies. - If any vacancy shall occur among the officers of the Corporation, such vacancy shall be filled by the Board of Directors.

Section 4.Other Officers, Agents and Employees - Their Powers and Duties. - The Board of Directors may from time to time appoint such other officers as the Board of Directors may deem necessary, to hold office for such time as may be designated by it or during its pleasure, and the Board of Directors or the chairman of the Board of Directors may appoint, from time to time, such agents and employees of the Corporation as may be deemed proper, and may authorize any officers to appoint and remove agents and employees. The Board of Directors or the chairman of the Board of Directors may from time to time prescribe the powers and duties of such other officers, agents and employees of the Corporation.

Section 5.Removal. - Any officer, agent or employee of the Corporation may be removed, either with or without cause, by a vote of a majority of the Board of Directors or, in the case of any agent or employee not appointed by the Board of Directors, by a superior officer upon whom such power of removal may be conferred by the Board of Directors or the chairman of the Board of Directors.

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Section 6.Chairman of the Board of Directors and Chief Executive Officer. - The chairman of the Board of Directors shall preside at meetings of the stockholders and of the Board of Directors and shall be a member of the executive committee. The chairman shall be the Chief Executive Officer of the Corporation and shall be responsible to the Board of Directors. He or she shall be responsible for the general management and control of the business and affairs of the Corporation and shall see to it that all orders and resolutions of the Board of Directors are implemented. The chairman shall from, time to time, report to the Board of Directors on matters within his or her knowledge which the interests of the Corporation may require be brought to its notice. The chairman shall do and perform such other duties asfrom time to time the Board of Directors may prescribe.

Section 7.Deputy Chairman of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The deputy chairman shall be responsible to the chairman of the Board of Directors and shall perform such duties as shall be assigned to him or her by the chairman of the Board of Directors. The deputy chairman shall from time to time report to the chairman of the Board of Directors on matters within the deputy chairman’sknowledge which the interests of the Corporation may require be brought to the chairman’snotice.

Section 8.President. - In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The president shall be responsible to the chairman of the Board of Directors. Subject to the authority of the chairman of the Board of Directors, the president shall be devoted to the Corporation’s business and affairs under the basic policies set by the Board of Directors and the chairman of the Board of Directors. He or sheshall from, time to time, report to the chairman of the Board of Directors on matters within the president’s knowledge which the interests of the Corporation may require be brought to the chairman’snotice. In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if any)shall, except as otherwise directed by the Board of Directors, have all of the powers and the duties of the chairman of the Board of Directors. The president (if any)shall do and perform such other duties asfrom time to time the Board of Directors or the chairman of the Board of Directors may prescribe.

Section 9.Vice Chairmen of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), the vice chairman of the Board of Directors designated for such purpose by the chairman of the Board of Directors (if any) shall preside at meetings of the stockholders and of the Board of Directors. Each vice chairman of the

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Board of Directors shall be responsible to the chairman of the Board of Directors. Each vice chairman of the Board of Directors shall from time to time report to the chairman of the Board of Directors on matters within the vice chairman’s knowledge which the interests of the Corporation may require be brought to the chairman’s notice. In the absence or inability to act of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), such vice chairman of the Board of Directors as the chairman of the Board of Directors may designate for the purpose shall have the powers and discharge the duties of the chairman of the Board of Directors. In the event of the failure or inability of the chairman of the Board of Directors to so designate a vice chairman of the Board of Directors, the Board of Directors may designate a vice chairman of the Board of Directors who shall have the powers and discharge the duties of the chairman of the Board of Directors.

Section 10.Chief Operating Officer. - The chief operating officer (if any) shall be responsible to the Chairman of the Board of Directors for the principal operating businesses of the Corporation and shall perform those duties that may from time to time be assigned.

Section 11.Vice Presidents. - The vice presidents of the Corporation shall assist the chairman of the Board of Directors, the deputy chairman of the Board of Directors, the president (if any) and the vice chairmen (if any) of the Board of Directors in carrying out their respective duties and shall perform those duties which may from time to time be assigned to them. The chief financial officer shall be a vice president of the Corporation (or more senior) and shall be responsible for the management and supervision of the financial affairs of the Corporation.

Section 12.Treasurer. - The treasurer shall have charge of the funds, securities, receipts and disbursements of the Corporation. He or sheshall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as the Board of Directors may from time to time designate. The treasurershall render to the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), the vice chairmen of the Board of Directors (if any), and the chief financial officer, whenever required by any of them, an account of all of his transactions as treasurer. If required, the treasurershall give a bond in such sum as the Board of Directors may designate, conditioned upon the faithful performance of the duties of the treasurer’soffice and the restoration to the Corporation at the expiration of his or her term of office or in case of death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind in his or her possession or under his or hercontrol belonging to the Corporation. The treasurershall perform such other duties as from time to time may be assigned to him or her.

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Section 13.Assistant Treasurers. - In the absence or disability of the treasurer, one or more assistant treasurers shall perform all the duties of the treasurer and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the treasurer. Assistant treasurers shall also perform such other duties as from time to time may be assigned to them.

Section 14.Secretary. - The secretary shall keep the minutes of all meetings of the stockholders and of the Board of Directors in a book or books kept for that purpose. He or she shall keep in safe custody the seal of the Corporation, and shall affix such seal to any instrument requiring it. The secretary shall have charge of such books and papers as the Board of Directors may direct. He or she shall attend to the giving and serving of all notices of the Corporation and shall also have such other powers and perform such other duties as pertain to the secretary’s office, or as the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) or any vice chairman of the Board of Directors may from time to time prescribe.

Section 15.Assistant Secretaries. - In the absence or disability of the secretary, one or more assistant secretaries shall perform all of the duties of the secretary and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the secretary. Assistant secretaries shall also perform such other duties as from time to time may be assigned to them.

Section 16.Controller. - The controller shall be administrative head of the controller’s department. He or she shall be in charge of all functions relating to accounting and the preparation and analysis of budgets and statistical reports and shall establish, through appropriate channels, recording and reporting procedures and standards pertaining to such matters. The controllershall report to the chief financial officer and shall aid in developing internal corporate policies whereby the business of the Corporation shall be conducted with the maximum safety, efficiency and economy. The controllershall be available to all departments of the Corporation for advice and guidance in the interpretation and application of policies that are within the scope of his or herauthority. The controllershall perform such other duties as from time to time may be assigned to him or her.

Section 17.Assistant Controllers. - In the absence or disability of the controller, one or more assistant controllers shall perform all of the duties of the controller and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the controller. Assistant controllers shall also perform such other duties as from time to time may be assigned to them.

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ARTICLE V

Contracts, Checks, Drafts, Bank Accounts, Etc.

Section 1.Contracts. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the chairman of the Board of Directors may authorize shall have the power to execute any contract or other instrument on behalf of the Corporation; no other officer, agent or employee shall, unless otherwise in these By-Laws provided, have any power or authority to bind the Corporation by any contract or acknowledgement, or pledge its credit or render it liable pecuniarily for any purpose or to any amount.

Section 2.Loans. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the Board of Directors may authorize shall have the power to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any corporation, firm or individual, and for such loans and advances may make, execute and deliver promissory notes or other evidences of indebtedness of the Corporation, and, as security for the payment of any and all loans, advances, indebtedness and liability of the Corporation, may pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the Corporation, and to that end endorse, assign and deliver the same.

Section 3.Voting of Stock Held. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may from time to time appoint an attorney or attorneys or agent or agents of the Corporation to cast the votes that the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose stock or securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by any other such corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the Corporation such written proxies, consents, waivers or other instruments as such officer may deem necessary or proper in the premises; or the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may attend in person any meeting of the holders of stock or other securities of such other corporation and thereat vote or exercise any and all powers of the Corporation as the holder of such stock or other securities of such other corporation.

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ARTICLE VI

Certificates Representing Shares

Certificates representing shares of the Corporation shall be signed by the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), or the vice chairman of the Board of Directors (if any), or the president of the Corporation (if any) and the secretary or an assistant secretary. Any and all signatures on such certificates, including signatures of officers, transfer agents and registrars, may be facsimile.

ARTICLE VII

Dividends

The Board of Directors may declare dividends from funds of the Corporation legally available therefor.

ARTICLE VIII

Seal

The Board of Directors shall provide a suitable seal or seals, which shall be in the form of a circle, and shall bear around the circumference the words “Philip Morris Companies Inc.” and in the center the word and figures “Virginia, 1985.”

ARTICLE IX

Fiscal Year

The fiscal year of the Corporation shall be the calendar year.

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ARTICLE X

Amendment

The power to alter, amend or repeal the By-Laws of the Corporation or to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by the Board of Directors may be repealed or changed by the stockholders, or new By-Laws may be adopted by the stockholders, and the stockholders may prescribe that any By-Laws made by them shall not be altered, amended or repealed by the directors.

ARTICLE XI

Emergency By-Laws

If a quorum of the Board of Directors cannot be readily assembled because of some catastrophic event, and only in such event, these By-Laws shall, without further action by the Board of Directors, be deemed to have been amended for the duration of such emergency, as follows:

Section 1.Section 6 of Article II shall read as follows:

Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the directors present at a meeting of the Board of Directors called in accordance with these By-Laws.

Section 2.The first sentence of Section 10 of Article II shall read as follows:

Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors or a deputy chairman (if any), or of the president (if any) or any vice chairman of the Board of Directors (if any) or any director or of any person having the powers and duties of the chairman of the Board of Directors, the deputy chairman, the president or any vice chairman of the Board of Directors.

Section 3.Section 12 of Article II shall read as follows:

The directors present at any regular or special meeting called in accordance with these By-Laws shall constitute a quorum for the transaction of business at such meeting, and the action of a majority of such directors shall be the act of the Board of Directors, provided, however, that in the event that only one director is present at any such meeting no action except the election of directors shall be taken until at least two additional directors have been elected and are in attendance.

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EX-10

Exhibit 10.15

2000 STOCK COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS
(As Amended and Restated as of March 1, 2003)

Section 1.Purpose; Definitions.

The purposes of the Plan are (i) to assist the Company in promoting a greater identity of interest between the Company’s Non-Employee Directors and the Company’s stockholders; and (ii) to assist the Company in attracting and retaining Non-Employee Directors by affording them an opportunity to share in the future successes of the Company.

For purposes of the Plan, the following terms are defined as set forth below:

a.“Altria Group, Inc. Stock Fund” means the Altria Group, Inc. Stock Fund of the Altria Group, Inc. Deferred Profit-Sharing Plan, as amended from time to time.

b.“Award” means the grant under the Plan of Common Stock and, to the extent relevant, Stock Options.

c.“Board” means the Board of Directors of the Company.

d.“Committee” means the Nominating and Corporate Governance Committee of the Board or a subcommittee thereof, any successor thereto or such other committee or subcommittee as may be designated by the Board to administer the Plan.

e.“Common Stock” or “Stock” means the Common Stock of the Company.

f.“Company” means Altria Group, Inc., a corporation organized under the laws of the Commonwealth of Virginia, or any successor thereto.

g.“Deferred Stock” means an unfunded obligation of the Company, represented by an entry on the books and records of the Company, to pay an amount equal to the value of one unit in the Altria Group, Inc. Stock Fund.

h.“Deferred Stock Account” means the unfunded deferred compensation account established by the Company with respect to each participant who elects to participate in the Deferred Stock Program in accordance with Section 7 of the Plan.

i.“Deferred Stock Program” means the provisions of Section 7 of the Plan that permit participants to defer all or part of any Award of Stock pursuant to Section 5(a)(i) of the Plan.

j.“Fair Market Value” means, as of any given date, the mean between the highest and lowest reported sales prices of the Common Stock on the New York Stock Exchange-Composite Transactions or, if no such sale of Common Stock is reported on such date, the fair market value of the Stock as determined by the Committee in good faith; provided, however, that the Committee may in its discretion designate the actual sales price as Fair Market Value in the case of dispositions of Common Stock under the Plan.

k.“Non-Employee Director” means each member of the Board who is not a full-time employee of the Company or of any corporation in which the Company owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation.

l.“Plan” means this 2000 Stock Compensation Plan for Non-Employee Directors, as amended from time to time.

m.“Plan Year” means the period commencing at the opening of business on the day on which the Company’s annual meeting of stockholders is held and ending on the day immediately preceding the day on which the Company’s next annual meeting of stockholders is held.

n.“Prior Directors Plan” shall mean the Company’s 1992 Compensation Plan For Non-Employee Directors.

o.“Stock Option” means the right granted to each Non-Employee director on or before April 25, 2002 to purchase a share of Stock at a price equal to the Fair Market Value on the date of grant. All Stock Options granted pursuant to the Plan are and shall be nonqualified stock options.

Section 2.Administration.

The Plan shall be administered by the Committee, which shall have the power to interpret the Plan and to adopt such rules and guidelines for carrying out the Plan as it may deem appropriate. The Committee shall have the authority to adopt such modifications, procedures and subplans as may be necessary or desirable to comply with the laws, regulations, compensation practices and tax and accounting principles of the countries in which Non-Employee Directors reside or are citizens of and to meet the objectives of the Plan.

Any determination made by the Committee in accordance with the provisions of the Plan with respect to any Award shall be made in the sole discretion of the Committee, and all decisions made by the Committee pursuant to the provisions of the Plan shall be final and binding on all persons, including the Company and Plan participants.

Section 3.Eligibility.

Only Non-Employee Directors shall be granted Awards under the Plan.

Section 4.Common Stock Subject to the Plan.

The total number of shares of Common Stock reserved and available for distribution pursuant to the Plan shall be 1,000,000. If any Stock Option is forfeited or expires without the delivery of Common Stock to a participant, the shares subject to such Stock Option shall again be available for distribution in connection with Awards under the Plan. Any shares of Common Stock that are used by a participant as full or partial payment of withholding or other taxes or as payment for the exercise price of a Stock Option shall be available for distribution in connection with Awards under the Plan.

In the event of any merger, share exchange, reorganization, consolidation, recapitalization, reclassification, distribution, stock dividend, stock split, reverse stock split, split-up, spin-off, issuance of rights or warrants or other similar transaction or event affecting the Common Stock after adoption of the Plan by the Board, the Board is authorized, to the extent it deems appropriate, to make substitutions or adjustments in the aggregate number and kind of shares of Common Stock reserved for issuance under the Plan, in the number, kind and price of shares of Common Stock subject to outstanding Awards and in the Award amounts set forth in Section 5 (or to make provision for cash payments to the holders of Awards.

Section 5.Awards.

(a)  Annual Awards. On the first day of each Plan Year, each Non-Employee Director serving as such immediately after the annual meeting held on such day shall be awarded the following:

(i)  a grant of that number of shares of Stock having an aggregate Fair Market Value on the date of grant equal to $40,000 (with any fractional share being rounded up to the next whole share); and

(ii)  a grant of Stock Options to purchase that number of shares of Stock equal to the number derived from dividing $40,000 by the Black-Scholes Value of each such Stock Option (with any fractional share being rounded up to the next whole share); provided, however,

that effective with the Plan Year commencing in 2003, (x) the grants of Stock Options referred to in Section 5(a)(ii) are discontinued and (y) the $40,000 amount referred to in Section 5(a)(ii) is increased to $55,000 .

(b)  Terms of Awards.

(i)  Awards pursuant to Section 5(a)(i) are eligible for participation in the Deferred Stock Program described in Section 7.

(ii)  The term of each Stock Option shall be ten years. Subject to the applicable Award agreement, Stock Options may be exercised, in whole or in part, by giving written notice of exercise specifying the number of shares to be purchased. Such notice shall be accompanied by payment in full of the purchase price by certified or bank check or such other instrument as the Company may accept (including, to the extent the Committee determines such a procedure to be acceptable, a copy of instructions to a broker or bank acceptable to the Company to deliver promptly to the Company an amount of sale or loan proceeds sufficient to pay the purchase price). As determined by the Committee, payment in full or in part may also be made in the form of Common Stock already owned by the Non-Employee Director valued at Fair Market Value; provided, however, that such Common Stock shall not have been acquired by the optionee within the preceding six months.

Section 6.Plan Amendment and Termination.

The Board may amend or terminate the Plan at any time, provided that no such amendment shall be made without stockholder approval if such approval is required under applicable law, or if such amendment would: (i) decrease the grant or exercise price of any Stock Option to less than the Fair Market Value on the date of grant; or (ii) increase the total number of shares of Common Stock that may be distributed under the Plan. Except as may be necessary to comply with a change in the laws, regulations or accounting principles of a foreign country applicable to participants subject to the laws of such foreign country, the Committee may not, without stockholder approval, cancel any option and substitute therefor a new Stock Option with a lower option price. Except as set forth in any Award agreement, no amendment or termination of the Plan may materially and adversely affect any outstanding Award under the Plan without the Award recipient’s consent.

Section 7.Payments and Payment Deferrals.

The Committee, either at the time of grant or by subsequent amendment, may require or permit deferral of the payment of Awards under such rules and procedures as it may establish. It also may provide that deferred settlements include the payment or crediting of interest or other earnings on the deferred amounts, or the payment or crediting of dividend equivalents where the deferred amounts are denominated in Common Stock equivalents.

Each participant may elect to participate in a Deferred Stock Program with respect to Awards granted under Section 5(a)(i). Any election to have the Company establish a Deferred Stock Account shall be made in terms of integral multiples of 25% of the value of the Common Stock that the participant otherwise would have been granted on each date of grant and any such election (including an existing election to participate in the Deferred Stock Program under the Prior Directors Plan) shall remain in effect

for purposes of the Plan until the participant executes a new election not to participate in the Deferred Stock Program for any future grants of Common Stock. The Deferred Stock Account of a participant who elects to participate in the Deferred Stock Program shall be credited with Deferred Stock equal to that resulting from a theoretical investment in the Altria Group, Inc. Stock Fund on the date of grant of an amount equal to the portion of the award of Common Stock that the participant elected to receive as Deferred Stock. The Deferred Stock Account shall be credited with earnings and charged with losses, if any, and subject to other adjustments on the same basis as the Altria Group, Inc. Stock Fund. The Deferred Stock Program shall otherwise be administered in a manner similar to the deferred fee program under the Prior Directors Plan and under such rules and procedures as the Committee may, from time to time establish, including rules with respect to elections to defer, beneficiary designations and distributions under the Deferred Stock Program.

Section 8.Transferability.

Unless otherwise required by law, Awards shall not be transferable or assignable other than by will or the laws of descent and distribution.

Section 9.Award Agreements.

Each Award of a Stock Option under the Plan shall be evidenced by a written agreement (which need not be signed by the Award recipient unless otherwise specified by the Committee) that sets forth the terms, conditions and limitations for each such Award. Each Stock Option shall vest in not less than six months (or such longer period set forth in the Award agreement) and shall be forfeited if the participant does not continue to be a Non-Employee Director for the duration of the vesting period. The Committee may amend an Award agreement, provided that no such amendment may materially and adversely affect an Award without the Award recipient’s consent.

Section 10.Unfunded Status Plan.

It is presently intended that the Plan constitute an “unfunded” plan for incentive and deferred compensation. The Committee may authorize the creation of trusts or other arrangements to meet the obligations created under the Plan to deliver Common Stock or make payments; provided, however, that, unless the Committee otherwise determines, the existence of such trusts or other arrangements is consistent with the “unfunded” status of the Plan.

Section 11.General Provisions.

(a)  The Committee may require each person acquiring shares of Common Stock pursuant to an Award to represent to and agree with the Company in writing that such person is acquiring the shares without a view to the distribution thereof. The

certificates for such shares may include any legend that the Committee deems appropriate to reflect any restrictions on transfer.

All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations and other requirements of the Securities and Exchange Commission (or any successor agency), any stock exchange upon which the Common Stock is then listed, and any applicable Federal, state or foreign securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.

(b)  Nothing contained in the Plan shall prevent the Company from adopting other or additional compensation arrangements for Non-Employee Directors.

(c)  No later than the date as of which an amount first becomes includable in the gross income of the participant for income tax purposes with respect to any Award under the Plan, the participant shall pay to the Company, or make arrangements satisfactory to the Company regarding the payment of, any Federal, state, local or foreign taxes of any kind that are required by law or applicable regulation to be withheld with respect to such amount. Unless otherwise determined by the Committee, withholding obligations arising from an Award may be settled with Common Stock, including Common Stock that is part of, or is received upon exercise of the Award that gives rise to the withholding requirement. The obligations of the Company under the Plan shall be conditional on such payment or arrangements, and the Company, shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the participant. The Committee may establish such procedures as it deems appropriate, including the making of irrevocable elections, for the settling of withholding obligations with Common Stock.

(d)  The Plan and all Awards made and actions taken thereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia.

(e)  If any provision of the Plan is held invalid or unenforceable, the invalidity or unenforceability shall not affect the remaining parts of the Plan, and the Plan shall be enforced and construed as if such provision had not been included.

(f)  As originally adopted and approved by shareholders, this Plan became effective at the conclusion of the 2000 Annual Meeting of Stockholders. The Plan, as amended and restated as of March 1, 2003, became effective upon approval by a majority of the Board at a duly called meeting on February 26, 2003, at which a quorum was present. Except as otherwise provided by the Board, no Awards shall be made after the Awards made immediately following the 2005 Annual Meeting of Stockholders, provided that any Awards granted prior to that date may extend beyond it.

EX-13

Financial Review

Financial Contents
Management’s Discussion and Analysis of Financial Condition and Results of Operations	page 22
Selected Financial Data — Five-Year Review	page 43
Consolidated Balance Sheets	page 44
Consolidated Statements of Earnings	page 46
Consolidated Statements of Stockholders’ Equity	page 47
Consolidated Statements of Cash Flows	page 48
Notes to Consolidated Financial Statements	page 50
Report of Independent Accountants	page 74
Company Report on Financial Statements	page 74

Guide to Select Disclosures

For easy reference, areas that may be of interest to investors are highlighted in the index below.
Benefit Plans
Note 15 includes a discussion of pension plans	page 61
Contingencies
Note 18 includes a discussion of litigation	page 65
Finance Assets, net
Note 7 includes a discussion of leasing activities	page 54
Miller Brewing Company Transaction
Note 3	page 53
Segment Reporting
Note 14	page 59
Stock Plans
Note 11 includes a discussion of stock compensation	page 57

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

In April 2002, the stockholders of Philip Morris Companies Inc. approved changing the name of the parent company from Philip Morris Companies Inc. to Altria Group, Inc. (“ALG”). The name change became effective on January 27, 2003. ALG’s wholly-owned subsidiaries, Philip Morris USA Inc. (“PM USA”), Philip Morris International Inc. (“PMI”) and its majority-owned (84.2%) subsidiary, Kraft Foods Inc. (“Kraft”), are engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese and convenient meals. Philip Morris Capital Corporation (“PMCC”), another wholly-owned subsidiary, is primarily engaged in leasing activities. ALG’s former wholly-owned subsidiary, Miller Brewing Company (“Miller”), was engaged in the manufacture and sale of various beer products prior to the merger of Miller into South African Breweries plc (“SAB”) on July 9, 2002 (see Note 3 to the consolidated financial statements). Throughout this discussion and analysis, Altria Group, Inc. refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies. ALG’s access to the operating cash flows of its subsidiaries is comprised of cash received from the payment of dividends and interest, and the repayment of amounts borrowed from ALG by its subsidiaries.

Critical Accounting Policies

Financial Reporting Release No. 60, which was issued by the Securities and Exchange Commission (“SEC”), requires all registrants to discuss critical accounting policies or methods used in the preparation of financial statements. Note 2 to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of Altria Group, Inc.’s consolidated financial statements. In many instances, Altria Group, Inc. must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The preparation of financial statements includes the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, income taxes, the allowance for loan losses and estimated residual values of finance leases, and contingencies. Altria Group, Inc. bases its estimates on historical experience and other assumptions that it believes are appropriate. If actual amounts are ultimately different from previous estimates, the revisions are included in Altria Group, Inc.’s consolidated results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between Altria Group, Inc.’s estimates and actual amounts in any year, have not had a significant impact on its consolidated financial statements.

The selection and disclosure of Altria Group, Inc.’s critical accounting policies and estimates have been discussed with Altria Group, Inc.’s Audit Committee. The following is a review of the more significant assumptions and estimates, as well as the accounting policies and methods used in the preparation of Altria Group, Inc.’s consolidated financial statements:

•Revenue Recognition: As required by U.S. GAAP, Altria Group, Inc.’s consumer products businesses recognize revenues, net of sales incentives, and including shipping and handling charges billed to customers, upon shipment of goods when title and risk of loss pass to customers. Shipping and handling costs are classified as part of cost of sales. Provisions and allowances for sales returns and bad debts are also recorded in the consolidated financial statements. The amounts recorded for these provisions and related allowances are not significant to Altria Group, Inc.’s consolidated financial position or results of operations. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, Altria Group, Inc. adopted newly required accounting standards mandating that certain costs reported as marketing expenses be shown as a reduction of operating revenues or as an increase in cost of sales or excise taxes on products. As a result, previously reported revenues were reduced by $9.0 billion and $6.9 billion in 2001 and 2000, respectively. The adoption of the new accounting standards had no impact on net earnings or basic and diluted earnings per share (“EPS”).

•Depreciation and Amortization: Altria Group, Inc. depreciates property, plant and equipment and amortizes its definite life intangible assets using straight-line methods over the estimated useful lives of the assets. As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, Altria Group, Inc. adopted the provisions of a new accounting standard. Altria Group, Inc. has determined that substantially all of its goodwill and other intangible assets have indefinite lives due to the long history of its brands. As a result, Altria Group, Inc. stopped recording the amortization of goodwill and substantially all of its intangible assets as a charge to earnings. Net earnings and diluted EPS would have been as follows had the provisions of the new standards been applied as of January 1, 2000:

(in millions, except per share data)
For the years ended December 31,	2001		2000
Net earnings, as previously reported	$	8,560	$	8,510
Adjustment for amortization of goodwill and other intangible assets	932		586
Net earnings, as adjusted	$	9,492	$	9,096
Diluted EPS, as previously reported	$	3.87	$	3.75
Adjustment for amortization of goodwill and other intangible assets	0.43		0.25
Diluted EPS, as adjusted	$	4.30	$	4.00

•Marketing and Advertising Costs: As required by U.S. GAAP, Altria Group, Inc. records marketing costs as an expense in the year to which such costs relate. Altria Group, Inc. does not defer any amounts on its consolidated balance sheets with respect to marketing costs. Altria Group, Inc. expenses advertising costs in the year in which the related advertisement initially appears. Consumer incentive and trade promotion costs are recorded as a reduction of revenues in the year in which these programs are offered, based on estimates of utilization and redemption rates that are developed from historical information.

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•Contingencies: As discussed in Note 18 to the consolidated financial statements (“Note 18”), legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against ALG, its subsidiaries and affiliates, including PM USA and PMI, as well as their respective indemnitees. In 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the “MSA”) with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by four other states (together with the MSA, the “State Settlement Agreements”). As part of the MSA, PM USA and three other domestic tobacco product manufacturers agreed to establish and fund a trust to provide aid to tobacco growers and quota-holders. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments subject to adjustment for several factors, including inflation, market share and industry volume. In addition, the domestic tobacco industry is required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap. These payment obligations, which are subject to adjustment for the factors mentioned above, are the several and not joint obligations of each settling defendant. Industry payments under the State Settlement Agreements are: 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. PM USA’s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers’ domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USA records its portion of ongoing settlement payments as part of cost of sales as product is shipped. During the years ended December 31, 2002, 2001 and 2000, PM USA recorded expenses of $5.3 billion, $5.9 billion and $5.2 billion, respectively, as part of cost of sales for the payments under the State Settlement Agreements and to fund the trust for tobacco growers and quota-holders.

It is not possible to predict the outcome of the litigation pending against ALG and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and/or punitive damages against PM USA have been returned in the Engle smoking and health class action, several individual smoking and health cases, a flight attendant environmental tobacco smoke (“ETS”) lawsuit and a health care cost recovery case, and are being appealed. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation.

ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed in Note 18: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.

The present legislative and litigation environment is substantially uncertain, and it is possible that the business and volume of ALG’s subsidiaries, as well as Altria Group, Inc.’s consolidated results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. ALG and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, ALG and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of ALG’s stockholders to do so.

•Employee Benefit Plans: As discussed in Note 15. Benefit Plans, Altria Group, Inc. provides a range of benefits to its employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). Altria Group, Inc. records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases, turnover rates and health care cost trend rates. Altria Group, Inc. reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. As required by U.S. GAAP, the effect of the modifications is generally recorded or amortized over future periods. Altria Group, Inc. believes that the assumptions utilized in recording its obligations under its plans, which are presented in Note 15 to the consolidated financial statements, are reasonable based on advice from its actuaries.

At December 31, 2002, for the U.S. pension and postretirement plans, Altria Group, Inc. reduced its discount rate assumption to 6.50% and increased its medical trend rate assumption. Altria Group, Inc.’s long-term rate of return assumption remains at 9.0% based on the investment of its pension assets primarily in U.S. equity securities. A fifty basis point decline in Altria Group, Inc.’s discount rate would increase Altria Group, Inc.’s pension and postretirement expense by approximately $75 million, while a fifty basis point decline in the expected return on plan assets would increase Altria Group, Inc.’s pension expense by approximately $50 million. See Note 15 for a sensitivity discussion of the assumed health care cost trend rates.

Altria Group, Inc. makes the maximum tax-deductible contribution to its U.S. pension funds. Contributions to U.S. and non-U.S. pension funds totaled

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$1.1 billion in 2002. However, recent stock market declines have resulted in significant deferred losses that will be reflected in the pension calculation over the next four years. These losses have resulted in the recording of additional minimum pension liabilities through an after-tax charge of $760 million to stockholders’ equity as of December 31, 2002. The amortization of these deferred losses will result in higher pension expense in future periods.

•Income Taxes: Altria Group, Inc. accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the book and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

PMCC is primarily engaged in leasing activities. PMCC’s net revenues and operating companies income was less than 1% of Altria Group, Inc.’s consolidated net revenues and operating companies income for the year ended December 31, 2002. The accounting principle used by PMCC for revenue recognition, which is prescribed by U.S. GAAP, differs from that used by ALG’s consumer products businesses. A summary of this policy is as follows:

•Leasing: More than 70% of PMCC’s net revenues in 2002 related to leveraged leases. Income relating to leveraged leases is recorded initially as unearned income, which is included in finance assets, net, on Altria Group, Inc.’s consolidated balance sheets, and is subsequently recorded as revenues over the life of the related leases at a constant after-tax rate of return. The remainder of PMCC’s net revenues consist primarily of amounts related to direct finance leases, with income initially recorded as unearned and subsequently recognized in net revenues over the life of the leases at a constant pre-tax rate of return. As discussed further in Note 7, PMCC has ceased recording income on certain aircraft leases where the counter-party has entered Chapter 11 bankruptcy protection.

PMCC’s investment in leases is included in finance assets, net, on the consolidated balance sheet as of December 31, 2002. As required by U.S. GAAP, PMCC’s investment in leases is presented on a net basis and consists of lease receivables and estimated residual values, reduced by non-recourse debt (which is collateralized by the assets under lease and lease receivables) and unearned income. Estimated residual values represent PMCC’s estimate at lease inception as to the fair value of assets under lease at the end of the lease term. The estimated residual values are reviewed annually by PMCC’s management based on a number of factors, including appraisals on certain assets, and activity in the relevant industry. If necessary, revisions to reduce the residual values are recorded. Such reviews have not resulted in adjustments to Altria Group, Inc.’s consolidated net revenues or operating results for any of the periods presented. To the extent that lease receivables due PMCC may be uncollectible, PMCC records an allowance for losses against its finance assets. During 2002, PMCC increased this allowance by $290 million for exposure to the troubled airline industry. PMCC’s investment in finance leases includes an aggregate of approximately $2.6 billion relating to the airline industry. It is possible that further adverse developments in the airline industry may develop, which might require PMCC to record an additional allowance for losses in future periods. For a further discussion of PMCC’s investment in leveraged leases, see the section entitled “Leveraged Leases” within Altria Group, Inc.’s Financial Review of Debt and Liquidity and Note 7. Finance Assets, net of the notes to the consolidated financial statements.

Consolidated Operating Results

(in millions)
	2002		2001		2000
Net Revenues
Domestic tobacco	$	18,877	$	19,902	$	18,967
International tobacco	28,672		26,517		26,290
North American food	21,485		20,970		15,312
International food	8,238		8,264		7,610
Beer	2,641		4,791		4,907
Financial services	495		435		417
Net revenues	$	80,408	$	80,879	$	73,503

(in millions)
	2002			2001			2000
Operating Income
Domestic tobacco	$	5,011		$	5,264		$	5,350
International tobacco	5,666			5,406			5,211
North American food	4,953			4,796			3,547
International food	1,330			1,239			1,208
Beer	276			481			650
Financial services	55			296			262
Operating companies income	17,291			17,482			16,228
Amortization of intangibles	(7		)	(1,014		)	(591		)
General corporate expenses	(683		)	(766		)	(831		)
Operating income	$	16,601		$	15,702		$	14,806

Items Affecting Comparability

Several events occurred in 2002, 2001 and 2000 that affected the comparability of statement of earnings amounts. In order to isolate the impact of these events and provide better clarity to business trends, comparisons will be discussed both including and excluding these events, which are as follows:

•Miller Transaction: On May 30, 2002, Altria Group, Inc. announced an agreement with SAB to merge Miller into SAB. The transaction closed on July 9, 2002 and SAB changed its name to SABMiller plc (“SABMiller”). The transaction, which is discussed more fully in Note 3 to the consolidated financial statements, resulted in a pre-tax gain of approximately $2.6 billion or approximately $1.7 billion after-tax. ALG records its share of SABMiller’s net earnings, based on its economic ownership percentage, in minority interest in earnings and other, net, on the consolidated statement of earnings.

•Provision for Airline Industry Exposure: During 2002, in recognition of the economic downturn in the airline industry, PMCC increased its allowance for losses by $290 million.

•Amortization of Intangibles: As previously discussed, Altria Group, Inc. stopped recording the amortization of goodwill and substantially all of its intangible assets as a charge to earnings as of January 1, 2002.

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•Separation Programs and Asset Impairments: During 2002, PMI offered separation programs in Germany and the United Kingdom. Approximately 250 employees were terminated. As a result, pre-tax charges of $58 million, primarily for enhanced severance, pension and postretirement benefits, were recorded in operating companies income of the international tobacco segment. During 2002, approximately 800 employees elected to retire or terminate employment under separation programs. Pre-tax charges of $135 million, $7 million and $23 million were recorded in operating companies income of the North American food, international food and beer segments, respectively, for these separation programs and a beer asset impairment. During 2001, Miller revised the terms of a contract brewing agreement with Pabst Brewing Co., which resulted in pre-tax charges of $19 million in the operating companies income of the beer segment.

•Integration Costs and a Loss on Sale of a Food Factory: The integration of Nabisco Holdings Corp. (“Nabisco”) into the operations of Kraft resulted in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the consolidated statement of earnings to close or reconfigure facilities and integrate Nabisco were originally estimated to be in the range of $200 million to $300 million. During 2002 and 2001, Kraft Foods North America, Inc. (“KFNA”) recorded pre-tax charges of $98 million and $53 million, respectively, related to the closing of a facility and other consolidation programs in North America. During 2002, Kraft Foods International, Inc. (“KFI”) recorded pre-tax charges of $17 million to consolidate production lines and distribution networks in Latin America. As of December 31, 2002, the aggregate pre-tax charges to the consolidated statements of earnings to close or reconfigure Kraft facilities and integrate Nabisco, including Kraft’s separation programs ($142 million) discussed above, were $310 million, slightly above the original estimate. The integration-related charges of $168 million included $27 million for severance, $117 million for asset write-offs and $24 million for other cash exit costs. Cash payments relating to these charges will approximate $51 million, of which $21 million has been paid through December 31, 2002. No additional pre-tax charges are expected to be recorded for these programs. In addition, during the first quarter of 2001 KFNA recorded a pre-tax loss of $29 million on the sale of a North American food factory.

•Gains on Sales of Businesses: During 2002, KFI sold a Latin American yeast and industrial bakery ingredients business for $110 million and recorded a pre-tax gain of $69 million. The total gains on sales in 2002, including the sale of some small food businesses, were $80 million. During 2001, a small international food business was sold and a pre-tax gain of $8 million was recorded. During 2000, KFI sold a French confectionery business for proceeds of $251 million, on which a pre-tax gain of $139 million was recorded. In addition, Miller sold its rights to Molson trademarks in the United States for proceeds of $131 million, on which a pre-tax gain of $100 million was recorded. The total gains on sales in 2000, including the sale of several small food and beer businesses were $274 million.

•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 sales dates. 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 2002 consolidated operating results of KFNA.

•Nabisco Acquisition: On December 11, 2000, Altria Group, Inc., through its subsidiary Kraft, acquired all of the outstanding shares of Nabisco for $55 per share in cash. The purchase of the outstanding shares, retirement of employee stock options and other payments totaled approximately $15.2 billion. In addition, the acquisition included the assumption of approximately $4.0 billion of existing Nabisco debt. The acquisition was financed through the issuance of $12.2 billion of short-term obligations and $3.0 billion of available cash. The acquisition has been accounted for as a purchase. Beginning January 1, 2001, Nabisco’s earnings have been included in the consolidated operating results of Altria Group, Inc. The interest cost on borrowings associated with acquiring Nabisco has been included in interest and other debt expense, net, on Altria Group, Inc.’s consolidated statements of earnings for the years ended December 31, 2002, 2001 and 2000.

•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. Altria Group, Inc. used the IPO proceeds, net of underwriting discount and expenses, of $8.4 billion to retire a portion of the debt incurred to finance the acquisition of Nabisco. After the completion of the IPO, Altria Group, Inc. owned approximately 83.9% of the outstanding shares of Kraft’s capital stock through Altria Group, Inc.’s ownership of 49.5% of Kraft’s Class A common stock and 100% of Kraft’s Class B common stock. Kraft’s Class A common stock has one vote per share while Kraft’s Class B common stock has ten votes per share. As of December 31, 2002 and 2001, Altria Group, Inc. held approximately 98% of the combined voting power of Kraft’s outstanding capital stock. At December 31, 2002, Altria Group, Inc. owned approximately 84.2% of the outstanding shares of Kraft’s capital stock.

•Litigation Related Expense: As discussed in Note 18, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM USA, certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court, 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 the operating companies income of the domestic tobacco segment for the year ended December 31, 2001. In July 2001, PM USA also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM USA should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2002 and 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recorded as earned in interest and other debt expense, net, in the consolidated statements of earnings.

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•Century Date Change: During the fourth quarter of 1999, Altria Group, Inc.’s customers purchased additional product in anticipation of potential Century Date Change (“CDC”) related disruptions. These incremental shipments would have normally been made during the first quarter of 2000. The increased shipments in 1999 resulted in incremental net revenues and operating companies income in 1999 of approximately $213 million and $100 million, respectively, and corresponding decreases in net revenues and operating companies income in 2000.

Management uses net revenues, operating companies income, operating income, net earnings and diluted and basic EPS measures, excluding items affecting comparability, to manage and to evaluate the performance of Altria Group, Inc. Management believes it is appropriate to disclose these measures to assist investors with analyzing business performance and trends. These measures should not be considered in isolation or as a substitute for net revenues, operating income, net earnings and diluted and basic EPS, prepared in accordance with U.S. GAAP.

2002 compared with 2001

Net revenues for 2002 decreased $471 million (0.6%) from 2001, due primarily to 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. Excluding the items affecting comparability, as well as the net revenues of businesses divested since the beginning of 2001, net revenues for 2002 increased $1.5 billion (1.9%) over 2001.

Operating income for 2002 increased $899 million (5.7%) over 2001, due primarily to the cessation of intangible asset amortization in 2002. Excluding the previously discussed items affecting comparability from each year, as well as the results from operations divested since the beginning of 2001, operating income for 2002 increased $30 million (0.2%) over 2001, due primarily to higher operating income from the food and international tobacco businesses and lower corporate expenses, mostly offset by lower operating income from the domestic tobacco business.

Altria Group, Inc.’s management reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, decreased $191 million (1.1%) from 2001, due primarily to lower operating income from the domestic tobacco business, a provision for airline industry exposure and the exclusion of Miller’s operating results during the second half of 2002, partially offset by the 2001 litigation related expense and higher operating income from PMI and Kraft. Excluding the items affecting comparability from each year, as well as the results from businesses divested since the beginning of 2001, operating companies income decreased $53 million (0.3%).

Currency movements have decreased net revenues by $850 million ($530 million, after excluding the impact of currency movements on excise taxes) and operating companies income by $235 million from 2001. Declines in net revenues and operating companies income are due primarily to the strength versus prior year 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. Although Altria Group, Inc. cannot predict future movements in currency rates, the recent weakening of the U.S. dollar against the euro, if sustained during 2003, could have a favorable impact on net revenues and operating companies income comparisons with 2002.

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 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 is 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.

Diluted and basic EPS of $5.21 and $5.26, respectively, for 2002, increased by 34.6% and 34.2%, respectively, over 2001. Net earnings of $11.1 billion for 2002 increased $2.5 billion (29.7%) over 2001. These results include the gain from the Miller transaction, as well as the other items affecting comparability. Excluding the after-tax impact of the gain from the Miller transaction, as well as the other items affecting comparability, net earnings decreased 0.3% to $9.7 billion, diluted EPS increased 3.4% to $4.57 and basic EPS increased 2.9% to $4.61, reflecting the impact of share repurchases during 2002.

2001 compared with 2000

Net revenues for 2001 increased $7.4 billion (10.0%) over 2000, due primarily to the acquisition of Nabisco and an increase in net revenues from Altria Group, Inc.’s domestic tobacco business. Adjusting for the shift in CDC revenues and for the impact of businesses previously held for sale, and excluding the net revenues of businesses divested since the beginning of 2000, net revenues for 2001 increased $7.6 billion (11.0%) over 2000. Net revenues would have increased 1.0% over 2000 had the acquisition of Nabisco occurred on January 1, 2000.

Operating income for 2001 increased $896 million (6.1%) over 2000. Including the incremental CDC income in 2000 and excluding the previously discussed items affecting comparability from each year, as well as the results from operations divested since the beginning of 2000, operating income for 2001 increased $2.2 billion (14.8%) over 2000, due primarily to higher operating income from Altria Group, Inc.’s food and tobacco businesses. Operating income would have increased 7.5% had the acquisition of Nabisco occurred on January 1, 2000.

Operating companies income increased $1.3 billion (7.7%) over 2000, due primarily to the Nabisco acquisition, partially offset by the 2001 litigation related expense. Adjusting for the shift in CDC income and the items affecting comparability in each year, as well as the results from operations divested since the beginning of 2000, operating companies income increased $2.1 billion (13.6%). Operating companies income would have increased 6.7% had the acquisition of Nabisco occurred on January 1, 2000, due primarily to higher results from Altria Group, Inc.’s tobacco and food businesses.

Currency movements decreased net revenues by $1.9 billion ($1.1 billion, after excluding the impact of currency movements on excise taxes) and operating companies income by $449 million from 2000. Declines in net revenues and operating companies income were due primarily to the strength of the U.S. dollar against the euro, the Turkish lira and Asian currencies.

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Interest and other debt expense, net, of $1.4 billion for 2001 increased $699 million over 2000. This increase was due primarily to higher average debt outstanding in 2001, as a result of the Nabisco acquisition. The Kraft IPO proceeds of $8.4 billion were used to retire a portion of the debt incurred as a result of the Nabisco acquisition.

During 2001, Altria Group, Inc.’s effective tax rate decreased by 0.8 percentage points to 37.9%. This change primarily reflects the reversal in 2001 of previously accrued taxes for certain foreign jurisdictions where Altria Group, Inc. received favorable closings of audits by taxing authorities.

Diluted and basic EPS of $3.87 and $3.92, respectively, for 2001, increased by 3.2% and 4.0%, respectively, over 2000. Net earnings of $8.6 billion for 2001 increased $50 million (0.6%) over 2000. These results include the previously discussed items affecting comparability. Excluding the after-tax impact of the items affecting comparability, net earnings increased 8.4% to $9.8 billion, diluted EPS increased 11.3% to $4.42 and basic EPS increased 12.3% to $4.48.

Operating Results by Business Segment

Tobacco

Business Environment

The tobacco industry, both in the United States and abroad, has faced, and continues to face, a number of issues that may adversely affect the business, volume, results of operations, cash flows and financial position of PM USA, PMI and Altria Group, Inc.

These issues, some of which are more fully discussed below, include:

•a $74.0 billion punitive damages verdict against PM USA in the Engle smoking and health class action case discussed in Note 18 and punitive damages awards against PM USA in individual smoking and health cases discussed in Note 18;

•the civil lawsuit filed by the United States federal government against various cigarette manufacturers, including PM USA, and others discussed in Note 18;

•legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects caused by both smoking and exposure to environmental tobacco smoke (“ETS”);

•price increases in the United States related to the settlement of certain tobacco litigation, and the effect of any resulting cost advantage of manufacturers not subject to these settlements;

•actual and proposed excise tax increases in the United States and foreign markets;

•diversion into the United States market of products intended for sale outside the United States;

•the sale of counterfeit cigarettes by third parties;

•price disparities and changes in price disparities between premium and lowest price brands;

•the outcome of proceedings and investigations involving contraband shipments of cigarettes;

•governmental investigations;

•actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information;

•governmental and private bans and restrictions on smoking;

•actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States;

•actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales inside and outside the United States; and

•the diminishing prevalence of smoking and increased efforts by tobacco control advocates to further restrict smoking; and

•actual and proposed tobacco legislation both inside and outside the United States.

•Excise Taxes: Cigarettes are subject to substantial federal, state and local excise taxes in the United States and to similar taxes in most foreign markets. In general, such taxes have been increasing. The United States federal excise tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the United States, state and local sales and excise taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may currently be as high as $4.10 per pack of 20 cigarettes. Further tax increases in various jurisdictions are currently under consideration or pending. In 2002, 21 states and the Commonwealth of Puerto Rico imposed excise tax increases, ranging from $0.07 per pack in Tennessee to as much as $1.81 per pack in New York. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and significant increases in excise and other cigarette-related taxes have been proposed or enacted at the state and local levels within the United States and in many jurisdictions outside the United States. In the European Union (the “EU”), taxes on cigarettes vary considerably and currently may be as high as the equivalent of $5.69 per pack of 20 cigarettes on the most popular brands (using an exchange rate at January 2, 2003 of €1.00 = $1.0446). In Germany, where total tax on cigarettes is currently equivalent to $2.50 per pack of 19 cigarettes on the most popular brands, the excise tax increased by the equivalent of $0.20 per pack of 19 cigarettes in January 2003. In the opinion of PM USA and PMI, increases in excise and similar taxes have had an adverse impact on sales of cigarettes, particularly the legitimate sales of cigarettes, and create an incentive for smokers to turn to untaxed or lower-taxed products. Any future increases, the extent of which cannot be predicted, may result in volume declines for the cigarette industry, including PM USA and PMI, and might also cause sales to shift from the premium segment to the non-premium, including the discount, segment.

Each of the countries currently anticipated to join the EU by 2004 will be required to increase excise levels to EU standards by a date negotiated with the EU, in all cases to levels that may produce the results described above.

•Tar and Nicotine Test Methods and Brand Descriptors: Several jurisdictions have questioned the utility of standardized test methods to measure tar and nicotine yields of cigarettes. In 1997, the United States Federal Trade Commission (“FTC”) issued a request for public comment on its proposed revision of its tar and nicotine test methodology and reporting procedures established by a 1970 voluntary agreement among domestic cigarette manufacturers. In 1998, the FTC requested assistance from the Department of Health and Human Services (“HHS”) in developing a testing program for the tar, nicotine, and carbon monoxide content of cigarettes. In 2001, the National Cancer Institute issued a report stating that there was no meaningful evidence of a difference in smoke exposure or risk to smokers between cigarettes with different machine-measured tar and nicotine yields. In September 2002, PM USA petitioned the FTC to promulgate new rules

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governing the disclosure of average tar and nicotine yields of cigarette brands. PM USA asked the FTC to take action in response to evolving scientific evidence about machine-measured low-yield cigarettes, including the National Cancer Institute’s Monograph 13, which represents a fundamental departure from the scientific and public health community’s prior thinking about the health effects of low-yield cigarettes. Public health officials in other countries and the EU have stated that the use of terms such as “lights” to describe low yield cigarettes is misleading. Some jurisdictions have questioned the relevance of the method for measuring tar, nicotine, and carbon monoxide yields established by the International Standards Organization. The EU Commission has been directed to establish a committee to address, among other things, alternative methods for measuring tar, nicotine and carbon monoxide yields. In addition, public health authorities in the United States, the EU, Brazil and other countries have prohibited or called for the prohibition of the use of brand descriptors such as “Lights” and “Ultra Lights.” See Note 18, which describes pending litigation concerning the use of descriptors.

•Food and Drug Administration (“FDA”) Regulations: In 1996, the FDA promulgated regulations asserting jurisdiction over cigarettes as “drugs” or “medical devices” under the provisions of the Food, Drug and Cosmetic Act (“FDCA”). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, record keeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in 2000. PM USA has stated that while it continues to oppose FDA regulation over cigarettes as “drugs” or “medical devices” under the provisions of the FDCA, it would support new legislation that would provide for reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there are bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products; PM USA has expressed support for certain of the bills. The bills take a variety of approaches to the issue, ranging from codification of the original FDA regulations under the “drug” and “medical device” provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of any Congressional action regarding the pending bills cannot be predicted.

•Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose the ingredients used in the manufacture of cigarettes and, in certain cases, to provide toxicological information. The Commonwealth of Massachusetts enacted legislation to require cigarette manufacturers to report the flavorings and other ingredients used in each brand-style of cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the district court granted the plaintiffs’ motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand-specific information on ingredients in their products, and defendants appealed. In December 2002, the United States Court of Appeals for the First Circuit, sitting en banc, affirmed the district court’s entry of summary judgment. The deadline for the Commonwealth to file a petition for certiorari in the U.S. Supreme Court is March 3, 2003. Similar legislation has been enacted or proposed in other states and in jurisdictions outside the United States, including the EU. Under an EU tobacco product directive, tobacco companies are now required to disclose ingredients and toxicological information to each Member State. In December 2002, PMI submitted this information to all EU member states in a form it believes complies with the directive. PMI had also voluntarily disclosed the ingredients in its brands in a number of other countries. Other jurisdictions have also enacted or proposed legislation that would require the submission of information about ingredients and would permit governments to prohibit the use of certain ingredients.

•Health Effects of Smoking and Exposure to ETS: Reports with respect to the health risks of cigarette smoking have been publicized for many years, and sale, promotion, and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommended various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focused on the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking during adolescence.

Studies with respect to the health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States, and the National Academy of Sciences reported that non-smokers were at increased risk of lung cancer and respiratory illness due to ETS. Since then, a number of government agencies around the world have concluded that ETS causes diseases — including lung cancer and heart disease — in nonsmokers. In 2002, the International Agency for Research on Cancer concluded that ETS is carcinogenic and that exposure to ETS causes diseases in non-smokers.

It is the policy of each of PM USA and PMI to support a single, consistent public health message on the health effects of cigarette smoking in the development of diseases in smokers, and on smoking and addiction. It is also their policy to defer to the judgment of public health authorities as to the content of warnings in advertisements and on product packaging regarding the health effects of smoking, addiction and exposure to ETS.

In 1999, PM USA and PMI established web sites that include, among other things, views of public health authorities on smoking, disease causation in smokers, addiction and ETS. In October 2000, the sites were updated to reflect PM USA’s and PMI’s agreement with the overwhelming medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. The web sites advise smokers, and those considering smoking, to rely on the messages of public health authorities in making all smoking-related decisions.

The sites also state that public health officials have concluded that ETS causes or increases the risk of disease — including lung cancer and heart disease — in non-smoking adults, and causes conditions in children such as asthma, respiratory infections, cough, wheeze, otitis media (middle ear infection) and Sudden Infant Death Syndrome. The sites also state that public health officials have concluded that secondhand smoke can exacerbate adult asthma and cause eye, throat and nasal irritation. The site also states that the public should be guided by the conclusions of public health officials regarding the health effects of ETS in deciding whether to be in places

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where ETS is present or, if they are smokers, when and where to smoke around others. In addition, PM USA and PMI state on their web sites that they believe that particular care should be exercised where children are concerned, and adults should avoid smoking around children. PM USA and PMI also state that the conclusions of the public health officials concerning ETS are sufficient to warrant measures that regulate smoking in public places, and that where smoking is permitted, the government should require the posting of warning notices that communicate public health officials’ conclusions that second-hand smoke causes diseases in non-smokers.

•The World Health Organization’s Framework Convention for Tobacco Control: The World Health Organization (“WHO”) and its member states are negotiating a proposed Framework Convention for Tobacco Control. The proposed treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things:

•establish specific actions to prevent youth smoking;

•restrict and gradually eliminate tobacco product marketing;

•inform the public about the health consequences of smoking and the benefits of quitting;

•regulate the ingredients of tobacco products;

•impose new package warning requirements that would include the use of pictures or graphic images;

•eliminate cigarette smuggling and counterfeit cigarettes;

•restrict smoking in public places;

•increase cigarette taxes;

•prohibit the use of terms that suggest one brand of cigarettes is safer than another;

•phase out duty-free tobacco sales; and

•encourage litigation against tobacco product manufacturers.

PM USA and PMI have stated that they would support a treaty that member states could consider for ratification, based on the following four principles: (1) smoking-related decisions should be made on the basis of a consistent public health message; (2) effective measures should be taken to prevent minors from smoking; (3) the right of adults to choose to smoke should be preserved; and (4) all manufacturers of tobacco products should compete on a level playing field. The fifth round of treaty negotiations was recently concluded and the WHO released a revised draft of the treaty in January, 2003. The outcome of the treaty negotiations cannot be predicted.

•Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would:

•subject cigarettes to various regulations under the HHS or regulation under the Consumer Products Safety Act;

•establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities;

•further restrict the advertising of cigarettes;

•require additional warnings, including graphic warnings, on packages and in advertising;

•eliminate or reduce the tax deductibility of tobacco advertising;

•provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law; and

•allow state and local governments to restrict the sale and distribution of cigarettes.

Legislative initiatives affecting the regulation of the tobacco industry have also been considered or adopted in a number of jurisdictions outside the United States. In 2001, the EU adopted a directive on tobacco product regulation requiring EU Member States to implement regulations that:

•reduce maximum permitted levels of tar, nicotine and carbon monoxide yields to 10, 1 and 10 milligrams, respectively;

•require manufacturers to disclose ingredients and toxicological data on ingredients;

•require health warnings that cover at least 30% of the front panel and rotational warnings that cover no less than 40% of the back panel;

•require the health warnings to be surrounded by a black border;

•require the printing of tar, nicotine and carbon monoxide numbers on the side panel of the pack at a minimum size of 10% of the side panel; and

•prohibit the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others.

EU Member States are in the process of implementing these regulations over the course of 2003 and 2004. The European Commission is currently working on guidelines for graphic warnings on cigarette packaging which are expected to be issued in early 2003. The EU is also considering a new directive that would restrict tobacco radio, press and Internet tobacco marketing and advertising that cross Member State borders. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions.

In August 2000, New York State enacted legislation that requires the State’s Office of Fire Prevention and Control to promulgate by January 1, 2003, fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. On December 31, 2002, the New York State Office of Fire Prevention and Control (in the Department of State) published a proposed regulation to implement this legislation. PM USA plans to submit comments concerning the proposed regulation, and will continue to participate in the public comment process. It is, however, not possible to predict the impact of the New York State law until the regulation is promulgated. Similar legislation is being considered in other states and localities, at the federal level, and in jurisdictions outside the United States.

It is not possible to predict what, if any, additional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM USA, PMI and Altria Group, Inc. could be materially adversely affected.

•Governmental Investigations: Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters, including those discussed below. Altria Group, Inc. believes that Canadian authorities are contemplating a legal proceeding based on an investigation of PMI and its subsidiary, Philip Morris Duty Free, Inc., relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s. During 2001, the competition authorities in Italy and Turkey initiated an investigation into the pricing activities by participants in those cigarette markets. The investigation in Turkey was closed after that country’s Competition Board

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issued a ruling that there was insufficient evidence to conclude that the Turkish affiliate of PMI had violated competition laws. The Italian order initiating the investigation named PMI and certain of its affiliates as well as all other parties identified as being engaged in the sale of cigarettes in Italy, including the Italian state tobacco monopoly. In October 2002, the Italian competition authority issued a statement of objections. A final hearing took place on January 14, 2003, and on or before February 28, 2003 the authority will issue final findings and, if it deems appropriate, levy fines. The level of fines is determined based on the seriousness and duration of any infringements. To date, the largest total fine ever imposed by the Italian competition authority in a matter involving similar allegations is approximately $360 million; the largest fine assessed on an individual entity ever imposed by the authority in a matter involving similar allegations is approximately $110 million. The parties will have the right to appeal the authority’s findings and any fines before the administrative court and thereafter before the supreme administrative court. In 2002, the Italian authorities, at the request of a consumer group, initiated an investigation into the use of descriptors for Marlboro Lights. The investigation is directed at PMI’s German and Dutch affiliates, which manufacture product for sale in Italy. The competition authority issued its decision in September 2002, finding that the use of the term “lights” on the packaging of the Marlboro Lights brand is misleading advertising under Italian law, but that it was not necessary to take any action because the use of the term “lights” will be prohibited as of October 2003 under the EU directive on tobacco product regulation. The consumer group that requested the investigation has indicated that it will appeal the decision, seeking an order to remove Marlboro Lights from the market. The group has also requested that the public prosecutor in Naples, Italy investigate whether a crime has been committed under Italian law with regard to the use of the term “lights.” In October 2002, the consumer group filed new requests with the competition authority asking for investigation of the use of descriptors for additional low yield brands, including Merit Ultra Lights and certain brands manufactured by other companies. In 2001, authorities in Australia initiated an investigation into the use of descriptors, alleging that their use was false and misleading. The investigation is directed at one of PMI’s Australian affiliates and other cigarette manufacturers. PMI cannot predict the outcome of these investigations or whether additional investigations may be commenced.

•Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and certain foreign jurisdictions. See Note 18 for a discussion of such litigation.

•State Settlement Agreements: As discussed in Note 18, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements provide for substantial annual payments. They also place numerous restrictions on the tobacco industry’s business operations, including restrictions on the advertising and marketing of cigarettes. Among these are restrictions or prohibitions on the following:

•targeting youth;

•use of cartoon characters;

•use of brand name sponsorships and brand name non-tobacco products;

•outdoor and transit brand advertising;

•payments for product placement; and

•free sampling.

In addition, the settlement agreements require companies to affirm corporate principles directed at:

•reducing underage use of cigarettes;

•imposing requirements regarding lobbying activities;

•mandating public disclosure of certain industry documents;

•limiting the industry’s ability to challenge certain tobacco control and underage use laws; and

•providing for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.

Operating Results

(in millions)	Net Revenues						Operating Companies Income
	2002		2001		2000		2002		2001		2000
Domestic Tobacco	$	18,877	$	19,902	$	18,967	$	5,011	$	5,264	$	5,350
International Tobacco	28,672		26,517		26,290		5,666		5,406		5,211
Total	$	47,549	$	46,419	$	45,257	$	10,677	$	10,670	$	10,561

2002 compared with 2001

•Domestic tobacco: During 2002, PM USA’s net revenues, which include excise taxes billed to customers, decreased $1.0 billion (5.2%) from 2001. Excluding excise taxes, net revenues decreased $1.2 billion (7.6%), due primarily to lower volume ($1.6 billion), partially offset by higher pricing, net of higher promotional spending ($288 million).

Operating companies income for 2002 decreased $253 million (4.8%) from 2001, due primarily to lower volume ($998 million), partially offset by price increases and lower costs under the State Settlement Agreements, net of higher promotional spending (aggregating $283 million) and the 2001 Engle litigation related expense ($500 million). Excluding the 2001 Engle litigation related expense, operating companies income of $5.0 billion in 2002 decreased 13.1% from $5.8 billion in 2001.

As reported by Management Science Associates, shipment volume for the domestic tobacco industry during 2002 decreased to 391.4 billion units, a 3.7% decrease from 2001. PM USA’s shipment volume during 2002 was 191.6 billion units, a decrease of 7.5% from 2001, due primarily to weak economic conditions, increases in state excise taxes, the growth of deep-discount cigarettes, increased competitive promotional activity, the increased incidence of counterfeit product and increased sales of some manufacturers, both domestic and foreign, that are not complying with either the MSA or related state legislation.

It should be noted that Management Science Associates’ current measurements of the domestic cigarette industry’s total shipments and related share data do not include all shipments of some manufacturers that Management Science Associates is presently unable to monitor effectively. Accordingly, it should also be noted that the discussion herein of PM USA’s performance within the industry is based upon Management Science Associates’ estimates of total industry volume.

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For 2002, PM USA’s shipment market share was 48.9%, a decrease of 2.1 share points from 2001. Marlboro shipment volume decreased 9.2 billion units (5.8%) from 2001 to 148.6 billion units for a 37.9% share of the total domestic tobacco industry, a decrease of 0.9 share points from 2001. This volume and share performance was due primarily to the factors mentioned above.

Based on shipments, the premium segment accounted for approximately 72.7% of the domestic tobacco industry volume in 2002, a decrease of 1.2 share points from 2001. In the premium segment, PM USA’s volume decreased 6.5% during 2002, compared with a 5.1% decrease for the industry, resulting in a premium segment share of 60.7%, a decrease of 0.9 share points from 2001, due primarily to increased competitive promotional activity and the increased incidence of counterfeit product.

In the discount segment, PM USA’s shipments decreased 15.6% to 18.8 billion units in 2002, compared with a total domestic tobacco industry increase of 0.4%, resulting in a discount segment share of 17.6%, a decrease of 3.3 share points from 2001. Basic shipment volume for 2002 was down 12.8% to 17.8 billion units, for a 16.7% share of the discount segment, down 2.5 share points compared to 2001, due primarily to the growth of deep-discount cigarettes and increased competitive promotional activity.

Information Resources Inc./Capstone is a proprietary retail tracking service that uses a sample of stores to project market share performance in the universe of stores PM USA’s sales representatives regularly visit. PM USA estimates that this universe (which does not include stores added during a recent retail coverage expansion) represents approximately 87% of industry volume. PM USA believes that the share of deep-discount cigarettes sold at retail in those stores not regularly visited by its sales representatives may be higher than in those stores whose sales are reflected in the Information Resources Inc./Capstone data. PM USA is working to develop a new approach to more comprehensively track retail performance.

According to retail data from Information Resources Inc./Capstone, PM USA’s share of cigarettes sold at retail decreased 0.7 share points to 50.1% for 2002. Marlboro’s retail share for 2002 increased 0.1 share points to 38.3% and PM USA’s retail share of the premium segment grew 0.6 share points to 62.2%. Retail share for Basic, PM USA’s major discount brand, decreased 0.2 share points to 4.9%. During the third quarter of 2002, plans were announced to invest approximately $350 million to promote the premium brands and retail presence of PM USA and PMI to enhance future volumes and market shares. In addition, on September 26, 2002, Altria Group, Inc. announced that PM USA would increase its promotional programs and retail presence during the remainder of 2002. As a result of these actions, combined retail share for PM USA’s four focus brands, Marlboro, Parliament, Virginia Slims and Basic for the fourth quarter of 2002, increased 1.0 share points to 47.5% over the third quarter of 2002. During the same time period, Marlboro retail share increased 1.1 share points to 38.8%. These actions resulted in lower operating companies income for PM USA. PM USA anticipates that the current intensely competitive domestic tobacco market will continue through 2003. PM USA estimates that the cost of promotional activities in this environment will result in lower operating companies income during 2003 than in 2002.

In March 2002, PM USA announced a price increase of $6.00 per thousand cigarettes on its domestic premium and discount brands. The price increase was effective April 1, 2002. This followed price increases of $2.50 per thousand in October 2001, $7.00 per thousand in April 2001, $7.00 per thousand in December 2000, $3.00 per thousand in July 2000 and $6.50 per thousand in January 2000. Each $1.00 per thousand increase by PM USA equates to a $0.02 increase in the price to wholesalers of each pack of twenty cigarettes.

PM USA cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM USA’s shipments, shipment market share or retail market share; however, it believes that PM USA’s results may be materially adversely affected by price increases related to increased excise taxes and tobacco litigation settlements, as well as by the other items discussed under the caption “Tobacco — Business Environment.”

•International tobacco: During 2002, international tobacco net revenues, which include excise taxes billed to customers, increased $2.2 billion (8.1%) over 2001. Excluding excise taxes, net revenues increased $949 million (6.9%), due primarily to higher volume/mix ($543 million) and price increases ($420 million), partially offset by unfavorable currency movements.

Operating companies income for 2002 increased $260 million (4.8%) over 2001, due primarily to price increases ($420 million) and higher volume/mix ($156 million), partially offset by unfavorable currency movements ($231 million) and the 2002 pre-tax charges for separation programs and asset impairment ($58 million). Excluding the 2002 pre-tax charges for separation programs and asset impairment, operating companies income increased 5.9%.

PMI’s volume for 2002 of 723.1 billion units increased 24.2 billion units (3.5%) over 2001, due primarily to volume increases in most markets of Western, Central and Eastern Europe, as well as Asia and Latin America, partially offset by lower volume resulting from a decline in the total industry in France; increased competition in Italy, Hong Kong, Korea and Singapore; and economic weakness in Egypt, Lebanon, Paraguay and Venezuela. In addition, volume declined in Poland, due primarily to intense price competition. Volume advanced in a number of important markets, including Germany, Austria, Spain, Turkey, Romania, Russia, the Ukraine, Indonesia, Japan, Malaysia, the Philippines, Taiwan, Thailand, Argentina, Brazil and Mexico. PMI recorded market share gains in most of its major markets. International volume for Marlboro decreased 0.6%, due to consumer down-trading in the Czech Republic, Hungary, Saudi Arabia, Turkey, Poland, Egypt, Lebanon, Russia and Argentina, partially offset by higher volumes in Western Europe and Asia.

2001 compared with 2000

•Domestic tobacco: During 2001, PM USA’s net revenues, which include excise taxes billed to customers, increased $935 million (4.9%) over 2000. Excluding excise taxes, net revenues increased $1.0 billion (6.6%), due primarily to higher pricing ($1.4 billion) and improved mix, partially offset by lower volume ($441 million).

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Operating companies income for 2001 decreased $86 million (1.6%) from 2000, due primarily to the 2001 Engle litigation related expense ($500 million) and lower volume ($403 million), partially offset by price increases, net of higher promotional spending and resolution costs (aggregating $674 million), lower marketing, administration and research costs ($62 million) and improved mix. Excluding the 2001 Engle litigation related expense, operating companies income of $5.8 billion in 2001 increased 7.7% over $5.4 billion in 2000.

As reported by Management Science Associates, shipment volume for the domestic tobacco industry during 2001 decreased to 406.3 billion units, a 3.2% decrease from 2000. PM USA’s shipment volume for 2001 was 207.1 billion units, a decrease of 2.3% from 2000.

For 2001, PM USA’s shipment market share was 51.0%, an increase of 0.5 share points over 2000 due to increased shipment share for Marlboro, Parliament and Virginia Slims. Marlboro shipment volume decreased 397 million units (0.3%) from 2000 to 157.8 billion units for a 38.8% share of the total industry, an increase of 1.1 share points over 2000.

Based on shipments, the premium segment accounted for approximately 73.9% of the domestic cigarette industry volume in 2001, an increase of 0.4 share points over 2000. In the premium segment, PM USA’s volume decreased 1.1% during 2001, compared with a 2.7% decrease for the industry, resulting in a premium segment share of 61.6%, an increase of 1.0 share points over 2000.

In the discount segment, PM USA’s shipments decreased 11.0% to 22.2 billion units in 2001, compared with an industry decrease of 4.5%, resulting in a discount segment share of 20.9%, a decrease of 1.6 share points from 2000. Basic shipment volume for 2001 was down 5.5% to 20.4 billion units, for a 19.2% share of the discount segment, down 0.2 share points compared to 2000.

According to consumer purchase data from Information Resources Inc./Capstone, PM USA’s share of cigarettes sold at retail grew 0.3 share points to 50.8% for 2001. The 2001 retail share for Marlboro increased 1.1 share points to 38.2%.

•International tobacco: During 2001, international tobacco net revenues, which include excise taxes billed to customers, increased $227 million (0.9%) over 2000. Excluding excise taxes, net revenues increased $169 million (1.2%), due primarily to price increases ($376 million), higher volume/mix ($156 million) and the shift in CDC revenues ($97 million), partially offset by unfavorable currency movements.

Operating companies income for 2001 increased $195 million (3.7%) over 2000, due primarily to price increases and favorable costs ($419 million), higher volume/mix ($23 million), the shift of CDC income ($59 million) and the favorable impact of new distribution and contract manufacturing agreements in several markets, partially offset by unfavorable currency movements ($390 million). Adjusting for the shift in CDC income, operating companies income of $5,406 million in 2001 increased 2.6% over $5,270 million in 2000.

PMI’s volume for 2001 of 698.9 billion units increased 27.7 billion units (4.1%) over 2000. Adjusting for the shift in CDC volume (the basis of presentation for all following PMI volume disclosures), PMI’s volume for 2001 increased 23.5 billion units (3.5%) over 2000, due primarily to volume increases in Western, Central and Eastern Europe, as well as Asia. Volume advanced in a number of important markets, including Italy, Belgium, France, Spain, Portugal, the Netherlands, Sweden, the United Kingdom, Israel, Poland, Romania, Saudi Arabia, Russia, the Ukraine, Japan, Korea, Indonesia, Taiwan, Malaysia, Thailand, Mexico and Brazil. PMI recorded market share gains in most of its major markets. Volume and share in Germany were lower due to the continued growth of low-priced trade brands. Volume declined in Turkey as several price increases related to the Turkish lira devaluation have led to a market contraction and consumer downtrading. In Argentina, volume declined due to a recession-driven decline in the total cigarette industry, which more than offset higher market share. International volume for Marlboro decreased 0.4%, as lower volumes in Germany, Turkey, Poland, Egypt, the Philippines, Argentina and worldwide duty-free were partially offset by higher volumes in France, Spain, Russia, the Ukraine, Indonesia, Japan, Korea and Mexico. Excluding Argentina, Turkey and worldwide duty-free, international volume for Marlboro increased 2.5%.

Food

Business Environment

Kraft, the largest branded food and beverage company headquartered in the United States, conducts its global business through two subsidiaries. KFNA manufactures and markets a wide variety of snacks, beverages, cheese, grocery products and convenient meals in the United States, Canada and Mexico. KFI manufactures and markets a wide variety of snacks, beverages, cheese, grocery products and convenient meals in Europe, the Middle East and Africa, as well as the Latin America and Asia Pacific regions. KFNA and KFI are subject to fluctuating commodity costs, currency movements and competitive challenges in various product categories and markets, including a trend toward increasing consolidation in the retail trade and consequent inventory reductions, and changing consumer preferences. In addition, certain competitors may have different profit objectives and some competitors may be more or less susceptible to currency exchange rates. To confront these challenges, Kraft continues to take steps to build the value of its brands and improve its food business portfolio with new product and marketing initiatives.

Fluctuations in commodity costs can cause retail price volatility, intensify price competition and influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, including dairy, coffee bean and cocoa costs. Dairy and coffee commodity costs on average have been lower in 2002 than those incurred in 2001, while cocoa bean prices have been higher than in 2001.

Kraft’s subsidiaries end their fiscal years on the last Saturday closest to the end of each year. Accordingly, most years contain 52 weeks of operating results while every fifth or sixth year includes 53 weeks. Altria Group, Inc.’s consolidated statement of earnings for the year ended December 31, 2000 included a 53rd week for Kraft. Volume comparisons contained in Management’s Discussion and Analysis for 2001 versus 2000 have been provided on a comparable 52-week basis to provide a more meaningful comparison of operating results.

On December 11, 2000, Altria Group, Inc., through Kraft, acquired all of the outstanding shares of Nabisco. The closure of a number of Nabisco domestic and international facilities resulted in severance and other exit costs of $379 million, which were included in the adjustments for the allocation of the Nabisco purchase price. The closures will result in the termination of approximately 7,500 employees and will require total cash payments of $373 million, of which approximately $190 million has been spent through December 31, 2002. Substantially all of the closures were completed as of December 31, 2002, and the remaining payments relate to salary continuation payments for severed employees and lease payments.

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The integration of Nabisco into the operations of Kraft also resulted in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the consolidated statement of earnings to close or reconfigure facilities and integrate Nabisco were originally estimated to be in the range of $200 million to $300 million. During 2002 and 2001, KFNA recorded pre-tax charges of $98 million and $53 million, respectively, related to the closing of a facility and other consolidation programs in North America. During 2002, KFI recorded pre-tax charges of $17 million to consolidate production lines and distribution networks in Latin America. In addition, during the first quarter of 2002, approximately 700 employees accepted the benefits offered by a voluntary early retirement program for certain salaried employees. Pre-tax charges of $135 million and $7 million were recorded in the operating results of the North American food and international food segments, respectively, for these separation programs. As of December 31, 2002, the aggregate pre-tax charges to the consolidated statements of earnings to close or reconfigure Kraft facilities and integrate Nabisco, including Kraft’s separation programs, were $310 million, slightly above the original estimate. The integration related charges of $168 million included $27 million for severance, $117 million for asset write-offs and $24 million for other cash exit costs. Cash payments relating to these charges will approximate $51 million, of which $21 million has been paid through December 31, 2002. No additional pre-tax charges are expected to be recorded for these programs.

During 2001, certain small Nabisco businesses were reclassified as businesses held for sale, including their estimated results of operations through anticipated sales dates. 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 2002 consolidated operating results.

During 2002, KFI purchased a snacks business in Turkey and a biscuit business in Australia. The total cost of these and other smaller food acquisitions during 2002 was $122 million. During 2001, KFI purchased coffee businesses in Romania, Morocco and Bulgaria and also acquired confectionery businesses in Russia and Poland. The total cost of these and other smaller food acquisitions was $194 million. During 2000, KFNA purchased Balance Bar Co. and Boca Burger, Inc. The total cost of these and other smaller food acquisitions was $365 million. The operating results of the acquired businesses, except for Nabisco, were not material to Altria Group, Inc.’s consolidated financial position or results of operations in any of the periods presented.

During 2002, Kraft sold several small international and domestic food businesses, some of which were previously classified as businesses held for sale. The net revenues and operating results of the businesses held for sale, which were not significant, were excluded from the consolidated statements of earnings, and no gain or loss was recognized on these sales. In addition, Kraft sold several other small businesses in 2002, 2001 and 2000, including a Latin American yeast and industrial bakery ingredients business in 2002 and a French confectionery business in 2000. The aggregate proceeds received in these transactions were $219 million in 2002, $21 million in 2001 and $300 million in 2000, on which pre-tax gains of $80 million in 2002, $8 million in 2001 and $172 million in 2000 were recorded. The operating results of businesses divested were not material to Altria Group, Inc.’s consolidated financial position or results of operations in any of the periods presented.

Operating Results

(in millions)	Net Revenues						Operating Companies Income
	2002		2001		2000		2002		2001		2000
North American food	$	21,485	$	20,970	$	15,312	$	4,953	$	4,796	$	3,547
International food	8,238		8,264		7,610		1,330		1,239		1,208
Total	$	29,723	$	29,234	$	22,922	$	6,283	$	6,035	$	4,755

2002 compared with 2001

•North American food: During 2002, net revenues increased $515 million (2.5%) over 2001, due primarily to higher volume/mix ($437 million) and the inclusion in 2002 of a business that was previously held for sale ($252 million), partially offset by lower net pricing ($154 million). Excluding businesses divested since the beginning of 2001 and adjusting for businesses previously held for sale, net revenues increased $273 million (1.3%).

Operating companies income for 2002 increased $157 million (3.3%) over 2001, due primarily to favorable margins ($176 million, driven by lower commodity-related costs and productivity savings) and higher volume/mix ($174 million), partially offset by higher benefit expenses, including the 2002 charge for a separation program ($135 million). Excluding the items affecting comparability from each year, as well as the impact of businesses divested since the beginning of 2001, operating companies income increased $274 million (5.6%).

Volume for 2002 increased 8.2% over 2001. Excluding the impact of businesses divested and after adjusting for businesses previously held for sale (the basis of presentation for all of the following KFNA volume comparisons), volume increased 2.8%. In Cheese, Meals and Enhancers, volume increased slightly, due primarily to increases in Kraft pourable dressings, barbecue sauce, higher shipments of macaroni & cheese dinners and the 2001 acquisition of It’s Pasta Anytime, partially offset by lower shipments of cheese. Cheese volume declined, as lower dairy costs in 2002 resulted in aggressive competitive activity by private label manufacturers in the form of reduced prices and increased merchandising levels. Volume increased slightly in Biscuits, Snacks and Confectionery, driven primarily by higher shipments of biscuits, which benefited from new product introductions, and higher shipments of snacks, due primarily to promotional initiatives, partially offset by lower confectionery shipments due to competitive activity in the breath freshening category. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily by the strength of ready-to-drink beverages, coffee and desserts. In Oscar Mayer and Pizza, volume increased due primarily to hot dogs, bacon, soy-based meat alternatives and frozen pizza.

•International food: Net revenues for 2002 decreased $26 million (0.3%) from 2001. Excluding businesses divested since the beginning of 2001, net revenues decreased slightly, due primarily to unfavorable currency movements ($271 million) and lower volume/mix ($36 million), partially offset by the impact of acquisitions ($181 million) and higher net pricing ($122 million).

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Operating companies income for 2002 increased $91 million (7.3%) over 2001. Excluding the 2002 pre-tax charges for the separation program ($7 million) and integration costs ($17 million), the impact of businesses divested since the beginning of 2001, as well as pre-tax gains on sales of businesses ($64 million), operating companies income increased $59 million (4.9%), due primarily to favorable margins ($37 million, including productivity savings), lower marketing, administration and research costs ($23 million, including synergy savings) and the impact of acquisitions ($18 million), partially offset by lower volume/mix ($19 million).

Volume for 2002 increased 2.8% over 2001. Excluding the impact of divested businesses (the basis of presentation for all of the following KFI volume comparisons), volume increased 3.7%, benefiting from acquisitions, new product introductions, geographic expansion and marketing programs, partially offset by the impact of economic weakness in several Latin American countries.

In Europe, Middle East and Africa, volume increased over 2001, benefiting from acquisitions and from growth in most markets across the region, including Italy, the United Kingdom, Sweden, the Ukraine, the Middle East and Poland, partially offset by declines in Germany and Romania. In beverages, volume increased in both coffee and refreshment beverages. Coffee volume grew in most markets, driven by new product introductions, and acquisitions in Romania, Morocco and Bulgaria. In Germany, coffee volume decreased, reflecting market softness and increased price competition. Refreshment beverages volume also increased, driven by geographic expansion and new product introductions. Snacks volume increased, benefiting from confectionery acquisitions in Russia and Poland, a snacks acquisition in Turkey and new product introductions. Snacks volume growth was moderated by lower volume in Germany, due to increased price competition, and in Romania, due to lower consumer purchasing power. Cheese volume increased, due primarily to cream cheese growth across the region. In convenient meals, volume increased, due primarily to introductions of new lunch combinations in the United Kingdom and higher shipments of canned meats in Italy against a weak comparison in 2001.

Volume increased in the Latin America and Asia Pacific region driven by the acquisition of a biscuits business in Australia and gains across a number of markets, partially offset by a volume decline in Argentina due to economic weakness, and lower results in China. Beverages volume increased, due primarily to growth in powdered beverages in Latin America and Asia Pacific, benefiting from new product introductions. Snacks volume increased, driven primarily by new biscuit product introductions, geographic expansion, and by the 2002 acquisition of a biscuits business in Australia, partially offset by the negative impact of continued economic weakness in Argentina and distributor inventory reductions in China. In grocery, volume declined in both Latin America and Asia Pacific. Continued instability of the economic climate in Venezuela, Brazil and Argentina is expected to negatively affect volume and operating companies income in the Latin America and Asia Pacific region during 2003.

2001 compared with 2000

•North American food: During 2001, net revenues increased $5.7 billion (37.0%) over 2000, due primarily to the acquisition of Nabisco ($5.7 billion) and the shift in CDC revenues ($59 million), partially offset by unfavorable currency movements ($62 million). Adjusting for the shift in CDC revenues and businesses previously held for sale, and excluding businesses divested since the beginning of 2000, net revenues increased 38.0%. Net revenues would have increased 0.4% had the acquisition of Nabisco occurred on January 1, 2000.

Operating companies income for 2001 increased $1.2 billion (35.2%) over 2000, primarily reflecting the acquisition of Nabisco ($1.2 billion), lower marketing, administration and research costs ($274 million, the majority of which related to lower marketing expenses) and the shift in CDC income ($27 million), partially offset by the pre-tax loss on the sale of a North American food factory and integration costs ($82 million) and lower margins ($136 million). Adjusting for the shift in CDC income and for the impact of businesses previously held for sale, and excluding the loss on the sale of a food factory and integration costs, as well as the impact of businesses divested since the beginning of 2000, operating companies income of $4.9 billion in 2001 increased 38.4% over $3.5 billion in 2000. Operating companies income would have increased 9.6% had the acquisition of Nabisco occurred on January 1, 2000.

Volume for 2001 increased 31.7% over 2000. Excluding the impact of divested businesses and adjusting for the impact of businesses previously held for sale and the shift in volume related to the CDC, volume increased 37.8%, due primarily to the acquisition of Nabisco. Had the acquisition of Nabisco occurred on January 1, 2000, volume would have increased 1.7%. Excluding the 53rd week of shipments in 2000 (the basis of presentation of all of the following KFNA 2001 volume comparisons), volume increased 2.9%. In Cheese, Meals and Enhancers, volume increased slightly due primarily to increases in grated and natural cheese, spoonable and pourable dressings, and higher shipments of macaroni & cheese dinners. Partially offsetting these increases were lower U.S. food service volume, lower shipments of process cheese loaves and cream cheese, and the discontinuation of lower-margin, non-branded cheese products. In Canada, shipments increased as a result of higher consumption of branded products. Volume increased in Biscuits, Snacks and Confectionery, driven primarily by new biscuit product introductions, partially offset by lower shipments of snack nuts. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily by the strength of ready-to-drink beverages, partially offset by volume declines in desserts and cereals. In Oscar Mayer and Pizza, volume increased due primarily to hot dogs, bacon, luncheon meats, soy-based meat alternatives and frozen pizza.

•International food: Net revenues for 2001 increased $654 million (8.6%) over 2000. Adjusting for the shift in CDC revenues and excluding the net revenues of businesses divested since the beginning of 2000, net revenues increased $690 million (9.2%), due primarily to the acquisition of Nabisco ($1.2 billion), partially offset by unfavorable currency movements ($431 million) and lower net pricing ($113 million, due primarily to lower coffee pricing). Net revenues would have decreased 4.5% from 2000 had the acquisition of Nabisco occurred on January 1, 2000, due primarily to unfavorable currency movements and lower coffee pricing.

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Operating companies income for 2001 increased $31 million (2.6%) over 2000. Adjusting for the shift in CDC income and excluding the pre-tax gain on the sale of a French confectionery business in 2000 and the operating companies income of businesses divested since the beginning of 2000, operating companies income increased $166 million (15.9%), due primarily to the acquisition of Nabisco ($128 million) and lower marketing, administration and research costs ($131 million), partially offset by unfavorable currency movements ($51 million). Operating companies income would have increased 8.5% had the acquisition of Nabisco occurred on January 1, 2000.

Volume for 2001 increased 34.4% over 2000. Excluding the impact of divested businesses and adjusting for the shift in volume related to the CDC, volume increased 32.0%, due primarily to the acquisition of Nabisco. Volume would have increased 3.5% had the acquisition of Nabisco occurred on January 1, 2000. Excluding the 53rd week of shipments in 2000 (the basis of presentation of all following KFI 2001 volume comparisons), volume increased 4.8%.

In Europe, Middle East and Africa, volume increased over 2000, due primarily to higher volume in the developing markets of Central and Eastern Europe and growth in many Western European markets, partially offset by lower volume in Germany and Italy. In beverages, volume increased in both coffee and refreshment beverages. Coffee volume grew in many markets, due primarily to acquisitions in Romania, Morocco and Bulgaria and new product introductions. Refreshment beverages volume increased, driven by higher sales to the Middle East. Snacks volume increased, driven by confectionery and salted snacks. Snacks growth was moderated by lower volume in Germany, due to increased price competition and trade inventory reductions. Cheese volume increased, due primarily to cream cheese growth across the region, partially offset by lower volume in Germany. In convenient meals and grocery, volume decreased, as lower canned meats volume in Italy and a decline in grocery volume in Germany were partially offset by higher shipments of lunch combinations and pourable dressings in the United Kingdom.

Volume increased in the Latin American and Asia Pacific regions driven by gains across most categories. Beverages volume increased, due primarily to growth in refreshment beverages, in Latin America and Asia Pacific, and coffee in Asia Pacific. Cheese volume increased driven primarily by cream cheese and process cheese. Grocery volume was higher, due primarily to new product introductions. Snacks volume increased, driven primarily by new biscuit product introductions and geographic expansion, partially offset by lower volume in Argentina due to economic weakness in that country.

Beer

Operating Results

(in millions)	Net Revenues						Operating Companies Income
	2002		2001		2000		2002		2001		2000
Beer	$	2,641	$	4,791	$	4,907	$	276	$	481	$	650

2002 compared with 2001

On May 30, 2002, ALG announced an agreement with SAB to merge Miller into SAB. The transaction closed on July 9, 2002 and SAB changed its name to SABMiller. The transaction, which is discussed more fully in Note 3 to the consolidated financial statements, resulted in a pre-tax gain of approximately $2.6 billion or approximately $1.7 billion after-tax. Beginning with the third quarter of 2002, ALG ceased consolidating the operating results and balance sheet of Miller and began to account for its ownership interest in SABMiller under the equity method. Accordingly, ALG’s investment in SABMiller of approximately $1.9 billion is included in other assets on the consolidated balance sheet at December 31, 2002. In addition, ALG records its share of SABMiller’s net earnings, based on its economic ownership percentage, in minority interest in earnings and other, net, on the consolidated statement of earnings. The decline in 2002 net revenues and operating companies income from the 2001 levels reflects the exclusion of Miller’s operating results during the second half of 2002.

2001 compared with 2000

Net revenues for 2001 decreased $116 million (2.4%) from 2000. Excluding the net revenues of businesses divested since the beginning of 2000, net revenues increased slightly, due primarily to higher pricing ($101 million), partially offset by lower volume ($91 million) and contract manufacturing fees. Operating companies income for 2001 decreased $169 million (26.0%) from 2000. Excluding the contract brewing charge, the sale of rights to the Molson trademarks in the United States and the operating companies income of businesses divested since the beginning of 2000, operating companies income decreased by $43 million (7.9%), due primarily to lower volume ($44 million) and higher marketing, administration and research costs ($61 million, primarily higher marketing spending for core brands), partially offset by higher pricing ($58 million).

Domestic shipment volume of 39.6 million barrels for 2001 decreased 4.8% from 2000. Excluding the impact of businesses divested since the beginning of 2000, total domestic shipment volume was down 2.4%. The majority of Miller’s decline in domestic shipments was due to below-premium products, which decreased 7.7%, while premium brands decreased 1.0%. Miller’s estimated market share of the U.S. malt beverage industry (based on shipments, including exports) was 19.7%, a decrease of 1.0 share points from the prior year. Excluding the impact of businesses divested since the beginning of 2000, total wholesalers’ sales to retailers decreased 2.5% from 2000, reflecting lower retail sales of Miller Lite, Miller Genuine Draft, Icehouse, Milwaukee’s Best and Red Dog.

Financial Services

Business Environment

Among other leasing activities, PMCC leases a number of aircraft, predominantly to major United States carriers. At December 31, 2002, approximately 27%, or $2.6 billion of PMCC’s investment in finance leases related to aircraft.

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On August 11, 2002, US Airways Group, Inc. (“US Air”) filed for Chapter 11 bankruptcy protection. PMCC currently leases 16 Airbus A319 aircraft to US Air under long-term leveraged leases, which expire in 2018 and 2019. The aircraft were leased in 1998 and 1999 and represent an investment in finance leases of $150 million at December 31, 2002.

On December 9, 2002, United Air Lines Inc. (“UAL”) filed for Chapter 11 bankruptcy protection. At December 31, 2002, PMCC leased 24 Boeing 757 aircraft to UAL, 6 under long-term leveraged leases, which expire in 2014, and 18 under long-term single investor leases, which expire in 2011 and 2014. The investment in finance assets totals $92 million for the 6 aircraft under leveraged leases and $747 million for the 18 aircraft under single investor leases. Of the existing single investor leases, 16 were originally leveraged leases. As a result of PMCC’s purchase of the senior non-recourse debt on these planes totaling $239 million, these 16 leases, as required by U.S. GAAP, were converted to single investor leases. The remaining non-recourse debt principal and accrued interest on these aircraft totaling $214 million is held by UAL and is subordinate to the senior debt. Aggregate exposure to UAL totals $625 million, net of the non-recourse debt held by UAL at December 31, 2002.

PMCC continues to evaluate the effect of the US Air and UAL bankruptcy filings, while seeking to negotiate with US Air and UAL in their efforts to restructure and emerge from bankruptcy. PMCC ceased recording income on the leases as of the dates of the bankruptcy filings.

In recognition of the recent economic downturn in the airline industry, PMCC increased its allowance for losses by $290 million in the fourth quarter of 2002. It is possible that further adverse developments in the airline industry may occur, which might require PMCC to record an additional allowance for losses in future periods.

Operating Results

(in millions)	Net Revenues						Operating Companies Income
	2002		2001		2000		2002		2001		2000
Financial Services	$	495	$	435	$	417	$	55	$	296	$	262

PMCC’s net revenues for 2002 increased $60 million (13.8%) over 2001, due primarily to growth in leasing activities and continued gains derived from PMCC’s finance asset portfolio, including a significant gain during the second quarter of 2002 from the early termination of a lease. Operating companies income for 2002 decreased $241 million (81.4%) from 2001, due primarily to the $290 million provision for exposure related to the troubled airline industry. Excluding the impact of this provision, PMCC’s operating companies income increased 16.6%.

PMCC’s net revenues and operating companies income for 2001 increased $18 million (4.3%) and $34 million (13.0%), respectively, over 2000. These increases were due primarily to growth in leasing activities and increased gains derived from PMCC’s finance asset portfolio. Additionally, operating companies income benefited from lower interest rates.

Financial Review

•Net Cash Provided by Operating Activities: During 2002, net cash provided by operating activities was $10.6 billion compared with $8.9 billion in 2001. The increase was due primarily to PM USA’s 2001 establishment of a litigation related escrow account (see Note 18). During 2002, contributions to U.S. and non-U.S. pension funds totaled $1.1 billion. This use of operating cash flows was offset by an increase in deferred income taxes in 2002, due primarily to the Miller transaction. As previously discussed, PM USA expects that its promotional spending will increase during 2003 in response to the continued highly competitive domestic tobacco market. The cost of these programs, as well as the change in the nature of the promotional programs, may result in lower operating cash flows for PM USA and Altria Group, Inc. in 2003.

During 2001, net cash provided by operating activities was lower than 2000, due primarily to the 2001 litigation related payment by PM USA to establish an escrow account, and higher inventory spending.

•Net Cash Used in Investing Activities: One element of the growth strategy of ALG’s subsidiaries is to strengthen their brand portfolios through active programs of selective acquisitions and divestitures. ALG’s subsidiaries are constantly investigating potential acquisition candidates and from time to time sell businesses that are outside their core categories or that do not meet their growth or profitability targets.

During 2002, 2001 and 2000, net cash used in investing activities was $2.5 billion, $2.9 billion and $17.5 billion, respectively. The decrease in 2002 primarily reflects lower levels of cash used for acquisitions and an increase in cash provided by the sales of businesses. The cash used in 2000 primarily reflects the acquisition of Nabisco.

Capital expenditures for 2002, which were funded by operating activities, increased 4.5% to $2.0 billion. Approximately 30% related to tobacco operations and approximately 60% related to food operations, which were primarily for modernization and consolidation of manufacturing facilities and expansion of certain production capacity. The increase in 2001 over 2000 was due primarily to the acquisition and integration of Nabisco. In 2003, capital expenditures are expected to be at or slightly below 2002 expenditures and are expected to be funded by operating cash flows.

•Net Cash Used in Financing Activities: During 2002, net cash of $8.2 billion was used in financing activities, compared with $6.4 billion used in financing activities during 2001. The increase in net cash used in financing activities was due primarily to the use of approximately $1.7 billion of cash flow from the Miller transaction to repurchase shares of Altria Group, Inc. common stock. In 2000, Altria Group, Inc.’s financing activities provided cash, as additional borrowings to finance the acquisition of Nabisco exceeded the cash used to repurchase Altria Group, Inc. common stock and pay dividends to Altria Group, Inc. stockholders.

•Debt and Liquidity: Financial Reporting Release No. 61 sets forth the views of the SEC regarding enhanced disclosures relating to liquidity and capital resources. The information provided below about Altria Group, Inc.’s debt, credit lines, guarantees and future commitments is included here to facilitate a review of Altria Group, Inc.’s liquidity and capital resources.

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Debt: Altria Group, Inc.’s total debt (consumer products and financial services) was $23.3 billion and $22.1 billion at December 31, 2002 and 2001, respectively. Total consumer products debt was $21.2 billion and $20.1 billion at December 31, 2002 and 2001, respectively.

In April 2002, Kraft filed a Form S-3 shelf registration statement with the SEC, under which Kraft may sell debt securities and/or warrants to purchase debt securities in one or more offerings up to a total amount of $5.0 billion. In May 2002 and November 2002, Kraft issued $2.5 billion of global bonds and $750 million of floating rate notes, respectively, under the shelf registration. The bond offering included $1.0 billion of 5-year notes bearing interest at a rate of 5.25% and $1.5 billion of 10-year notes bearing interest at a rate of 6.25%. The floating rate notes mature in 2004, and the interest rate on the notes is based on the three month LIBOR plus 0.20%, which will be reset quarterly. At December 31, 2002, Kraft had $1.75 billion of capacity remaining under its shelf registration statement. In May 2002, Miller borrowed $2.0 billion under a one-year bank term loan agreement. At the closing of the Miller transaction on July 9, 2002, ALG received 430 million shares of SABMiller in exchange for Miller. The Miller borrowing was outstanding as of the closing of the Miller transaction. ALG does not guarantee the debt of Miller or Kraft.

As discussed in Notes 8 and 9 to the consolidated financial statements, Altria Group, Inc.’s total debt of $23.3 billion at December 31, 2002 is due to be repaid as follows: in 2003, $5.7 billion; in 2004, $1.9 billion; in 2005-2006, $5.7 billion; and thereafter, $10.0 billion. Debt obligations due to be repaid in 2003 will be satisfied with a combination of short-term borrowings, long-term borrowings and operating cash flows. During 2001, the proceeds from the Kraft IPO and a Kraft global bond offering were used to repay outstanding borrowings. At December 31, 2002 and 2001, Altria Group, Inc.’s ratio of consumer products debt to total equity was 1.09 and 1.02, respectively. The ratio of total debt to total equity was 1.20 and 1.13 at December 31, 2002 and 2001, respectively.

Fixed-rate debt constituted approximately 75% of total consumer products debt at December 31, 2002 and 2001. The average interest rate on total consumer products debt, including the impact of swap agreements, was approximately 5.1% and 5.8% at December 31, 2002 and 2001, respectively.

Credit Ratings: ALG’s credit ratings by Moody’s at December 31, 2002 and 2001 were “P-1” in the commercial paper market and “A2” for long-term debt obligations. ALG’s credit ratings by Standard & Poor’s at December 31, 2002 and 2001 were “A-1” in the commercial paper market, and “A-” for long-term debt obligations. ALG’s credit ratings by Fitch Rating Services at December 31, 2002 and 2001 were “F-1” in the commercial paper market and “A” for long-term debt obligations. Changes in ALG’s credit ratings could result in corresponding changes in ALG’s borrowing costs; however, none of ALG’s debt agreements require accelerated repayment in the event of a decrease in credit ratings.

Credit Lines: Altria Group, Inc. maintains credit lines with a number of lending institutions, amounting to approximately $15.0 billion at December 31, 2002. Approximately $14.6 billion of these credit lines were undrawn at December 31, 2002. Certain of these credit lines were used to support $3.6 billion of commercial paper borrowings at December 31, 2002, the proceeds of which were used for general corporate purposes. A portion of these lines is available to meet the short-term working capital needs of Altria Group, Inc.’s international businesses. Altria Group, Inc.’s credit facilities include $7.0 billion (of which $2.0 billion is for the sole use of Kraft) of 5-year revolving credit facilities expiring in July 2006, and $6.0 billion (of which $3.0 billion is for the sole use of Kraft) of 364-day revolving credit facilities expiring in July 2003. The Altria Group, Inc. facilities require the maintenance of a fixed charges coverage ratio and the Kraft facilities require the maintenance of a minimum net worth. Altria Group, Inc. and Kraft met their respective covenants at December 31, 2002. The foregoing revolving credit facilities do not include any other financial tests, any credit rating triggers or any provisions that could require the posting of collateral. The majority of Altria Group, Inc.’s remaining lines expire within one year. The 5-year revolving credit facilities enable Altria Group, Inc. to reclassify short-term debt on a long-term basis. At December 31, 2002, approximately $3.6 billion of short-term borrowings that Altria Group, Inc. intends to refinance were reclassified as long-term debt. Altria Group, Inc. expects to continue to refinance long-term and short-term debt from time to time. The nature and amount of Altria Group, Inc.’s long-term and short-term debt and the proportionate amount of each can be expected to vary as a result of future business requirements, market conditions and other factors.

Guarantees: As discussed in Note 18, Altria Group, Inc. had third-party guarantees, which are primarily derived from acquisition and divestiture activities, approximating $255 million, of which $210 million have no expiration dates. The remainder expire through 2012, with $12 million expiring in 2003. Altria Group, Inc. is required to perform under these guarantees in the event that a third-party fails to make contractual payments or achieve performance measures. Altria Group, Inc. has recorded a liability of $86 million at December 31, 2002 relating to these guarantees. In addition, at December 31, 2002, Altria Group, Inc. was contingently liable for $1.3 billion of guarantees related to its own performance, consisting of the following:

•$0.9 billion of guarantees of excise tax and import duties related to international shipments of tobacco products. In these agreements, a financial institution provides a guarantee of tax payments to respective governments. PMI then issues a guarantee to the respective financial institution for the payment of the taxes. These are revolving facilities that are integral to the shipment of tobacco products in international markets, and the underlying taxes payable are recorded on Altria Group, Inc.’s consolidated balance sheet.

•$0.4 billion of other guarantees related to the tobacco and food businesses.

Although Altria Group, Inc.’s guarantees are frequently short-term in nature, the short-term guarantees are expected to be replaced, upon expiration, with similar guarantees of similar amounts. Guarantees do not have, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.

Litigation Escrow Deposits: As discussed in Note 18, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM USA, certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court 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 the operating

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companies income of the domestic tobacco segment for the year ended December 31, 2001. In July 2001, PM USA also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM USA should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2002 and 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recorded as earned in interest and other debt expense, net, in the consolidated statements of earnings. In addition, with respect to certain adverse verdicts currently on appeal (excluding amounts relating to the Engle stipulation agreement), PM USA has posted various forms of security totaling $424 million to obtain stays of judgments pending appeals.

Tobacco Litigation Settlement Payments: As discussed in Note 18, PM USA, along with other domestic tobacco companies, has entered into State Settlement Agreements that require the domestic tobacco industry to make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million, as well as an additional $250 million in 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM USA’s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers’ domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. Accordingly, PM USA records its portion of ongoing settlement payments as part of cost of sales as product is shipped.

As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM USA, and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (in 2003 through 2008, $500 million each year; and 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer’s relative market share. PM USA records its portion of these payments as part of cost of sales as product is shipped.

During the years ended December 31, 2002, 2001 and 2000, PM USA recognized $5.3 billion, $5.9 billion and $5.2 billion, respectively, as part of cost of sales attributable to the foregoing settlement obligations.

As discussed above under “Tobacco — Business Environment,” the present legislative and litigation environment is substantially uncertain and could result in material adverse consequences for the business, financial condition, cash flows or results of operations of ALG, PM USA and PMI. Assuming there are no material adverse developments in the legislative and litigation environment, Altria Group, Inc. expects its cash flow from operations and its access to global capital markets to provide sufficient liquidity to meet the ongoing needs of the business.

Rent Payments: Altria Group, Inc.’s consolidated rent expense for 2002 was $635 million. Altria Group, Inc. does not consider its operating lease commitments to be a significant determinant of Altria Group, Inc.’s liquidity.

Leveraged Leases: As part of its lease portfolio, PMCC invests in leveraged leases. At December 31, 2002, PMCC’s net finance receivable of $7.6 billion in leveraged leases, which is included in Altria Group, Inc.’s consolidated balance sheet as finance assets, net, is comprised of total lease payments receivable ($29.3 billion) and the residual value of assets under lease ($2.3 billion), reduced by non-recourse third-party debt ($20.0 billion) and unearned income ($4.0 billion). PMCC has no obligation for the payment of the non-recourse third-party debt issued to purchase the assets under lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is non-recourse to all other assets of PMCC or Altria Group, Inc. As required by U.S. GAAP, the non-recourse third-party debt has been offset against the related rentals receivable and has been presented on a net basis, within finance assets, net, in Altria Group, Inc.’s consolidated balance sheets. See Note 7 to the consolidated financial statements for a further discussion of leveraged leases.

•Equity and Dividends: During 2002 and 2001, Altria Group, Inc. repurchased 134.4 million and 84.6 million shares, respectively, of its common stock at a cost of $6.3 billion and $4.0 billion, respectively. During 2001, Altria Group, Inc. completed its three-year, $8 billion share repurchase program and began a three-year, $10 billion share repurchase program. At December 31, 2002, cumulative repurchases under the $10 billion authority totaled 204.0 million shares at an aggregate cost of $9.6 billion. Altria Group, Inc. accelerated its rate of share repurchases during the second half of 2002 by utilizing approximately $1.7 billion of cash flow to Altria Group, Inc. resulting from the transfer of the Miller debt as a consequence of the merger of Miller with SAB in July 2002.

On June 21, 2002, Kraft’s Board of Directors approved the repurchase from time to time of up to $500 million of Kraft’s Class A common stock solely to satisfy the obligations of Kraft to provide shares under its 2001 Performance Incentive Plan, 2001 Compensation Plan for non-employee directors, and other plans where options to purchase Kraft’s Class A common stock are granted to employees of Kraft. As of December 31, 2002, Kraft had repurchased 4.4 million shares of its Class A common stock at a cost of $170 million.

Concurrently with Kraft’s IPO, certain employees of Altria Group, Inc. (other than Kraft and its subsidiaries) received a one-time grant of options to purchase shares of Kraft’s Class A common stock held by Altria Group, Inc. at the IPO price of $31.00 per share. At December 31, 2002, employees held options to purchase approximately 1.6 million shares of Kraft’s Class A common stock from Altria Group, Inc. In order to completely satisfy the obligation and maintain its current percentage ownership of Kraft, Altria Group, Inc. purchased approximately 1.6 million shares of Kraft’s Class A common stock in open market transactions during 2002.

Dividends paid in 2002 and 2001 were $5.1 billion and $4.8 billion, respectively, an increase of 6.3%, reflecting a higher dividend rate in 2002, partially offset by a lower number of shares outstanding as a result of ongoing share repurchases. During the third quarter of 2002, Altria Group, Inc.’s Board of Directors approved a 10.3% increase in the quarterly dividend rate to $0.64 per share. As a result, the annualized dividend rate increased to $2.56 from $2.32.

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Market Risk

Altria Group, Inc. operates globally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency and commodity exposures, which primarily relate to forecasted transactions and debt. Derivative financial instruments are used by Altria Group, Inc., principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates and commodity prices, by creating offsetting exposures. Altria Group, Inc. is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes.

A substantial portion of Altria Group, Inc.’s derivative financial instruments is effective as hedges under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendment, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (collectively referred to as “SFAS No. 133”). Accordingly, Altria Group, Inc. increased other accumulated comprehensive losses by $110 million during 2002. This reflects a decrease in the fair value of derivatives of $111 million, partially offset by deferred losses transferred to earnings of $1 million. During 2001, Altria Group, Inc. recorded deferred gains of $33 million in accumulated other comprehensive losses relating to the fair value of Altria Group, Inc.’s derivative financial instruments. This reflects a gain resulting from the initial adoption of SFAS No. 133 of $15 million and an increase in the fair value of derivatives during the year of $102 million, partially offset by deferred gains transferred to earnings of $84 million. The fair value of all derivative financial instruments has been calculated based on market quotes.

•Foreign exchange rates: Altria Group, Inc. uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which Altria Group, Inc. is exposed include the Japanese yen, the Swiss franc and the euro. At December 31, 2002 and 2001, Altria Group, Inc. had option and forward foreign exchange contracts with aggregate notional amounts of $10.1 billion and $3.7 billion, respectively, which were comprised of contracts for the purchase and sale of foreign currencies. Included in the foreign currency aggregate notional amounts at December 31, 2002, were $2.6 billion of equal and offsetting foreign currency positions, which do not qualify as hedges and that will not result in any net gain or loss. In addition, Altria Group, Inc. uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. A substantial portion of the foreign currency swap agreements are accounted for as cash flow hedges. The unrealized gain (loss) relating to foreign currency swap agreements that do not qualify for hedge accounting treatment under U.S. GAAP was insignificant as of December 31, 2002 and 2001. At December 31, 2002 and 2001, the notional amounts of foreign currency swap agreements aggregated $2.5 billion and $2.3 billion, respectively.

Altria Group, Inc. also designates certain foreign currency denominated debt as net investment hedges of foreign operations. During the years ended December 31, 2002 and 2001, losses of $163 million, net of income taxes of $88 million, and losses of $18 million, net of income taxes of $10 million, respectively, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments.

•Commodities: Kraft is exposed to price risk related to forecasted purchases of certain commodities used as raw materials. Accordingly, Kraft uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk and cheese. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar and soybean oil. At December 31, 2002 and 2001, Kraft had net long commodity positions of $544 million and $589 million, respectively. In general, commodity forward contracts qualify for the normal purchase exception under SFAS No. 133 and are, therefore, not subject to the provisions of SFAS No. 133. The effective portion of unrealized gains and losses on commodity futures and option contracts is deferred as a component of accumulated other comprehensive losses and is recognized as a component of cost of sales when the related inventory is sold. Unrealized gains or losses on net commodity positions were immaterial at December 31, 2002 and 2001.

•Value at Risk: Altria Group, Inc. uses a value at risk (“VAR”) computation to estimate the potential one-day loss in the fair value of its interest rate-sensitive financial instruments and to estimate the potential one-day loss in pre-tax earnings of its foreign currency and commodity price-sensitive derivative financial instruments. The VAR computation includes Altria Group, Inc.’s debt; short-term investments; foreign currency forwards, swaps and options; and commodity futures, forwards and options. Anticipated transactions, foreign currency trade payables and receivables, and net investments in foreign subsidiaries, which the foregoing instruments are intended to hedge, were excluded from the computation.

The VAR estimates were made assuming normal market conditions, using a 95% confidence interval. Altria Group, Inc. used a “variance/co-variance” model to determine the observed interrelationships between movements in interest rates and various currencies. These interrelationships were determined by observing interest rate and forward currency rate movements over the preceding quarter for the calculation of VAR amounts at December 31, 2002 and 2001, and over each of the four preceding quarters for the calculation of average VAR amounts during each year. The values of foreign currency and commodity options do not change on a one-to-one basis with the underlying currency or commodity, and were valued accordingly in the VAR computation.

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The estimated potential one-day loss in fair value of Altria Group, Inc.’s interest rate-sensitive instruments, primarily debt, under normal market conditions and the estimated potential one-day loss in pre-tax earnings from foreign currency and commodity instruments under normal market conditions, as calculated in the VAR model, were as follows:

(in millions)	Pre-Tax Earnings Impact
	At 12/31/02		Average		High		Low
Instruments sensitive to:
Foreign currency rates	$	33	$	47	$	69	$	29
Commodity prices		4		6		9		4

(in millions)	Fair Value Impact
	At 12/31/02		Average		High		Low
Instruments sensitive to:
Interest rates	$	99	$	95	$	114	$	75

(in millions)	Pre-Tax Earnings Impact
	At 12/31/01		Average		High		Low
Instruments sensitive to:
Foreign currency rates	$	40	$	30	$	49	$	12
Commodity prices		5		7		11		5

(in millions)	Fair Value Impact
	At 12/31/01		Average		High		Low
Instruments sensitive to:
Interest rates	$	121	$	68	$	121	$	45

The VAR computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in interest rates, foreign currency rates and commodity prices under normal market conditions. The computation does not purport to represent actual losses in fair value or earnings to be incurred by Altria Group, Inc., nor does it consider the effect of favorable changes in market rates. Altria Group, Inc. cannot predict actual future movements in such market rates and does not present these VAR results to be indicative of future movements in such market rates or to be representative of any actual impact that future changes in market rates may have on its future results of operations or financial position.

New Accounting Standards

As previously discussed, on January 1, 2002, Altria Group, Inc. adopted SFAS No. 141, “Business Combinations,” SFAS No. 142, “Goodwill and Other Intangible Assets,” Emerging Issues Task Force (“EITF”) Issue No. 00-14, “Accounting for Certain Sales Incentives” and EITF No. 00-25, “Vendors Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.”

The Financial Accounting Standards Board (“FASB”) recently issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. Interpretation No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interests or significant financial support provided to it. Interpretation No. 46 will be effective for Altria Group, Inc. on February 1, 2003 for variable interest entities created after January 31, 2003, and on July 31, 2003 for variable interest entities created prior to February 1, 2003. Based on its preliminary analysis of Interpretation No. 46, which was issued in January 2003, Altria Group, Inc. does not currently expect the adoption of Interpretation No. 46 to have a material impact on its 2003 consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 requires the disclosure of certain guarantees existing at December 31, 2002. In addition, Interpretation No. 45 requires the recognition of a liability for the fair value of the obligation of qualifying guarantee activities that are initiated or modified after December 31, 2002. Accordingly, Altria Group, Inc. will apply the recognition provisions of Interpretation No. 45 prospectively to guarantee activities initiated after December 31, 2002. See Note 18 for a further discussion of guarantees.

In November 2002, the EITF issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” which addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF Issue No. 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF Issue No. 00-21 is effective for Altria Group, Inc. for revenue arrangements entered into beginning July 1, 2003. Altria Group, Inc. does not expect the adoption of EITF Issue No. 00-21 to have a material impact on its 2003 consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Accordingly, Altria Group, Inc. will apply the provisions of SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002.

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Effective January 1, 2002, Altria Group, Inc. adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of.” SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on the consolidated financial position, results of operations or cash flows of Altria Group, Inc.

Contingencies

See Note 18 to the consolidated financial statements for a discussion of contingencies.

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

We* may from time to time make written or oral forward-looking statements, including statements contained in filings with the SEC, in reports to shareholders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “intends,” “projects,” “goals,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in Altria Group, Inc.’s securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in the “Business Environment” sections preceding our discussion of operating results of our subsidiaries’ tobacco businesses and food and beverage businesses. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time.

•Tobacco Related Litigation: There is substantial litigation pending in the United States and in foreign jurisdictions arising out of the tobacco businesses of PM USA and PMI. We anticipate that new cases will continue to be filed. In some cases, plaintiffs claim damages, including punitive damages, ranging into the billions of dollars. Although, to date, PM USA and PMI have never had to pay a judgment in a tobacco related case, there are presently ten cases on appeal in which verdicts were returned against PM USA, including a $74 billion verdict against PM USA in the Engle case in Florida and four verdicts against PM USA in California in the aggregate amount of $31.1 billion. The trial courts in the California cases subsequently reduced the punitive damages awards to an aggregate of $163 million and these cases are being appealed. In order to prevent a plaintiff from seeking to collect a judgment while the verdict is being appealed, the defendant must post an appeal bond, frequently in the amount of the judgment or more, or negotiate an alternative arrangement with plaintiffs. In the event of future losses at trial, we may not always be able to obtain the required bond or to negotiate an acceptable alternative arrangement.

The present litigation environment is substantially uncertain, and it is possible that our business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome of pending litigation, including certain of the verdicts against us that are on appeal. We intend to continue vigorously defending all tobacco related litigation, although we may settle particular cases if we believe it is in the best interest of our shareholders to do so. Please see Note 18 for a detailed discussion of tobacco related litigation.

•Anti-Tobacco Action in the Public and Private Sectors: Our tobacco subsidiaries face significant governmental action aimed at reducing the incidence of smoking and seeking to hold us responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke. Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volume, and we expect this decline to continue.

•Excise Taxes: Substantial excise tax increases have been and continue to be imposed on cigarettes in the United States at the federal, state and local levels, as well as in foreign jurisdictions. The resulting price increases have caused, and may continue to cause, consumers to shift from premium to discount brands and to cease or reduce smoking.

•Increasing Competition in the Domestic Tobacco Market: Settlements of certain tobacco litigation in the United States, combined with excise tax increases, have resulted in substantial cigarette price increases. PM USA faces increased competition from lowest priced brands sold by domestic and foreign manufacturers that enjoy cost advantages because they are not making payments under the settlements or related state escrow legislation. Additional competition results from diversion into the domestic market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties and increasing imports of foreign lowest priced brands. Recently, the competitive environment has become even more challenging, characterized by weak economic conditions, erosion of consumer confidence, a continued influx of cheap products, and higher prices due to higher state excise taxes and list price increases. As a result, the lowest priced products of manufacturers of numerous small share brands have increased their market share, putting pressure on the industry’s premium segment. If these competitive factors continue and if the disparity in price between our premium brands and our competitors’ lowest priced brands

*          This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among ALG and its various operating subsidiaries or when any distinction is clear from the context.

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continues to increase, sales from the premium segment, PM USA’s most profitable category, may continue to shift to the discount segment. Steps that PM USA may take to reduce the price disparity, such as increasing promotional spending, may reduce the profitability of its premium brands.

•Governmental Investigations: From time to time, our tobacco subsidiaries are subject to governmental investigations on a range of matters. Ongoing investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain international markets and allegations of false and misleading usage of the terms “Lights” and “Ultra Lights” in brand descriptors. We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our business could be materially affected by an unfavorable outcome of pending or future investigations.

•New Tobacco Product Technologies: Our tobacco subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the risk of smoking. Their goal is to reduce harmful constituents in tobacco smoke while continuing to offer adult smokers products that meet their taste expectations. We cannot guarantee that our tobacco subsidiaries will succeed in these efforts. If they do not succeed, but one or more of their competitors do, our tobacco subsidiaries may be at a competitive disadvantage.

•Foreign Currency: Our international food and tobacco subsidiaries conduct their businesses in local currency and, for purposes of financial reporting, their results are translated into U.S. dollars based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar, our reported net revenues and operating companies income will be reduced because the local currency will translate into fewer U.S. dollars.

•Competition and Economic Downturns: Each of our consumer products subsidiaries is subject to intense competition, changes in consumer preferences and local economic conditions. To be successful, they must continue:

•to promote brand equity successfully;

•to anticipate and respond to new consumer trends;

•to develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products in a consolidating environment at the retail and manufacturing levels;

•to improve productivity; and

•to respond effectively to changing prices for their raw materials.

The willingness of consumers to purchase premium cigarette brands and premium food and beverage brands depends in part on local economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label and other economy brands and the volume of our consumer products subsidiaries could suffer accordingly.

Our finance subsidiary, PMCC, invests in finance leases, principally in transportation, power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If counterparties to PMCC’s leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our profitability.

•Grocery Trade Consolidation: As the retail grocery trade continues to consolidate and retailers grow larger and become more sophisticated, they demand lower pricing and increased promotional programs. Further, these customers are reducing their inventories and increasing their emphasis on private label products. If Kraft fails to use its scale, marketing expertise, branded products and category leadership positions to respond to these trends, its volume growth could slow or it may need to lower prices or increase promotional support of its products, any of which would adversely affect profitability.

•Continued Need to Add Food and Beverage Products in Faster Growing and More Profitable Categories: The food and beverage industry’s growth potential is constrained by population growth. Kraft’s success depends in part on its ability to grow its business faster than populations are growing in the markets that it serves. One way to achieve that growth is to enhance its portfolio by adding products that are in faster growing and more profitable categories. If Kraft does not succeed in making these enhancements, its volume growth may slow, which would adversely affect our profitability.

•Strengthening Brand Portfolios Through Acquisitions and Divestitures: One element of the growth strategy of Kraft and PMI is to strengthen their brand portfolios through active programs of selective acquisitions and divestitures. These subsidiaries are constantly investigating potential acquisition candidates and from time to time sell businesses that are outside their core categories or that do not meet their growth or profitability targets. Acquisition opportunities are limited and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to continue to acquire attractive businesses on favorable terms or that all future acquisitions will be quickly accretive to earnings.

•Raw Material Prices: The raw materials used by our consumer products subsidiaries are largely commodities that experience price volatility caused by external conditions, commodity market fluctuations, currency fluctuations and changes in governmental agricultural programs. Commodity price changes may result in unexpected increases in raw material and packaging cost, and our operating subsidiaries may be unable to increase their prices to offset these increased costs without suffering reduced volume, revenue and operating companies income. We do not fully hedge against changes in commodity prices and our hedging procedures may not work as planned.

•Food Safety and Quality Concerns: We could be adversely affected if consumers in Kraft’s principal markets lose confidence in the safety and quality of certain food products. Adverse publicity about these types of concerns, like the recent publicity about genetically modified organisms and “mad cow disease” in Europe, whether or not valid, may discourage consumers from buying Kraft’s products or cause production and delivery disruptions. In addition, Kraft may need to recall some of its products if they become adulterated or misbranded. Kraft may also be liable if the consumption of any of its products causes injury. A widespread product recall or a significant product liability judgment could cause products to be unavailable for a period of time and a loss of consumer confidence in Kraft’s food products and could have a material adverse effect on Kraft’s business.

42

Selected Financial Data — Five-Year Review

(in millions of dollars, except per share data)	2002			2001			2000			1999			1998
Summary of Operations:
Net revenues*	$	80,408		$	80,879		$	73,503		$	72,685		$	69,409
United States export sales*	3,658			3,866			4,347			5,061			6,056
Cost of sales*	32,748			33,900			29,687			29,913			27,087
Federal excise taxes on products*	4,229			4,418			4,537			3,390			3,535
Foreign excise taxes on products*	13,997			12,791			12,733			13,555			13,096
Operating income	16,601			15,702			14,806			13,616			10,105
Interest and other debt expense, net	1,134			1,418			719			795			890
Earnings before income taxes, minority interest and cumulative effect of accounting change	18,098			14,284			14,087			12,821			9,215
Pre-tax profit margin	22.5		%	17.7		%	19.2		%	17.6		%	13.3		%
Provision for income taxes	6,424			5,407			5,450			5,020			3,715
Earnings before minority interest and cumulative effect of accounting change	11,674			8,877			8,637			7,801			5,500
Minority interest in earnings and other, net	572			311			127			126			128
Earnings before cumulative effect of accounting change	11,102			8,566			8,510			7,675			5,372
Cumulative effect of accounting change				(6		)
Net earnings	11,102			8,560			8,510			7,675			5,372
Basic EPS before cumulative effect of accounting change	5.26			3.93			3.77			3.21			2.21
Per share cumulative effect of accounting change				(0.01		)
Basic EPS	5.26			3.92			3.77			3.21			2.21
Diluted EPS before cumulative effect of accounting change	5.21			3.88			3.75			3.19			2.20
Per share cumulative effect of accounting change				(0.01		)
Diluted EPS	5.21			3.87			3.75			3.19			2.20
Dividends declared per share	2.44			2.22			2.02			1.84			1.68
Weighted average shares (millions) — Basic	2,111			2,181			2,260			2,393			2,429
Weighted average shares (millions) — Diluted	2,129			2,210			2,272			2,403			2,446
Capital expenditures	2,009			1,922			1,682			1,749			1,804
Depreciation	1,324			1,323			1,126			1,120			1,106
Property, plant and equipment, net (consumer products)	14,846			15,137			15,303			12,271			12,335
Inventories (consumer products)	9,127			8,923			8,765			9,028			9,445
Total assets	87,540			84,968			79,067			61,381			59,920
Total long-term debt	21,355			18,651			19,154			12,226			12,615
Total debt — consumer products	21,154			20,098			27,196			13,522			13,953
— financial services	2,166			2,004			1,926			946			709
Total deferred income taxes	9,739			8,622			4,750			3,751			3,638
Stockholders’ equity	19,478			19,620			15,005			15,305			16,197
Common dividends declared as a % of Basic EPS	46.4		%	56.6		%	53.6		%	57.3		%	76.0		%
Common dividends declared as a % of Diluted EPS	46.8		%	57.4		%	53.9		%	57.7		%	76.4		%
Book value per common share outstanding	9.55			9.11			6.79			6.54			6.66
Market price per common share — high/low	57.79-35.40			53.88-38.75			45.94-18.69			55.56-21.25			59.50-34.75
Closing price of common share at year end	40.53			45.85			44.00			23.00			53.50
Price/earnings ratio at year end—Basic	8			12			12			7			24
Price/earnings ratio at year end—Diluted	8			12			12			7			24
Number of common shares outstanding at year end (millions)	2,039			2,153			2,209			2,339			2,431
Number of employees		166,000			175,000			178,000			137,000			144,000

*    Altria Group, Inc. adopted Emerging Issues Task Force (“EITF”) statements relating to the classification of vendor consideration and certain sales incentives, resulting in a reclassification of prior period data. The adoption of the EITF statements had no impact on operating income, net earnings, or basic and diluted earnings per share.

43

Consolidated Balance Sheets

(in millions of dollars, except per share data)
at December 31,	2002		2001
Assets
Consumer products
Cash and cash equivalents	$	565	$	453
Receivables (less allowances of $142 and $193)	5,139		5,148
Inventories:
Leaf tobacco	3,605		3,827
Other raw materials	1,935		1,909
Finished product	3,587		3,187
	9,127		8,923
Other current assets	2,610		2,751
Total current assets	17,441		17,275
Property, plant and equipment, at cost:
Land and land improvements	710		796
Buildings and building equipment	6,219		6,347
Machinery and equipment	16,127		17,152
Construction in progress	1,497		1,330
	24,553		25,625
Less accumulated depreciation	9,707		10,488
	14,846		15,137
Goodwill and other intangible assets, net	37,871		37,548
Other assets	8,151		6,144
Total consumer products assets	78,309		76,104
Financial services
Finance assets, net	9,075		8,691
Other assets	156		173
Total financial services assets	9,231		8,864
Total Assets	$	87,540	$	84,968

See notes to consolidated financial statements.

44

at December 31,	2002			2001
Liabilities
Consumer products
Short-term borrowings	$	407		$	997
Current portion of long-term debt	1,558			1,942
Accounts payable	3,088			3,600
Accrued liabilities:
Marketing	3,192			2,794
Taxes, except income taxes	1,735			1,654
Employment costs	1,099			1,192
Settlement charges	3,027			3,210
Other	2,563			2,480
Income taxes	1,103			1,021
Dividends payable	1,310			1,251
Total current liabilities	19,082			20,141
Long-term debt	19,189			17,159
Deferred income taxes	6,112			5,238
Accrued postretirement health care costs	3,128			3,315
Minority interest	4,366			4,013
Other liabilities	8,004			7,796
Total consumer products liabilities	59,881			57,662
Financial services
Short-term borrowings				512
Long-term debt	2,166			1,492
Deferred income taxes	5,521			5,246
Other liabilities	494			436
Total financial services liabilities	8,181			7,686
Total liabilities	68,062			65,348
Contingencies (Note 18)
Stockholders’ Equity
Common stock, par value $0.331/3 per share (2,805,961,317 shares issued)	935			935
Additional paid-in capital	4,642			4,503
Earnings reinvested in the business	43,259			37,269
Accumulated other comprehensive losses (including currency translation of $2,951 and $3,238)	(3,956		)	(3,373		)
Cost of repurchased stock (766,701,765 and 653,458,100 shares)	(25,402		)	(19,714		)
Total stockholders’ equity	19,478			19,620
Total Liabilities and Stockholders’ Equity	$	87,540		$	84,968

45

Consolidated Statements of Earnings

(in millions of dollars, except per share data)
for the years ended December 31,	2002			2001			2000
Net revenues	$	80,408		$	80,879		$	73,503
Cost of sales	32,748			33,900			29,687
Excise taxes on products	18,226			17,209			17,270
Gross profit	29,434			29,770			26,546
Marketing, administration and research costs	12,282			12,461			11,423
Gains on sales of businesses	(80		)	(8		)	(274		)
Integration costs and a loss on sale of a food factory	111			82
Separation programs and asset impairments	223			19
Provision for airline industry exposure	290
Litigation related expense				500
Amortization of intangibles	7			1,014			591
Operating income	16,601			15,702			14,806
Gain on Miller Brewing Company transaction	(2,631		)
Interest and other debt expense, net	1,134			1,418			719
Earnings before income taxes, minority interest and cumulative effect of accounting change	18,098			14,284			14,087
Provision for income taxes	6,424			5,407			5,450
Earnings before minority interest and cumulative effect of accounting change	11,674			8,877			8,637
Minority interest in earnings and other, net	572			311			127
Earnings before cumulative effect of accounting change	11,102			8,566			8,510
Cumulative effect of accounting change				(6		)
Net earnings	$	11,102		$	8,560		$	8,510
Per share data:
Basic earnings per share before cumulative effect of accounting change	$	5.26		$	3.93		$	3.77
Cumulative effect of accounting change				(0.01		)
Basic earnings per share	$	5.26		$	3.92		$	3.77
Diluted earnings per share before cumulative effect of accounting change	$	5.21		$	3.88		$	3.75
Cumulative effect of accounting change				(0.01		)
Diluted earnings per share	$	5.21		$	3.87		$	3.75

See notes to consolidated financial statements.

46

Consolidated Statements of Stockholders’ Equity

(in millions of dollars, except per share data)
								Accumulated Other Comprehensive Earnings (Losses)
	Common Stock		Additional Paid-in Capital		Earnings Reinvested in the Business			Currency Translation Adjustments			Other			Total			Cost of Repurchased Stock			Total Stockholders’ Equity
Balances, January 1, 2000	$	935	$	—	$	29,556		$	(2,056	)	$	(52	)	$	(2,108	)	$	(13,078	)	$	15,305
Comprehensive earnings:
Net earnings					8,510															8,510
Other comprehensive losses, net of income taxes:
Currency translation adjustments								(808		)				(808		)				(808		)
Additional minimum pension liability											(34		)	(34		)				(34		)
Total other comprehensive losses																				(842		)
Total comprehensive earnings																				7,668
Exercise of stock options and issuance of other stock awards					(37		)										217			180
Cash dividends declared ($2.02 per share)					(4,548		)													(4,548		)
Stock repurchased																	(3,600		)	(3,600		)
Balances, December 31, 2000	935		—		33,481			(2,864		)	(86		)	(2,950		)	(16,461		)	15,005
Comprehensive earnings:
Net earnings					8,560															8,560
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments								(753		)				(753		)				(753		)
Additional minimum pension liability											(89		)	(89		)				(89		)
Change in fair value of derivatives accounted for as hedges											33			33						33
Total other comprehensive losses																				(809		)
Total comprehensive earnings																				7,751
Exercise of stock options and issuance of other stock awards			138		70												747			955
Cash dividends declared ($2.22 per share)					(4,842		)													(4,842		)
Stock repurchased																	(4,000		)	(4,000		)
Sale of Kraft Foods Inc. common stock			4,365					379			7			386						4,751
Balances, December 31, 2001	935		4,503		37,269			(3,238		)	(135		)	(3,373		)	(19,714		)	19,620
Comprehensive earnings:
Net earnings					11,102															11,102
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments								287						287						287
Additional minimum pension liability											(760		)	(760		)				(760		)
Change in fair value of derivatives accounted for as hedges											(110		)	(110		)				(110		)
Total other comprehensive losses																				(583		)
Total comprehensive earnings																				10,519
Exercise of stock options and issuance of other stock awards			139		15												563			717
Cash dividends declared ($2.44 per share)					(5,127		)													(5,127		)
Stock repurchased																	(6,251		)	(6,251		)
Balances, December 31, 2002	$	935	$	4,642	$	43,259		$	(2,951	)	$	(1,005	)	$	(3,956	)	$	(25,402	)	$	19,478

See notes to consolidated financial statements.

47

Consolidated Statements of Cash Flows

(in millions of dollars)
for the years ended December 31,	2002			2001			2000
Cash Provided by (Used in) Operating Activities
Net earnings — Consumer products	$	11,072		$	8,382		$	8,345
— Financial services	30			178			165
Net earnings	11,102			8,560			8,510
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Cumulative effect of accounting change				6
Depreciation and amortization	1,331			2,337			1,717
Deferred income tax provision	1,310			277			660
Minority interest in earnings and other, net	572			311			127
Integration costs and a loss on sale of a food factory	111			82
Separation programs and asset impairments	223			19
Escrow bond for domestic tobacco litigation				(1,200		)
Gain on Miller Brewing Company transaction	(2,631		)
Gains on sales of businesses	(80		)	(8		)	(274		)
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net	(161		)	(320		)	28
Inventories	38			(293		)	741
Accounts payable	(640		)	(309		)	84
Income taxes	(151		)	782			(178		)
Accrued liabilities and other current assets	257			(1,397		)	(479		)
Settlement charges	(189		)	480			316
Pension plan contributions	(1,104		)	(350		)	(391		)
Other	86			(500		)	(146		)
Financial services
Deferred income tax provision	275			408			346
Provision for airline industry exposure	290
Other	(27		)	8			(17		)
Net cash provided by operating activities	10,612			8,893			11,044
Cash Provided by (Used in) Investing Activities
Consumer products
Capital expenditures	(2,009		)	(1,922		)	(1,682		)
Purchase of Nabisco, net of acquired cash							(15,159		)
Purchase of other businesses, net of acquired cash	(147		)	(451		)	(417		)
Proceeds from sales of businesses	221			21			433
Other	54			139			28
Financial services
Investments in finance assets	(950		)	(960		)	(865		)
Proceeds from finance assets	360			257			156
Net cash used in investing activities		(2,471	)		(2,916	)		(17,506	)

See notes to consolidated financial statements.

48

for the years ended December 31,	2002			2001			2000
Cash Provided by (Used in) Financing Activities
Consumer products
Net (repayment) issuance of short-term borrowings	$	(473	)	$	(5,678	)	$	8,501
Long-term debt proceeds	5,325			4,079			3,110
Long-term debt repaid	(2,024		)	(5,215		)	(1,702		)
Financial services
Net (repayment) issuance of short-term borrowings	(512		)	(515		)	1,027
Long-term debt proceeds	440			557
Repurchase of Altria Group, Inc. common stock	(6,220		)	(3,960		)	(3,597		)
Repurchase of Kraft Foods Inc. common stock	(170		)
Dividends paid on Altria Group, Inc. common stock	(5,068		)	(4,769		)	(4,500		)
Issuance of Altria Group, Inc. common stock	724			779			112
Issuance of Kraft Foods Inc. common stock				8,425
Other	(187		)	(143		)	(293		)
Net cash (used in) provided by financing activities	(8,165		)	(6,440		)	2,658
Effect of exchange rate changes on cash and cash equivalents	136			(21		)	(359		)
Cash and cash equivalents:
Increase (decrease)	112			(484		)	(4,163		)
Balance at beginning of year	453			937			5,100
Balance at end of year	$	565		$	453		$	937
Cash paid: Interest — Consumer products	$	1,355		$	1,689		$	1,005
— Financial services	$	88		$	76		$	102
Income taxes	$	4,818		$	3,775		$	4,358

49

Notes to Consolidated Financial Statements

Note 1.
Background and Basis of Presentation:

•Background: In April 2002, the stockholders of Philip Morris Companies Inc. approved changing the name of the parent company from Philip Morris Companies Inc. to Altria Group, Inc. (“ALG”). The name change became effective on January 27, 2003. ALG’s wholly-owned subsidiaries, Philip Morris USA Inc. (“PM USA”), Philip Morris International Inc. (“PMI”) and its majority-owned (84.2%) subsidiary, Kraft Foods Inc. (“Kraft”), are engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese and convenient meals. Philip Morris Capital Corporation (“PMCC”), another wholly-owned subsidiary, is primarily engaged in leasing activities. ALG’s former wholly-owned subsidiary, Miller Brewing Company (“Miller”), was engaged in the manufacture and sale of various beer products prior to the merger of Miller into South African Breweries plc (“SAB”) on July 9, 2002 (see Note 3. Miller Brewing Company Transaction). Throughout these financial statements, Altria Group, Inc. refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies. ALG’s access to the operating cash flows of its subsidiaries is comprised of cash received from the payment of dividends and interest, and the repayment of amounts borrowed from ALG by its subsidiaries.

•Basis of presentation: The consolidated financial statements include ALG and its subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, income taxes, and the allowance for loan losses and estimated residual values of finance leases. Actual results could differ from those estimates.

Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices.

Certain prior years’ amounts have been reclassified to conform with the current year’s presentation, due primarily to the adoption of new accounting rules regarding revenues, as well as the disclosure of more detailed information on the consolidated statements of earnings and the consolidated statements of cash flows.

Note 2.
Summary of Significant Accounting Policies:

•Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less.

•Depreciation, amortization and goodwill valuation: Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from 3 to 20 years and buildings and building improvements over periods up to 50 years.

On January 1, 2002, Altria Group, Inc. adopted Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.” As a result, Altria Group, Inc. stopped recording the amortization of goodwill and indefinite life intangible assets as a charge to earnings as of January 1, 2002. Net earnings and diluted earnings per share (“EPS”) would have been as follows had the provisions of the new standards been applied as of January 1, 2000:

(in millions, except per share data)
For the years ended December 31,	2001		2000
Net earnings, as previously reported	$	8,560	$	8,510
Adjustment for amortization of goodwill and other intangible assets	932		586
Net earnings, as adjusted	$	9,492	$	9,096
Diluted EPS, as previously reported	$	3.87	$	3.75
Adjustment for amortization of goodwill and other intangible assets	0.43		0.25
Diluted EPS, as adjusted	$	4.30	$	4.00

In addition, Altria Group, Inc. is required to conduct an annual review of goodwill and intangible assets for potential impairment. In 2002, Altria Group, Inc. completed its review and did not have to record a charge to earnings for an impairment of goodwill or other intangible assets.

At December 31, 2002, goodwill by segment was as follows:

(in millions)
International tobacco	$	981
North American food	20,722
International food	4,334
Total goodwill	$	26,037

Intangible assets as of December 31, 2002 were as follows:

(in millions)	Gross Carrying Amount		Accumulated Amortization
Non-amortizable intangible assets	$	11,810
Amortizable intangible assets	54		$	30
Total intangible assets	$	11,864	$	30

Non-amortizable intangible assets are substantially comprised of brand names purchased through the Nabisco acquisition. Amortizable intangible assets consist primarily of certain trademark licenses and non-compete agreements. Pre-tax amortization expense for intangible assets during the year ended December 31, 2002 was $7 million. Based upon the amortizable intangible assets recorded on the balance sheet as of December 31, 2002, amortization expense for each of the next five years is estimated to be $8 million or less.

Goodwill and other intangible assets, net, at December 31, 2002 increased by $323 million from December 31, 2001. During 2002, Altria

50

Group, Inc. repurchased shares of Kraft’s Class A common stock, which increased goodwill by $145 million. This increase represents the difference between market price and book value for the shares repurchased. The remainder of the increase is due primarily to acquisitions and currency, partially offset by the Miller transaction.

•Environmental costs: Altria Group, Inc. is subject to laws and regulations relating to the protection of the environment. Altria Group, Inc. provides for expenses associated with environmental remediation obligations on an undiscounted basis when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change.

While it is not possible to quantify with certainty the potential impact of actions regarding environmental remediation and compliance efforts that Altria Group, Inc. may undertake in the future, in the opinion of management, environmental remediation and compliance costs, before taking into account any recoveries from third parties, will not have a material adverse effect on Altria Group, Inc.’s consolidated financial position, results of operations or cash flows.

•Finance leases: Income attributable to leveraged leases is initially recorded as unearned income and subsequently recognized as finance lease revenues over the terms of the respective leases at a constant after-tax rate of return on the positive net investment balances.

Income attributable to direct finance leases is initially recorded as unearned income and subsequently recognized as finance lease revenues over the terms of the respective leases at a constant pre-tax rate of return on the net investment balances.

Finance leases include unguaranteed residual values that represent PMCC’s estimate at lease inception as to the fair values of assets under lease at the end of the non-cancelable lease term. The estimated residual values are reviewed annually by PMCC’s management based on a number of factors, including appraisals and activity in the relevant industry. If necessary, revisions to reduce the residual values are recorded. Such reviews have not resulted in adjustments to PMCC’s net revenues or results of operations for any of the periods presented.

Investments in leveraged leases are stated net of related non-recourse debt obligations.

•Foreign currency translation: Altria Group, Inc. translates the results of operations of its foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Currency translation adjustments are recorded as a component of stockholders’ equity. Transaction gains and losses are recorded in the consolidated statements of earnings and were not significant for any of the periods presented.

•Guarantees: In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 requires the disclosure of certain guarantees existing at December 31, 2002. In addition, Interpretation No. 45 requires the recognition of a liability for the fair value of the obligation of qualifying guarantee activities that are initiated or modified after December 31, 2002. Accordingly, Altria Group, Inc. will apply the recognition provisions of Interpretation No. 45 prospectively to guarantee activities initiated after December 31, 2002. See Note 18. Contingencies for a further discussion of guarantees.

•Hedging instruments: Effective January 1, 2001, Altria Group, Inc. adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and its related amendment, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities” (collectively referred to as “SFAS No. 133”). These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded each period either in accumulated other comprehensive losses or in earnings, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive earnings (losses) are reclassified to the consolidated statements of earnings in the periods in which operating results are affected by the hedged item. Cash flows from hedging instruments are classified in the same manner as the affected hedged item in the consolidated statements of cash flows. As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of any accounting change that reduced net earnings by $6 million, net of income taxes of $3 million, and decreased accumulated other comprehensive losses by $15 million, net of income taxes of $8 million.

•Impairment of long-lived assets: Altria Group, Inc. reviews long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Altria Group, Inc. performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.

Effective January 1, 2002, Altria Group, Inc. adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which replaces SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of.” SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the exemption to consolidation when control over a subsidiary is likely to be temporary. The adoption of this new standard did not have a material impact on the consolidated financial position, results of operations or cash flows of Altria Group, Inc.

•Income taxes: Altria Group, Inc. accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.

•Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out (“LIFO”) method is used to cost substantially all domestic inventories. The cost of other inventories is principally determined by the average cost method. It is a generally recognized industry practice to classify leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year.

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•Marketing costs: Altria Group, Inc. promotes its products with significant marketing activities, including advertising, consumer incentives and trade promotions. Advertising costs are expensed as incurred. Consumer incentive and trade promotion activities are recorded as a reduction of revenues based on amounts estimated as being due to customers and consumers at the end of a period, based principally on historical utilization and redemption rates.

•Revenue recognition: The consumer products businesses recognize revenues, net of sales incentives and including shipping and handling charges billed to customers, upon shipment of goods when title and risk of loss pass to customers. Shipping and handling costs are classified as part of cost of sales.

Effective January 1, 2002, Altria Group, Inc. adopted Emerging Issues Task Force (“EITF”) Issue No. 00-14, “Accounting for Certain Sales Incentives,” and EITF Issue No. 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products.” Prior period consolidated statements of earnings have been reclassified to reflect the adoption. The adoption of these EITF Issues resulted in a reduction of revenues of $9.0 billion and $6.9 billion in 2001 and 2000, respectively. In addition, the adoption reduced marketing, administration and research costs in 2001 and 2000 by $9.9 billion and $7.6 billion, respectively. Cost of sales increased in 2001 and 2000 by $633 million and $539 million, respectively, and excise taxes on products increased by $229 million and $190 million, respectively. The adoption of these EITF Issues had no impact on operating income, net earnings or basic and diluted EPS.

•Software costs: Altria Group, Inc. capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed five years.

•Stock-based compensation: Altria Group, Inc. accounts for employee stock compensation plans in accordance with the intrinsic value-based method permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” which did not result in compensation cost for stock options. The market value of restricted stock at date of grant is recorded as compensation expense over the period of restriction.

At December 31, 2002, Altria Group, Inc. had stock-based employee compensation plans, which are described more fully in Note 11. Stock Plans. Altria Group, Inc. applies the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for those plans. No compensation expense for employee stock options is reflected in net earnings, as all options granted under those plans had an exercise price not less than the market value of the common stock on the date of the grant. Net earnings, as reported, includes compensation expense related to restricted stock. The following table illustrates the effect on net earnings and EPS if Altria Group, Inc. had applied the fair value recognition provisions of SFAS No. 123 for the years ended December 31, 2002, 2001 and 2000:

(in millions, except per share data)
	2002		2001		2000
Net earnings, as reported	$	11,102	$	8,560	$	8,510
Deduct:
Total stock-based employee compensation expense determined under fair value method for all stock option awards, net of related tax effects	137		202		121
Pro forma net earnings	$	10,965	$	8,358	$	8,389
Earnings per share:
Basic — as reported	$	5.26	$	3.92	$	3.77
Basic — pro forma	$	5.19	$	3.83	$	3.71
Diluted — as reported	$	5.21	$	3.87	$	3.75
Diluted — pro forma	$	5.15	$	3.78	$	3.69

•New accounting pronouncements: In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Costs covered by SFAS No. 146 include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing or other exit or disposal activity. This statement is effective for exit or disposal activities that are initiated after December 31, 2002. Accordingly, Altria Group, Inc. will apply the provisions of SFAS No. 146 prospectively to exit or disposal activities initiated after December 31, 2002.

In November 2002, the EITF issued EITF Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” which addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF Issue No. 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. EITF Issue No. 00-21 is effective for Altria Group, Inc. for revenue arrangements entered into beginning July 1, 2003. Altria Group, Inc. does not expect the adoption of EITF Issue No. 00-21 to have a material impact on its 2003 consolidated financial statements.

The FASB recently issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 requires that the assets, liabilities and results of the activity of variable interest entities be consolidated into the financial statements of the company that has the controlling financial interest. Interpretation No. 46 also provides the framework for determining whether a variable interest entity should be consolidated based on voting interests or significant financial support provided to it. Interpretation No. 46 will be effective for Altria Group, Inc. on February 1, 2003 for variable interest entities created after January 31, 2003, and on July 31, 2003 for variable interest entities created prior to February 1, 2003. Based on its preliminary analysis of Interpretation No. 46, which was issued in January 2003, Altria Group, Inc. does not currently expect the adoption of Interpretation No. 46 to have a material impact on its 2003 consolidated financial statements.

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Note 3.
Miller Brewing Company Transaction:

On May 30, 2002, ALG announced an agreement with SAB to merge Miller into SAB. The transaction closed on July 9, 2002, and SAB changed its name to SABMiller plc (“SABMiller”). At closing, ALG received 430 million shares of SABMiller valued at approximately $3.4 billion, based upon a share price of 5.12 British pounds per share, in exchange for Miller, which had $2.0 billion of existing debt. The shares in SABMiller owned by ALG resulted in a 36% economic interest in SABMiller and a 24.9% voting interest. The transaction resulted in a pre-tax gain of approximately $2.6 billion or approximately $1.7 billion after-tax. The gain was recorded in the third quarter of 2002. Beginning with the third quarter of 2002, ALG’s ownership interest in SABMiller is being accounted for under the equity method. Accordingly, ALG’s investment in SABMiller of approximately $1.9 billion is included in other assets on the consolidated balance sheet at December 31, 2002. In addition, ALG records its share of SABMiller’s net earnings, based on its economic ownership percentage, in minority interest in earnings and other, net, on the consolidated statement of earnings.

Note 4.
Divestitures:

During 2002, Kraft Foods North America, Inc. (“KFNA”) sold several small North American food businesses, some of which were previously classified as businesses held for sale. The net revenues and operating results of the businesses held for sale, which were not significant, were excluded from Altria Group, Inc.’s consolidated statements of earnings and no gain or loss was recognized on these sales. In addition, Kraft Foods International, Inc. (“KFI”) sold a Latin American yeast and industrial bakery ingredients business for approximately $110 million and recorded a pre-tax gain of $69 million. The aggregate proceeds received from the sales of these businesses, as well as a small beer operation, were $221 million, resulting in pre-tax gains of $80 million.

During 2001, KFI sold two small food businesses and KFNA sold one small food business. The aggregate proceeds received in these transactions were $21 million, on which pre-tax gains of $8 million were recorded.

During 2000, KFI sold a French confectionery business for proceeds of $251 million, on which a pre-tax gain of $139 million was recorded. In addition, Miller sold its rights to Molson trademarks in the United States for proceeds of $131 million, on which a pre-tax gain of $100 million was recorded. The aggregate proceeds received in divestiture transactions in 2000, including the sale of several small international food, North American food and beer businesses, were $433 million, on which pre-tax gains of $274 million were recorded.

The operating results of the businesses sold were not material to Altria Group, Inc.’s consolidated operating results in any of the periods presented.

Note 5.
Acquisitions:

•Nabisco: On December 11, 2000, Altria Group, Inc., through its subsidiary Kraft, acquired all of the outstanding shares of Nabisco Holdings Corp. (“Nabisco”) for $55 per share in cash. The purchase of the outstanding shares, retirement of employee stock options and other payments totaled approximately $15.2 billion. In addition, the acquisition included the assumption of approximately $4.0 billion of existing Nabisco debt. The acquisition was financed through the issuance of $12.2 billion of short-term obligations and $3.0 billion of available cash. The acquisition has been accounted for as a purchase. Beginning January 1, 2001, Nabisco’s earnings have been included in the consolidated operating results of Altria Group, Inc. The interest cost on borrowings associated with acquiring Nabisco has been included in interest and other debt expense, net, on Altria Group, Inc.’s consolidated statements of earnings for the years ended December 31, 2002, 2001 and 2000.

During 2001, the allocation of excess purchase price relating to Nabisco was completed. As a result, Kraft recorded, among other things, the final valuation of property, plant and equipment and intangible assets, primarily trade names, amounts relating to the closure of Nabisco facilities and related deferred income taxes. The final allocation of excess purchase price at December 31, 2001 was as follows:

(in millions)
Purchase price	$	15,254
Historical value of tangible assets acquired and liabilities assumed	(1,271		)
Excess of purchase price over assets acquired and liabilities assumed at the date of acquisition	16,525
Increases for allocation of purchase price:
Property, plant and equipment	367
Other assets	347
Accrued postretirement health care costs	230
Pension liabilities	190
Debt	50
Legal, professional, lease and contract termination costs	129
Other liabilities, principally severance	602
Deferred income taxes	3,583
Goodwill and other intangible assets at December 31, 2001	$	22,023

Goodwill and other intangible assets, at December 31, 2001, included approximately $11.7 billion related to trade names. Kraft also recorded deferred federal income taxes of $3.9 billion related to trade names. During 2002, Kraft decreased goodwill by $76 million, due primarily to the favorable completion of certain severance and exit programs.

The closure of a number of Nabisco domestic and international facilities resulted in severance and other exit costs of $379 million, which are included in the above adjustments for the allocation of the Nabisco purchase price. The closures will result in the termination of approximately 7,500 employees and will require total cash payments of $373 million, of which approximately $190 million has been spent through December 31, 2002. Substantially all of the closures were completed as of December 31, 2002, and the remaining payments relate to salary continuation payments for severed employees and lease payments.

The integration of Nabisco into the operations of Kraft also resulted in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the consolidated statement of earnings to close or reconfigure facilities and integrate Nabisco were originally estimated to be in the range of $200 million to $300 million. During 2002 and 2001, KFNA recorded pre-tax charges of $98 million and $53 million, respectively, related to the closing of a facility and other consolidation programs in North America. During 2002, KFI recorded pre-tax charges of $17 million to consolidate production lines and distribution networks in Latin America. In addition, during the first quarter of 2002, approximately 700 employees

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accepted the benefits offered by a voluntary early retirement program for certain salaried employees. Pre-tax charges of $135 million and $7 million were recorded in the operating results of the North American food and international food segments, respectively, in the first quarter of 2002 for these separation programs. As of December 31, 2002, the aggregate pre-tax charges to the consolidated statements of earnings to close or reconfigure Kraft facilities and integrate Nabisco, including Kraft’s separation programs, were $310 million, slightly above the original estimate. The integration related charges of $168 million included $27 million relating to severance, $117 million relating to asset write-offs and $24 million relating to other cash exit costs. Cash payments relating to these charges will approximate $51 million, of which $21 million has been paid through December 31, 2002. No additional pre-tax charges are expected to be recorded for these programs.

During 2001, certain small Nabisco businesses were reclassified to businesses held for sale, including their estimated results of operations through anticipated sales dates. 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 2002 consolidated operating results of KFNA.

Assuming the acquisition of Nabisco occurred at the beginning of 2000, pro forma net revenues for 2000 would have been $81 billion; pro forma net earnings would have been $8 billion; pro forma basic EPS would have been $3.52; and pro forma diluted EPS would have been $3.50. These pro forma results, which are unaudited, do not give effect to any synergies expected to result from the merger of Nabisco’s operations with those of Kraft, nor do they give effect to the reduction of interest expense from the repayment of borrowings with proceeds from Kraft’s initial public offering (“IPO”) of its common stock. The pro forma results also do not reflect the effects of SFAS No. 141 and 142 on the amortization of goodwill or other intangible assets. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been consummated and the IPO completed at the beginning of 2000, nor are they necessarily indicative of future consolidated operating results.

On June 13, 2001, Kraft completed an IPO of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. Altria Group, Inc. used the IPO proceeds, net of underwriting discount and expenses, of $8.4 billion to retire a portion of the debt incurred to finance the acquisition of Nabisco. After the completion of the IPO, Altria Group, Inc. owned approximately 83.9% of the outstanding shares of Kraft’s capital stock through Altria Group, Inc.’s ownership of 49.5% of Kraft’s Class A common stock and 100% of Kraft’s Class B common stock. Kraft’s Class A common stock has one vote per share while Kraft’s Class B common stock has ten votes per share. As of December 31, 2002 and 2001, Altria Group, Inc. held approximately 98% of the combined voting power of Kraft’s outstanding capital stock. As a result of the IPO, an adjustment of $8.4 billion to the carrying amount of Altria Group, Inc.’s investment in Kraft has been reflected on Altria Group, Inc.’s consolidated balance sheet as an increase to additional paid-in capital of $4.4 billion (net of the recognition of cumulative currency translation adjustments and other comprehensive losses) and minority interest of $3.7 billion. At December 31, 2002, Altria Group, Inc. owns approximately 84.2% of the outstanding shares of Kraft’s capital stock.

•Other Acquisitions: During 2002, KFI acquired a snacks business in Turkey and a biscuits business in Australia. The total cost of these and other smaller acquisitions, including a PMI acquisition, was $147 million.

During 2001, PMI increased its ownership interest in its Argentine tobacco subsidiary for an aggregate cost of $255 million. In addition, KFI purchased coffee businesses in Romania, Morocco and Bulgaria and also acquired confectionery businesses in Russia and Poland. The total cost of these and other smaller acquisitions was $451 million.

During 2000, KFNA purchased Balance Bar Co. and Boca Burger, Inc. The total cost of these and other smaller acquisitions was $417 million.

The effects of these acquisitions were not material to Altria Group, Inc.’s consolidated financial position or results of operations in any of the periods presented.

Note 6.
Inventories:

The cost of approximately 46% and 50% of inventories in 2002 and 2001, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.6 billion and $0.7 billion lower than the current cost of inventories at December 31, 2002 and 2001, respectively.

Note 7.
Finance Assets, net:

At December 31, 2002, finance assets, net, of $9,075 million were comprised of investment in finance leases of $9,358 million and other receivables of $161 million, reduced by allowance for losses of $444 million. At December 31, 2001, finance assets, net, of $8,691 million were comprised of investment in finance leases of $8,238 million and other receivables of $585 million, reduced by allowance for losses of $132 million.

A summary of net investment in finance leases at December 31, before allowance for losses, was as follows:

(in millions)	Leveraged Leases						Direct Finance Leases						Total
	2002			2001			2002			2001			2002			2001
Rentals receivable, net	$	9,381		$	8,677		$	2,110		$	1,482		$	11,491		$	10,159
Unguaranteed residual values	2,267			2,296			148			82			2,415			2,378
Unearned income	(3,953		)	(3,807		)	(546		)	(431		)	(4,499		)	(4,238		)
Deferred investment tax credits	(49		)	(61		)							(49		)	(61		)
Investment in finance leases	7,646			7,105			1,712			1,133			9,358			8,238
Deferred income taxes	(5,163		)	(4,934		)	(434		)	(189		)	(5,597		)	(5,123		)
Net investment in finance leases	$	2,483		$	2,171		$	1,278		$	944		$	3,761		$	3,115

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Rentals receivable, net, for leveraged leases, represent unpaid rentals, less principal and interest payments on remaining third-party non-recourse debt. PMCC’s rights to rentals receivable are subordinate to the non-recourse debt-holders and the leased equipment is pledged as collateral to the debt-holders. PMCC has no obligation for the payment of non-recourse third-party debt issued to purchase the assets under the lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is non-recourse to all other assets of PMCC. As required by U.S. GAAP, the non-recourse third-party debt of $20.0 billion and $17.9 billion at December 31, 2002 and 2001, respectively, has been offset against the related rentals receivable. There were no leases with contingent rentals in 2002 and 2001.

PMCC’s investment in finance leases is principally comprised of the following investment categories: aircraft (27%), electric power (20%), surface transport (17%), real estate (14%), manufacturing (14%), energy (6%) and other (2%). Investments located outside the United States, which are all dollar-denominated, represent 20% and 16% of PMCC’s finance assets in 2002 and 2001, respectively.

PMCC leases a number of aircraft, predominantly to major United States carriers. On August 11, 2002, US Airways Group, Inc. (“US Air”) filed for Chapter 11 bankruptcy protection. PMCC currently leases 16 Airbus A319 aircraft to US Air under long-term leveraged leases, which expire in 2018 and 2019. The aircraft were leased in 1998 and 1999 and represent an investment in finance leases of $150 million at December 31, 2002. PMCC ceased recording income on these leases as of the date of the bankruptcy filing, pending US Air’s effort to restructure with the assistance of a government loan guarantee.

On December 9, 2002, United Air Lines Inc. (“UAL”) filed for Chapter 11 bankruptcy protection. At December 31, 2002, PMCC leased 24 Boeing 757 aircraft to UAL, 6 under long-term leveraged leases, which expire in 2014, and 18 under long-term single investor leases, which expire in 2011 and 2014. The investment in finance assets totals $92 million for the 6 aircraft under leveraged leases and $747 million for the 18 aircraft under single investor leases. Of the existing single investor leases, 16 were originally leveraged leases. As a result of PMCC’s purchase of the senior non-recourse debt on these planes totaling $239 million, these 16 leases, as required by U.S. GAAP, were converted to single investor leases. The remaining non-recourse debt principal and accrued interest on these aircraft totaling $214 million is held by UAL and is subordinate to the senior debt. Aggregate exposure to UAL totals $625 million, net of the non-recourse debt held by UAL at December 31, 2002. PMCC continues to evaluate the effect of the UAL bankruptcy filing, while seeking to negotiate with UAL in its efforts to restructure and emerge from bankruptcy. PMCC ceased recording income on the leases as of the date of the bankruptcy filing.

In recognition of the recent economic downturn in the airline industry, PMCC increased its allowance for losses by $290 million in the fourth quarter of 2002.

Rentals receivable in excess of debt service requirements on non-recourse debt related to leveraged leases and rentals receivable from direct finance leases at December 31, 2002 were as follows:

(in millions)	Leveraged Leases		Direct Finance Leases		Total
2003	$	260	$	218	$	478
2004	285		227		512
2005	231		187		418
2006	266		169		435
2007	258		148		406
2008 and thereafter	8,081		1,161		9,242
Total	$	9,381	$	2,110	$	11,491

Included in net revenues for the years ended December 31, 2002, 2001 and 2000 were leveraged lease revenues of $363 million, $284 million and $256 million, respectively, and direct finance lease revenues of $99 million, $102 million and $104 million, respectively. Income tax expense on leveraged lease revenues for the years ended December 31, 2002, 2001 and 2000 was $142 million, $110 million and $93 million, respectively.

Income from investment tax credits on leveraged leases and initial direct costs and executory costs on direct financing leases were not material during the years ended December 31, 2002, 2001 and 2000.

Note 8.
Short-Term Borrowings and Borrowing Arrangements:

At December 31, 2002 and 2001, Altria Group, Inc.’s consumer products businesses had short-term borrowings of $4,005 million and $4,485 million, respectively, consisting principally of commercial paper borrowings with an average year-end interest rate of 1.4% and 1.9%, respectively. Of these amounts, Altria Group, Inc. reclassified $3,598 million at December 31, 2002, and $3,488 million at December 31, 2001, of the commercial paper borrowings to long-term debt based upon its intent and ability to refinance these borrowings on a long-term basis.

In addition, at December 31, 2001, Altria Group, Inc.’s financial services business had short-term commercial paper borrowings of $512 million, with an average year-end interest rate of 2.0%.

The fair values of Altria Group, Inc.’s short-term borrowings at December 31, 2002 and 2001, based upon current market interest rates, approximate the amounts disclosed above.

Altria Group, Inc. maintains credit lines with a number of lending institutions, amounting to approximately $15.0 billion at December 31, 2002. Approximately $14.6 billion of these credit lines were undrawn at December 31, 2002. Certain of these credit lines were used to support $3.6 billion of commercial paper borrowings at December 31, 2002, the proceeds of which were used for general corporate purposes. A portion of these lines is also used to meet the short-term working capital needs of Altria Group, Inc.’s international businesses. Altria Group, Inc.’s credit facilities include $7.0 billion (of which $2.0 billion is for the sole use of Kraft) of 5-year revolving credit facilities maturing in July 2006, and $6.0 billion (of which $3.0 billion is for the sole use of Kraft) of 364-day revolving credit facilities expiring in July 2003. The Altria Group, Inc. facilities require the maintenance of a fixed charges coverage ratio and the Kraft facilities require the maintenance of a minimum net worth. Altria Group, Inc. and Kraft met their respective

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covenants at December 31, 2002. The foregoing revolving credit facilities do not include any other financial tests, any credit rating triggers or any provisions that could require the posting of collateral.

Note 9.
Long-Term Debt:

At December 31, 2002 and 2001, Altria Group, Inc.’s long-term debt consisted of the following:

(in millions)
	2002			2001
Consumer products:
Short-term borrowings, reclassified as long-term debt	$	3,598		$	3,488
Notes, 4.63% to 8.25% (average effective rate 6.09%), due through 2035	13,686			12,012
Debentures, 7.00% to 7.75% (average effective rate 8.36%), $950 million face amount, due through 2027	904			1,118
Foreign currency obligations:
Euro, 4.50% to 5.63% (average effective rate 5.07%), due through 2008	2,083			1,841
German mark, 5.63%, due 2002				140
Other foreign	120			137
Other	356			365
	20,747			19,101
Less current portion of long-term debt	(1,558		)	(1,942		)
	$	19,189		$	17,159
Financial services:
Eurodollar bonds, 7.50%, due 2009	$	498		$	498
Swiss franc, 4.00%, due 2006 and 2007	1,223			601
Euro, 5.38% to 6.88% (average effective rate 6.23%),due through 2006	445			393
	$	2,166		$	1,492

Aggregate maturities of long-term debt, excluding short-term borrowings reclassified as long-term debt, are as follows:

(in millions)	Consumer Products		Financial Services
2003	$	1,558	$	131
2004	1,725		158
2005	1,787
2006	3,119		854
2007	1,896		525
2008-2012	5,173		498
2013-2017	393
Thereafter		1,544

Based on market quotes, where available, or interest rates currently available to Altria Group, Inc. for issuance of debt with similar terms and remaining maturities, the aggregate fair value of consumer products and financial services long-term debt, including the current portion of long-term debt, at December 31, 2002 and 2001, was $24.2 billion and $21.1 billion, respectively.

Note 10.
Capital Stock:

Shares of authorized common stock are 12 billion; issued, repurchased and outstanding shares were as follows:

	Shares Issued	Shares Repurchased		Shares Outstanding
Balances, January 1, 2000	2,805,961,317	(467,441,576	)	2,338,519,741
Exercise of stock options and issuance of other stock awards		7,938,869		7,938,869
Repurchased		(137,562,230	)	(137,562,230	)
Balances, December 31, 2000	2,805,961,317	(597,064,937	)	2,208,896,380
Exercise of stock options and issuance of other stock awards		28,184,943		28,184,943
Repurchased		(84,578,106	)	(84,578,106	)
Balances, December 31, 2001	2,805,961,317	(653,458,100	)	2,152,503,217
Exercise of stock options and issuance of other stock awards		21,155,477		21,155,477
Repurchased		(134,399,142	)	(134,399,142	)
Balances, December 31, 2002	2,805,961,317	(766,701,765	)	2,039,259,552

At December 31, 2002, 208,774,099 shares of common stock were reserved for stock options and other stock awards under Altria Group, Inc.’s stock plans, and 10 million shares of Serial Preferred Stock, $1.00 par value, were authorized, none of which have been issued.

Altria Group, Inc. repurchases its stock in open market transactions. On March 12, 2001, Altria Group, Inc. completed an $8 billion repurchase program, acquiring 256,967,772 shares at an average price of $31.13 per share. On March 12, 2001, Altria Group, Inc. commenced repurchasing shares under a $10 billion repurchase program. Through December 31, 2002, cumulative repurchases under the $10 billion program were 204,002,792 shares at a cost of approximately $9.6 billion, or $46.82 per share. Kraft also began to repurchase its Class A common stock in 2002 to satisfy the requirements of its stock-based compensation programs. During 2002, Kraft repurchased $170 million of its common stock.

56

Note 11.
Stock Plans:

Under the Altria Group, Inc. 2000 Performance Incentive Plan (the “2000 Plan”), Altria Group, Inc. may grant to eligible employees stock options, stock appreciation rights, restricted stock, reload options and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 110 million shares of common stock may be issued under the 2000 Plan, of which no more than 27.5 million shares may be awarded as restricted stock. In addition, Altria Group, Inc. may grant up to one million shares of common stock to members of the Board of Directors who are not employees of Altria Group, Inc. under the 2000 Stock Compensation Plan for Non-Employee Directors (the “2000 Directors Plan”). Shares available to be granted under the 2000 Plan and the 2000 Directors Plan at December 31, 2002 were 93,477,267 and 827,992, respectively.

Stock options are granted at an exercise price of not less than fair value on the date of the grant. Stock options granted under the 2000 Plan or the 2000 Directors Plan (collectively, “the Plans”) generally become exercisable on the first anniversary of the grant date and have a maximum term of ten years.

In addition, Kraft may grant stock options, stock appreciation rights, restricted stock, reload options and other awards of its Class A common stock to its employees under the terms of the Kraft Performance Incentive Plan. Up to 75 million shares of Kraft’s Class A common stock may be issued under the Kraft plan. At December 31, 2002, Kraft’s employees held options to purchase 19,291,672 shares of Kraft’s Class A common stock.

Concurrent with Kraft’s IPO, certain Altria Group, Inc. employees received a one-time grant of options to purchase shares of Kraft’s Class A common stock held by Altria Group, Inc. at the IPO price of $31.00 per share. At December 31, 2002, employees held options to purchase approximately 1.6 million shares of Kraft’s Class A common stock from Altria Group, Inc. In order to completely satisfy the obligation and maintain its current percentage ownership of Kraft, Altria Group, Inc. purchased approximately 1.6 million shares of Kraft’s Class A common stock in open market transactions during 2002.

Altria Group, Inc. and Kraft apply the intrinsic value-based methodology in accounting for the various stock plans. Accordingly, no compensation expense has been recognized other than for restricted stock awards. Had compensation cost for stock option awards been determined by using the fair value at the grant date, Altria Group, Inc.’s net earnings and basic and diluted EPS would have been $10,965 million, $5.19 and $5.15, respectively, for the year ended December 31, 2002; $8,358 million, $3.83 and $3.78, respectively, for the year ended December 31, 2001; and $8,389 million, $3.71 and $3.69, respectively, for the year ended December 31, 2000. The foregoing impact of compensation cost was determined using a modified Black-Scholes methodology and the following assumptions for Altria Group, Inc. and Kraft Class A common stock:

	Risk-Free Interest Rate			Weighted Average Expected Life	Expected Volatility			Expected Dividend Yield			Fair Value at Grant Date
2002 Altria Group, Inc.	3.89		%	5 years	31.73		%	4.54		%		$10.17
2002 Kraft	4.27			5	28.72			1.41			10.65
2001 Altria Group, Inc.	4.85			5	33.75			4.67			10.71
2001 Kraft	4.81			5	29.70			1.68			9.13
2000 Altria Group, Inc.		6.57		5		31.73			8.98			3.22

Altria Group, Inc. option activity was as follows for the years ended December 31, 2000, 2001 and 2002:

	Shares Subject to Option			Weighted Average Exercise Price		Options Exercisable
Balance at January 1, 2000	100,305,968			$	34.65	78,423,023
Options granted	41,535,255			21.47
Options exercised	(5,263,363		)	21.16
Options canceled	(3,578,922		)	32.87
Balance at December 31, 2000	132,998,938			31.11		92,266,885
Options granted	35,636,252			45.64
Options exercised	(30,276,835		)	25.71
Options canceled	(1,223,518		)	42.45
Balance at December 31, 2001	137,134,837			35.98		103,155,954
Options granted	3,245,480			53.08
Options exercised	(24,115,829		)	30.33
Options canceled	(1,941,148		)	38.22
Balance at December 31, 2002		114,323,340			37.62		105,145,417

The weighted average exercise prices of Altria Group, Inc. options exercisable at December 31, 2002, 2001 and 2000 were $36.57, $32.74 and $35.30, respectively.

The following table summarizes the status of Altria Group, Inc. stock options outstanding and exercisable as of December 31, 2002 by range of exercise price:

	Options Outstanding					Options Exercisable
Range of Exercise Prices	Number Outstanding		Average Remaining Contractual Life	Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$16.35 –$22.09	21,044,490		6 years	$	20.80	21,044,490		$	20.80
24.52 –  34.90	14,686,584		3	30.90		14,686,584		30.90
35.81 –  42.96	32,507,344		6	39.82		32,417,806		39.81
43.87 –  65.00	46,084,922		7	45.89		36,996,537		44.96
		114,323,340					105,145,417

57

Altria Group, Inc. and Kraft may grant shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares and rights. Such shares and rights are subject to forfeiture if certain employment conditions are not met. During 2002, 2001 and 2000, Altria Group, Inc. granted 6,000, 889,680 and 3,473,270 shares, respectively, of restricted stock to eligible U.S.-based employees, and during 2001 and 2000, also issued to eligible non-U.S. employees rights to receive 36,210 and 1,717,640 equivalent shares, respectively. At December 31, 2002, restrictions on the Altria Group, Inc. stock, net of forfeitures, lapse as follows: 2003–224,250 shares; 2004–126,000 shares; 2005–39,000 shares; and 2007 and thereafter–354,000 shares. Kraft did not grant any shares of restricted stock or any rights to receive shares of stock during any of the periods presented.

The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period. Altria Group, Inc. recorded compensation expense related to restricted stock and other stock awards of $13 million, $89 million and $84 million for the years ended December 31, 2002, 2001 and 2000, respectively. The unamortized portion, which is reported as a reduction of earnings reinvested in the business, was $8 million and $22 million at December 31, 2002 and 2001, respectively.

Note 12.
Earnings per Share:

Basic and diluted EPS were calculated using the following for the years ended December 31, 2002, 2001 and 2000:

(in millions)
	2002		2001		2000
Net earnings	$	11,102	$	8,560	$	8,510
Weighted average shares for basic EPS	2,111		2,181		2,260
Plus incremental shares from conversions:
Restricted stock and stock rights	1		7		4
Stock options	17		22		8
Weighted average shares for diluted EPS		2,129		2,210		2,272

In 2002, 2001 and 2000, options on 11 million, 5 million and 69 million shares of common stock, respectively, were not included in the calculation of weighted average shares for diluted EPS because the effect of their inclusion would be antidilutive.

Note 13.
Pre-tax Earnings and Provision for Income Taxes:

Pre-tax earnings and provision for income taxes consisted of the following for the years ended December 31, 2002, 2001 and 2000:

(in millions)
	2002		2001		2000
Pre-tax earnings:
United States	$	12,179	$	9,105	$	9,273
Outside United States	5,919		5,179		4,814
Total pre-tax earnings	$	18,098	$	14,284	$	14,087
Provision for income taxes:
United States federal:
Current	$	2,633	$	2,722	$	2,571
Deferred	1,493		570		736
	4,126		3,292		3,307
State and local	459		484		552
Total United States	4,585		3,776		3,859
Outside United States:
Current	1,747		1,516		1,321
Deferred	92		115		270
Total outside United States	1,839		1,631		1,591
Total provision for income taxes	$	6,424	$	5,407	$	5,450

At December 31, 2002, applicable United States federal income taxes and foreign withholding taxes have not been provided on approximately $7.1 billion of accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested. It is not practical to estimate the amount of additional taxes that might be payable on such undistributed earnings.

The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2002, 2001 and 2000:

	2002		2001		2000
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
State and local income taxes, net of federal tax benefit	1.7		2.3		2.6
Goodwill amortization			2.3		1.3
Other (including foreign rate differences)	(1.2	)	(1.7	)	(0.2	)
Effective tax rate	35.5	%	37.9	%	38.7	%

58

The tax effects of temporary differences that gave rise to consumer products deferred income tax assets and liabilities consisted of the following at December 31, 2002 and 2001:

(in millions)
	2002			2001
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	1,291		$	1,403
Settlement charges	1,066			1,132
Other	82			859
Total deferred income tax assets	2,439			3,394
Deferred income tax liabilities:
Trade names	(3,839		)	(3,847		)
Property, plant and equipment	(2,158		)	(2,142		)
Prepaid pension costs	(660		)	(781		)
Total deferred income tax liabilities	(6,657		)	(6,770		)
Net deferred income tax liabilities	$	(4,218	)	$	(3,376	)

Financial services deferred income tax liabilities are primarily attributable to temporary differences relating to net investments in finance leases.

Note 14.
Segment Reporting:

The products of ALG’s subsidiaries include cigarettes, food (consisting principally of a wide variety of snacks, beverages, cheese, grocery products and convenient meals) and beer, prior to the merger of Miller into SAB on July 9, 2002. Another subsidiary of ALG, PMCC, is primarily engaged in leasing activities. The products and services of these subsidiaries constitute Altria Group, Inc.’s reportable segments of domestic tobacco, international tobacco, North American food, international food, beer (prior to July 9, 2002) and financial services.

Altria Group, Inc.’s management reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income for the segments excludes general corporate expenses and amortization of intangibles. Interest and other debt expense, net (consumer products), and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by Altria Group, Inc.’s management. Altria Group, Inc.’s assets are managed on a worldwide basis by major products and, accordingly, asset information is reported for the tobacco, food and financial services segments, and for 2001 and 2000, the beer segment. Intangible assets and related amortization are principally attributable to the food businesses. Other assets consist primarily of cash and cash equivalents. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies.

Segment data were as follows:

(in millions)
	2002			2001			2000
Net revenues:
Domestic tobacco	$	18,877		$	19,902		$	18,967
International tobacco	28,672			26,517			26,290
North American food	21,485			20,970			15,312
International food	8,238			8,264			7,610
Beer	2,641			4,791			4,907
Financial services	495			435			417
Net revenues	$	80,408		$	80,879		$	73,503
Operating companies income:
Domestic tobacco	$	5,011		$	5,264		$	5,350
International tobacco	5,666			5,406			5,211
North American food	4,953			4,796			3,547
International food	1,330			1,239			1,208
Beer	276			481			650
Financial services	55			296			262
Total operating companies income	17,291			17,482			16,228
Amortization of intangibles	(7		)	(1,014		)	(591		)
General corporate expenses	(683		)	(766		)	(831		)
Operating income	16,601			15,702			14,806
Gain on Miller transaction	2,631
Interest and other debt expense, net	(1,134		)	(1,418		)	(719		)
Earnings before income taxes, minority interest and cumulative effect of accounting change	$	18,098		$	14,284		$	14,087

On May 30, 2002, Altria Group, Inc. announced an agreement with SAB to merge Miller into SAB. The transaction closed on July 9, 2002, and SAB changed its name to SABMiller. The transaction, which is discussed more fully in Note 3. Miller Brewing Company Transaction, resulted in a pre-tax gain of $2.6 billion or $1.7 billion after-tax.

During 2002, PMI announced a separation program in Germany and approximately 160 employees accepted the benefits offered by this program. In addition, PMI announced a separation program in the United Kingdom, and approximately 90 employees were terminated. As a result, pre-tax charges of $58 million, primarily for enhanced severance, pension and postretirement benefits, were recorded in the operating companies income of the international tobacco segment. Cash payments relating to these charges will approximate $50 million, of which approximately $10 million has been paid through December 31, 2002. The remaining payments are expected to be made over the remaining lives of the former employees in accordance with the terms of the related benefit plans.

During 2002 and 2001, operating companies income for the North American food and international food segments included pre-tax charges related to the consolidation of production lines, the closing of a facility and other consolidation programs. Pre-tax charges of $98 million and $53 million were recorded in the operating companies income of the North American food segment for the years ended December 31, 2002 and 2001, respectively, and $17 million was recorded in the international food segment for the year ended December 31, 2002. The integration related charges of

59

$168 million included $27 million relating to severance, $117 million relating to asset write-offs and $24 million relating to other cash exit costs. Cash payments relating to these charges will approximate $51 million, of which $21 million has been paid through December 31, 2002. During 2002, KFI sold a Latin American yeast and industrial bakery ingredients business, resulting in a pre-tax gain of $69 million, and KFNA sold several small businesses, resulting in gains of $11 million. In addition, during 2001, KFNA sold a North American food factory, which resulted in a pre-tax loss of $29 million.

During 2002, in recognition of the economic downturn in the airline industry, PMCC increased its allowance for losses by $290 million.

During 2002, Miller recorded a pre-tax charge of $15 million for a beer asset impairment. During 2001, Miller revised the terms of a contract brewing agreement with Pabst Brewing Company, which resulted in pre-tax charges of $19 million in the operating companies income of the beer segment. During 2000, Miller sold its rights to Molson trademarks in the United States and recorded a pre-tax gain of $100 million in operating companies income.

As discussed in Note 18. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM USA, certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court 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 the operating companies income of the domestic tobacco segment for the year ended December 31, 2001. In July 2001, PM USA also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM USA should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2002 and 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recorded as earned in interest and other debt expense, net, in the consolidated statements of earnings.

During 2001, separation programs were announced for certain eligible salaried employees in the food and beer businesses. During the first quarter of 2002, approximately 800 employees accepted the benefits offered by these programs and elected to retire or terminate employment. Pre-tax charges of $135 million, $7 million and $8 million were recorded in the operating companies income of the North American food, international food and beer segments, respectively, during the first quarter of 2002 for these separation programs.

See Notes 3, 4 and 5 regarding the Miller Brewing Company transaction, divestitures and acquisitions.

(in millions)
For the years ended December 31,	2002		2001		2000
Depreciation expense:
Domestic tobacco	$	194	$	187	$	202
International tobacco	307		294		277
North American food	506		483		310
International food	203		197		189
Beer	61		119		118
	1,271		1,280		1,096
Other	53		43		30
Total depreciation expense	$	1,324	$	1,323	$	1,126
Assets:
Tobacco	$	18,329	$	17,791	$	15,687
Food	57,245		55,798		52,071
Beer			1,782		1,751
Financial services	9,231		8,864		8,402
	84,805		84,235		77,911
Other	2,735		733		1,156
Total assets	$	87,540	$	84,968	$	79,067
Capital expenditures:
Domestic tobacco	$	140	$	166	$	156
International tobacco	497		418		410
North American food	808		761		588
International food	376		340		318
Beer	84		132		135
	1,905		1,817		1,607
Other	104		105		75
Total capital expenditures	$	2,009	$	1,922	$	1,682

Geographic data for net revenues and long-lived assets (which consist of all financial services assets and non-current consumer products assets, other than goodwill and other intangible assets) were as follows:

(in millions)
For the years ended December 31,	2002		2001		2000
Net revenues:
United States — domestic	$	41,067	$	43,876	$	37,834
— export	3,658		3,866		4,347
Europe	26,118		22,737		22,962
Other	9,565		10,400		8,360
Total net revenues	$	80,408	$	80,879	$	73,503
Long-lived assets:
United States	$	24,308	$	22,864	$	21,314
Europe	4,939		4,328		4,299
Other	2,981		2,953		3,126
Total long-lived assets	$	32,228	$	30,145	$	28,739

60

Note 15.
Benefit Plans:

Altria Group, Inc. sponsors noncontributory defined benefit pension plans covering substantially all U.S. employees. Pension coverage for employees of ALG’s non-U.S. subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, ALG and its U.S. and Canadian subsidiaries provide health care and other benefits to substantially all retired employees. Health care benefits for retirees outside the United States and Canada are generally covered through local government plans.

•Pension Plans: Net pension (income) cost consisted of the following for the years ended December 31, 2002, 2001 and 2000:

(in millions)	U.S. Plans									Non-U.S. Plans
	2002			2001			2000			2002			2001			2000
Service cost	$	215		$	189		$	142		$	105		$	100		$	93
Interest cost	590			595			455			183			174			157
Expected return on plan assets	(943		)	(961		)	(799		)	(209		)	(205		)	(175		)
Amortization:
Net gain on adoption of SFAS No. 87	(1		)	(10		)	(22		)
Unrecognized net loss (gain) from experience differences	23			(34		)	(53		)	7			(3		)	(3		)
Prior service cost	14			22			21			9			7			5
Termination, settlement and curtailment	133			(12		)	(34		)	28
Net pension cost (income)	$	31		$	(211	)	$	(290	)	$	123		$	73		$	77

During 2002, 2001 and 2000, employees left Altria Group, Inc. under voluntary early retirement and workforce reduction programs, and through the Miller transaction. These events resulted in settlement losses and curtailment losses, and termination benefits of $112 million for the U.S. plans in 2002. In addition, retiring employees of KFNA elected lump-sum payments, resulting in settlement losses of $21 million in 2002, and settlement gains of $12 million and $34 million in 2001 and 2000, respectively. During 2002, early retirement programs in the international tobacco business resulted in additional termination benefits of $28 million for the non-U.S. plans.

The changes in benefit obligations and plan assets, as well as the funded status of Altria Group, Inc.’s pension plans at December 31, 2002 and 2001, were as follows:

(in millions)	U.S. Plans						Non-U.S. Plans
	2002			2001			2002			2001
Benefit obligation at January 1	$	8,818		$	7,602		$	3,404		$	3,183
Service cost	215			189			105			100
Interest cost	590			595			183			174
Benefits paid	(845		)	(605		)	(179		)	(169		)
Acquisitions				71						(22		)
Miller transaction	(650		)
Termination, settlement and curtailment	126			14			11
Actuarial losses	756			897			208			70
Currency							301			5
Other	(8		)	55			41			63
Benefit obligation at December 31	9,002			8,818			4,074			3,404
Fair value of plan assets at January 1	9,448			10,342			2,272			2,676
Actual return on plan assets	(1,415		)	(584		)	(156		)	(373		)
Contributions	705			223			399			127
Benefits paid	(858		)	(599		)	(137		)	(127		)
Acquisitions				(45		)				(41		)
Miller transaction	(476		)
Currency							170			7
Actuarial gains	131			111						3
Fair value of plan assets at December 31	7,535			9,448			2,548			2,272
(Deficit) excess of plan assets versus benefit obligations at December 31	(1,467		)	630			(1,526		)	(1,132		)
Unrecognized actuarial losses	2,956			1,147			720			392
Unrecognized prior service cost	134			185			72			71
Unrecognized net transition obligation				(3		)	7			9
Net prepaid pension asset (liability)	$	1,623		$	1,959		$	(727	)	$	(660	)

The combined U.S. and non-U.S. pension plans resulted in a net prepaid pension asset of $0.9 billion and $1.3 billion at December 31, 2002 and 2001, respectively. These amounts were recognized in Altria Group, Inc.’s consolidated balance sheets at December 31, 2002 and 2001, as other assets of $3.0 billion and $2.7 billion, respectively, for those plans in which plan assets exceeded their accumulated benefit obligations, and as other liabilities of $2.1 billion and $1.4 billion, respectively, for those plans in which the accumulated benefit obligations exceeded their plan assets.

61

For U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $4,026 million, $3,442 million and $2,615 million, respectively, as of December 31, 2002, and $2,677 million, $2,170 million and $1,753 million, respectively, as of December 31, 2001. For non-U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $2,904 million, $2,512 million and $1,433 million, respectively, as of December 31, 2002, and $1,490 million, $1,343 million and $451 million, respectively, as of December 31, 2001.

The following weighted-average assumptions were used to determine Altria Group, Inc.’s obligations under the plans:

	U.S. Plans				Non-U.S. Plans
	2002		2001		2002		2001
Discount rate	6.50	%	7.00	%	4.99	%	5.38	%
Expected rate of return on plan assets	9.00		9.00		7.81		7.94
Rate of compensation increase	4.20		4.50		3.30		3.68

SFAS No. 87, “Employers’ Accounting for Pensions,” permits the delayed recognition of pension fund gains and losses in ratable periods of up to five years. Altria Group, Inc. uses a four-year period wherein pension fund gains and losses are reflected in the pension calculation at 25% per year, beginning the year after the gains or losses occur. Recent stock market declines have resulted in deferred losses, which in turn resulted in the recording of additional minimum pension liabilities through an after-tax charge of $760 million to other comprehensive earnings (losses) in 2002. Including this charge, the total additional minimum pension liabilities contained in other comprehensive earnings (losses) at December 31, 2002 was $928 million. The amortization of deferred losses will result in higher pension cost in future periods.

ALG and certain of its subsidiaries sponsor deferred profit-sharing plans covering certain salaried, non-union and union employees. Contributions and costs are determined generally as a percentage of pre-tax earnings, as defined by the plans. Certain other subsidiaries of ALG also maintain defined contribution plans. Amounts charged to expense for defined contribution plans totaled $222 million, $231 million and $211 million in 2002, 2001 and 2000, respectively.

•Postretirement Benefit Plans: Net postretirement health care costs consisted of the following for the years ended December 31, 2002, 2001 and 2000:

(in millions)
	2002			2001			2000
Service cost	$	68		$	64		$	51
Interest cost	272			270			199
Amortization:
Unrecognized net loss (gain) from experience differences	24			1			(8		)
Unrecognized prior service cost	(24		)	(12		)	(12		)
Other expense	16
Net postretirement health care costs	$	356		$	323		$	230

During 2002, Altria Group, Inc. instituted early retirement programs. These actions resulted in curtailment losses of $16 million in 2002, which are included in other expense above.

Altria Group, Inc.’s postretirement health care plans are not funded. The changes in the benefit obligations of the plans at December 31, 2002 and 2001 were as follows:

(in millions)
	2002			2001
Accumulated postretirement benefit obligation at January 1	$	3,966		$	3,323
Service cost	68			64
Interest cost	272			270
Benefits paid	(260		)	(233		)
Miller transaction	(322		)
Curtailments	21
Acquisitions				8
Plan amendments	(180		)	1
Assumption changes	348			319
Actuarial losses	336			214
Accumulated postretirement benefit obligation at December 31	4,249			3,966
Unrecognized actuarial losses	(1,098		)	(475		)
Unrecognized prior service cost	199			63
Accrued postretirement health care costs	$	3,350		$	3,554

The current portion of Altria Group, Inc.’s accrued postretirement health care costs of $222 million and $239 million at December 31, 2002 and 2001, respectively, are included in other accrued liabilities on the consolidated balance sheets.

The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for U.S. plans was 6.5% in 2001, 5.9% in 2002 and 8.0% in 2003, declining to 5.0% by the year 2006 and remaining at that level thereafter. For Canadian plans, the assumed health care cost trend rate was 9.0% in 2001, 8.0% in 2002 and 7.0% in 2003, declining to 4.0% by the year 2006 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rates for each year would increase the accumulated postretirement benefit obligation as of December 31, 2002, and postretirement health care cost

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(service cost and interest cost) for the year then ended by approximately 8.4% and 11.5%, respectively. A one-percentage-point decrease in the assumed health care cost trend rates for each year would decrease the accumulated postretirement benefit obligation as of December 31, 2002, and postretirement health care cost (service cost and interest cost) for the year then ended by approximately 6.9% and 9.4%, respectively.

The accumulated postretirement benefit obligations for U.S. plans at December 31, 2002 and 2001 were determined using assumed discount rates of 6.5% and 7.0%, respectively. The accumulated postretirement benefit obligations for Canadian plans at December 31, 2002 and 2001, were determined using an assumed discount rate of 6.75%.

Assumption changes of $348 million at December 31, 2002 relate primarily to lowering the discount rate from 7.0% to 6.5% and to increasing the medical trend rate for 2003 through 2005 in consideration of current medical inflation trends. Assumption changes of $319 million at December 31, 2001 relate to lowering the discount rate from 7.75% to 7.0%.

•Postemployment Benefit Plans: ALG and certain of its subsidiaries sponsor postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs consisted of the following for the years ended December 31, 2002, 2001 and 2000:

(in millions)
	2002		2001		2000
Service cost	$	48	$	34	$	26
Amortization of unrecognized net loss	3		8		6
Other expense	40
Net postemployment costs	$	91	$	42	$	32

During 2002, certain salaried employees left Altria Group, Inc. under voluntary early retirement and integration programs. These programs resulted in incremental postemployment costs, which are included in other expense above.

Altria Group, Inc.’s postemployment plans are not funded. The changes in the benefit obligations of the plans at December 31, 2002 and 2001 were as follows:

(in millions)
	2002			2001
Accumulated benefit obligation at January 1	$	788		$	656
Service cost	48			34
Benefits paid	(220		)	(225		)
Acquisitions				269
Miller transaction	(35		)
Actuarial (gains) losses	(108		)	54
Accumulated benefit obligation at December 31	473			788
Unrecognized experience losses	(8		)	(144		)
Accrued postemployment costs	$	465		$	644

The accumulated benefit obligation was determined using an assumed ultimate annual turnover rate of 0.3% in 2002 and 2001, assumed compensation cost increases of 4.2% in 2002 and 4.5% in 2001, and assumed benefits as defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Note 16.
Additional Information:

(in millions)
For the years ended December 31,	2002			2001			2000
Research and development expense	$	686		$	647		$	538
Advertising expense	$	1,869		$	2,196		$	2,353
Interest and other debt expense, net:
Interest expense	$	1,327		$	1,659		$	1,078
Interest income	(193		)	(241		)	(359		)
	$	1,134		$	1,418		$	719
Interest expense of financial services operations included in cost of sales	$	97		$	99		$	96
Rent expense	$	635		$	534		$	441

Minimum rental commitments under non-cancelable operating leases in effect at December 31, 2002 were as follows:

(in millions)
2003	$387
2004	294
2005	229
2006	159
2007	132
Thereafter	373
	$1,574

Note 17.
Financial Instruments:

•Derivative financial instruments: Altria Group, Inc. operates globally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency and commodity exposures, which primarily relate to forecasted transactions and debt. Derivative financial instruments are used by Altria Group, Inc., principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates and commodity prices, by creating offsetting exposures. Altria Group, Inc. is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. Altria Group, Inc. formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of

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forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction will not occur, the gain or loss would be recognized in earnings currently.

A substantial portion of Altria Group, Inc.’s derivative financial instruments is effective as hedges under SFAS No. 133. Altria Group, Inc. uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which Altria Group, Inc. is exposed include the Japanese yen, Swiss franc and the euro. At December 31, 2002 and 2001, Altria Group, Inc. had option and forward foreign exchange contracts with aggregate notional amounts of $10.1 billion and $3.7 billion, respectively, which are comprised of contracts for the purchase and sale of foreign currencies. Included in the foreign currency aggregate notional amounts at December 31, 2002 were $2.6 billion of equal and offsetting foreign currency positions, which do not qualify as hedges and that will not result in any net gain or loss. The effective portion of unrealized gains and losses associated with forward contracts and the value of option contracts is deferred as a component of accumulated other comprehensive losses until the underlying hedged transactions are reported on Altria Group, Inc.’s consolidated statement of earnings.

In addition, Altria Group, Inc. uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. A substantial portion of the foreign currency swap agreements are accounted for as cash flow hedges. The unrealized gain (loss) relating to foreign currency swap agreements that do not qualify for hedge accounting treatment under SFAS No. 133 was insignificant as of December 31, 2002 and 2001. At December 31, 2002 and 2001, the notional amounts of foreign currency swap agreements aggregated $2.5 billion and $2.3 billion, respectively. Aggregate maturities of foreign currency swap agreements at December 31, 2002 were as follows:

(in millions)
2003	$142
2004	180
2006	968
2008	1,165
	$2,455

Altria Group, Inc. also designates certain foreign currency denominated debt as net investment hedges of foreign operations. During the years ended December 31, 2002 and 2001, losses of $163 million, net of income taxes of $88 million, and losses of $18 million, net of income taxes of $10 million, respectively, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments.

Altria Group, Inc. is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by Altria Group, Inc.’s food businesses. Accordingly, Kraft uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk and cheese. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar and soybean oil. In general, commodity forward contracts qualify for the normal purchase exception under SFAS No. 133 and are, therefore, not subject to the provisions of SFAS No. 133. At December 31, 2002 and 2001, Kraft had net long commodity positions of $544 million and $589 million, respectively. The effective portion of unrealized gains and losses on commodity futures and option contracts is deferred as a component of accumulated other comprehensive losses and is recognized as a component of cost of sales when the related inventory is sold. Unrealized gains or losses on net commodity positions were immaterial at December 31, 2002 and 2001.

During the years ended December 31, 2002 and 2001, ineffectiveness related to fair value hedges and cash flow hedges was not material. Altria Group, Inc. is hedging forecasted transactions for periods not exceeding the next fifteen months. At December 31, 2002, Altria Group, Inc. estimates derivative losses of $40 million, net of income taxes, reported in accumulated other comprehensive losses will be reclassified to the consolidated statement of earnings within the next twelve months.

Derivative gains or losses reported in accumulated other comprehensive earnings (losses) are a result of qualifying hedging activity. Transfers of gains or losses from accumulated other comprehensive earnings (losses) to earnings are offset by the corresponding gains or losses on the underlying hedged item. Hedging activity affected accumulated other comprehensive earnings (losses), net of income taxes, during the years ended December 31, 2002 and 2001, as follows:

(in millions)
Balance as of January 1, 2001	$—
Impact of SFAS No. 133 adoption	15
Derivative gains transferred to earnings	(84	)
Change in fair value	102
Balance as of December 31, 2001	33
Derivative losses transferred to earnings	1
Change in fair value	(111	)
Balance as of December 31, 2002	$(77	)

•Credit exposure and credit risk: Altria Group, Inc. is exposed to credit loss in the event of nonperformance by counterparties. Altria Group, Inc. does not anticipate nonperformance within its consumer products businesses. However, see Note 7. Finance Assets, net regarding certain aircraft leases.

•Fair value: The aggregate fair value, based on market quotes, of Altria Group, Inc.’s total debt at December 31, 2002, was $24.6 billion, as compared with its carrying value of $23.3 billion. The aggregate fair value of Altria Group, Inc.’s total debt at December 31, 2001 was $22.6 billion, as compared with its carrying value of $22.1 billion.

The fair value, based on market quotes, of Altria Group, Inc.’s equity investment in SABMiller at December 31, 2002, was $3.1 billion, as compared with its carrying value of $1.9 billion.

See Notes 8 and 9 for additional disclosures of fair value for short-term borrowings and long-term debt.

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Note 18.
Contingencies:

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against ALG, its subsidiaries and affiliates, including PM USA and PMI, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.

Overview of Tobacco-Related Litigation

•Types and Number of Cases: Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and nongovernmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms “Lights” and “Ultra Lights” constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages resulting from the allegedly illegal importation of cigarettes into various jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and various antitrust suits. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. Plaintiffs’ theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below.

As of December 31, 2002, there were approximately 1,500 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM USA and, in some instances, ALG, compared with approximately 1,500 such cases on December 31, 2001 and on December 31, 2000. In certain jurisdictions, individual smoking and health cases have been aggregated for trial in a single proceeding; the largest such proceeding aggregates 1,250 cases in West Virginia and is currently scheduled for trial in June 2003. An estimated 16 of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke (“ETS”). In addition, approximately 2,800 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages.

As of December 31, 2002, there were an estimated 40 smoking and health putative class actions pending in the United States against PM USA and, in some cases, ALG (including two that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 25 such cases on December 31, 2001, and approximately 36 such cases on December 31, 2000.

As of December 31, 2002, there were an estimated 41 health care cost recovery actions, including the suit discussed below under “Federal Government’s Lawsuit,” filed by the United States government, pending in the United States against PM USA and, in some instances, ALG, compared with approximately 45 such cases pending on December 31, 2001, and 52 such cases on December 31, 2000. In addition, health care cost recovery actions are pending in Israel, the Province of British Columbia, Canada, France and Spain.

There are also a number of other tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries, including an estimated 86 smoking and health cases brought on behalf of individuals (Argentina (43), Australia, Brazil (26), Czech Republic, Germany, Ireland, Israel (2), Italy (5), Japan, the Philippines, Scotland, Spain (2) and Venezuela), compared with approximately 64 such cases on December 31, 2001, and 68 such cases on December 31, 2000. In addition, as of December 31, 2002, there were eight smoking and health putative class actions pending outside the United States (Brazil, Canada (4), and Spain (3)), compared with 11 such cases on December 31, 2001 and nine such cases on December 31, 2000.

•Pending and Upcoming Trials: Trials are currently underway in two individual smoking and health cases in which PM USA is a defendant or the sole defendant in California (Lucier v. Philip Morris Incorporated, et al.) and New York (Inzerilla v. The American Tobacco Company, et al.). Trials are also currently underway in a smoking and health class action in Louisiana in which PM USA is a defendant and in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs (Scott, et al. v. The American Tobacco Company, Inc. et al.) and in a Lights/Ultra Lights class action in Illinois, in which PM USA is the defendant (Miles, et al. v. Philip Morris Incorporated).

Additional cases against PM USA and, in some instances, ALG, are scheduled for trial through the end of 2003. They include a class action in California in which plaintiffs seek restitution under the California Business and Professions Code for the costs of cigarettes purchased by class members during the class period, a case in West Virginia that aggregates 1,250 individual smoking and health cases, a Lights/Ultra Lights class action in Ohio, a health care cost recovery action in France and a class action in Kansas in which plaintiffs allege that defendants, including PM USA, conspired to fix cigarette prices in violation of antitrust laws. In addition, an estimated 15 individual smoking and health cases and 10 additional cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by ETS are scheduled for trial through the end of 2003. Five of the cases brought by flight attendants are scheduled to begin trial during the first quarter of 2003. Cases against other tobacco companies are also scheduled for trial through the end of 2003. Trial dates, however, are subject to change.

•Recent Trial Results: Since January 1999, jury verdicts have been returned in 25 smoking and health and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 15 of the 25 cases. These 15 cases were tried in Pennsylvania, Rhode Island, West Virginia, Ohio (2), New Jersey, Florida (4), New York (2), Mississippi and Tennessee (2). Plaintiffs’ appeals or post-trial motions challenging the verdicts are pending in West Virginia, Ohio and Florida; a motion for a new trial has been granted in one of the cases in Florida. In December 2002, the court in an individual smoking and health case in California dismissed the case at the end of trial after ruling that plaintiffs had not introduced sufficient evidence to support their claims. The deadline for plaintiffs to appeal has not yet expired. In addition, in May 2002, a mistrial was declared in a case brought by a flight attendant

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claiming personal injuries allegedly caused by ETS, and the case was subsequently dismissed. In 2001, a mistrial was declared in New York in an asbestos contribution case, and plaintiffs subsequently voluntarily dismissed the case. The chart below lists the verdicts and post-trial developments in the ten cases that have gone to trial since January 1999 in which verdicts were returned in favor of plaintiffs.

Date	Location of Court/Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
October 2002	California/Bullock	Individual Smoking and Health	$850,000 in compensatory damages and $28 billion in punitive damages against PM USA.	In December 2002, the trial court reduced the punitive damages award to $28 million; PM USA and plaintiff have filed notices of appeal.
June 2002	Florida/French	Flight Attendant ETS Litigation	$5.5 million in compensatory damages against all defendants, including PM USA.	In September 2002, the court reduced the damages award to $500,000; plaintiff and defendants have appealed.
June 2002	Florida/Lukacs	Individual Smoking and Health	$37.5 million in compensatory damages against all defendants, including PM USA.	Defendants have filed post-trial motions challenging the verdict.
March 2002	Oregon/Schwarz	Individual Smoking and Health	$168,500 in compensatory damages and $150 million in punitive damages against PM USA.	In May 2002, the trial court reduced the punitive damages award to $100 million, and in July 2002, the trial court denied PM USA’s post-trial motions challenging the verdict. PM USA and plaintiff have appealed.
June 2001	California/Boeken	Individual Smoking and Health	$5.5 million in compensatory damages, and $3 billion in punitive damages against PM USA.	In August 2001, the trial court reduced the punitive damages award to $100 million; PM USA and plaintiff have appealed.
June 2001	New York/ Empire Blue Cross and Blue Shield	Health Care Cost Recovery	$17.8 million in compensatory damages against all defendants, including $6.8 million against PM USA.	In February 2002, the trial court awarded plaintiffs $38 million in attorneys’ fees. Defendants have appealed.
July 2000	Florida/Engle	Smoking and Health Class Action	$145 billion in punitive damages against all defendants, including $74 billion against PM USA.	See “Engle Class Action,” below.
March 2000	California/Whitely	Individual Smoking and Health	$1.72 million in compensatory damages against PM USA and another defendant, and $10 million in punitive damages against PM USA and $10 million in punitive damages against the other defendant.	Defendants have appealed.
March 1999	Oregon/Williams	Individual Smoking and Health	$800,000 in compensatory damages, $21,500 in medical expenses and $79.5 million in punitive damages against PM USA.	The trial court reduced the punitive damages award to $32 million, and PM USA appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. The Oregon Supreme Court refused to hear PM USA’s appeal in December 2002. PM USA will petition the United States Supreme Court for further review. In view of these developments, although PM USA intends to continue to defend this case vigorously, it has recorded a provision of $32 million in the consolidated financial statements as its best estimate of the probable loss in this case.
February 1999	California/Henley	Individual Smoking and Health	$1.5 million in compensatory damages and $50 million in punitive damages against PM USA.	The trial court reduced the punitive damages award to $25 million and PM USA appealed. In November 2001, a California District Court of Appeals affirmed the trial court’s ruling, and PM USA appealed to the California Supreme Court. In October 2002, the California Supreme Court vacated the decision of the District Court of Appeals and remanded the case back to the District Court of Appeals for further consideration.

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With respect to certain adverse verdicts currently on appeal, excluding amounts relating to the Engle case, PM USA has posted various forms of security totaling $324 million to obtain stays of judgments pending appeals.

In addition, since January 1999, jury verdicts have been returned in 13 tobacco-related cases in which neither ALG nor any of its subsidiaries were defendants. Verdicts in favor of defendants were returned in eight of the 13 cases in cases tried in Connecticut, Texas, South Carolina, Mississippi, Louisiana, Missouri and Tennessee (2). Plaintiffs’ appeal is pending in Mississippi. Verdicts in favor of plaintiffs were returned in 5 of the 13 cases in cases tried in Australia, Kansas, Florida (2) and Puerto Rico. Defendants’ appeals or post-trial motions are pending. In December 2002, the appellate court reversed the ruling in favor of plaintiff in the case in Australia. In October 2002, the court granted defendants’ motion for a new trial in the case in Puerto Rico. In addition, in a case in France the trial court found in favor of plaintiff; however, the appellate court reversed the trial court’s ruling and dismissed plaintiff’s claim.

•Engle Class Action: Verdicts have been returned and judgment has been entered against PM USA and other defendants in the first two phases of this three-phase smoking and health class action trial in Florida. The class consists of all Florida residents and citizens, and their survivors, “who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine.”

In July 1999, the jury returned a verdict against defendants in phase one of the trial concerning certain issues determined by the trial court to be “common” to the causes of action of the plaintiff class. Among other things, the jury found that smoking cigarettes causes 20 diseases or medical conditions, that cigarettes are addictive or dependence-producing, defective and unreasonably dangerous, that defendants made materially false statements with the intention of misleading smokers, that defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes, and that defendants were negligent and engaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional distress.

During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs.

In July 2000, the same jury returned a verdict assessing punitive damages on a lump sum basis for the entire class totaling approximately $145 billion against the various defendants in the case, including approximately $74 billion severally against PM USA. PM USA believes that the punitive damages award was determined improperly and that it should ultimately be set aside on any one of numerous grounds. Included among these grounds are the following: under applicable law, (i) defendants are entitled to have liability and damages for each plaintiff tried by the same jury, an impossibility due to the jury’s dismissal; (ii) punitive damages cannot be assessed before the jury determines entitlement to, and the amount of, compensatory damages for all class members; (iii) punitive damages must bear a reasonable relationship to compensatory damages, a determination that cannot be made before compensatory damages are assessed for all class members; and (iv) punitive damages can “punish” but cannot “destroy” the defendant. In March 2000, at the request of the Florida legislature, the Attorney General of Florida issued an advisory legal opinion stating that “Florida law is clear that compensatory damages must be determined prior to an award of punitive damages” in cases such as Engle. As noted above, compensatory damages for all but three members of the class have not been determined.

Following the verdict in the second phase of the trial, the jury was dismissed, notwithstanding that liability and compensatory damages for all but three class members have not yet been determined. According to the trial plan, phase three of the trial will address other class members’ claims, including issues of specific causation, reliance, affirmative defenses and other individual-specific issues regarding entitlement to damages, in individual trials before separate juries.

It is unclear how the trial plan will be further implemented. The trial plan provides that the punitive damages award should be standard as to each class member and acknowledges that the actual size of the class will not be known until the last class member’s case has withstood appeal, i.e., the punitive damages amount would be divided equally among those plaintiffs who, in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal.

Following the jury’s punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature.

The trial judge in the state court, without a hearing, then immediately denied the defendants’ post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM USA and ALG believe that the entry of judgment by the trial court is unconstitutional and violates Florida law. PM USA has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM USA has also posted a $100 million bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages (“bond cap legislation”).

Plaintiffs had previously indicated that they believe the bond cap legislation is unconstitutional and might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM USA to post a bond in the full amount of the judgment and, absent appellate relief, PM USA would not be able to stay any attempted execution of the judgment in Florida. PM USA and ALG will take all appropriate steps to seek to prevent this worst-case scenario from occurring. In May 2001, the trial court approved a stipulation (the “Stipulation”) among PM USA, certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the Stipulation and in addition to the $100 million bond it previously posted, PM USA placed $1.2 billion into an interest-bearing escrow account for the benefit of the Engle class. Should PM USA prevail in its appeal of the case, both amounts are to be returned to PM USA. PM USA also placed an additional

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$500 million into a separate interest-bearing escrow account for the benefit of the Engle class. If PM USA prevails in its appeal, this amount will be paid to the court, and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. In connection with the Stipulation, ALG recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001.

PM USA and ALG remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. PM USA has filed an appeal challenging the class certification and the compensatory and punitive damages awards, as well as numerous other reversible errors that it believes occurred during the trial to date. The appellate court heard oral argument on defendants’ appeals in November 2002.

Smoking and Health Litigation

Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. In May 1996, the United States Court of Appeals for the Fifth Circuit held in the Castano case that a class consisting of all “addicted” smokers nationwide did not meet the standards and requirements of the federal rules governing class actions. Since this class decertification, lawyers for plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise “addiction” claims and, in many cases, claims of physical injury as well. As of December 31, 2002, smoking and health putative class actions were pending in Alabama, Florida, Illinois, Louisiana, Missouri, Nevada, New Jersey, Oregon, Utah, West Virginia and the District of Columbia, as well as in Brazil, Canada, Israel and Spain. Class certification has been denied or reversed by courts in 29 smoking and health class actions involving PM USA in Arkansas, the District of Columbia, Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while classes remain certified in the Engle case in Florida (discussed above) and a case in Louisiana in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs for class members. In May 1999, the United States Supreme Court declined to review the decision of the United States Court of Appeals for the Third Circuit affirming a lower court’s decertification of a class. In November 2001, in the first medical monitoring class action case to go to trial, a West Virginia jury returned a verdict in favor of all defendants, including PM USA, and plaintiffs have appealed.

Health Care Cost Recovery Litigation

•Overview: In certain pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds (“unions”), Native American tribes, insurers and self-insurers such as Blue Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs.

The claims asserted in the health care cost recovery actions include the equitable claim that the tobacco industry was “unjustly enriched” by plaintiffs’ payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes.

Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to “set off” any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by “standing in the shoes” of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.

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Although there have been some decisions to the contrary, most courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In addition, eight federal circuit courts of appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia circuits, as well as California, Florida and Tennessee intermediate appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by the courts of appeals for the Second, Third, Fifth, Ninth and District of Columbia circuits. As of December 31, 2002, there were an estimated 41 health care cost recovery cases pending in the United States against PM USA, and in some instances, ALG, including the case filed by the United States government, which is discussed below under “Federal Government’s Lawsuit.” The cases brought in the United States include actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11 Brazilian states and 11 Brazilian cities. The actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. The district court dismissed the cases brought by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and the dismissals are now final. The district court has remanded to state courts the remaining cases, except for the cases brought by Bolivia and Panama. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the cases brought by Venezuela and the Brazilian state of Espirito Santo were dismissed by the state court, and Venezuela appealed. In September 2002, the appellate court affirmed the dismissal of the case brought by Venezuela, and Venezuela has petitioned the state supreme court for further review. In addition to cases brought in the United States, health care cost recovery actions have also been brought in Israel, the Marshall Islands (dismissed), the Province of British Columbia, Canada, France and Spain (dismissed for lack of jurisdiction; appeal pending), and other entities have stated that they are considering filing such actions.

In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In June 2001, a New York jury returned a verdict awarding $6.83 million in compensatory damages against PM USA and a total of $11 million against four other defendants in a health care cost recovery action brought by a Blue Cross and Blue Shield plan. In February 2002, the court awarded plaintiff approximately $38 million for attorneys’ fees. Defendants, including PM USA, have appealed.

•Settlements of Health Care Cost Recovery Litigation: In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The MSA has received final judicial approval in all 52 settling jurisdictions. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million, as well as additional annual payments of $250 million through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM USA’s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers’ domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USA records its portions of ongoing settlement payments as part of cost of sales as product is shipped.

The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.

As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM USA, and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer’s relative market share. PM USA records its portion of these payments as part of cost of sales as product is shipped.

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The State Settlement Agreements have materially adversely affected the volumes of PM USA and may adversely affect future volumes. ALG believes that they may also materially adversely affect the results of operations, cash flows or financial position of PM USA and Altria Group, Inc. in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in United States cigarette sales in the premium and discount segments, PM USA’s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements.

Certain litigation, described below, has arisen challenging the validity of the MSA and alleging violations of antitrust laws.

As of December 31, 2002, two suits challenging the validity of the MSA were pending against PM USA. Plaintiffs in these cases allege that by entering into the MSA, defendants violated plaintiffs’ constitutional rights and antitrust laws. In addition, since December 2000, cases have been filed in Pennsylvania and Missouri against governmental entities alleging that enforcement of the MSA is unconstitutional and violates antitrust laws; neither PM USA nor ALG is a party to these suits.

•Federal Government’s Lawsuit: In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers and others, including PM USA and ALG, asserting claims under three federal statutes, the Medical Care Recovery Act (“MCRA”), the Medicare Secondary Payer (“MSP”) provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act (“RICO”). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants’ fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans’ health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of what it alleges to be equitable and declaratory relief, including disgorgement, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government’s future costs of providing health care resulting from defendants’ alleged past tortious and wrongful conduct. PM USA and ALG moved to dismiss this lawsuit on numerous grounds, including that the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government’s MCRA and MSP claims, but permitted discovery to proceed on the government’s claims for relief under RICO. In October 2000, the government moved for reconsideration of the trial court’s order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. In February 2001, the government filed an amended complaint attempting to replead the MSP claims. In July 2001, the court denied the government’s motion for reconsideration of the dismissal of the MCRA claims and dismissed the government’s amended MSP claims. Trial of the case is currently scheduled for September 2004.

Certain Other Tobacco-Related Litigation

•Lights/Ultra Lights Cases: As of December 31, 2002, there were 13 putative class actions pending against PM USA and, in some instances, ALG in California, Florida, Illinois, Massachusetts, Minnesota, Missouri, New Hampshire (2), Ohio (2), Oregon, Tennessee and West Virginia on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plaintiffs in these cases allege, among other things, that the use of the terms “Lights” and/or “Ultra Lights” constitutes deceptive and unfair trade practices, and seek injunctive and equitable relief, including restitution and, in certain cases, plaintiffs also seek punitive damages. Classes have been certified in Illinois, Massachusetts and Florida. Trial is currently underway in the Illinois case. Trial in one of the Ohio cases is scheduled for August 2003.

•Cigarette Contraband Cases: As of December 31, 2002, the European Community and ten member states, various Departments of Colombia, Ecuador, Belize and Honduras had filed suits in the United States against ALG and certain of its subsidiaries, including PM USA and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into various jurisdictions. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In February 2002, the courts granted defendants’ motions to dismiss all of the actions. In the Colombia and European Community actions, however, the RICO and fraud claims predicated on allegations of money laundering claims were dismissed without prejudice. Plaintiffs in each of the cases have appealed. In October 2001, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a cigarette contraband case filed against another cigarette manufacturer. Plaintiff in that case petitioned the United States Supreme Court for further review, and in October 2002, the Supreme Court denied plaintiff’s petition.

•Asbestos Contribution Cases: As of December 31, 2002, an estimated eight suits were pending on behalf of former asbestos manufacturers and affiliated entities against domestic tobacco manufacturers, including PM USA. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages.

•Retail Leaders Case: Three domestic tobacco manufacturers filed suit against PM USA seeking to enjoin the PM USA “Retail Leaders” program that became available to retailers in October 1998. The complaint alleged that this retail merchandising program is exclusionary, creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiffs sought unspecified treble damages, attorneys’ fees, costs and interest. In May 2002, the court granted PM USA’s motion for summary judgment and dismissed all of plaintiffs’ claims with prejudice. Plaintiffs have appealed.

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•Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM USA has violated the Robinson-Patman Act in connection with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. The initial complaint was amended to bring the total number of plaintiffs to 211, but by stipulated orders, all claims were stayed, except those of ten plaintiffs that proceeded to pre-trial discovery. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys’ fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs’ motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. In August 2001, the court granted PM USA’s motion for summary judgment and dismissed, with prejudice, the claims of the ten plaintiffs. In October 2001, the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following the stipulation of all plaintiffs that the district court’s dismissal would, if affirmed, be binding on all plaintiffs.

•Tobacco Price Cases: As of December 31, 2002, there were 39 putative class actions pending against PM USA and other domestic tobacco manufacturers, as well as, in certain instances, ALG and PMI, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Seven of the putative class actions were filed in various federal district courts by direct purchasers of tobacco products, and the remaining 32 were filed in 14 states and the District of Columbia by retail purchasers of tobacco products. In November 2001, plaintiffs’ motion for class certification was granted in a case pending in state court in Kansas, and trial in this case is scheduled for September 2003. In November 2001, plaintiffs’ motion for class certification was denied in a case pending in state court in Minnesota. In June 2002, plaintiffs’ motion for class certification was denied in a case pending in the State of Michigan. Plaintiffs’ motion for reconsideration of this ruling was denied. Defendants’ motions for summary judgment are pending. In May 2002, the Arizona Court of Appeals reversed the trial court’s decision to dismiss an action. Defendants appealed to the Arizona Supreme Court, which has accepted defendants’ appeal. The seven federal class actions were consolidated in the United States District Court for the Northern District of Georgia, and, in July 2002, the court granted defendants’ motion for summary judgment dismissing the case in its entirety. Plaintiffs have appealed.

•Cases Under the California Business and Professions Code: In June 1997 and July 1998, two suits were filed in California courts alleging that domestic cigarette manufacturers, including PM USA and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted as to plaintiffs’ claims that defendants violated sections 17200 and/or 17500 of California Business and Professions Code pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. In September 2002, the court granted defendants’ motions for summary judgment as to all claims in one of the cases; in November 2002, the court confirmed its earlier rulings granting defendants’ motions for summary judgment. Plaintiffs have appealed. Trial in the other case is scheduled for May 2003.

•Tobacco Growers’ Case: In February 2000, a suit was filed on behalf of a purported class of tobacco growers and quota-holders, and amended complaints were filed in May 2000 and in August 2000. The second amended complaint alleges that defendants, including PM USA, violated antitrust laws by bid-rigging and allocating purchases at tobacco auctions and by conspiring to undermine the tobacco quota and price-support program administered by the federal government. In October 2000, defendants filed motions to dismiss the amended complaint and to transfer the case, and plaintiffs filed a motion for class certification. In November 2000, the court granted defendants’ motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amended complaint to add tobacco leaf buyers as defendants. This motion was granted, and the additional parties were served in February 2001. In March 2001, the leaf buyer defendants filed a motion to dismiss the case. In July 2001, the court denied the manufacturer and leaf buyer defendants’ motions to dismiss the case, and in April 2002 granted plaintiffs’ motion for class certification. Defendants’ petition for interlocutory review of the class certification order was denied in June 2002. Trial is scheduled for April 2004.

•Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court in the Eastern District of New York that purported to consolidate punitive damages claims in ten tobacco-related actions then pending in federal district courts in New York and Pennsylvania. In July 2002, plaintiffs filed an amended consolidated class action complaint and a motion seeking certification of a punitive damages class of persons residing in the United States who smoke or smoked defendants’ cigarettes, and who have been diagnosed by a physician with an enumerated disease from April 1993 through the date notice of the certification of this class is disseminated. The following persons are excluded from the class: (1) those who have obtained judgments or settlements against any defendants; (2) those against whom any defendant has obtained judgment; (3) persons who are part of the certified Engle class; (4) persons who should have reasonably realized that they had an enumerated disease prior to April 9, 1993; and (5) those whose diagnosis or reasonable basis for knowledge predates their use of tobacco. In September 2002, the court granted plaintiffs’ motion for class certification, and defendants have petitioned the United States Court of Appeals for the Second Circuit for review of the trial court’s ruling. Trial of the case, which was previously scheduled for January 2003, has been stayed pending resolution of defendants’ petition to the Second Circuit.

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Certain Other Actions

•National Cheese Exchange Cases: Since 1996, seven putative class actions have been filed by various dairy farmers alleging that Kraft and others engaged in a conspiracy to fix and depress the prices of bulk cheese and milk through their trading activity on the National Cheese Exchange. Plaintiffs seek injunctive and equitable relief and unspecified treble damages. Plaintiffs voluntarily dismissed two of the actions after class certification was denied. Three cases were consolidated in state court in Wisconsin, and in November 1999, the court granted Kraft’s motion for summary judgment. In June 2001, the Wisconsin Court of Appeals affirmed the trial court’s ruling dismissing the cases. In April 2002, the Wisconsin Supreme Court affirmed the intermediate appellate court’s ruling, and plaintiffs have petitioned the United States Supreme Court for further review. In December 2002, the Supreme Court denied plaintiffs’ petition. In April 2002, Kraft’s motion for summary judgment dismissing the case was granted in a case pending in the United States District Court for the Central District of California. In June 2002, the parties settled this dispute on an individual (non-class) basis, and plaintiffs dismissed their appeal. A case in Illinois state court has been settled and dismissed. No cases remain pending at this time.

•Italian Tax Matters: Two hundred tax assessments, including nine assessments for 1996 that were served in December 2002, that allege nonpayment of taxes in Italy (value-added taxes for the years 1988 to 1996 and income taxes for the years 1987 to 1996) have been served upon certain affiliates of ALG. The aggregate amount of alleged unpaid taxes assessed to date is the euro equivalent of $2.5 billion. In addition, the euro equivalent of $4.1 billion in interest and penalties has been assessed. ALG anticipates that value-added and income tax assessments may also be received with respect to subsequent years. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 188 of the assessments, and the tax authorities have appealed to the regional appellate court in Milan. To date, the regional appellate court has rejected 81 of the appeals filed by the tax authorities. The tax authorities have appealed 45 of the 81 decisions of the regional appellate court to the Italian Supreme Court, and a hearing on these cases was held in December 2001. Six of the 81 decisions were not appealed and are now final. In March, May and July 2002, the Italian Supreme Court issued its decisions in 43 of the 45 appeals. The Italian Supreme Court rejected 12 of the 45 appeals and these 12 cases are now final. The Italian Supreme Court vacated the decisions of the regional appellate court in 31 of the cases and remanded these cases back to the regional appellate court for further hearings on the merits. Two decisions have not been issued. In a separate proceeding in October 1997, a Naples court dismissed charges of criminal association against certain present and former officers and directors of affiliates of ALG, but permitted tax evasion and related charges to remain pending. In February 1998, the criminal court in Naples determined that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan. In March 2002, after the Milan prosecutor’s investigation into the matter, these present and former officers and directors received notices that an initial hearing would take place in June 2002 at which time the “preliminary judge” hearing the case would evaluate whether the Milan prosecutor’s charges should be sent to a criminal judge for a full trial. At the June 2002 hearing, the “preliminary judge” ruled that there was no legal basis for the prosecutor’s charges and acquitted all of the defendants; the prosecutor has appealed. ALG, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings.

It is not possible to predict the outcome of the litigation pending against ALG and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and/or punitive damages against PM USA have been returned in the Engle smoking and health class action, several individual smoking and health cases, a flight attendant ETS lawsuit, and a health care cost recovery case and are being appealed. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. An unfavorable outcome or settlement of a pending tobacco-related litigation could encourage the commencement of additional litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation.

ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed elsewhere in this Note 18: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.

The present legislative and litigation environment is substantially uncertain, and it is possible that the business and volume of ALG’s subsidiaries, as well as Altria Group, Inc.’s consolidated results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. ALG and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, ALG and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of ALG’s stockholders to do so.

Guarantees

At December 31, 2002, Altria Group, Inc.’s third-party guarantees, which are primarily derived from acquisition and divestiture activities, approximated $255 million, of which $210 million have no expiration dates. The remainder expire through 2012, with $12 million expiring in 2003. Altria Group, Inc. is required to perform under these guarantees in the event that a third-party fails to make contractual payments or achieve performance measures. Altria Group, Inc. has recorded a liability of $86 million at December 31, 2002 relating to these guarantees.

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Note 19.
Quarterly Financial Data (Unaudited):

(in millions, except per share data)	2002 Quarters
	1st		2nd		3rd		4th
Net revenues	$	20,535	$	21,103	$	19,996	$	18,774
Gross profit	$	7,428	$	8,019	$	7,564	$	6,423
Net earnings	$	2,365	$	2,610	$	4,359	$	1,768
Per share data:
Basic EPS	$	1.10	$	1.22	$	2.07	$	0.86
Diluted EPS	$	1.09	$	1.21	$	2.06	$	0.85
Dividends declared	$	0.58	$	0.58	$	0.64	$	0.64
Market price — high	$	54.48	$	57.79	$	52.00	$	44.09
— low	$	45.40	$	42.24	$	37.52	$	35.40

(in millions, except per share data)	2001 Quarters
	1st			2nd		3rd		4th
Net revenues	$	19,959		$	20,789	$	20,249	$	19,882
Gross profit	$	7,156		$	7,651	$	7,600	$	7,363
Earnings before cumulative effect of accounting change	$	1,786		$	2,288	$	2,328	$	2,164
Cumulative effect of accounting change	(6		)
Net earnings	$	1,780		$	2,288	$	2,328	$	2,164
Per share data:
Basic EPS	$	0.81		$	1.04	$	1.07	$	1.00
Diluted EPS	$	0.80		$	1.03	$	1.06	$	0.99
Dividends declared	$	0.53		$	0.53	$	0.58	$	0.58
Market price — high	$	52.04		$	53.88	$	49.76	$	51.72
— low	$	38.75		$	44.00	$	43.00	$	44.70

Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total for the year.

During 2002 and 2001, Altria Group, Inc. recorded the following pre-tax charges or (gains):

(in millions)	2002 Quarters
	1st		2nd			3rd			4th
Separation programs and asset impairments	$	165	$	25		$	33
Gain on Miller transaction						(2,653		)	$	22
Integration costs and a loss on sale of a food factory	27		92						(8		)
Provision for airline industry exposure									290
Gains on sales of businesses			(3		)				(77		)
	$	192	$	114		$	(2,620	)	$	227

(in millions)	2001 Quarters
	1st		2nd			3rd		4th
Litigation related expense	$	500
Gain on sale of a business			$	(8	)
Integration costs and a loss on sale of a food factory	29					$	37	$	16
Contract brewing agreement						19
	$	529	$	(8	)	$	56	$	16

The principal stock exchange, on which Altria Group, Inc.’s common stock (par value $0.33 ¹/3 per share) is listed, is the New York Stock Exchange. At January 31, 2003, there were approximately 129,700 holders of record of Altria Group, Inc.’s common stock.

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Report of Independent Accountants

To the Board of Directors and Stockholders of
Altria Group, Inc.:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders’ equity and cash flows present fairly, in all material respects, the consolidated financial position of Altria Group, Inc. (formerly known as Philip Morris Companies Inc.) and its subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of Altria Group, Inc.’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, on January 1, 2002, Altria Group, Inc. adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

PricewaterhouseCoopers LLP

New York, New York
January 27, 2003

Company Report on Financial Statements

The consolidated financial statements and all related financial information herein are the responsibility of Altria Group, Inc. and its subsidiaries (“Altria Group, Inc.”). The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting principles. Other financial information in the annual report is consistent with that in the financial statements.

Altria Group, Inc. maintains a system of internal controls that, it believes, provide reasonable assurance that transactions are executed in accordance with management’s authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within Altria Group, Inc., which includes written policies and procedures, careful selection and training of personnel, and audits by a professional staff of internal auditors.

PricewaterhouseCoopers LLP, independent accountants, have audited and reported on Altria Group, Inc.’s consolidated financial statements. Their audits were performed in accordance with generally accepted auditing standards.

The Audit Committee of the Board of Directors, composed of six non-management directors, meets periodically with PricewaterhouseCoopers LLP, Altria Group, Inc.’s internal auditors and management representatives to review internal accounting controls, auditing and financial reporting matters. Both PricewaterhouseCoopers LLP and the internal auditors have unrestricted access to the Audit Committee and may meet with it without management representatives being present.

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EX-21 8 ex21.htm EXHIBIT 21

Exhibit 21

ALTRIA GROUP, INC. SUBSIDIARIES

Certain active subsidiaries of the Company and their subsidiaries as of December 31, 2002, are listed below. The names of certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted.

Name	State or Country of Organization
152999 Canada Inc.	Canada
AB Kraft Foods Lietuva	Lithuania
Abal Hermanos S.A.	Uruguay
Aberdare Developments Ltd.	British Virgin Islands
AGF Pack, Inc.	Japan
AGF SP, Inc.	Japan
Airco IHC, Inc.	Delaware
Ajinomoto General Foods, Inc.	Japan
Alimentos Especiales, Sociedad Anonima	Guatemala
Altria Corporate Services International, Inc. f/k/a Philip Morris Corporate Services Inc.	Delaware
Altria Corporate Services, Inc. f/k/a Philip Morris Management Corp.	New York
Altria Insurance (Ireland) Limited f/k/a Philip Morris Capital (Ireland) Limited	Ireland
B. Muratti Sons & Co Inc.	New York
Balance Bar Company	Delaware
Beijing Nabisco Food Company Ltd.	China
Biscuits Delacre B.V.	Netherlands
Boca Foods Company	Delaware
Burlington Foods, Inc.	Delaware
C.A. Tabacalera Nacional	Venezuela
Cafe Grand ‘Mere S.A.S.	France
Callard & Bowser-Suchard, Inc.	Delaware
Capri Sun, Inc.	Delaware
Carlton Lebensmittelvertriebs GmbH	Germany
Carnes y Conservas Espanolas, S.A.	Spain
Charles Stewart & Company (Kirkcaldy) Limited	United Kingdom
Chrysalis Technologies Incorporated	Virginia
Churny Company, Inc.	Delaware
Closed Joint Stock Company Kraft Foods Rus	Russia
Closed Joint Stock Company Kraft Foods Ukraine	Ukraine
Compania Venezolana de Conservas C.A.	Venezuela
Consiber, S.A.	Spain
Convenco Holding C.A.	Venezuela
Corporativo Kraft, S. de R.L. de C.V.	Mexico
Cote d’Or Italia S.r.l.	Italy
Croky Chips B.V.	Netherlands
Dart Resorts Inc.	Delaware
Deluxestar Limited	United Kingdom
Dong Suh Foods Corporation	Korea

Exhibit 21

Name	State or Country of Organization
Dong Suh Oil & Fats Co., Ltd.	Korea
Dumas B.V.	Netherlands
El Gallito Industrial, S.A.	Costa Rica
Estrella A/S	Denmark
Estrella Eesti Osauhing	Estonia
f6 Cigarettenfabrik Dresden GmbH	Germany
Fattorie Osella S.p.A.	Italy
Finalrealm Ltd.	United Kingdom
Fleischmann Nabisco Uruguay S.A.	Uruguay
Franklin Baker Company of the Philippines	Philippines
Freezer Queen Foods (Canada) Limited	Canada
FRN Alimentos do Nordeste Ltda.	Brazil
FTR Holding S.A.	Switzerland
Fulmer Corporation Limited	Bahamas
Gelatinas Ecuatoriana S.A.	Ecuador
Gellatas United Biscuits, S.A.	Spain
General Foods Credit Corporation	Delaware
General Foods Credit Investors No. 1 Corporation	Delaware
General Foods Credit Investors No. 2 Corporation	Delaware
General Foods Credit Investors No. 3 Corporation	Delaware
General Foods Foreign Sales Corporation	U.S. Virgin Islands
Godfrey Phillips (Malaysia) Sdn. Bhd.	Malaysia
Grant Holdings, Inc.	Pennsylvania
Grant Transit Co.	Delaware
Grundstucksgemeinschaft Kraft Foods	Germany
HAG GF AG	Germany
HAG-Coffex SNC	France
Hervin Holdings, Inc.	Delaware
HNB Investment Corp.	Delaware
IKM S. de R.L. de C.V.	Mexico
Industrias Alimenticias Maguary Ltda.	Brazil
International Tobacco Co. Inc., New York	Delaware
International Tobacco Marketing Ltda	Chile
International Tobacco Marketing S.A.	Delaware
International Trademarks Incorporated	Delaware
Intertaba S.p.A.	Italy
Iracema Industrias de Caju Ltda.	Brazil
Jacobs Suchard Alimentos do Brasil Ltda.	Brazil
JSC Philip Morris Ukraine	Ukraine
Kar Gida Sanayi Ve Ticaret Anonim Sirketi	Turkey
KFI-USLLC I	Delaware
KFI-USLLC II	Delaware
KFI-USLLC IX	Delaware
KFI-USLLC V	Delaware
KFI-USLLC VII	Delaware

2

Exhibit 21

Name	State or Country of Organization
KFI-USLLC XI	Delaware
KJS India PrivateLimited	India
Koninklijke Verkade N.V.	Netherlands
KP Foods France S.A.	France
Kraft Canada Inc.	Canada
Kraft Direct, Inc.	Delaware
Kraft Food Ingredients Corp.	Delaware
Kraft Foods (New Zealand) Limited	New Zealand
Kraft Foods (Philippines), Inc.	Philippines
Kraft Foods (Puerto Rico), Inc.	Puerto Rico
Kraft Foods (Thailand) Limited	Thailand
Kraft Foods Argentina S.A.	Argentina
Kraft Foods AS	Norway
Kraft Foods Belgium S.A.	Belgium
Kraft Foods Brasil S.A.	Brazil
Kraft Foods Bulgaria AD	Bulgaria
Kraft Foods Caribbean Sales Corp.	Delaware
Kraft Foods Central & Eastern Europe Service BV	Netherlands
Kraft Foods Chile S.A.	Chile
Kraft Foods Colombia S.A.	Colombia
Kraft Foods Costa Rica, S.A.	Costa Rica
Kraft Foods CR s.r.o.	Czechoslovakia
Kraft Foods Danmark ApS	Denmark
Kraft Foods Danmark Holding A/S	Denmark
Kraft Foods de Mexico, S. de R.L. de C.V.	Mexico
Kraft Foods Deutschland GmbH & Co. KG	Germany
Kraft Foods Deutschland Holding GmbH	Germany
Kraft Foods Dominicana, S.A.	Dominican Republic
Kraft Foods Ecuador S.A.	Ecuador
Kraft Foods Egypt LLC	Egypt
Kraft Foods Espana, S.A.	Spain
Kraft Foods France	France
Kraft Foods Hellas S.A.	Greece
Kraft Foods Holding (Europa) GmbH	Switzerland
Kraft Foods Holdings, Inc.	Delaware
Kraft Foods Holland Holding B.V.	Netherlands
Kraft Foods Honduras, S.A.	Honduras
Kraft Foods Hors Domicile	France
Kraft Foods Hungaria Kft.	Hungary
Kraft Foods Inc.	Virginia
Kraft Foods International (EU) Ltd.	United Kingdom
Kraft Foods International, Inc.	Delaware
Kraft Foods Investments Inc.	Delaware
Kraft Foods Ireland Limited	Ireland
Kraft Foods Italia S.p.A.	Italy

3

Exhibit 21

Name	State or Country of Organization
Kraft Foods Jamaica Limited	Jamaica
Kraft Foods Laverune SNC	France
Kraft Foods Limited	Australia
Kraft Foods Limited (Asia)	Hong Kong
Kraft Foods Manufacturing Corporation	Delaware
Kraft Foods Manufacturing GmbH & Co. KG	Germany
Kraft Foods Manufacturing Midwest, Inc.	Delaware
Kraft Foods Manufacturing West, Inc.	Delaware
Kraft Foods Maroc SA	Morocco
Kraft Foods Mexico Holding I B.V.	Netherlands
Kraft Foods Mexico Holding II B.V.	Netherlands
Kraft Foods Namur S.A.	Belgium
Kraft Foods Nederland B.V.	Netherlands
Kraft Foods Norge AS	Norway
Kraft Foods North America, Inc.	Delaware
Kraft Foods Oesterreich GmbH	Austria
Kraft Foods Panama, S.A.	Panama
Kraft Foods Peru S.A.	Peru
Kraft Foods Polska Sp.z o.o.	Poland
Kraft Foods Portugal Produtos Alimentares Lda.	Portugal
Kraft Foods Produktion GmbH	Germany
Kraft Foods R & D, Inc.	Delaware
Kraft Foods Romania SA	Romania
Kraft Foods Schweiz AG	Switzerland
Kraft Foods Schweiz Holding AG	Switzerland
Kraft Foods Slovakia, a.s.	Slovak Republic
Kraft Foods Strasbourg SNC	France
Kraft Foods Sverige AB	Sweden
Kraft Foods Sverige Holding AB	Sweden
Kraft Foods Taiwan Limited	Taiwan
Kraft Foods UK Ltd.	United Kingdom
Kraft Foods Uruguay, S.A.	Uruguay
Kraft Foods Venezuela, C.A.	Venezuela
Kraft Gida Pazarlama ve Ticaret A.S.	Turkey
Kraft Guangtong Food Company, Limited	China
Kraft Japan, K.K.	Japan
Kraft Korea Inc.	Korea
Kraft Pizza Company	Delaware
Kraft Suchard Nicaragua S.A.	Nicaragua
Kraft Tianmei Food (Tianjin) Co., Ltd.	China
Krema Limited	Ireland
KTL S. de R.L. de C.V.	Mexico
La Loire Investment Corp.	Delaware
La Seine Investment Corp.	Delaware
Landers y Cia. S.A.	Colombia

4

Exhibit 21

Name	State or Country of Organization
Lanes Biscuits Pty Ltd	Australia
Lanes Food (Australia) Pty Ltd	Australia
Lanes Food Group Limited	New Zealand
Le Rhône Investment Corp.	Delaware
Limited Liability Company Kraft Foods	Russia
LLC (000) Kraft Foods Sales and Marketing	Russia
Lowney Inc.	Canada
Marsa Kraft Foods Sabanci Gida Sanayi ve Ticaret A.S.	Turkey
Massalin Particulares S.A.	Argentina
Merola Finance B.V.	Netherlands
Michigan Investment Corp.	Delaware
Mirabell Salzburger Confiserie-Und Bisquit GmbH	Austria
N.V. Biscuits Delacre S.A.	Belgium
N.V. Westimex Belgium S.A.	Belgium
Nabisco (China) Limited	China
Nabisco (Thailand) Limited	Thailand
Nabisco Arabia Co. Ltd.	Saudi Arabia
Nabisco Caribbean Export, Inc.	Delaware
Nabisco de Nicaragua, S.A.	Nicaragua
Nabisco Euro Holdings Ltd.	Cayman Islands
Nabisco Food (Suzhou) Co. Ltd.	China
Nabisco Group Ltd.	Delaware
Nabisco Hong Kong Limited	Hong Kong
Nabisco International, Inc.	Delaware
Nabisco International, S.A.	Panama
Nabisco Inversiones S.R.L.	Argentina
Nabisco Investments, Inc.	Delaware
Nabisco Philippines, Inc.	Philippines
Nabisco Royal Argentina LLC	Delaware
Nabisco Royal de Honduras, S.A.	Honduras
Nabisco Royal, Inc.	New York
Nabisco Taiwan Corporation	Taiwan
Nabisco, Inc. Foreign Sales Corporation	U.S. Virgin Islands
NISA Holdings LLC	Delaware
OAO Philip Morris Kuban	Russia
OJSS Philip Morris Kazakhstan	Kazakhstan
One Channel Corp.	Delaware
Orecla Realty, Inc.	Philippines
Oy Kraft Foods Finland Ab	Finland
P.M. Beverage Holdings, Inc.	Delaware
P.T. Kraft Ultrajaya Indonesia	Indonesia
Park (U.K.) Limited	United Kingdom
Park 1989 B.V.	Netherlands
Park Export Corporation	U.S. Virgin Islands
Park International S.A.	Switzerland
Pavlides S.A. Chocolate Manufacturers	Greece

5

Exhibit 21

Name	State or Country of Organization
Pers Gida Sanayi ve Ticaret Anonim Sirketi	Turkey
Phenix Leasing Corporation	Delaware
Phenix Management Corporation	Delaware
Philip Morris (China) Investments Co., Ltd.	China
Philip Morris (Malaysia) Sdn. Bhd.	Malaysia
Philip Morris (Malaysia) Sendirian Berhad	Malaysia
Philip Morris (Portugal) Empresa Comercial de Tabacos Limitada	Portugal
Philip Morris (Thailand) Ltd	Delaware
Philip Morris AB	Sweden
Philip Morris ApS	Denmark
Philip Morris Asia Limited	Hong Kong
Philip Morris Belgium S.A.	Belgium
Philip Morris Belgrade D.o.o.	Yugoslavia
Philip Morris Brasil S.A.	Delaware
Philip Morris Capital Corporation	Delaware
Philip Morris Colombia S.A.	Colombia
Philip Morris CR a.s.	Czech Republic
Philip Morris Duty Free Inc.	Delaware
Philip Morris Exports Sarl	Switzerland
Philip Morris Finance Europe B.V.	Netherlands
Philip Morris France S.A.S.	France
Philip Morris GmbH	Germany
Philip Morris Hellas A.E.B.E.	Greece
Philip Morris Holland B.V.	Netherlands
Philip Morris Hungary Cigarette Manufacturing and Trading Ltd.	Hungary
Philip Morris India Private Ltd.	India
Philip Morris Indonesia Inc.	Delaware
Philip Morris Information Services Limited	Australia
Philip Morris International Finance Corporation	Delaware
Philip Morris International Inc.	Delaware
Philip Morris International Management SA	Switzerland
Philip Morris International Services S.a.r.l.	Switzerland
Philip Morris Italia S.p.A.	Italy
Philip Morris Kabushiki Kaisha	Japan
Philip Morris Korea C.H.	Korea
Philip Morris LA Holding	Delaware
Philip Morris Latvia Ltd.	Latvia
Philip Morris Limited	Australia
Philip Morris Limited	United Kingdom
Philip Morris Ljubljana d.o.o.	Slovenia
Philip Morris Management Services B.V.	Netherlands
Philip Morris Management Services SA	Switzerland
Philip Morris Mexico, S.A. de C.V.	Mexico
Philip Morris Overseas Investment Corp.	Delaware
Philip Morris Peru S.A.	Peru
Philip Morris Philippines Inc.	Philippines
Philip Morris Philippines Manufacturing, Inc.	Philippines
Philip Morris Polska S.A.	Poland
Philip Morris Products Inc.	Virginia
Philip Morris Products S.A.	Switzerland

6

Exhibit 21

Name	State or Country of Organization
Philip Morris Research Laboratories BVBA	Belgium
Philip Morris Research Laboratories GmbH	Germany
Philip Morris Reunion s.a.r.l.	Le Réunion
Philip Morris Romania S.R.L.	Romania
Philip Morris SA, Philip Morris Sabanci Pazarlama ve Satis A.S.	Turkey
Philip Morris Sales & Marketing Ltd.	Russia
Philip Morris Sales Promotion Kabushiki Kaisha	Japan
Philip Morris Sdn Bhd	Brunei
Philip Morris Services S.A.	Switzerland
Philip Morris Singapore Pte. Ltd.	Singapore
Philip Morris Skopje d.o.o.e.l.	Macedonia
Philip Morris Slovakia s.r.o.	Slovak Republic
Philip Morris Spain, S.A., Sociedad Unipersonal	Spain
Philip Morris Taiwan S.A.	Switzerland
Philip Morris USA Inc. f/k/a Philip Morris Incorporated	Virginia
Philip Morris Vietnam Inc.	Delaware
Philip Morris World Trade S.à r.l.	Switzerland
PHILSA Philip Morris Sabanci Sigara ve Tütüncülük Sanayi ve Ticaret A.S.	Turkey
PMCC Investors No. 1 Corporation	Delaware
PMCC Investors No. 2 Corporation	Delaware
PMCC Investors No. 3 Corporation	Delaware
PMCC Investors No. 4 Corporation	Delaware
PMCC Leasing Corporation	Delaware
PMI Aviation Services SA	Switzerland
PMM-S.G.P.S., S.A.	Portugal
PMSI Beteiligungen GmbH	Switzerland
Productos Kraft, S. de R.L.de C.V.	Mexico
Productos y Alimentos, S.A. de C.V.	El Salvador
PT Nabisco Foods	Indonesia
PT Philip Morris Indonesia	Indonesia
Regentrealm Limited	United Kingdom
Riespri, S.A.	Spain
Runecorp Limited	United Kingdom
SB Leasing Inc.	Delaware
Seven Seas Foods, Inc.	Delaware
Stella D’oro Biscuit Co., Inc.	New York
Suchard Limited	United Kingdom
Suchard Schokolade Ges. MbH	Austria
Tabacalera Centroamericana, S.A.	Guatemala
Tabacalera Costarricense S.A.	Costa Rica
Tabacalera de El Salvador S.A. de C.V.	El Salvador
Tabacalera Nacional S.A.	Panama
Tabaqueira, S.A.	Portugal
Taloca AG	Switzerland
Taloca Cafe Ltda	Brazil
Taloca y Cia Ltda.	Colombia
Tevalca Holding C.A.	Venezuela
The Daisy L.L.C.	Delaware
The Fleischmann Corporation	Delaware

7

Exhibit 21

Name	State or Country of Organization
The Hervin Company	Oregon
The United Kingdom Tobacco Company Limited	United Kingdom
Trademarks LLC	Delaware
Trimaran Leasing Investors, L.L.C.-II	Delaware
U. B. Europe, Middle East and Africa Trading, S.A.	Spain
UAB Philip Morris Lietuva	Lithuania
UB China Ltd.	China
UB Finance B.V.	Netherlands
UB Group Limited	United Kingdom
UB Humber Limited	United Kingdom
UB International Sales Limited	United Kingdom
UB Investments (Netherlands) B.V.	Netherlands
UB Limited	United Kingdom
UB Overseas Limited	United Kingdom
United Biscuits (East China) Limited	China
United Biscuits (Properties) Limited	United Kingdom
United Biscuits Asia Pacific Limited	Hong Kong
United Biscuits Finance plc	United Kingdom
United Biscuits France S.A.	France
United Biscuits Iberia Limitada	Portugal
United Biscuits Iberia, S.L.	Spain
United Biscuits Industries S.A.S.	France
United Biscuits Tunisia S.A.	Tunisia
Vict. Th. Engwall & Co., Inc.	Delaware
Votesor BV	Netherlands
Wolverine Investment Corp.	Delaware
Yili-Nabisco Biscuit & Food Company Limited	China
ZAO Philip Morris Izhora	Russia

8

EX-23 9 ex23.htm EXHIBIT 23

Exhibit 23

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in Post-Effective Amendment No. 13 to the Registration Statement of Altria Group, Inc. (formerly known as Philip Morris Companies Inc.) on Form S-14 (File No. 2-96149) and in Altria Group, Inc.’s Registration Statements on Form S-3 (File No. 333-35143) and Form S-8 (File Nos. 333-28631, 333-20747, 333-16127, 33-1479, 33-10218, 33-13210, 33-14561, 33-1480, 33-17870, 33-38781, 33-39162, 33-37115, 33-40110, 33-48781, 33-59109, 333-43478, 333-43484 and 333-71268), of our report dated January 27, 2003 relating to the consolidated financial statements of Altria Group, Inc., which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 27, 2003 relating to the financial statement schedule, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York
March 27, 2003

EX-24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 26th day of February, 2003.

/s/ ELIZABETH E. BAILEY

Elizabeth E. Bailey

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ HAROLD BROWN

Harold Brown

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ MATHIS CABIALLAVETTA

Mathis Cabiallavetta

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 26th day of February, 2003.

/s/ JANE EVANS

Jane Evans

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ J. DUDLEY FISHBURN

J. Dudley Fishburn

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of March, 2003.

/s/ CARLOS SLIM HELÚ

Carlos Slim Helú

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ ROBERT E. R. HUNTLEY

Robert E. R. Huntley

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 3rd day of March, 2003.

/s/ THOMAS W. JONES

Thomas W. Jones

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 26th day of February, 2003.

/s/ BILLIE JEAN KING

Billie Jean King

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ JOHN D. NICHOLS

John D. Nichols

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ LUCIO A. NOTO

Lucio A. Noto

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ JOHN S. REED

John S. Reed

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Altria Group, Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Dinyar S. Devitre and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these present.

IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 26th day of February, 2003.

/s/ STEPHEN M. WOLF

Stephen M. Wolf

EX-99

Exhibit 99.1

CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS

As described in Item 3 of this Annual Report on Form 10-K, and Note 18 to Altria Group Inc.’s Consolidated Financial Statements included as Exhibit 13 hereto, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against ALG, its subsidiaries and affiliates, including PM USA and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms “Lights” and “Ultra Lights” constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages resulting from the allegedly illegal importation of cigarettes into various jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and various antitrust suits. Governmental plaintiffs in the health care cost recovery actions include the federal government, various cities and counties in the United States and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds (“unions”), Native American tribes, insurers and self-insurers, taxpayers and others.

The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since November 13, 2002 are also described.

SMOKING AND HEALTH LITIGATION

The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM USA and, in some cases, ALG and/or its other subsidiaries and affiliates, including PMI, as of February 14, 2003, and describes certain developments in these cases since November 13, 2002.

Consolidated Individual Smoking and Health Cases

In re Tobacco Litigation (Individual Personal Injury cases), Circuit Court, Ohio County, West Virginia, consolidated January 11, 2000. In West Virginia, all smoking and health cases alleging personal injury have been transferred to the State’s Mass Litigation Panel. The transferred cases include individual cases and putative class actions. All pending individual cases as well as cases filed in or transferred to the court by September 8, 2000 are to be included in a single consolidated trial. Approximately 1,100 individual cases are pending. The trial court’s order provides for the trial to be conducted in two phases. The issues to be tried in phase one are “general liability issues common to all defendants including, if appropriate, defective product theory, negligence theory, warranty theory; and any other theories supported by pretrial development” as well as entitlement to punitive damages and a punitive damages multiplier. Pursuant to the court’s order, the individual claims of the plaintiffs whose cases have been consolidated will be tried on an individual basis or “in reasonably sized trial groups” during the second phase of the trial. Trial is scheduled to begin in June 2003.

Flight Attendant Litigation

The settlement agreement entered into in the case of Broin, et al. v. Philip Morris Companies Inc., et al., permitted members of the purported class to bring individual suits as to their alleged injuries. As of February 14, 2003, approximately 2,800 of these suits were pending in the Circuit Court of Dade County, Florida against PM USA and three other cigarette manufacturers. In October 2000, the court held that the flight attendants will not be required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover damages, if any, other than establishing that the plaintiffs’ alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded. In October 2001, the appellate court dismissed defendants’ appeal of the trial court’s ruling. Defendants have appealed to the Florida Supreme Court, which has rejected defendants’ appeal. To date, an estimated 12 such cases are scheduled for trial through the end of 2003.

Domestic Class Actions

Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 5, 1994. See Item 3. Legal Proceedings for a discussion of this case.

Scott, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed May 24, 1996. The court granted plaintiffs’ motion for class certification on behalf of current and former Louisiana cigarette smokers seeking the creation of funds to pay the costs of monitoring the medical conditions of members of the purported class and providing class members with smoking cessation programs. Jury selection began in June 2001, and is now completed. In September 2002, the trial court entered an order precluding defendants from introducing evidence or making arguments to the jury concerning the affirmative defense of comparative fault. Also, in September 2002, the trial court issued an amended trial plan requiring the adjudication of defendants’ liability to the entire class, including defendants’ affirmative defenses, based on a trial of the two class representatives’ claims. Defendants filed writs challenging each of these rulings with the intermediate appellate court, and the Louisiana Supreme Court. Defendants’ appeals were denied by the Louisiana Supreme Court. Trial is currently underway.

In re: Tobacco Litigation (Medical Monitoring cases) (formerly McCune, et al. v. The American Tobacco Company, et al.), Circuit Court, Kanawha County, West Virginia, filed January 31, 1997. In November 2001, the jury returned a verdict in favor of all defendants, and plaintiffs appealed. In February 2003, the West Virginia Supreme Court agreed to hear plaintiffs’ appeal.

Muncie (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997. In January 2003, the case was dismissed.

Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997.

Jackson, et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, Utah, filed February 13, 1998.

Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998.

Cleary, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed June 3, 1998.

Cypret (formerly Jones), et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998.

Julian, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Montgomery County, Alabama, filed April 14, 1999.

Sims, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed May 23, 2001. In February 2003, the court denied plaintiffs’ motion for class certification.

Lowe, et al. v. Philip Morris Incorporated, et al., Circuit Court, Multomah, Oregon, filed November 19, 2001.

Birchall, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 10, 2002.

Goldfarb, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 25, 2002.

Cahn, et al. v. United States of America, et al., United States District Court, New Jersey, filed July 29, 2002.

Ellington, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 31, 2002.

Vandina, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 31, 2002.

Vavrek, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 31, 2002.

Martinez, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 4, 2002.

Ginsburg, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 6, 2002.

Hamil, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 6, 2002.

Ramsden, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 6, 2002.

Deller, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 9, 2002.

Hudson, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 9, 2002.Buffman v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Eben v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Gagne v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Garnier v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Goodman v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Griffin v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Huckeby v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Lee v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Lee v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Raimo v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Ramstetter v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002.

Baker v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 31, 2002.

Page v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 31, 2002.

Sampson v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 31, 2002.

Brown v. Philip Morris Incorporated, et al., Circuit Court, Campbell County, Kentucky, filed January 2, 2003.

Brown, et al. v. Philip Morris Incorporated, et al., Superior Court, Hamden County, Massachusetts, filed January 10, 2003 (not yet served).

International Class Actions

Caputo (formerly LeTourneau) v. Imperial Tobacco Limited, et al., Ontario Court of Justice, Toronto, Canada, filed January 13, 1995.

The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995.

Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada, filed on or about September 11, 1998.

Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior Court, Canada, filed November 20, 1998.

Ragoonanan, et al. v. Imperial Tobacco Limited, et al., Superior Court of Justice, Ontario, Canada, filed January 11, 2000.

Asociacion Espanola de Laringectomizados y Multiados de la voz v. Altadis S.A., et al., Court of First Instance, Barcelona, Spain, filed January 3, 2001. In April 2002, the court dismissed the case, and plaintiffs appealed. In November 2002, the appellate court affirmed the dismissal.

Asociacion Vallisoletana de Laringectomizados v. Altadis S.A., et al., Court of First Instance, Valadolid, Spain, filed January 4, 2001. In February 2002, the case was dismissed and plaintiff has appealed.

Asociacion Viscaina de Laringectomizados v. Altadis S.A., et al., Court of First Instance, Bilbao, Spain, filed January 5, 2001. In September 2002, the case was dismissed, and plaintiff has appealed.

Asociacion de Laringectomizados de Leon v. Altadis S.A., et al., Court of First Instance, Leon, Spain, filed January 3, 2001. In 2003, the case was dismissed, and plaintiff has appealed.

HEALTH CARE COST RECOVERY LITIGATION

The following lists the health care cost recovery actions pending against PM USA and, in some cases, ALG and/or its other subsidiaries and affiliates as of February 14, 2003 and describes certain developments in these cases since November 13, 2002. As discussed in Item 3. Legal Proceedings, in 1998 PM USA and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the “MSA”) settling the health care cost recovery claims of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas. Settlement agreements settling similar claims had previously been entered into with the states of Mississippi, Florida, Texas and Minnesota. ALG believes that the claims in the city/county, taxpayer and certain of the other health care cost recovery actions listed below are released in whole or in part by the MSA or that recovery in any such actions should be subject to the offset provisions of the MSA.

City/County Cases

County of Cook v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed April 18, 1997. Defendants’ motion to dismiss the case was granted by the trial court and plaintiffs’ appeal is pending.

City of St. Louis, et al. v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed November 23, 1998. In November 2001, the court granted in part and denied in part defendants’ motion to dismiss and dismissed three of plaintiffs’ 11 claims. Trial is scheduled for September 2004.

County of St. Louis v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed December 3, 1998. The case is currently stayed.

County of McHenry, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed July 13, 2000. The case has been stayed pending the outcome of the appeal in County of Cook v. Philip Morris Incorporated, et al., discussed above.

Department of Justice Case

The United States of America v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed September 22, 1999. See Item 3. Legal Proceedings, for a discussion of this case.

International Cases

The Republic of Panama v. The American Tobacco Company, Inc., United States District Court, District of Columbia, filed September 11, 1998. In July 2000, the United States Court of Appeals for the Fifth Circuit vacated the ruling by the United States District Court for the Eastern District of Louisiana that granted plaintiff’s motion to remand the case to the Civil District Court, Orleans Parish, Louisiana. In November 2000, the case was transferred to the Multidistrict Litigation Proceeding pending before the United States District Court for the District of Columbia (see In re: Tobacco/Government Health Care Cost Litigation (MDL No. 1279) (the “MDL Proceeding,” discussed below)). Plaintiff’s motion to remand this case is pending before the court hearing the MDL Proceeding.

Kupat Holim Clalit v. Philip Morris Incorporated, et al., Jerusalem District Court, Israel, filed September 28, 1998.

The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 20, 1999. In February 1999, this case was removed to federal court by defendants and subsequently transferred on the court’s own motion to the federal district court for the District of Columbia in March 1999. It is currently pending in the MDL Proceeding discussed below.

The Republic of Venezuela v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed January 27, 1999. In November 2001, the court dismissed the case, and plaintiff appealed. In September 2002, the appellate court affirmed the trial court’s ruling, and Venezuela has petitioned the state supreme court for further review.

The Caisse Primaire d’Assurance Maladie of Saint-Nazaire v. SEITA, et al., Civil Court of Saint-Nazaire, France, filed June 1999. A final hearing on the cases is scheduled for June 2003.

In re: Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279), United States District Court, District of Columbia, consolidated June 1999. In June 1999, the United States Judicial Panel on Multidistrict Litigation transferred foreign government health care cost recovery actions brought by Nicaragua, Venezuela, and Thailand to the District of Columbia for coordinated pretrial proceedings with two such actions brought by Bolivia and Guatemala already pending in that court. Subsequently, the resulting proceeding has also included filed cases brought by the following foreign governments: Ukraine; the Brazilian States of Espirito Santo, Goias, Mato Grosso do Sul, Para, Parana, Pernambuco, Piaui, Rondonia, Sao Paulo and Tocantins; Panama; the Province of Ontario, Canada; Ecuador; the Russian Federation; Honduras; Tajikistan; Belize; the Kyrgyz Republic and 11

Brazilian cities. The cases brought by Thailand and the Kyrgyz Republic were voluntarily dismissed. The complaints filed by Guatemala, Nicaragua, Ukraine and the Province of Ontario, have been dismissed, and the dismissals are now final. The district court has remanded the cases brought by Belize, Ecuador, Honduras, the Russian Federation, Tajikistan, Venezuela, the 10 Brazilian states listed and the 11 Brazilian cities to state courts. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the Venezuela and Espirito Santo actions were dismissed, and Venezuela appealed. In September 2002, the appellate court affirmed the trial court’s ruling that dismissed the case brought by Venezuela, and Venezuela has petitioned the state supreme court for further review.

The State of Rio de Janeiro of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., District Court, Angelina County, Texas, filed July 12, 1999. In December 2002, the court granted defendants’ motion to dismiss the case, and plaintiff has appealed.

The State of Goias of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 18, 1999.

The State of Sao Paulo of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Civil District Court, Orleans Parish, Louisiana, filed February 9, 2000.

The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed July 19, 2000.

The Russian Federation v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed on August 25, 2000.

The Republic of Honduras v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 5, 2000.

The State of Tocantins, Brazil v. The Brooke Group Ltd. Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 24, 2000.

The State of Piaui, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed December 13, 2000.

The Republic of Tajikistan v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed January 22, 2001.

Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001.

The Republic of Belize v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed April 5, 2001.

City of Belford Roxo, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Belo Horizonte, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Caripicuiba, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Duque de Caxias, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Joao Pessoa, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Jundiai, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Mage, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Nilopolis-RJ, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Nova Iguacu, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Rio de Janiero, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

City of Sao Bernardo de Campo, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

State of Para, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

State of Parana, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

State of Rondonia, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 8, 2001.

State of Pernambuco, Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed December 28, 2001.

Junta de Andalucia, et al. v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, filed February 21, 2002. In September 2002, the court granted defendants’ motion for dismissal for lack of jurisdiction, and plaintiff has appealed.

Union Cases

Operating Engineers Local 12 Health and Welfare Trust Fund, et al. v. American Tobacco, Inc., et al., Superior Court, San Diego County, California, filed September 17, 1997. In March 2000, the court ruled that plaintiffs are not permitted to use California’s unfair business practices statute to seek monetary damages for their claims. In April 2000, the plaintiffs voluntarily dismissed the remaining claims with prejudice and appealed certain trial court rulings to the state court of appeals. In October 2001, the California Court of Appeals affirmed the trial court’s ruling. Plaintiffs appealed to the California Supreme Court, which granted review, but ruled in November 2002 that review should not have been granted and remanded the case to the intermediate appellate court, which issued an order that its 2001 ruling dismissing the case is final.

Native American Cases

Sisseton-Wahpeton Sioux Tribe v. American Tobacco Co., et al., Tribal Court of the Sisseton-Wahpeton Sioux Tribe, filed May 8, 1998. In October 2002, the parties entered into stipulations to dismiss the case for lack of subject matter jurisdiction, and dismiss their pending appeals with prejudice. The trial court subsequently entered an order dismissing the case for lack of subject matter jurisdiction. In November 2002, the appellate court issued an order dismissing the appeals with prejudice.

Navajo Nation v. Philip Morris Incorporated, et al., District Court, Window Rock, Arizona, filed August 11, 1999. In January 2002, the court granted in part defendants’ motion to dismiss the case and dismissed all of plaintiff’s claims, except one, and plaintiff has moved for reconsideration.

The Alabama Coushatta Tribe of Texas v. American Tobacco Co., et al., United States District Court, Eastern District, Texas, filed August 30, 2000. In August 2002, the United States Court of Appeals for the Fifth Circuit denied plaintiff’s petition for rehearing of the Fifth Circuit’s affirmance of the trial court’s August 2001 ruling that dismissed the case. In November 2002, plaintiffs petitioned the United States Supreme Court for further review, and the Supreme Court refused to consider plaintiffs’ appeal in January 2003.

Insurer and Self - Insurer Cases

Group Health Plan, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed March 11, 1998. In January 2002, the court granted defendants’ motion for summary judgment dismissing the case, and plaintiffs have appealed. In April 2002, plaintiff-appellants moved to certify certain questions of law to the Minnesota Supreme Court, and the motion for certification has been denied.

Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 29, 1998. In September 2000, the court severed the claims of one plaintiff, Empire Blue Cross and Blue Shield (“Empire”), from those of the other plaintiffs. Trial of Empire’s claims commenced March 2001, and in June 2001, the jury returned a verdict in favor of Empire on two of its claims and awarded Empire up to approximately $17.8 million in compensatory damages, including $6.8 million against PM USA, and no punitive damages. In July 2001, the court stayed the remaining Blue Cross plans’ cases pending the outcome of Empire’s appeal, and denied plaintiff’s motion to treble the damage

award. In October 2001, the court denied defendants’ post-trial motions challenging the verdict, and in November 2001, entered judgment. In February 2002, the court awarded plaintiff approximately $38 million for attorneys’ fees. PM USA has appealed.

Taxpayer Cases

Temple, et al. v. The State of Tennessee, et al., United States District Court, Middle District, Tennessee, filed September 11, 2000. Plaintiffs’ complaint seeks class certification of those individuals who are Medicaid/TennCare recipients and who have allegedly suffered from smoking-related injuries. Plaintiffs claim that the putative class is entitled to a portion of the MSA funds under Tennessee’s “made whole” doctrine. Plaintiffs’ motion for a preliminary injunction seeking to enjoin the State of Tennessee from receiving the MSA payments and asking that the MSA proceeds be paid into the court was denied in March 2002. In July 2002, the court granted the State’s motion to dismiss on the grounds of sovereign immunity. In December 2002, the trial court granted the remaining defendants’ motion to dismiss for failure to state a claim and plaintiffs have appealed.

Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Middle District, Tennessee, filed May 23, 1997. In October 2002, an order was entered that consolidated this case with Temple, et al. v. The State of Tennessee, et al. (“Temple”) discussed above and granted plaintiffs’ motion to amend the complaint to make the allegations in this case similar to those in Temple. In November 2002, the trial court granted defendants’ motion to dismiss for failure to state a claim, and plaintiffs have appealed.

Other Cases

Perry, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Tennessee, filed September 30, 1996. Defendants’ motion to dismiss the case was granted by the trial court and plaintiffs’ appeal is pending. Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed December 23, 1997. In July 2002, the court denied plaintiffs’ motion for class certification, and granted defendants’ motion to dismiss the case. Plaintiffs have appealed.

A.O. Fox Memorial Hospital, et al. v. The American Tobacco Company, et al., Supreme Court, Nassau County, New York, filed March 30, 2000. Defendants’ motion to dismiss was granted by the trial court and plaintiffs appealed. In February 2003, the appellate court affirmed the trial court’s ruling.

Jefferson County d/b/a Cooper Green Hospital, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, Alabama, filed October 10, 2002.

CERTAIN OTHER TOBACCO-RELATED ACTIONS

The following lists certain other tobacco-related litigation pending against ALG and/or its various subsidiaries and others as of February 14, 2003, and describes certain developments since November 13, 2002.

Lights/Ultra Lights Cases

Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998. In October 2001, the court granted plaintiffs’ motion for class certification.

McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filed January 19, 1999.

Marrone, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Court of Common Pleas, Medina County, Ohio, filed November 8, 1999. Trial is scheduled for August 2003.

Price (formerly, Miles), et al. v. Philip Morris Incorporated, Circuit Court, Madison County, Illinois, filed February 10, 2000. See Item 3. Legal Proceedings for a discussion of this case.

Craft (formerly, Ratliff), et al. v. Philip Morris Companies Inc., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000.

Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed February 23, 2001. In February 2002, the court granted plaintiffs’ motion for class certification.

Philipps, et al. v. Philip Morris Incorporated, et al., Court of the Common Pleas, Medina County, Ohio, filed May 1, 2001.

Moore, et al. v. Philip Morris Incorporated, et al., Circuit Court, Marshall County, West Virginia, filed August 10, 2001.

In re Tobacco Cases II (Daniel Fischer, Jr., individually and on behalf of those similarly situated and the general public) v. Philip Morris Incorporated, et al., Superior Court, San Diego County, California, filed October 31, 2001. In August 2002, plaintiff stipulated to the dismissal of ALG as a defendant. In October 2002, plaintiffs amended their complaint to add PMI as a defendant. Also, in October 2002, defendants’ motion to coordinate the case with a case pending in state court in San Diego, California was granted.

Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth Judicial District Court, Hennepin County, Minnesota, filed November 28, 2001.

Tremblay, et al. v. Philip Morris Incorporated, Superior Court, Rockingham County, New Hampshire, filed March 29, 2002. The case has been consolidated with Peters v. Philip Morris Incorporated.

Peters v. Philip Morris Incorporated, Superior Court, Rockingham County, New Hampshire, filed April 22, 2002. This case has been consolidated with Tremblay, et al. v. Philip Morris Incorporated.

Pearson v. Philip Morris Incorporated, et al., , United States District Court, Oregon, filed November 20, 2002.

Cigarette Contraband Cases

Department of Amazonas, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, New York, filed May 19, 2000. Defendants’ motion to dismiss the complaint for failure to state a claim was granted by the trial court and plaintiffs’ appeal is pending.

The Republic of Ecuador v. Philip Morris Incorporated, et al., United States District Court, Southern District, Florida, filed June 5, 2000. Defendants’ motion to dismiss the complaint for failure to state a claim was granted by the trial court and plaintiff’s appeal is pending.

The Republic of Belize v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. Defendants’ motion to dismiss the complaint for failure to state a claim was granted by the trial court and plaintiff’s appeal is pending.

The Republic of Honduras v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. Defendants’ motion to dismiss the complaint for failure to state a claim was granted by the trial court and plaintiff’s appeal is pending.

The European Community, et al. v. RJR Nabisco, Inc., et al., United States District Court, Eastern District, New York, filed August 6, 2001. Defendants’ motion to dismiss the complaint for failure to state a claim was granted by the trial court and plaintiff’s appeal is pending.

Asbestos Contribution Cases

Fibreboard Corporation, et al. v. The American Tobacco Company, et al., Superior Court, Alameda County, California, filed December 11, 1997.

Owens Corning v. R.J. Reynolds Tobacco Company, et al., Circuit Court, Fayette County, Mississippi, filed August 30, 1998. In July 2001, the court granted defendants’ motion for summary judgment dismissing the claims of the asbestos company plaintiff, and plaintiff has appealed.

UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed March 15, 1999. In January 2003, the parties submitted a stipulation of dismissal with prejudice to the trial court.

Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served).

Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served).

Kaiser Aluminum & Chemical Corporation, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000.

T&N, Ltd., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served).

W.R. Grace & Co. Conn., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed April 24, 2001 (not yet served).

Retail Leaders Case

R.J. Reynolds Tobacco Company, et al. v. Philip Morris Incorporated, United States District Court, Middle District, North Carolina, filed March 12, 1999. Defendants’ motion for summary judgment dismissing all claims with prejudice was granted by the trial court and plaintiffs’ appeal is pending.

Vending Machine Case

Lewis d/b/a B&H Vendors v. Philip Morris Incorporated, United States District Court, Middle District, Tennessee, filed February 3, 1999.

Tobacco Price Cases

The following are the cases filed by tobacco wholesalers/distributors and by smokers, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws.

Buffalo Tobacco Products, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed February 8, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District, Georgia. (See Inre: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.)

DelSeronne, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed February 8, 2000. In June 2002, plaintiffs’ motion for class certification was denied. Plaintiffs’ motion for reconsideration has been denied. Defendants’ motions for summary judgment are pending.

Greer, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000.

Lennon v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed February 9, 2000. Defendants’ motion to dismiss was granted by the trial court and plaintiffs’ appeal is pending.

Munoz, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco County, California, filed February 9, 2000.

Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000. In November 2001, the court granted plaintiffs’ motion for class certification. Trial is scheduled for September 2003.

Gray, M.D., et al. v. Philip Morris Companies Inc., et al., Superior Court, Pima County, Arizona, filed February 11, 2000. In March 2001, the trial court dismissed the case, and plaintiffs appealed. In May 2002, the Arizona Court of Appeals reversed the trial court’s ruling, and defendants appealed.

Brownstein, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Broward County, Florida, filed February 14, 2000. In February 2003, the court granted defendants’ motion to dismiss the case, and plaintiffs have appealed.

Morse v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 14, 2000.

Ulan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 17, 2000.

Williamson Oil Company, Inc. v. Philip Morris Companies, et al., United States District Court, Northern District, Georgia, filed February 18, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In re:Cigarette Antitrust Litigation, MDL No. 1342, discussed below.)

Shafer v. Philip Morris Companies Inc., et al., District Court, Morton County, North Dakota, filed February 16, 2000.

Sullivan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000.

Teitler v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000.

Peirona v. Philip Morris Companies Inc., et al., Superior Court, San Francisco County, California, filed February 28, 2000.

Cusatis v. Philip Morris Companies Inc., et al., Circuit Court, Milwaukee County, Wisconsin, filed February 28, 2000.

Sand v. Philip Morris Companies Inc., et al., Superior Court, Los Angeles County, California, filed February 28, 2000.

Amsterdam Tobacco Corp., et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed March 6, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.)

Nierman v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 6, 2000. Defendants’ motion to dismiss was granted by the trial court and plaintiffs’ appeal is pending.

Sylvester v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 8, 2000. Defendants’ motion to dismiss was granted by the trial court and plaintiff’s appeal is pending.

I.Goldschlack v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed March 9, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.)

Suwanee Swifty Stores, Inc., D.I.P. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 14, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.)

Holiday Markets, Inc., et al. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 17, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.)

Taylor, et al. v. Philip Morris Companies Inc., et al., Superior Court, Cumberland County, Maine, filed March 24, 2000.

Romero, et al. v. Philip Morris Companies Inc., et al., First Judicial District Court, Rio Arriba County, New Mexico, filed April 10, 2000. Plaintiffs’ motion for class certification is pending.

Belch, et al. v. Philip Morris Companies Inc., et al., Superior Court, Alameda County, California, filed April 11, 2000.

Belmonte, et al. v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000.

Aguayo, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000.

Swanson, et al. (formerly Vetter, et al.) v. Philip Morris Companies Inc., et al., District Court, Hughes County, South Dakota, filed April 18, 2000.

Ludke, et al. v. Philip Morris Companies Inc., et al., District Court, Hennepin County, Minnesota, filed April 20, 2000. In November 2001, the court denied plaintiffs’ motion for class certification.

Kissel, et al. (formerly Quickle, et al.) v. Philip Morris Companies Inc., et al., First Judicial Circuit Court, Ohio County, West Virginia, filed May 2, 2000.

Hartz Foods, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed May 10, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In re: Cigarette Antitrust Litigation, MDL No. 1342, discussed below.)

Baker, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000.

Campe, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000.

Barnes v. Philip Morris Companies Inc., et al., Superior Court, District of Columbia, filed May 18, 2000. In November 2002, the court granted defendants’ motion for partial dismissal of the case.

Lau, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 25, 2000.

In re: Cigarette Antitrust Litigation, MDL No. 1342, Federal Multidistrict Litigation Panel, United States District Court, Northern District, Georgia, Atlanta Division, filed June 7, 2000. (Coordinated litigation of all federal cases.) Defendants’ motion for summary judgment was granted by the trial court and plaintiffs’ appeal is pending.

Philips, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed June 9, 2000.

Pooler/Unruh, et al. v. R.J. Reynolds, et al., Second Judicial District, Washoe County, Nevada, filed June 9, 2000.

Saylor, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District, Tennessee, filed August 15, 2001. Plaintiffs' motion to amend the complaint was granted in February 2003 after they withdrew their motion for class certification and defendants withdrew their motion to dismiss. In March 2003, defendants filed a motion to dismiss the case.

Wholesale Supply Co., Inc. v. Philip Morris Inc., et al., District Court, Ward County, North Dakota, filed October 11, 2002.

Cases Under the California Business and Professions Code

Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2001, the court granted in part plaintiffs’ motion for class certification and certified a class comprised of residents of California who smoked at least one of defendants’ cigarettes between June 1993 and April 2001 and who were exposed to defendants’ marketing and advertising activities in California. Certification was granted as to plaintiffs’ claims that defendants violated California Business and Professions Code Sections 17200 and 17500 pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. Trial is scheduled for August 2003.

Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. In November 2000, the court granted the plaintiffs’ motion for class certification on behalf of minor California residents who smoked at least one cigarette between April 1994 and December 1999. Certification was granted as to plaintiffs’ claims that defendants violated California Business and Professions Code Section 17200 pursuant to which plaintiffs allege that class members are entitled to reimbursements of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. In September 2002, the court granted defendants’ motions for summary judgment as to all claims in the case. Plaintiffs have appealed.

Tobacco Growers’ Case

DeLoach, et al. v. Philip Morris Incorporated, et al., United States District Court, Middle District, North Carolina, filed February 16, 2000. In April 2002, the court granted plaintiffs’ motion for class certification. Defendants’ petition for interlocutory review of the class certification order was denied in June 2002. Trial is scheduled for April 2004.

MSA-Related Cases

The following are cases in which plaintiffs have challenged the validity of the Master Settlement Agreement described in Item 3. Legal Proceedings.

Forces Action Project, LLC, et al. v. The State of California, et al., United States District Court, Northern District, California, filed January 23, 1999. In August 2001, the United States Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal of plaintiffs’ claims based on lack of standing, and reversed the district court’s denial of plaintiffs’ motion for leave to file an amended complaint. In January 2002, the district court denied plaintiffs’ new motion to amend the complaint, and plaintiffs appealed. In February 2003, the Ninth Circuit affirmed the district court’s January 2002 ruling, and plaintiffs have filed a petition for rehearing.

A.D. Bedell Company, Inc. v. Philip Morris Incorporated, et al., Supreme Court, Cattaraugus County, New York, filed October 18, 1999. In November 1999, the court denied a motion to dismiss the complaint and denied a motion to vacate the temporary restraining order enjoining PM USA from refusing to sell products to plaintiff. Defendants filed an appeal from the court’s denial of their motion to dismiss and motion to vacate. In May 2000, the appellate court granted in part and denied in part defendants’ motion to dismiss the case. The stay which was previously pending resolution of A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., expired upon the denial of certiorari in that case.

PTI, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, California, filed August 13, 1999. In May 2000, the court dismissed plaintiffs’ claims.

Mariana, et al. v. William, et al., United States District Court, Middle District, Pennsylvania, filed October 31, 2001. Plaintiffs, seeking to enjoin the Commonwealth of Pennsylvania’s receipt of funds pursuant to the MSA, allege that enforcement of the MSA is unconstitutional and violates antitrust laws.

Neel, et al. v. Strong, et al., Circuit Court, St. Louis County, Missouri, filed January 8, 2002. Plaintiffs, two Missouri residents and taxpayers, seek to enjoin the payment by PM USA and other tobacco companies of attorneys’ fees to counsel who represented the State of Missouri in its health care cost recovery suit against the tobacco industry, and allege that the Missouri fee payment agreement violates certain provisions of the Missouri Constitution. In September 2002, the court granted defendants’ motion to dismiss the case, and plaintiffs have appealed.

Consolidated Putative Punitive Damages Cases

Simon, et al. v. Philip Morris Incorporated, et al. (Simon II), United States District Court, Eastern District, New York, filed September 6, 2000. In July 2002, plaintiffs filed an amended complaint and a motion seeking certification of a punitive damages class of persons residing in the United States who smoke or smoked defendants’ cigarettes, and who have been diagnosed by a physician with an enumerated disease from April 1993 through the date notice of the certification of this class was disseminated. The following persons are excluded from the class: (1) those who have obtained judgments or settlements against any defendants;

(2) those against whom any defendant has obtained judgment; (3) persons who are part of the certified Engle case; (4) persons who should have reasonably realized that they had an enumerated disease prior to April 9, 1993; and (5) those whose diagnosis or reasonable basis for knowledge predates their use of tobacco. In September 2002, the trial court granted plaintiffs’ motion for class certification, and defendants have petitioned the United States Court of Appeals for the Second Circuit for review of the trial court’s ruling. The Second Circuit has agreed to hear defendants’ appeal. Trial of the case has been stayed pending resolution of defendants’ petition to the Second Circuit.

CERTAIN OTHER ACTIONS

The following lists certain other actions pending against subsidiaries of the Company and others as of February 14, 2003.

Environmental Matters

In May 2001, the Attorney General for the State of Ohio notified KFNA that it may be subject to an enforcement action for alleged violations of the state’s water pollution control law at its production facility in Farmdale, Ohio. The Ohio Attorney General has alleged that this facility has exceeded its water permit effluent limits and violated its reporting requirements. The State has offered to attempt to negotiate a settlement of this matter, and KFNA has accepted the offer to do so. The State has not yet identified the relief it may seek in this matter.

EX-99

Exhibit 99.2

TRIAL SCHEDULE FOR CERTAIN CASES

Set forth below is a listing of the case under the California Business and Professions Code and the consolidated individual smoking and health cases, as well as the health care cost recovery, Lights/Ultra Lights and Tobacco Price cases currently scheduled for trial through 2003 against PM USA and, in some cases, ALG or an affiliate of PMI. Trial dates, however, are subject to change.

Case (Jurisdiction)	Type of Action	Trial Date
In re: Tobacco Litigation (Individual Personal Injury cases) (West Virginia)	Consolidated Individual Smoking and Health Cases	June 3, 2003
Marrone, et al. v. Philip Morris Companies Inc., et al. (Ohio)	Lights/Ultra Lights Class Action	August 4, 2003
Brown, et al. v. The American Tobacco Company, Inc., et al. (California)	Case Under the California Business and Professions Code	August 11, 2003
Smith, et al. v. Philip Morris Companies Inc., et al. (Kansas)	Tobacco Price Case	September 8, 2003

Below is a schedule setting forth by month the number of individual smoking and health cases, including cases brought by current and former flight attendants claiming personal injuries allegedly related to ETS, against PM USA and, in some cases, ALG, that are currently scheduled for trial through the end of the year 2003.

2003

April (2)

May (3)

June (4)

July (1)

August (6)

September (3)

October (4)

November (1)

EX-99

Exhibit 99.3
Additional Exhibit

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Altria Group, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Louis C. Camilleri, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ LOUIS C. CAMILLERI

Louis C. Camilleri
President and Chief
Executive Officer
March 27, 2003

A signed original of this written statement required by Section 906 has been provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 99.3
Additional Exhibit

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Altria Group, Inc. (the “Company”) on Form 10-K for the year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dinyar S. Devitre, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ DINYAR S. DEVITRE

Dinyar S. Devitre
Senior Vice President and
Chief Financial Officer
March 27, 2003

A signed original of this written statement required by Section 906 has been provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.