10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2004

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)
13-3260245
(I.R.S. Employer
Identification No.)

120 Park Avenue, New York, New York
(Address of principal executive offices)
10017
(Zip Code)

Registrant’s telephone number, including area code (917) 663-4000

_________________________________________________________________
Former name, former address and former fiscal year, if changed since last report

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, and (2) has been subject to such filing requirements for the past 90 days. Yes  X  No     

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     

At April 30, 2004, there were 2,050,802,670 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.

ALTRIA GROUP, INC.

TABLE OF CONTENTS

			Page No.
PART I	–	FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets at March 31, 2004 and December 31, 2003	3 – 4
		Condensed Consolidated Statements of Earnings for the Three Months Ended March 31, 2004 and 2003	5
		Condensed Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2003 and the Three Months Ended March 31, 2004	6
		Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003	7 – 8
		Notes to Condensed Consolidated Financial Statements	9 – 29
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	30 – 53
Item 4.		Controls and Procedures	54
PART II	–	OTHER INFORMATION
Item 1.		Legal Proceedings	55
Item 2.		Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	55
Item 4.		Submission of Matters to a Vote of Security Holders	56
Item 6.		Exhibits and Reports on Form 8-K	57
Signature			58

-2-

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions of dollars)
(Unaudited)

	March 31, 2004		December 31, 2003
ASSETS
Consumer products
Cash and cash equivalents	$	3,204	$	3,777
Receivables (less allowances of $141 and $135)		5,592		5,256
Inventories:
Leaf tobacco		3,389		3,591
Other raw materials		2,148		2,009
Finished product		4,006		3,940
		9,543		9,540
Other current assets		1,980		2,809
Total current assets		20,319		21,382
Property, plant and equipment, at cost		27,637		27,233
Less accumulated depreciation		11,628		11,166
		16,009		16,067
Goodwill		28,277		27,742
Other intangible assets, net		11,402		11,803
Other assets		11,222		10,641
Total consumer products assets		87,229		87,635
Financial services
Finance assets, net		8,188		8,393
Other assets		148		147
Total financial services assets		8,336		8,540
TOTAL ASSETS	$	95,565	$	96,175

See notes to condensed consolidated financial statements.

Continued

-3-

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets (Continued)
(in millions of dollars, except share and per share data)
(Unaudited)

	March 31, 2004			December 31, 2003
LIABILITIES
Consumer products
Short-term borrowings	$	2,494		$	1,715
Current portion of long-term debt		1,528			1,661
Accounts payable		2,780			3,198
Accrued liabilities:
Marketing		2,445			2,443
Taxes, except income taxes		2,510			2,325
Employment costs		856			1,363
Settlement charges		1,265			3,530
Other		2,778			2,455
Income taxes		771			1,316
Dividends payable		1,396			1,387
Total current liabilities		18,823			21,393
Long-term debt		19,294			18,953
Deferred income taxes		7,224			7,295
Accrued postretirement health care costs		3,263			3,216
Minority interest		4,762			4,760
Other liabilities		7,162			7,161
Total consumer products liabilities		60,528			62,778
Financial services
Long-term debt		2,077			2,210
Deferred income taxes		5,785			5,815
Other liabilities		335			295
Total financial services liabilities		8,197			8,320
Total liabilities		68,725			71,098
Contingencies (Note 9)
STOCKHOLDERS’ EQUITY
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued)		935			935
Additional paid-in capital		5,072			4,813
Earnings reinvested in the business		47,696			47,008
Accumulated other comprehensive losses (including currency translation of $1,166 and $1,578)		(1,711	)		(2,125	)
		51,992			50,631
Less cost of repurchased stock (756,104,883 and 768,697,895 shares)		(25,152	)		(25,554	)
Total stockholders’ equity		26,840			25,077
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	95,565		$	96,175

See notes to condensed consolidated financial statements.

-4-

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(in millions of dollars, except per share data)
(Unaudited)

	For the Three Months Ended March 31,
	2004		2003
Net revenues	$	21,839	$	19,371
Cost of sales		8,084		7,565
Excise taxes on products		6,317		4,887
Gross profit		7,438		6,919
Marketing, administration and research costs		3,371		3,053
Domestic tobacco headquarters relocation charges		10
Asset impairment and exit costs		325
Amortization of intangibles		4		2
Operating income		3,728		3,864
Interest and other debt expense, net		300		283
Earnings before income taxes and minority interest		3,428		3,581
Provision for income taxes		1,186		1,261
Earnings before minority interest		2,242		2,320
Minority interest in earnings and other, net		48		134
Net earnings	$	2,194	$	2,186
Per share data:
Basic earnings per share	$	1.07	$	1.08
Diluted earnings per share	$	1.07	$	1.07
Dividends declared	$	0.68	$	0.64

See notes to condensed consolidated financial statements.

-5-

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
for the Year Ended December 31, 2003 and
the Three Months Ended March 31, 2004
(in millions of dollars, except per share data)
(Unaudited)

								Accumulated Other Comprehensive Earnings (Losses)
	Common Stock		Addi- tional Paid-in Capital		Earnings Reinvested in the Business			Currency Translation Adjustments			Other			Total			Cost of Repurchased Stock			Total Stock- holders’ Equity
Balances, January 1, 2003	$	935	$	4,642	$	43,259		$	(2,951	)	$	(1,005	)	$	(3,956	)	$	(25,402	)	$	19,478
Comprehensive earnings:
Net earnings						9,204															9,204
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments									1,373						1,373						1,373
Additional minimum pension liability												464			464						464
Change in fair value of derivatives accounted for as hedges												(6	)		(6	)					(6	)
Total other comprehensive earnings																					1,831
Total comprehensive earnings																					11,035
Exercise of stock options and issuance of other stock awards				171		(93	)											537			615
Cash dividends declared ($2.64 per share)						(5,362	)														(5,362	)
Stock repurchased																		(689	)		(689	)
Balances, December 31, 2003		935		4,813		47,008			(1,578	)		(547	)		(2,125	)		(25,554	)		25,077
Comprehensive earnings:
Net earnings						2,194															2,194
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments									412						412						412
Additional minimum pension liability												(11	)		(11	)					(11	)
Change in fair value of derivatives accounted for as hedges												13			13						13
Total other comprehensive earnings																					414
Total comprehensive earnings																					2,608
Exercise of stock options and issuance of other stock awards				259		(112	)											402			549
Cash dividends declared ($0.68 per share)						(1,394	)														(1,394	)
Balances, March 31, 2004	$	935	$	5,072	$	47,696		$	(1,166	)	$	(545	)	$	(1,711	)	$	(25,152	)	$	26,840

Total comprehensive earnings were $2,528 million for the quarter ended March 31, 2003.

See notes to condensed consolidated financial statements.

-6-

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions of dollars)
(Unaudited)

		For the Three Months Ended March 31,
		2004			2003
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net earnings	- Consumer products	$	2,151		$	2,130
	- Financial services		43			56
Net earnings			2,194			2,186
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization			384			341
Deferred income tax provision (benefit)			1,009			(162	)
Minority interest in earnings and other, net			48			134
Domestic tobacco headquarters relocation charges, net of cash paid			(2	)
Escrow bond for the Price domestic tobacco case			(200	)
Asset impairment and exit costs, net of cash paid			304			(9	)
Integration costs, net of cash paid						(2	)
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net			(228	)		(271	)
Inventories			149			(187	)
Accounts payable			(463	)		(420	)
Income taxes			(536	)		970
Accrued liabilities and other current assets			(205	)		(790	)
Settlement charges			(2,265	)		856
Pension plan contributions			(138	)		(678	)
Other			161			91
Financial services
Deferred income tax benefit			(37	)		(5	)
Other			114			119
Net cash provided by operating activities			289			2,173
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures			(326	)		(423	)
Purchases of businesses, net of acquired cash			(152	)		(5	)
Other			(43	)		13
Financial services
Investments in finance assets						(109	)
Proceeds from finance assets			153			80
Net cash used in investing activities			(368	)		(444	)

See notes to condensed consolidated financial statements.

Continued

-7-

Altria Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(in millions of dollars)
(Unaudited)

	For the Three Months Ended March 31,
	2004			2003
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net issuance of short-term borrowings	$	874		$	2,085
Long-term debt proceeds		10			18
Long-term debt repaid		(11	)		(675	)
Financial services
Long-term debt repaid		(189	)		(144	)
Repurchase of Altria Group, Inc. common stock					(777	)
Repurchase of Kraft Foods Inc. common stock		(152	)		(79	)
Dividends paid on Altria Group, Inc. common stock		(1,385	)		(1,309	)
Issuance of Altria Group, Inc. common stock		430			52
Other		(154	)		(104	)
Net cash used in financing activities		(577	)		(933	)
Effect of exchange rate changes on cash and cash equivalents		83			30
Cash and cash equivalents:
(Decrease) Increase		(573	)		826
Balance at beginning of period		3,777			565
Balance at end of period	$	3,204		$	1,391

See notes to condensed consolidated financial statements.

-8-

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1. Accounting Policies:

Basis of Presentation

The interim condensed consolidated financial statements of Altria Group, Inc. and subsidiaries (“Altria Group, Inc.”) are unaudited. It is the opinion of Altria Group, Inc.’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year. Throughout this Form 10-Q, the term “Altria Group, Inc.” refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies and the term “ALG” refers solely to the parent company.

These statements should be read in conjunction with the consolidated financial statements and related notes, and management’s discussion and analysis of financial condition and results of operations, which appear in Altria Group, Inc.’s Annual Report to Stockholders and which are incorporated by reference into Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003 (the “2003 Form 10-K”).

Balance sheet accounts are segregated by two broad types of businesses. 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 year amounts have been reclassified to conform with the current year’s presentation, due primarily to a new global organization structure at Kraft Foods Inc. (“Kraft”) and the disclosure of more detailed information on the condensed consolidated statements of cash flows.

Stock-Based Compensation Expense

Altria Group, Inc. accounts for employee stock compensation plans in accordance with the intrinsic value-based method permitted by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” which does not result in compensation cost for stock options. The market value at date of grant of restricted stock and rights to receive shares of stock is recorded as compensation expense over the period of restriction.

In January 2004, Altria Group, Inc. granted approximately 1.4 million shares of restricted stock to eligible U.S.-based employees of Altria Group, Inc. and also issued to eligible non-U.S. employees rights to receive approximately 1.0 million equivalent shares. The market value per restricted share or right was $55.42 on the date of the grant. Restrictions on these shares lapse in the first quarter of 2007. In addition, Kraft granted approximately 4.1 million Class A restricted shares to eligible U.S.-based employees and issued rights to receive approximately 1.9 million Class A equivalent shares to eligible non-U.S. employees.

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 $40 million (including $21 million related to Kraft awards) and $17 million (including $9 million related to Kraft awards) for the quarters ended March 31, 2004 and 2003, respectively.

In addition to restricted stock, at March 31, 2004, Altria Group, Inc.’s stock-based employee compensation plans permit the issuance of stock options to employees. 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 stock options within those plans. No compensation expense for employee stock options is reflected in net earnings, as all stock options granted under those plans had an exercise

-9-

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

price not less than the market value of the common stock on the date of the grant. Net earnings, as reported, includes pre-tax compensation expense related to restricted stock and rights of $40 million and $17 million for the quarters ended March 31, 2004 and 2003, respectively. The following table illustrates the effect on net earnings and earnings per share (“EPS”) if Altria Group, Inc. had applied the fair value recognition provisions of SFAS No. 123 to measure stock-based compensation expense for outstanding stock option awards for the quarters ended March 31, 2004 and 2003 (in millions, except per share data):

		2004		2003
Net earnings, as reported	$	2,194	$	2,186
Deduct:
Total stock-based employee compensation expense determined under fair value method for all stock option awards, net of related tax effects		4		13
Pro forma net earnings	$	2,190	$	2,173
Earnings per share:
Basic - as reported	$	1.07	$	1.08
Basic - pro forma	$	1.07	$	1.07
Diluted - as reported	$	1.07	$	1.07
Diluted - pro forma	$	1.06	$	1.07

Altria Group, Inc. has not granted stock options to employees since 2002. The amount shown above as stock-based compensation expense in 2004 relates primarily to Executive Ownership Stock Options (“EOSOs”). Under certain circumstances, senior executives who exercise outstanding stock options using shares to pay the option exercise price, receive EOSOs equal to the number of shares tendered. Under provisions of a Financial Accounting Standards Board (“FASB”) Exposure Draft issued in 2004, Altria Group, Inc. would be required to record as compensation expense the fair values of EOSO’s beginning in 2005.

Note 2. Asset Impairment and Exit Costs:

For the quarter ended March 31, 2004, pre-tax asset impairment and exit costs consisted of the following:

		For the Three Months Ended March 31, 2004
		(in millions)
Separation program	Domestic tobacco	$	1
Restructuring program	North American food		245
Restructuring program	International food		34
Asset impairment	North American food		17
Asset impairment	International food		12
Separation program	General corporate*		8
Lease termination	General corporate*		5
Asset impairment	General corporate*		3
Asset impairment and exit costs		$	325

*In the first quarter of 2004, Altria Group, Inc. recorded a pre-tax charge of $16 million, primarily related to the streamlining of various corporate functions.

-10-

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Kraft Restructuring Program

In January 2004, Kraft announced a multi-year restructuring program with the objectives of leveraging Kraft’s global scale, realigning and lowering its cost structure, and optimizing capacity utilization. As part of this program, Kraft anticipates the closing or sale of up to twenty plants and the elimination of approximately six thousand positions. Over the next three years, Kraft expects to incur up to $1.2 billion in pre-tax charges, reflecting asset disposals, severance and other implementation costs, including an estimated range of $750 million to $800 million in 2004. Approximately one-half of the pre-tax charges are expected to require cash payments.

During the first quarter of 2004, pre-tax charges under the restructuring program of $279 million were recorded as asset impairment and exit costs on the condensed consolidated statement of earnings. These charges resulted from the first quarter 2004 announcement of the closing of five plants, the termination of a co-manufacturing agreement and the announcement of a number of workforce reduction programs. Approximately $88 million of the pre-tax charges will result in cash payments. Pre-tax restructuring liability activity for the quarter ended March 31, 2004 was as follows (in millions):

	Severance			Asset Write-downs			Other			Total
Liability balance, January 1, 2004	$	—		$	—		$	—		$	—
Charges		81			191			7			279
Cash spent		(8	)					(4	)		(12	)
Charges against assets					(191	)					(191	)
Liability balance, March 31, 2004	$	73		$	—		$	3		$	76

Severance costs in the above schedule, which relate to a number of workforce reduction programs, include the cost of related benefits. Programs announced during the first quarter of 2004 will result in the elimination of approximately 2,000 positions. Asset write-downs relate to the impairment of assets caused by the plant closings. Other costs incurred relate primarily to contract termination costs associated with the plant closings and the termination of a co-manufacturing agreement.

In addition, during the first quarter of 2004, Altira Group, Inc. completed its annual review of goodwill and intangible assets. This review resulted in a $29 million non-cash pre-tax charge at Kraft related to an intangible asset impairment for a small confectionery business in the United States and certain brands in Mexico. This charge was recorded as asset impairment and exit costs on the condensed consolidated statement of earnings.

Note 3. Benefit Plans:

In December 2003, the FASB issued a revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” In the first quarter of 2004, Altria Group, Inc. adopted the new interim-period disclosure requirements of this pronouncement relating to net periodic benefit cost and employer contributions to benefit plans, except for certain interim-period disclosures about non-U.S. plans which are not required until after December 31, 2004.

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.

-11-

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost (income) consisted of the following for the quarter ended March 31, 2004 and 2003:

	U.S. Plans						Non-U.S. Plans
	2004			2003			2004			2003
	(in millions)
Service cost	$	66		$	58		$	45		$	42
Interest cost		153			144			63			66
Expected return on plan assets		(228	)		(234	)		(75	)		(82	)
Amortization:
Unrecognized net loss from experience differences		38			10			12			8
Unrecognized prior service cost		4			4			4			4
Net periodic pension cost (income)	$	33		$	(18	)	$	49		$	38

Employer Contributions

Altria Group, Inc. presently plans to make contributions, to the extent that they are tax deductible, in order to maintain plan assets in excess of the accumulated benefit obligation of its U.S. funded plans. In April 2004, approximately $60 million of employer contributions were made to U.S. plans. Currently, Altria Group, Inc. anticipates making additional contributions of approximately $485 million during the remainder of 2004, based on current tax law. However, this estimate is subject to change, due primarily to asset performance significantly above or below the assumed long-term rate of return on pension assets and significant changes in interest rates. During the first quarter of 2004, pension plan contributions of $138 million, that related principally to non-U.S. plans, were reflected on the condensed consolidated statements of cash flows.

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the quarter ended March 31, 2004 and 2003:

	2004			2003
	(in millions)
Service cost	$	23		$	21
Interest cost		71			71
Amortization:
Unrecognized net loss from experience differences		16			13
Unrecognized prior service cost		(6	)		(6	)
Net postretirement health care costs	$	104		$	99

In December 2003, the United States enacted into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”). The Act establishes a prescription drug benefit under Medicare, known as “Medicare Part D,” and a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.

-12-

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In January 2004, the FASB issued FASB Staff Position No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“FSP 106-1”). Altria Group, Inc. has elected to defer accounting for the effects of the Act, as permitted by FSP 106-1. Therefore, in accordance with FSP 106-1, Altria Group, Inc.’s accumulated postretirement benefit obligation and net postretirement health care costs included in the condensed consolidated financial statements and accompanying notes do not reflect the favorable effects of the Act on the plans. Specific authoritative guidance on the accounting for the federal subsidy is pending, and that guidance, when issued, could require Altria Group, Inc. to change previously reported information.

Note 4. Goodwill and Other Intangible Assets, net:

Goodwill by segment was as follows (in millions):

	March 31, 2004		December 31, 2003
International tobacco	$	2,096	$	2,016
North American food		21,169		20,877
International food		5,012		4,849
Total goodwill	$	28,277	$	27,742

Intangible assets were as follows (in millions):

	March 31, 2004				December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Non-amortizable intangible assets	$	11,362			$	11,758
Amortizable intangible assets		85	$	45		84	$	39
Total intangible assets	$	11,447	$	45	$	11,842	$	39

Non-amortizable intangible assets substantially consist of brand names. Amortizable intangible assets consist primarily of certain trademark licenses and non-compete agreements. Pre-tax amortization expense for intangible assets during the quarters ended March 31, 2004 and 2003 was $4 million and $2 million, respectively. Amortization expense for each of the next five years is estimated to be $20 million or less.

The movement in goodwill and intangible assets from December 31, 2003 is as follows (in millions):

	Goodwill		Intangible Assets
Balance at December 31, 2003	$	27,742	$	11,842
Changes due to:
Acquisitions				33
Currency		195		(10	)
Other		340		(418	)
Balance at March 31, 2004	$	28,277	$	11,447

As a result of Kraft’s common stock repurchases, ALG’s ownership percentage of Kraft has increased, thereby resulting in an increase in goodwill. Other, above, includes this additional goodwill as well as the reclassification to goodwill of certain amounts previously classified as indefinite life intangible assets, and the impact of Kraft’s intangible asset impairment.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 5. Financial Instruments:

During the quarters ended March 31, 2004 and 2003, 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 twenty-one months. At March 31, 2004, Altria Group, Inc. estimates derivative losses of $79 million, net of income taxes, reported in accumulated other comprehensive earnings (losses), will be reclassified to the consolidated statement of earnings within the next twelve months.

Within currency translation adjustments at March 31, 2004 and 2003, Altria Group, Inc. recorded losses of $37 million, net of income taxes, and $65 million, net of income taxes, respectively, which represented effective hedges of net investments.

Hedging activity affected accumulated other comprehensive earnings (losses), net of income taxes, as follows:

	For the Three Months Ended March 31,
	2004			2003
	(in millions)
Loss at beginning of period	$	(83	)	$	(77	)
Derivative losses transferred to earnings		1			2
Change in fair value		12			28
Loss as of March 31	$	(70	)	$	(47	)

Note 6. Acquisitions:

During the first quarter of 2004, Kraft purchased a North American beverage business. In addition, Philip Morris International Inc. purchased a tobacco business in Finland. The total cost of acquisitions during the quarters ended March 31, 2004 and 2003 were $152 million and $5 million, respectively.

The operating results of businesses acquired were not material to Altria Group, Inc.’s consolidated financial position, results of operations or cash flows in any of the periods presented.

Note 7. Earnings Per Share:

Basic and diluted EPS were calculated using the following:

	For the Three Months Ended March 31,
	2004		2003
	(in millions)
Net earnings	$	2,194	$	2,186
Weighted average shares for basic EPS		2,041		2,032
Plus incremental shares from assumed conversions:
Restricted stock and stock rights		3		1
Stock options		15		7
Weighted average shares for diluted EPS		2,059		2,040

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Incremental shares from assumed conversions are calculated as the number of shares that would be issued, net of the number of shares that could be purchased in the marketplace with the cash received upon stock option exercise or, in the case of restricted stock, the amount of the related unamortized compensation expense. For the quarter ended March 31, 2003, 76 million stock options were excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive (i.e., the cash that would be received upon exercise is greater than the average market price of the stock during the period). The number of stock options excluded for the first quarter of 2004 was immaterial.

Note 8. Segment Reporting:

The products of ALG’s subsidiaries include cigarettes and food (consisting principally of a wide variety of snacks, beverages, cheese, grocery products and convenient meals). Another subsidiary of ALG, Philip Morris Capital Corporation, maintains a portfolio of leveraged and direct finance leases. The products and services of these subsidiaries constitute Altria Group, Inc.’s reportable segments of domestic tobacco, international tobacco, North American food, international food and financial services. During January 2004, Kraft announced a new global organization structure. Beginning in 2004, results for Kraft’s Mexico and Puerto Rico businesses, which were previously included in the North American food segment, are included in the international food segment, and historical amounts have been restated.

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 ALG 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.

Segment data were as follows:

	For the Three Months Ended March 31,
	2004			2003
	(in millions)
Net revenues:
Domestic tobacco	$	4,004		$	3,817
International tobacco		10,043			8,079
North American food		5,399			5,266
International food		2,294			2,093
Financial services		99			116
Net revenues	$	21,839		$	19,371
Earnings before income taxes and minority interest:
Operating companies income:
Domestic tobacco	$	970		$	742
International tobacco		1,835			1,690
North American food		846			1,273
International food		191			261
Financial services		70			83
Amortization of intangibles		(4	)		(2	)
General corporate expenses		(180	)		(183	)
Operating income		3,728			3,864
Interest and other debt expense, net		(300	)		(283	)
Earnings before income taxes and minority interest	$	3,428		$	3,581

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Items affecting the comparability of results were as follows:

• Domestic Tobacco Headquarters Relocation Charges – During the first quarter of 2003, Philip Morris USA Inc. (“PM USA”) announced that it will be moving its corporate headquarters from New York City to Richmond, Virginia, by June 2004. PM USA estimates that the total cost of the relocation will be approximately $120 million, including compensation to those employees who do not relocate. Pre-tax charges of $10 million were recorded in operating companies income of the domestic tobacco segment for the quarter ended March 31, 2004, and, to date, $79 million of relocation charges have been recorded. The relocation will require cash payments of approximately $70 million in 2004 and $20 million in 2005 and beyond. Cash payments of $12 million were made during the first quarter of 2004, while total cash payments related to the relocation were $44 million through March 31, 2004.

• Asset Impairment and Exit Costs – As discussed in Note 2. Asset Impairment and Exit Costs, in January 2004, Kraft announced a multi-year restructuring program that will result in pre-tax charges of approximately $1.2 billion over the next three years. During the first quarter of 2004, Altria Group, Inc. recorded pre-tax charges of $325 million for the restructuring program and other asset impairment and exit costs.

Note 9. 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, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding, (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 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 tobacco-related litigation range into the billions of dollars. Exhibit 99.1 hereto lists certain tobacco-related actions pending as of April 30, 2004, and discusses certain developments in such cases since March 12, 2004. Plaintiffs’ theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, ALG or PMI, as of April 30, 2004, May 1, 2003 and May 1, 2002, and a page-reference to further discussions of each type of case.

Type of Case	Number of Cases Pending as of April 30, 2004	Number of Cases Pending as of May 1, 2003	Number of Cases Pending as of May 1, 2002	Page References
Individual Smoking and Health Cases (1)(2)	285	275	250	22; Exhibit 99.1, page 1
Smoking and Health Class Actions and Aggregated Claims Litigation (3)	9	42	26	23; Exhibit 99.1, pages 2-4
Health Care Cost Recovery Actions	13	41	44	23-25; Exhibit 99.1, pages 4-7
Lights/Ultra Lights Class Actions	21	18	13	25-26; Exhibit 99.1, pages 7-8
Tobacco Price Cases	2	37	36	26; Exhibit 99.1, pages 8-9
Cigarette Contraband Cases	2	5	5	27; Exhibit 99.1, page 10
Asbestos Contribution Cases	6	7	12	27; Exhibit 99.1, pages 9-10

(1) The increase in cases at April 30, 2004 compared to prior periods is due primarily to new cases being filed in Maryland.

(2) Does not include 2,722 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“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.

(3) Includes as one case the aggregated claims of 967 individuals that are proposed to be tried in a single proceeding in West Virginia.

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 120 smoking and health cases brought on behalf of individuals (Argentina (47), Australia (2), Brazil (42), Czech Republic (2), France, Israel (2), Italy (18), the Philippines, Poland, Scotland, Spain (2) and Venezuela), compared with approximately 89 such cases on May 1, 2003, and 70 such cases on May 1, 2002. In addition, as of April 30, 2004, there were six smoking and health putative class actions pending outside the United States (Brazil, Canada (4), and Spain), compared with 11 such cases on May 1, 2003, and eight such cases on May 1, 2002. In addition, four health care cost recovery actions are pending in Israel, Canada, France and Spain against PMI or its affiliates. In addition, a Lights/Ultra Lights case is pending in Israel.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Pending and Upcoming Trials

Trial is currently underway in the Scott, et al. v. The American Tobacco Company, Inc. et al. class action (discussed below). As set forth in Exhibit 99.2 hereto, certain cases against PM USA are scheduled for trial through the end of 2004, including the case brought by the United States government in which ALG is also a defendant (discussed below) and an estimated six individual smoking and health cases, including one individual smoking and health case scheduled for trial in June 2004. In addition, one case brought by a flight attendant seeking compensatory damages for personal injuries allegedly caused by ETS is scheduled for trial through the end of 2004. Cases against other tobacco companies are also scheduled for trial through the end of 2004. Trial dates are subject to change.

Recent Trial Results

Since January 1999, verdicts have been returned in 36 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 23 of the 36 cases. These 23 cases were tried in California (2), Florida (7), Mississippi, Missouri, New Hampshire, New Jersey, New York (3), Ohio (2), Pennsylvania, Rhode Island, Tennessee (2) and West Virginia. Plaintiffs’ appeals or post-trial motions challenging the verdicts are pending in California, Florida, Missouri, New Hampshire, Ohio and Pennsylvania. A motion for a new trial has been granted in one of the cases in Florida. In addition, in December 2002, a court dismissed an individual smoking and health case in California at the end of trial.

The chart below lists the verdicts and post-trial developments in the 13 pending 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
November 2003	Missouri/ Thompson	Individual Smoking and Health	$2.1 million in compensatory damages against all defendants, including $837,403 against PM USA.	In March 2004, the court denied defendants’ post-trial motions challenging the verdict. PM USA has appealed.
April 2003	Florida/Eastman	Individual Smoking and Health	$6.54 million in compensatory damages, against all defendants, including $2.62 million against PM USA.	In May 2004, the Florida Second District Court of Appeal affirmed the judgment entered by the trial court. PM USA intends to appeal.
March 2003	Illinois/Price	Lights/Ultra Lights Class Action	$7.1005 billion in compensatory damages and $3 billion in punitive damages against PM USA.	The Illinois Supreme Court has agreed to hear PM USA’s appeal. See the discussion of the Price case under the heading “Certain Other Tobacco-Related Litigation—Lights/Ultra Lights Cases.”

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 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 trial 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.	In March 2003, the trial court reduced the damages award to $24.86 million; PM USA intends to appeal.
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; 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.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Date	Location of Court/Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
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. In September 2003, the United States Court of Appeals for the Second Circuit reversed the portion of the judgment relating to subrogation, certified questions relating to plaintiff’s direct claims of deceptive business practices to the New York Court of Appeals and deferred its ruling on the appeal of the attorneys’ fees award pending the ruling on the certified questions.
July 2000	Florida/Engle	Smoking and Health Class Action	$145 billion in punitive damages against all defendants, including $74 billion against PM USA.	In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs’ motion for reconsideration was denied in September 2003, and plaintiffs petitioned the Florida Supreme Court for further review. See “Engle Class Action” below.
March 2000	California/ Whiteley	Individual Smoking and Health	$1.72 million in compensatory damages against PM USA and another defendant, and $10 million in punitive damages against each of PM USA and the other defendant.	In April 2004, the California First District Court of Appeal entered judgment in favor of defendants on plaintiffs negligent design claims, and reversed and remanded for a new trial on plaintiff’s fraud-related claims.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 and plaintiff appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. Following the Oregon Supreme Court’s refusal to hear PM USA’s appeal, PM USA recorded a provision of $32 million in marketing, administration and research costs on the 2002 consolidated statement of earnings as its best estimate of the probable loss in this case and petitioned the United States Supreme Court for further review. In October 2003, the United States Supreme Court set aside the Oregon appellate court’s ruling, and directed the Oregon court to reconsider the case in light of the 2003 State Farm decision by the United States Supreme Court, which limited punitive damages.
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 and plaintiff appealed. In September 2003, a California Court of Appeal, citing the State Farm decision, reduced the punitive damages award to $9 million, but otherwise affirmed the judgment for compensatory damages, and PM USA petitioned the California Supreme Court for further review. In April 2004, the California Supreme Court granted PM USA’s petition on a grant and hold basis.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

In addition to the cases discussed above, in October 2003, an appellate court in Brazil reversed a lower court’s dismissal of an individual smoking and health case and ordered PMI’s Brazilian affiliate to pay plaintiff approximately $256,000 and other unspecified damages. PMI’s Brazilian affiliate has appealed to a larger panel of the appellate court.

With respect to certain adverse verdicts currently on appeal, excluding amounts relating to the Engle and Price cases, as of April 30, 2004, PM USA has posted various forms of security totaling $367 million, the majority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. The cash deposits are included in other assets on the consolidated balance sheets.

Engle Class Action

In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA posted a bond in the amount of $100 million and appealed.

In May 2001, the trial court approved a stipulation providing that execution 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, 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 Florida Rules of Civil Procedure. 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 March 31, 2004 and December 31, 2003 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 connection with the stipulation, PM USA recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001.

In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs’ motion for reconsideration was denied in September 2003, and plaintiffs have petitioned the Florida Supreme Court for further review.

Smoking and Health Litigation

Overview

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.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Smoking and Health Class Actions

Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of “addicted” smokers, 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.

Class certification has been denied or reversed by courts in 56 smoking and health class actions involving PM USA in Arkansas, the District of Columbia (2), Florida (the Engle case), Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada (29), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin. A class remains certified in the Scott class action discussed below.

In July 2003, following the first phase of the trial in the Scott class action, in which plaintiffs seek creation of funds to pay for medical monitoring and smoking cessation programs, a Louisiana jury returned a verdict in favor of defendants, including PM USA, in connection with plaintiffs’ medical monitoring claims, but also found that plaintiffs could benefit from smoking cessation assistance. The jury also found that cigarettes as designed are not defective but that the defendants failed to disclose all they knew about smoking and diseases and marketed their products to minors. The jury was not permitted to award damages during the first phase of the trial. The second phase of the trial began in March 2004 and is currently underway. In this phase, the jury is determining the parameters and funding of a statewide smoking cessation program. Plaintiffs have estimated the cost of their program to be approximately $1.18 billion. The court has ruled that all class-wide liability issues were decided in the verdict in the trial’s first phase and that the defendants are not entitled to any affirmative defenses in the second phase of the trial.

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 appealed. In May 2004, the West Virginia Supreme Court affirmed the judgment entered by the trial court.

Health Care Cost Recovery Litigation

Overview

In health care cost recovery litigation, domestic and foreign governmental entities and non-governmental plaintiffs seek 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.

The claims asserted include the claim that cigarette manufacturers were “unjustly enriched” by plaintiffs’ payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, 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 anti-racketeering 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

-23-

Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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.

Although there have been some decisions to the contrary, most judicial decisions have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and four state intermediate appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five circuit courts of appeals.

A number of foreign governmental entities have filed health care cost recovery actions in the United States. Such suits have been brought in the United States by 13 countries, a Canadian province, 11 Brazilian states and 11 Brazilian cities. Thirty-two of the cases have been dismissed, and four remain pending. In addition to the cases brought in the United States, health care cost recovery actions have also been brought in Israel, the Marshall Islands (dismissed), Canada, France and Spain, and other entities have stated that they are considering filing such actions. In September 2003, the case pending in France was dismissed, and plaintiff has appealed.

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, and defendants, including PM USA, appealed. See the above discussion of the Empire Blue Cross and Blue Shield case under the heading “Recent Trial Results” for the post-trial developments in this case.

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 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 adjustments for several factors, including inflation, market share and industry volume: 2005 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.

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

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 (2005 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 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.

The State Settlement Agreements have materially adversely affected the volumes of PM USA, and 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 on, among other things, 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.

In April 2004, a lawsuit was filed on behalf of a purported class of all California residents who purchased cigarettes in California from April 2000 to the present, contending that the MSA enabled the defendants, including PM USA and ALG, to engage in unlawful price-fixing and market sharing agreements. The complaint seeks damages, and also seeks to enjoin the defendants from continuing to operate under those provisions of the MSA that allegedly violate California law.

A putative class action brought on behalf of certain importers of cigarettes against the New York State Attorney General and Commissioner of Taxation & Finance alleging that the MSA and certain statutes enacted in New York in connection with the MSA violate federal antitrust law is pending in New York. Neither ALG nor PM USA is a defendant in the case. Plaintiffs’ motions for preliminary injunctive relief and summary judgment are currently pending. Previously, the district court granted defendants’ motion to dismiss the case, and plaintiff appealed. In January 2004, the United States Court of Appeals for the Second Circuit affirmed in part and reversed and remanded in part the trial court’s ruling, and defendants’ motions for rehearing were denied.

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, including PM USA, and others, including 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 what it alleges to be equitable and declaratory relief, including disgorgement of profits which arose from defendants’ allegedly tortious conduct, 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 January 2003, the government and defendants submitted preliminary proposed findings of fact and conclusions of law; rebuttals were filed in April 2003. The government alleges that disgorgement by defendants of approximately $290 billion is an appropriate remedy. Trial of the case is currently scheduled for September 2004, and the court has ruled on a number of motions filed by the government and defendants in advance of trial. Additional motions for summary judgment filed by the government and defendants are pending.

Certain Other Tobacco-Related Litigation

Lights/Ultra Lights Cases: These class actions have been brought against PM USA and, in certain instances, ALG and PMI or its subsidiaries, 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 class actions 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. Cases are pending in Arkansas,

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Delaware, Florida, Georgia, Illinois (2), Louisiana, Massachusetts, Minnesota, Missouri, New Hampshire (2), New Jersey, Ohio (2), Oregon, Tennessee, Washington, West Virginia (2) and Wisconsin. In addition, a case is pending in Israel. To date, trial courts in Arizona and Minnesota have refused to certify classes in these cases, and appellate courts in Florida and Massachusetts have overturned class certifications by trial courts. The decertification decision in Massachusetts is currently on appeal to Massachusetts’ highest court. Plaintiffs in the Florida case have filed a motion for rehearing. Trial courts have certified classes against PM USA in the Price case in Illinois and in Missouri and Ohio (2). PM USA has appealed or otherwise challenged these class certification orders. In January 2004, plaintiffs in a case in California voluntarily dismissed their case without prejudice.

With respect to the Price case, trial commenced in January 2003, and in March 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 against PM USA. In April 2003, the judge reduced the amount of the appeal bond that PM USA must provide and ordered PM USA to place a pre-existing 7.0%, $6 billion long-term note from ALG to PM USA in an escrow account with an Illinois financial institution. (Since this note is the result of an intercompany financing arrangement, it does not appear on the consolidated balance sheet of Altria Group, Inc.) The judge’s order also requires PM USA to make cash deposits with the clerk of the Madison County Circuit Court in the following amounts: beginning October 1, 2003, an amount equal to the interest earned by PM USA on the ALG note ($210 million every six months), an additional $800 million in four equal quarterly installments between September 2003 and June 2004 and the payments of principal of the note, which are due in April 2008, 2009 and 2010. Through March 31, 2004, PM USA paid $810 million of the cash payments due under the judge’s order. (Cash payments into the account are included in other assets on Altria Group, Inc.’s consolidated balance sheet at March 31, 2004.) If PM USA prevails on appeal, the escrowed note and all cash deposited with the court will be returned to PM USA, with accrued interest less administrative fees payable to the court. Plaintiffs appealed the judge’s order reducing the bond. In July 2003, the Illinois Fifth District Court of Appeals ruled that the trial court had exceeded its authority in reducing the bond. In September 2003, the Illinois Supreme Court upheld the reduced bond set by the trial court and announced it would hear PM USA’s appeal on the merits without the need for intermediate appellate court review. 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 of a number of legal and factual grounds that it is pursuing on appeal.

Tobacco Price Cases: As of April 30, 2004, two cases were pending in Kansas and New Mexico in which plaintiffs allege that defendants, including PM USA, conspired to fix cigarette prices in violation of antitrust laws. Plaintiffs’ motions for class certification have been granted in both cases; however, the New Mexico Court of Appeals has agreed to hear defendants’ appeal of the class certification decision.

Wholesale Leaders Cases: In June 2003, certain wholesale distributors of cigarettes filed suit against PM USA seeking to enjoin the PM USA “2003 Wholesale Leaders” (“WL”) program that became available to wholesalers in June 2003. The complaint alleges that the WL program constitutes unlawful price discrimination and is an attempt to monopolize. In addition to an injunction, plaintiffs seek unspecified monetary damages, attorneys’ fees, costs and interest. The states of Tennessee and Mississippi intervened as plaintiffs in this litigation. In January 2004, Tennessee filed a motion to dismiss its complaint, and the complaint was dismissed without prejudice in March 2004. In August 2003, the trial court issued a preliminary injunction, subject to plaintiffs’ posting a bond in the amount of $1 million, enjoining PM USA from implementing certain discount terms with respect to the sixteen wholesale distributor plaintiffs, and PM USA appealed. In September 2003, the United States Court of Appeals for the Sixth Circuit granted PM USA’s motion to stay the injunction pending an expedited appeal. Trial is scheduled for March 2005. In December 2003, a tobacco manufacturer filed a similar lawsuit against PM USA in Michigan alleging that the WL program constitutes unlawful price discrimination and is an attempt to monopolize. Plaintiff seeks unspecified monetary damages.

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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 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 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. Defendants petitioned the United States Court of Appeals for the Second Circuit for review of the trial court’s ruling, and the Second Circuit agreed to hear defendants’ petition. The parties are awaiting the Second Circuit’s decision. Trial of the case has been stayed pending resolution of defendants’ petition.

Case Under the California Business and Professions Code: In June 1997 and July 1998, two suits were filed in California 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 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’ motion for summary judgment as to all claims in one of the cases. Plaintiffs have appealed. Defendants’ motion for summary judgment is pending in the other case.

Asbestos Contribution Cases: These cases, which have been brought on behalf of former asbestos manufacturers and affiliated entities against PM USA and other cigarette manufacturers, 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.

Cigarette Contraband Cases: As of April 30, 2004, the European Community and ten member states and various Departments of Colombia 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 unspecified injunctive relief. In February 2002, the trial courts granted defendants’ motions to dismiss the actions. Plaintiffs in each case appealed. In January 2004, the United States Court of Appeals for the Second Circuit affirmed the dismissals of the cases. In April 2004, plaintiffs in each case petitioned the United States Supreme Court for further review. It is possible that future litigation related to cigarette contraband issues may be brought by these or other parties.

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. In

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

January 2004, the Sixth Circuit affirmed in part and reversed in part the trial court’s ruling that granted PM USA’s motion for summary judgment. The Sixth Circuit denied PM USA’s petition for rehearing in March 2004. In April 2004, the Sixth Circuit stayed the mandate to the district court to allow PM USA to seek further review from the United States Supreme Court.

Certain Other Actions

Italian Tax Matters: In recent years, approximately two hundred tax assessments alleging nonpayment of taxes in Italy (value-added taxes for the years 1988 to March 1996 and income taxes for the years 1987 to March 1996) were served upon certain affiliates of PMI. These assessments were in various stages of appeal. In 2003, certain affiliates of PMI invoked the amnesty provisions of a recently enacted Italian fiscal law and agreed with the Italian tax authorities to resolve all but twenty-five of the assessments issued to that date for the euro equivalent of $321 million, including statutory interest, to be paid in twelve quarterly installments over a three-year period. Of the twenty-five assessments that were not resolved, nineteen assessments (totaling the euro equivalent of $349 million with interest and penalties of $647 million) were subject to adverse decisions by the regional tax court and were duplicative of other assessments for which the amnesty was invoked. The affiliate of PMI which is subject to these assessments intends to appeal the regional tax court decisions to the Italian Supreme Court. The remaining six assessments (totaling the euro equivalent of $118 million with interest and penalties of $327 million) were not eligible for the amnesty and will be resolved in the Italian administrative tax court. PMI and its affiliates that are subject to these remaining assessments believe they have complied with applicable Italian tax laws.

In December 2003, ten assessments alleging nonpayment of taxes in Italy (value-added and income taxes for the years 1997 and 1998) were served upon certain affiliates of PMI. In April 2004, these PMI affiliates agreed with the Italian tax authorities to settle these assessments for the euro equivalent of $28 million (including interest and penalties). The same PMI affiliates also agreed with the Italian tax authorities during the second quarter of 2004 to settle potential claims for value-added and income taxes for the years 1996, 1999, 2000 and 2001 for the euro equivalent of $22 million (including interest and penalties).

Italian Antitrust Case: During 2001, the competition authority in Italy initiated an investigation into the pricing activities by participants in that cigarette market. In March 2003, the authority issued its findings, and imposed fines totaling €50 million on certain affiliates of PMI. PMI’s affiliates appealed to the administrative court, which rejected the appeal in July 2003. PMI believes that its affiliates have numerous grounds for appeal, and in February 2004, its affiliates appealed to the supreme administrative court. However, under Italian law, if fines are not paid within certain specified time periods, interest and eventually penalties will be applied to the fines. Accordingly, in December 2003, pending final resolution of the case, PMI’s affiliates paid €51 million representing the fines and any applicable interest to the date of payment. The €51 million will be returned to PMI’s affiliates if they prevail on appeal. Accordingly, the payment has been included in other assets on Altria Group, Inc.’s consolidated balance sheet at December 31, 2003.

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 13 cases since 1999 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 other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of judges and jurors 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 9. Contingencies: (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

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Altria Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)

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.

Guarantees

At March 31, 2004, Altria Group, Inc.’s third-party guarantees, which are primarily derived from acquisition and divestiture activities, approximated $244 million, of which $212 million have no specified expiration dates. The remainder expire through 2023, with $4 million expiring through March 31, 2005. 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 a liability of $49 million on its condensed consolidated balance sheet at March 31, 2004, relating to these guarantees. In the ordinary course of business, certain subsidiaries of ALG have agreed to indemnify a limited number of third parties in the event of future litigation.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of the Company

Altria Group, Inc. (“ALG”), through its wholly-owned subsidiaries, Philip Morris USA Inc. (“PM USA”) and Philip Morris International Inc. (“PMI”), and its majority-owned (84.6%) subsidiary, Kraft Foods Inc. (“Kraft”), is 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, maintains a portfolio of leveraged and direct finance leases. Throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, the term “Altria Group, Inc.” refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies and the term “ALG” refers solely to the parent company. ALG’s access to the operating cash flows of its subsidiaries consists of cash received from the payment of dividends and interest, and the repayment of amounts borrowed from ALG by its subsidiaries.

Executive Summary

The following executive summary is intended to provide highlights of the Discussion and Analysis that follows.

Consolidated Operating Results– The changes in Altria Group, Inc.’s net earnings and diluted earnings per share (“EPS”) for the first quarter ended March 31, 2004 from the first quarter ended March 31, 2003 were due primarily to the following (in millions, except per share data):

	Net Earnings			Diluted EPS
For the quarter ended March 31, 2003	$	2,186		$	1.07
2004 Domestic tobacco headquarters relocation charges		(7	)
2004 Asset impairment and exit costs		(180	)		(0.09	)
Subtotal 2004 items		(187	)		(0.09	)
Currency		180			0.09
Lower effective tax rate		23			0.01
Higher shares outstanding					(0.01	)
Operations		(8	)
For the quarter ended March 31, 2004	$	2,194		$	1.07

See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.

Asset Impairment and Exit Costs – In January 2004, Kraft announced a multi-year restructuring program. As part of this program, Kraft anticipates the closing or sale of up to twenty plants and the elimination of approximately six thousand positions. Over the next three years, Kraft expects to incur up to $1.2 billion in pre-tax charges, including an estimated range of $750 million to $800 million in 2004. During the first quarter of 2004, Kraft recorded pre-tax charges of $308 million for this program and other intangible asset impairment charges. For further details, see the Food Business Environment section of the following Discussion and Analysis.

The favorable currency impact on net earnings and diluted EPS is due primarily to the weakness of the U.S. dollar versus the euro and other currencies.

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The effective tax rate decreased by 0.6 percentage points to 34.6% reflecting the mix of foreign versus domestic pre-tax earnings and the reversal of tax provisions that are no longer required due to tax events that occurred during the first quarter of 2004.

Higher shares outstanding during the first quarter of 2004 reflect exercises of employee stock options and the impact of a higher average stock price on the number of incremental shares from the assumed conversion of outstanding employee stock options.

The decrease in results from operations was due primarily to the following:

• Lower North American food income reflecting higher commodity and benefit costs, and increased promotional programs.

• Lower international food income reflecting higher costs, including benefits, commodities and infrastructure investment in developing markets.

• Lower international tobacco income reflecting lower volume in the higher margin markets of France, Italy and Germany and increased marketing and infrastructure expenditures.

The decrease in results from operations was partially offset by:

• Higher domestic tobacco income, reflecting a favorable comparison to the first quarter of 2003, which included incremental costs associated with PM USA’s move to an off-invoice promotional allowance.

• Higher international tobacco pricing.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

2004 Projected Results – In April 2004, Altria Group, Inc. reaffirmed that it expects 2004 full-year diluted EPS in a range of $4.57 to $4.67, including anticipated charges of $0.23 for costs related to the restructuring at Kraft and other items, but excluding potential charges that may result from the draft cooperation agreement under discussion between PMI and the European Commission.

Potential charges for the agreement with the European Commission are estimated to be approximately $0.11 per share, which includes the initial payment of $250 million and accruals for payments due on the first anniversary of the agreement. Including these charges and a lower overall effective tax rate that is expected to result from the final resolution of certain U.S. and foreign tax matters (the major portion of which is expected to occur in the second quarter of 2004), 2004 full-year diluted EPS are projected to be in the range of $4.50 to $4.60 per share.

The factors described in the section entitled Cautionary Factors That May Affect Future Results of the following Discussion and Analysis represent continuing risks to these projections.

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Discussion and Analysis

Consolidated Operating Results

For the Three Months Ended March 31,
	Net Revenues
	(in millions)
	2004		2003
Domestic tobacco	$	4,004	$	3,817
International tobacco		10,043		8,079
North American food		5,399		5,266
International food		2,294		2,093
Financial services		99		116
Net revenues	$	21,839	$	19,371

	Operating Income
	(in millions)
	2004			2003
Operating companies income:
Domestic tobacco	$	970		$	742
International tobacco		1,835			1,690
North American food		846			1,273
International food		191			261
Financial services		70			83
Amortization of intangibles		(4	)		(2	)
General corporate expenses		(180	)		(183	)
Operating income	$	3,728		$	3,864

As discussed in Note 8. Segment Reporting, management reviews operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.

The following events occurred during the first quarter of 2004 and 2003 that affected the comparability of statement of earnings amounts.

• Domestic Tobacco Headquarters Relocation Charges – During the first quarter of 2003, PM USA announced that it will be moving its corporate headquarters from New York City to Richmond, Virginia, by June 2004. PM USA estimates that the total cost of the relocation will be approximately $120 million, including compensation to those employees who do not relocate. Pre-tax charges of $10 million were recorded in operating companies income of the domestic tobacco segment for the quarter ended March 31, 2004, and to date, $79 million of relocation charges have been recorded. The relocation will require cash payments of approximately $70 million in 2004 and $20 million in 2005 and beyond. Cash payments of $12 million were made during the first quarter of 2004, while total cash payments related to the relocation were $44 million through March 31, 2004.

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• Asset Impairment and Exit Costs – For the quarter ended March 31, 2004, pre-tax asset impairment and exit costs consisted of the following:

		For the Three Months Ended March 31, 2004
		(in millions)
Separation program	Domestic tobacco	$	1
Restructuring program	North American food		245
Restructuring program	International food		34
Asset impairment	North American food		17
Asset impairment	International food		12
Separation program	General corporate*		8
Lease termination	General corporate*		5
Asset impairment	General corporate*		3
Asset impairment and exit costs		$	325

* In the first quarter of 2004, Altria Group, Inc. recorded a pre-tax charge of $16 million, primarily for severance benefits related to the streamlining of various corporate functions.

There were no asset impairment and exit costs during the first quarter of 2003.

Consolidated Results of Operations for the Quarter Ended March 31, 2004

The following discussion compares consolidated operating results for the first quarter of 2004 with the first quarter of 2003.

Net revenues increased $2.5 billion (12.7%), due primarily to an increase in net revenues from the domestic and international tobacco businesses and favorable currency.

Operating income decreased $136 million (3.5%), due primarily to the 2004 pre-tax charges for asset impairment and exit costs related to the Kraft restructuring program and lower operating results from the food and international tobacco businesses, partially offset by the favorable impact of currency and higher operating results from the domestic tobacco business.

Currency movements increased net revenues by $1.3 billion ($712 million, after excluding the impact of currency movements on excise taxes) and operating income by $278 million. Increases in net revenues and operating income were due primarily to the weakness versus prior year of the U.S. dollar, primarily against the euro.

Altria Group, Inc.’s effective tax rate decreased by 0.6 percentage points to 34.6%. This decrease was due primarily to the mix of foreign versus domestic pre-tax earnings and the reversal of tax provisions that are no longer required due to tax events that occurred during the first quarter of 2004.

Net earnings of $2.2 billion increased $8 million (0.4%), due primarily to the favorable impact of currency, higher operating income from the domestic tobacco business and a lower effective tax rate, partially offset by the 2004 asset impairment and exit costs related to the Kraft restructuring program and lower operating income from the food and international tobacco businesses. Diluted earnings per share of $1.07 were equal to prior year, and basic earnings per share of $1.07, decreased by 0.9%.

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Operating Results by Business Segment

Tobacco

Business Environment

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

The tobacco industry, both in the United States and abroad, faces a number of challenges that may continue to adversely affect the business, volume, results of operations, cash flows and financial position of PM USA, PMI and ALG. These challenges, which are discussed below, include:

• a compensatory and punitive damages judgment totaling approximately $10.1 billion against PM USA in the Price Lights/Ultra Lights class action, and punitive damages verdicts against PM USA in other smoking and health cases discussed in Note 9. Contingencies (“Note 9”);

• the civil lawsuit filed by the United States federal government seeking disgorgement of approximately $290 billion from various cigarette manufacturers, including PM USA, and others discussed in Note 9;

• pending and threatened litigation and bonding requirements as discussed in Note 9;

• 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 as well as changes in tax structure in foreign markets;

• the sale of counterfeit cigarettes by third parties;

• the sale of cigarettes by third parties over the Internet and by other means designed to avoid the collection of applicable taxes;

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

• diversion into one market of products intended for sale in another;

• 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;

• actual and proposed 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;

• governmental and private bans and restrictions on smoking;

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

• governmental regulations setting fire safety standards for cigarettes; and

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

In the ordinary course of business, PM USA and PMI are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of customer incentive programs and customer inventory reduction programs, as well as the timing of pricing actions and tax-driven price increases.

Excise Taxes:Cigarettes are subject to substantial excise taxes in the United States and to substantial taxation abroad. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted within the United States, the European Union (the “EU”) and in other foreign jurisdictions.

These tax increases are expected to continue to have an adverse impact on sales of cigarettes by PM USA and PMI, due to lower consumption levels and to a shift in sales from the premium to the non-premium or discount segments or to sales outside of legitimate channels.

Tar and Nicotine Test Methods and Brand Descriptors:Authorities in several jurisdictions have questioned the utility of standardized test methods to measure average tar and nicotine yields of cigarettes. In 2001, the National Cancer Institute issued its Monograph 13 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 2002, PM USA petitioned the FTC to promulgate new rules governing the disclosure of average tar and nicotine yields of cigarette brands. In response to evolving scientific evidence about machine-measured low-yield cigarettes, which represents a fundamental departure from the scientific and public health communities’ prior thinking about the health effects of low-yield cigarettes, public health officials in other countries have stated that the use of terms such as “Lights” to describe low-yield cigarettes is misleading. 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. Public health officials in the EU and Brazil have prohibited the use of brand descriptors such as “Lights” and “Ultra Lights,” and public health authorities in other jurisdictions have called for such prohibitions. PMI has communicated to national governments, including the EU, as well as the World Health Organization (“WHO”), its views on the need for regulation of how tar and nicotine yields in cigarettes are measured and how this information is communicated to consumers. See Note 9, which describes pending litigation concerning the use of brand descriptors.

Food and Drug Administration (“FDA”) Regulations:PM USA has stated that while it opposes FDA regulation over cigarettes as “drugs” or “medical devices” under the Food, Drug and Cosmetic Act (“FDCA”), it would support new legislation that would provide for meaningful and effective regulation by the FDA of tobacco products. Currently, bills are pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products; PM USA has expressed support for one of the bills. The pending legislation could result in substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. In addition, some of the proposed legislation would impose fees to pay for the cost of regulation and other matters. The ultimate outcome of any Congressional action regarding the pending bills cannot be predicted.

Tobacco Quota Buy-Out:Bills are pending in Congress which, if enacted, would result in a “buy-out” of U.S. tobacco quotas. These bills would fund a quota buy-out by imposing new fees or assessments on all manufacturers of tobacco products sold in the United States. PM USA has voiced support for certain buy-out proposals if they are part of legislation granting the FDA authority to regulate tobacco products.

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. In some jurisdictions, proposals have also been discussed that would permit governments to prohibit the use of certain ingredients. Under an EU tobacco product directive, tobacco companies are now required to disclose ingredients and toxicological information to each Member State. In implementing the EU tobacco product directive, the

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Netherlands has issued a decree that would require tobacco companies to disclose the ingredients used in each brand of cigarettes, including quantities used. PMI and others have challenged this decree in the Dutch District Court of The Hague on the grounds of a lack of appropriate protection for proprietary information.

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 the sale, promotion, and use of cigarettes continue to be subject to increasing governmental regulation.

It is the policy 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 each established Web sites that include, among other things, the 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 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 (“SIDS”) and that it can exacerbate adult asthma and cause eye, throat and nasal irritation;

• 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;

• particular care should be exercised with regard to children, and that adults should avoid smoking around children;

• 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; and

• women who smoke have increased risks for delay in conceiving, infertility, pregnancy complications, premature birth, spontaneous abortion and stillbirth. Infants born to women who smoke during pregnancy have a lower average birth weight than infants born to women who do not smoke. The risks for SIDS are increased among the infants of women who smoke during pregnancy. Women who quit smoking before or during pregnancy reduce the risk of such adverse reproductive outcomes. For pregnant women, smoking is also likely to put their babies at risk for poor lung development, asthma and respiratory infections.

The World Health Organization’s Framework Convention for Tobacco Control:In May 2003, the Framework Convention for Tobacco Control was adopted by the World Health Assembly and has been signed by more than 100 countries and the EU, and several countries have ratified it. The 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;

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adopt measures that would 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.

Each country that ratifies the treaty is expected to implement legislation reflecting the treaty’s provisions and principles. PM USA and PMI have stated that they hope that the adoption of the treaty will lead to the implementation of meaningful, effective regulation of tobacco products around the world.

Cigarette Fire-Safety Requirements:In December 2003, the New York State Office of Fire Prevention and Control (the “OFPC”) published final regulations that implement fire-safety standards for cigarettes sold in New York. Beginning June 28, 2004, all cigarettes sold or offered for sale in New York (except for certain cigarettes that already are in the stream of commerce on that date) must meet standards established in the OFPC’s final regulations. PM USA will comply with these New York regulatory requirements. Similar regulation or legislation is being considered in other states, at the federal level, and in jurisdictions outside the United States. Similar legislation, which begins the process of requiring reduced ignition propensity cigarettes, has been passed in Canada.

Other Legislation and Legislative Initiatives:Legislative and regulatory initiatives affecting the tobacco industry have been adopted or are being considered in a number of countries and jurisdictions. 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; require manufacturers to disclose ingredients and toxicological data; require cigarette packs to carry health warnings covering no less than 30% of the front panel and no less than 40% of the back panel; gives Member States the option of introducing graphic warnings as of 2005; require tar, nicotine and carbon monoxide data to cover at least 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.

Current EU Member States have implemented these regulations and countries joining the EU on May 1, 2004 were required to implement them. The European Commission has issued guidelines for optional graphic warnings on cigarette packaging that Member States may apply as of 2005. Graphic warning requirements have also been proposed or adopted in a number of other jurisdictions. In 2003, the EU adopted a new directive prohibiting radio, press and Internet tobacco marketing and advertising. EU Member States must implement this directive by July 31, 2005. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions.

In the United States in recent years, various members of Congress have introduced legislation that would: subject cigarettes to various regulations; 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.

It is not possible to predict what, if any, additional governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or the tobacco industry generally. If, however, any of the proposals were to be implemented, the business, volume, results of operations, cash flows and financial position of PM USA, PMI and their parent, ALG, could be materially adversely affected.

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Governmental Investigations:From time to time, ALG and its subsidiaries are subject to governmental investigations on a range of matters, including those discussed below.

Australia:	In 2001, authorities in Australia initiated an investigation into the use of descriptors, in order to determine whether their use is false and misleading. The investigation is directed at one of PMI’s Australian affiliates and other cigarette manufacturers.
Canada:	ALG believes that Canadian authorities are contemplating a legal proceeding based on an investigation of ALG entities relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s.
Greece:	In 2003, the competition authorities in Greece initiated an investigation into recent cigarette price increases in that market. PMI’s Greek affiliates have responded to the authorities’ request for information.
Italy:	Review of Proposed Retail Sales Data Agreement: In February 2003, in accordance with Italian legal procedures, PMI’s Italian affiliate, Philip Morris Italia S.p.A., requested that Italy’s competition authority review its proposed agreement with retailers to purchase retail sales data. In July 2003, the Italian competition authority announced that it would review that request.
	“Lights” Cases: Pursuant to two separate requests from a consumer advocacy group, the Italian competition authorities held that the use of the “lights” descriptors such as Marlboro Lights, Merit Ultra Lights, and Diana Leggere brands to be misleading advertising, but took no action because an EU directive prohibited the use of the descriptors in October 2003. PMI has appealed the decisions to the administrative court.

ALG and its subsidiaries cannot predict the outcome of these investigations or whether additional investigations may be commenced.

Draft Cooperation Agreement between PMI and the European Commission: On April 3, 2004, PMI announced that it is in discussions to reach an agreement with the European Commission that provides for broad cooperation with European law enforcement agencies on anti-contraband and anti-counterfeit efforts. The draft agreement would also resolve all disputes between the European Community and the EU Member States that sign the agreement, on the one hand, and PMI and certain affiliates, on the other hand, relating to these issues. Under the terms of the draft agreement, PMI would make 13 payments over 12 years and would record a pre-tax charge of $250 million for the initial payment when the agreement is signed. The draft agreement calls for base payments of $150 million on the first anniversary of the agreement, $100 million on the second anniversary and $75 million each year thereafter for 10 years, each of which is to be adjusted based on certain variables, including PMI’s market share in the EU in the year preceding payment. PMI would record these base payments as an expense in cost of sales when product is shipped.

State Settlement Agreements:As discussed in Note 9 and “Debt and Liquidity — Tobacco Litigation Settlement Payments,” 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 require PM USA to make substantial annual payments. They also place numerous restrictions on PM USA’s business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes. Among these are prohibitions of outdoor and transit brand advertising; payments for product placement; and free sampling. Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose

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requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provides for the dissolution of certain tobacco-related organizations and places restrictions on the establishment of any replacement organizations.

Operating Results – Three Months Ended March 31, 2004

The following discussion compares tobacco operating results for the quarter ended March 31, 2004 with the quarter ended March 31, 2003.

	For the Three Months Ended March 31,
	Net Revenues				Operating Companies Income
			(in millions)
	2004		2003		2004		2003
Domestic tobacco	$	4,004	$	3,817	$	970	$	742
International tobacco		10,043		8,079		1,835		1,690
Total tobacco	$	14,047	$	11,896	$	2,805	$	2,432

Domestic tobacco. PM USA’s net revenues, which include federal excise taxes billed to customers, increased $187 million (4.9%). Excluding excise taxes, net revenues increased $201 million (6.8%), due primarily to the absence of one-time buy-down costs incurred in the first quarter of 2003, which were associated with PM USA’s move to an off-invoice promotional allowance, lower returned goods expenses and lower cash discounts paid to the trade (aggregating $291 million), partially offset by lower volume ($97 million).

Operating companies income increased $228 million (30.7%), due primarily to the absence of one-time buy-down costs incurred in the first quarter of 2003, which were associated with PM USA’s move to an off-invoice promotional allowance, lower returned goods expense and lower cash discounts paid to the trade (aggregating $291 million), and lower marketing, administration and research costs, partially offset by lower volume ($72 million) and the 2004 pre-tax charges for the headquarters relocation ($10 million).

PM USA’s shipment volume was 43.1 billion units, a decrease of 1.7%, but was essentially flat when adjusted for unfavorable comparisons related to the timing of promotional shipments and wholesaler inventory changes, partially offset by one extra shipping day in the first quarter of 2004. In the premium segment, PM USA’s shipment volume decreased 1.5%; however, Marlboro shipment volume increased 433 million units (1.3%) to 34.7 billion units with gains across most of the brand portfolio and the introduction of Marlboro Menthol 72mm. In the discount segment, PM USA’s shipment volume decreased 4.1%, while Basic shipment volume was down 2.7% to 3.6 billion units.

The following table summarizes PM USA’s retail share performance, based on data from the IRI/Capstone Total Retail Panel, which was developed to measure market share in retail stores selling cigarettes, but was not designed to capture Internet or direct mail sales:

	For the Three Months Ended March 31,
	2004		2003
Marlboro	39.0	%	37.5	%
Parliament	1.7		1.5
Virginia Slims	2.4		2.5
Basic	4.3		4.3
Focus Brands	47.4		45.8
Other	2.2		2.5
Total PM USA	49.6	%	48.3	%

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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 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. International tobacco net revenues, which include excise taxes billed to customers, increased $2.0 billion (24.3%). Excluding excise taxes, net revenues increased $520 million (12.8%), due primarily to favorable currency ($406 million), price increases ($141 million) and the impact of acquisitions ($83 million), partially offset by lower volume/mix ($140 million), reflecting lower volume in the higher margin markets of Western Europe.

Operating companies income increased $145 million (8.6%), due primarily to favorable currency ($243 million), price increases ($141 million) and the impact of acquisitions ($23 million), partially offset by higher marketing, administration and research costs, and unfavorable volume/mix ($109 million), reflecting lower volume in the higher margin markets of Western Europe.

PMI’s volume of 196.9 billion units increased 6.2 billion units (3.2%), due primarily to incremental volume from acquisitions made during 2003. Excluding acquisition volume, shipments were essentially unchanged. In Western Europe, volume declined 10.6%, due primarily to decreases in France, Italy and Germany. Shipment volume decreased 31.0% in France, due to trade inventory reductions and tax-driven price increases since January 1, 2003 that continued to drive an overall market decline. PMI’s market share in France remained relatively stable at 39.2%. In Italy, volume decreased 14.6% and market share fell 3.9 share points to 51.8%, as PMI’s brands were adversely impacted by low-priced competitive brands, trade purchasing patterns around price increases in 2004 and a lower total market. In Germany, volume declined, reflecting a lower total cigarette market mainly due to consumer shifts to low-priced tobacco portions. PMI expects to enter the tobacco portions market during the second quarter of 2004 with the Marlboro and Next brands. In Central and Eastern Europe, Middle East and Africa, volume increased due to gains in Russia, Turkey, Ukraine and the Czech Republic, and acquisitions in Greece and Serbia, partially offset by declines in Poland, due to intense price competition and down-trading to competitor roll-your-own cigarettes. In worldwide duty-free, volume increased, reflecting increased travel and gains in Turkey, Romania, Asia and the Middle East. In Asia, volume grew, as increases in Korea, Malaysia, Thailand and the Philippines were partially offset by decreases in Japan and Indonesia. In Japan, the total market was down due to the adverse impact of the July 2003 tax-driven retail price increase and a lower incidence of smoking. In Latin America, volume increased, driven by gains in Brazil and Mexico.

PMI achieved market share gains in a number of important markets including Argentina, Japan, Malaysia, Mexico, Portugal, Russia, Saudi Arabia, Spain, Switzerland, Turkey, Ukraine and the United Kingdom.

Volume for Marlboro declined 3.0%, due primarily to declines in France and Italy. However, Marlboro volume was higher in many markets, including Argentina, Brazil, Korea, Malaysia, Mexico, the Philippines, Poland, Romania, Russia, Serbia, and Ukraine.

During the first quarter of 2004, PMI purchased a tobacco business in Finland for a cost of approximately $33 million and increased its ownership interest of a tobacco business in Serbia for a cost of $32 million.

Food

Business Environment

Kraft manufactures and markets packaged retail food products, consisting principally of beverages, cheese, snacks, convenient meals and various packaged grocery products through Kraft Foods Global, Inc., (formerly known as Kraft Foods North America, Inc.) and its subsidiaries. Kraft manages and reports operating results through two units, Kraft North America Commercial (“KNAC”) and Kraft International

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Commercial (“KIC”). KNAC represents the North American food segment and KIC represents the international food segment. Beginning in 2004, results for the Mexico and Puerto Rico businesses, which were previously included in the North American food segment, are included in the international food segment and historical amounts have been restated.

KNAC and KIC are subject to a number of challenges that may adversely affect their businesses. These challenges, which are discussed below and under the “Forward-Looking and Cautionary Statements” section include:

• fluctuations in commodity prices;

• movements of foreign currencies against the U.S. dollar;

• competitive challenges in various products and markets, including price gaps with competitor products and the increasing price-consciousness of consumers;

• a rising cost environment;

• a trend toward increasing consolidation in the retail trade and consequent inventory reductions;

• changing consumer preferences;

• competitors with different profit objectives and less susceptibility to currency exchange rates; and

• consumer concerns about food safety, quality and health, including concerns about genetically modified organisms, trans-fatty acids and obesity.

To confront these challenges, Kraft continues to take steps to build the value of its brands, to improve its food business portfolio with new product and marketing initiatives, to reduce costs through productivity, and to address consumer concerns about food safety, quality and health.

In the ordinary course of business, Kraft is subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, seasonality of certain products, significant weather conditions, timing of Kraft and customer incentive programs, customer inventory reduction programs, Kraft’s initiatives to improve supply chain efficiency, including efforts to align product shipments more closely with consumption by shifting some of its customer marketing programs to a consumption based approach, financial situations of customers and general economic conditions.

In January 2004, Kraft announced a multi-year restructuring program with the objectives of leveraging Kraft’s global scale, realigning and lowering the cost structure, and optimizing capacity utilization. As part of this program, Kraft anticipates the closing or sale of up to twenty plants and the elimination of approximately six thousand positions. Over the next three years, Kraft expects to incur up to $1.2 billion in pre-tax charges, reflecting asset disposals, severance and other implementation costs, including an estimated range of $750 million to $800 million in 2004. Approximately one-half of the pre-tax charges are expected to require cash payments.

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During the first quarter of 2004, pre-tax charges under the restructuring program of $279 million were recorded as asset impairment and exit costs on the condensed consolidated statement of earnings. These charges resulted from the first quarter 2004 announcement of the closing of five plants, the termination of a co-manufacturing agreement and the announcement of a number of workforce reduction programs. Approximately $88 million of the pre-tax charges will result in cash payments. Pre-tax restructuring liability activity for the quarter ended March 31, 2004 was as follows (in millions):

	Severance			Asset Write-downs			Other			Total
Liability balance, January 1, 2004	$	—		$	—		$	—		$	—
Charges		81			191			7			279
Cash spent		(8	)					(4	)		(12	)
Charges against assets					(191	)					(191	)
Liability balance, March 31, 2004	$	73		$	—		$	3		$	76

Severance costs in the above schedule, which relate to a number of workforce reduction programs, include the cost of related benefits. Programs announced during the first quarter of 2004 will result in the elimination of approximately 2,000 positions. Asset write-downs relate to the impairment of assets caused by the plant closings. Other costs incurred relate primarily to contract termination costs associated with the plant closings and the termination of a co-manufacturing agreement.

In addition, during the first quarter of 2004, Kraft completed its annual review of its goodwill and intangible assets. This review resulted in a $29 million non-cash pre-tax charge related to an intangible asset impairment for a small confectionery business in the United States and certain brands in Mexico. This charge was recorded as asset impairment and exit costs on the condensed consolidated statement of earnings.

Kraft expects to spend approximately $140 million in capital over the next three years to implement the restructuring program, including approximately $50 million in 2004. Cost savings as a result of the restructuring program are expected to be approximately $120 million to $140 million in 2004, and are anticipated to reach approximately $400 million by 2006, all of which are expected to be used in supporting brand-building initiatives. Cost savings during the first quarter of 2004 were approximately $10 million.

Fluctuations in commodity costs can cause retail price volatility and intensive price competition, and can influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, including dairy, coffee and cocoa costs. In the first quarter of 2004, Kraft’s commodity costs on average were higher than those incurred in the first quarter of 2003 and adversely affected earnings. Dairy costs in particular are expected to remain significantly higher in 2004 than in 2003 because of lower U.S. milk supplies.

During the first quarter of 2004, Kraft acquired a U.S.-based beverage business. During the first quarter of 2004 and 2003, total purchases of businesses, net of acquired cash, were $119 million and $5 million, respectively.

The operating results of businesses acquired were not material to Altria Group, Inc.’s consolidated financial position, results of operations or cash flows in any of the periods presented.

In November 2003, Kraft was advised by the Fort Worth District Office of the Securities and Exchange Commission (“SEC”) that the staff is considering recommending that the SEC bring a civil injunctive action against Kraft charging it with aiding and abetting Fleming Companies (“Fleming”) in violations of the securities laws. District staff alleges that a Kraft employee, who received a similar notice, signed documents requested by Fleming, which Fleming used in order to accelerate its revenue recognition. The notice does not contain any allegations or statements regarding Kraft’s accounting for transactions with Fleming. Kraft believes that it properly recorded the transactions in accordance with accounting principles generally accepted in the United Sates of America (“U.S. GAAP”). Kraft has submitted a response to the staff indicating why it believes that no

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enforcement action should be brought against it. Kraft is cooperating fully with the SEC with respect to this matter and the SEC’s investigation of Fleming.

Operating Results – Three Months Ended March 31, 2004

The following discussion compares food operating results for the quarter ended March 31, 2004 with the quarter ended March 31, 2003.

	For the Three Months Ended March 31,
	Net Revenues				Operating Companies Income
	(in millions)
	2004		2003		2004		2003
North American food	$	5,399	$	5,266	$	846	$	1,273
International food		2,294		2,093		191		261
Total food	$	7,693	$	7,359	$	1,037	$	1,534

North American food. Net revenues increased $133 million (2.5%), due primarily to favorable currency ($72 million) and higher volume/mix ($58 million). Higher pricing, reflecting commodity-driven price increases in Foodservice, was substantially offset by increased promotional spending.

Operating companies income decreased $427 million (33.5%), due primarily to the 2004 pre-tax charges for asset impairment and exit costs relating to the Kraft restructuring program and the intangible asset impairment charge (aggregating $262 million), cost increases, net of higher pricing ($125 million, including higher commodity costs and increased promotional spending), higher benefit costs and higher marketing, administration and research expenses, partially offset by favorable currency ($11 million) and higher volume/mix.

Volume increased 1.0%. Volume gains were achieved in U.S. Cheese, Canada & North America Foodservice, due to share gains in cheese from promotional reinvestment spending and higher volume in Foodservice, due to higher shipments to national accounts. In U.S. Snacks, volume was flat, as higher snack nuts shipments were offset by lower biscuits volume. In U.S. Beverages & Grocery, volume declined, driven primarily by lower cereal and beverages volume, partially offset by growth in coffee, desserts and enhancers. In U.S. Convenient Meals, volume declined, due primarily to lower shipments of meals.

International food. Net revenues increased $201 million (9.6%), due primarily to favorable currency ($234 million), the impact of acquisitions ($11 million) and higher pricing (reflecting devaluation-driven cost increases in Latin America), partially offset by the impact of divestitures ($31 million), lower volume/mix ($13 million) and increased promotional spending.

Operating companies income decreased $70 million (26.8%), due primarily to the 2004 pre-tax charges for asset impairment and exit costs related to the Kraft restructuring program and the intangible asset impairment charge (aggregating $46 million), higher marketing, administration and research costs ($27 million, including higher benefit costs and infrastructure investment in developing markets), cost increases ($15 million, including commodities and fixed manufacturing costs), and the impact of divestitures, partially offset by favorable currency ($24 million).

Volume decreased 0.9%, due primarily to the impact of divestitures, price competition and trade inventory reductions, partially offset by the impact of acquisitions.

In Europe, Middle East and Africa, volume decreased, as the impact of divestitures and declines in France and Russia were partially offset by the impact of acquisitions and gains in Germany and the United Kingdom. Beverages volume declined, due primarily to coffee price competition in France and lower refreshment beverage consumption in the Middle East, partially offset by higher coffee volume in Germany and Spain. In

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cheese, volume decreased, due primarily to the divestiture of a branded fresh cheese business in Italy, partially offset by higher shipments of cream cheese in the United Kingdom and Germany. In convenient meals, volume declined, due primarily to the divestiture of a European rice business. Snacks volume increased, benefiting from acquisitions and new confectionery product introductions in Germany, Austria and Spain, partially offset by price competition and trade inventory reductions in Russia. In grocery, volume increased, due primarily to gains in Egypt and the United Kingdom.

Volume increased in Latin America & Asia Pacific, due primarily to growth in Argentina, Brazil, China and Venezuela, partially offset by declines in Puerto Rico, Australia and Southeast Asia. Snacks volume increased, due primarily to new product introductions in Argentina, Brazil and China, and the 2003 national strike in Venezuela. In beverages, volume decreased, impacted by price competition in Puerto Rico and Mexico, partially offset by gains in China. In cheese and grocery, volume increased, driven by gains in Venezuela.

Financial Services

Business Environment

During 2003, PMCC shifted its strategic focus from an emphasis on the growth of its portfolio of finance leases through new investments to one of maximizing investment gains and generating cash flows from its existing portfolio of leased assets. Accordingly, PMCC’s operating companies income will decrease over time, although there may be fluctuations from quarter to quarter, as lease investments mature or are sold. During the first quarters of 2004 and 2003, PMCC received proceeds from asset sales and maturities of $153 million and $80 million, respectively, and recorded gains of $10 million and $9 million, respectively, in operating companies income.

Among its leasing activities, PMCC leases a number of aircraft, predominantly to major U.S. carriers. At March 31, 2004, approximately 27%, or $2.3 billion of PMCC’s investment in finance lease assets, related to aircraft. Two of PMCC’s lessees, Atlas Air, Inc. (“Atlas”) and United Air Lines, Inc. (“UAL”), are currently under bankruptcy protection. PMCC leases a Boeing 747-400 freighter aircraft to Atlas under a long-term leveraged lease with exposure of $42 million at March 31, 2004. PMCC, Atlas and the leveraged lease lenders have reached conditional agreements on the restructuring of PMCC’s lease. PMCC also leases 24 Boeing 757 aircraft to UAL, and its aggregate exposure to UAL totaled $589 million at March 31, 2004. PMCC has entered into an agreement with UAL to amend 18 of its leases subject to UAL’s successful emergence from bankruptcy, which is currently anticipated to occur later in 2004. UAL remains current on lease payments due to PMCC on these 18 amended leases.

A third airline lessee, US Airways Group, Inc. (“US Airways”) emerged from Chapter 11 bankruptcy protection in March 2003, at which time PMCC’s leveraged leases were assumed. However, since emergence from bankruptcy, the airline has not met the financial projections under its reorganization plan. On May 5, 2004, US Airways' corporate credit rating was reduced to CCC+ by Standard & Poor's. This reduction may jeopardize the airline’s financing commitments for additional regional jets, which are a key component of US Airways’ turnaround plan. Furthermore, US Airways’ management has stated that the airline will continue to experience severe financial losses without further cost cuts. PMCC’s exposure to US Airways totals $145 million at March 31, 2004.

It is possible that further adverse developments in the airline industry may require PMCC to increase its allowance for losses, which was $399 million at March 31, 2004.

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Operating Results

	2004		2003
	(in millions)
Net revenues:
Quarter ended March 31,	$	99	$	116
Operating companies income:
Quarter ended March 31,	$	70	$	83

PMCC’s net revenues for the first quarter of 2004 decreased $17 million (14.7%) and operating companies income decreased $13 million (15.7%) from the comparable period in 2003, due primarily to the previously discussed change in strategy which resulted in lower income from leasing activities.

Financial Review

Net Cash Provided by Operating Activities

During the first quarter of 2004, net cash provided by operating activities was $289 million compared with $2.2 billion during the comparable 2003 period. The decrease of $1.9 billion was due primarily to the timing of payments for tobacco litigation settlement agreements, which were made in March of 2004 and in April of 2003. The impact of the timing of these payments is reflected in the year-over-year changes of the following line items in the condensed consolidated statements of cash flows: deferred income tax provision (benefit), income taxes and settlement charges.

Net Cash Used in Investing Activities

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 Kraft sells businesses that are outside its core categories or that do not meet its growth or profitability targets.

During the first quarter of 2004, net cash used in investing activities was $368 million, compared with $444 million during the first quarter of 2003. The decrease from the first quarter of 2003 primarily reflects the discontinuation of finance asset investments, given PMCC’s change in strategic direction.

Net Cash Used in Financing Activities

During the first quarter of 2004, net cash used in financing activities was $577 million, compared with $933 million during the first quarter of 2003. The decrease primarily reflects ALG’s payments for common stock repurchases in 2003.

Debt and Liquidity

Credit Ratings – Following a $10.1 billion judgment on March 21, 2003 against PM USA in the Price litigation, which is discussed in Note 9, the three major credit rating agencies took a series of ratings actions resulting in the lowering of ALG’s short-term and long-term debt ratings. During 2003, Moody’s lowered ALG’s short-term debt rating from “P-1” to “P-3” and its long-term debt rating from “A2” to “Baa2.” Standard & Poor’s lowered ALG’s short-term debt rating from “A-1” to “A-2” and its long-term debt rating from “A-” to “BBB.” Fitch Rating Services lowered ALG’s short-term debt rating from “F-1” to “F-2” and its long-term debt rating from “A” to “BBB.”

While Kraft is not a party to, and has no exposure to, this litigation, its credit ratings were also lowered, but to a lesser degree. As a result of the rating agencies’ actions, borrowing costs for ALG and Kraft have increased.

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None of ALG’s or Kraft’s debt agreements require accelerated repayment as a result of a decrease in credit ratings.

Credit Lines – ALG and Kraft each maintain separate revolving credit facilities that they have historically used to support the issuance of commercial paper. However, as a result of the rating agencies’ actions discussed above, ALG’s and Kraft’s access to the commercial paper market was temporarily eliminated in 2003. Subsequently, in April 2003, ALG and Kraft began to borrow against existing credit facilities to repay maturing commercial paper and to fund normal working capital needs. By the end of May 2003, Kraft regained its access to the commercial paper market, and in November 2003, ALG regained limited access to the commercial paper market.

In the table below, information is presented as of March 31, 2004 and April 30, 2004 to provide the most current information available. At March 31, 2004 and at April 30, 2004, credit lines for ALG and Kraft, and the related activity were as follows (in billions of dollars):

ALG			March 31, 2004						April 30, 2004
Type	Credit Lines		Amount Drawn		Commercial Paper Outstanding		Lines Available		Amount Drawn		Commercial Paper Outstanding		Lines Available
364-day	$	1.3	$	—	$	—	$	1.3	$	—	$	—	$	1.3
Multi-year		5.0				1.6		3.4		1.5		1.8		1.7
	$	6.3	$	—	$	1.6	$	4.7	$	1.5	$	1.8	$	3.0

Kraft			March 31, 2004						April 30, 2004
Type	Credit Lines		Amount Drawn		Commercial Paper Outstanding		Lines Available		Amount Drawn		Commercial Paper Outstanding		Lines Available
364-day	$	2.5	$	—	$	0.4	$	2.1	$	—	$	0.3	$	2.2
Multi-year		2.0				2.0		—				2.0		—
	$	4.5	$	—	$	2.4	$	2.1	$	—	$	2.3	$	2.2

The ALG multi-year revolving credit facility requires the maintenance of a fixed charges coverage ratio. The Kraft multi-year revolving credit facility, which is for the sole use of Kraft, requires the maintenance of a minimum net worth. ALG and Kraft met their respective covenants at March 31, 2004, and expect to continue to meet their respective covenants. The multi-year facilities, which both expire in July 2006, enable the respective companies to reclassify short-term debt on a long-term basis. At March 31, 2004, $2.0 billion of commercial paper borrowings that Kraft intends to refinance were reclassified as long-term debt. The ALG 364-day revolving credit facility expires in July 2004. It requires the maintenance of a fixed charges coverage ratio and prohibits ALG from repurchasing its common stock while borrowings are outstanding against either ALG’s 364-day or multi-year facility. In addition, the size of the 364-day facility will be reduced by 50% of the amount of the net proceeds of any long-term capital markets transactions completed by ALG. The Kraft 364-day revolving credit facility also expires in July 2004. It requires the maintenance of a minimum net worth. These facilities do not include any additional financial tests, any credit rating triggers or any provisions that could require the posting of collateral.

In addition to the above, certain international subsidiaries of ALG and Kraft maintain uncommitted credit lines to meet their respective working capital needs. These credit lines, which amounted to approximately $1.4 billion for ALG subsidiaries (other than Kraft) and approximately $0.7 billion for Kraft subsidiaries, are for the sole use of these international businesses. Borrowings on these lines amounted to approximately $0.5 billion at March 31, 2004.

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Debt – Altria Group, Inc.’s total debt (consumer products and financial services) was $25.4 billion and $24.5 billion at March 31, 2004 and December 31, 2003, respectively. Total consumer products debt was $23.3 billion and $22.3 billion at March 31, 2004 and December 31, 2003, respectively. At March 31, 2004 and December 31, 2003, Altria Group, Inc.’s ratio of consumer products debt to total equity was 0.87 and 0.89, respectively. The ratio of total debt to total equity was 0.95 and 0.98 at March 31, 2004 and December 31, 2003, respectively.

During March 2004, 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 $4.0 billion, when the Form S-3 filing becomes effective. This is in addition to the $250 million remaining under its previous shelf-registration, providing for a total capacity of $4.25 billion.

Guarantees - As discussed in Note 9, at March 31, 2004, Altria Group, Inc. had third-party guarantees, which are primarily derived from acquisition and divestiture activities, approximating $244 million, of which $212 million have no specified expiration dates. The remainder expire through 2023, with $4 million expiring through March 31, 2005. 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 a liability of $49 million on its condensed consolidated balance sheet at March 31, 2004, relating to these guarantees. In the ordinary course of business, certain subsidiaries of ALG have agreed to indemnify a limited number of third parties in the event of future litigation. At March 31, 2004, subsidiaries of ALG were also contingently liable for $1.5 billion of guarantees related to their own performance, consisting of the following:

• $1.3 billion of guarantees of excise tax and import duties related primarily to international shipments of tobacco products. In these agreements, a financial institution provides a guarantee of tax payments to the 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 condensed consolidated balance sheet.

• $0.2 billion of other guarantees related to the tobacco and food businesses.

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

Tobacco Litigation Settlement Payments -As discussed previously and in Note 9, 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: 2005 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. PM USA and the other settling defendants also agreed to make payments to a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by four of the major domestic tobacco product manufacturers, including PM USA, over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (in 2005 through 2008, $500 million each year; and 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, industry volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer’s relative market share.

Litigation Escrow Deposits - As discussed in Note 9,in connection with obtaining a stay of execution in May 2001 in the Engle class action, PM USA placed $1.2 billion into an interest-bearing escrow account. The $1.2 billion escrow account and a deposit of $100 million related to the bonding requirement are included in the March 31, 2004 and December 31, 2003 condensed consolidated balance sheets as other assets. These amounts will be returned to PM USA should it prevail in its appeal of the case. Interest income on the $1.2 billion

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escrow account is paid to PM USA quarterly and is being recorded as earned in interest and other debt expense, net, in the condensed consolidated statements of earnings.

In addition, in connection with obtaining a stay of execution in the Price case, PM USA placed a pre-existing 7.0%, $6 billion long-term note from ALG to PM USA into an escrow account with an Illinois financial institution. Since this note is the result of an intercompany financing arrangement, it does not appear on the condensed consolidated balance sheet of Altria Group, Inc. In addition, PM USA agreed to make cash deposits with the clerk of the Madison County Circuit Court in the following amounts: beginning October 1, 2003, an amount equal to the interest earned by PM USA on the ALG note ($210 million every six months), an additional $800 million in four equal quarterly installments between September 2003 and June 2004 and the payments of the principal of the note which are due in April 2008, 2009 and 2010. Through March 31, 2004, PM USA made $810 million of the cash deposits due under the judge’s order. Cash deposits into the account are included in other assets on the condensed consolidated balance sheet. If PM USA prevails on appeal, the escrowed note and all cash deposited with the court will be returned to PM USA, with accrued interest less administrative fees payable to the court.

With respect to certain adverse verdicts currently on appeal, other than the Engle and the Price cases discussed above, as of March 31, 2004, PM USA has posted various forms of security totaling $367 million, the majority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. In addition, as discussed in Note 9, PMI placed €51 million in an escrow account pending appeal of an adverse verdict in Italy. These cash deposits are included in other assets on the condensed consolidated balance sheets.

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 to provide sufficient liquidity to meet the ongoing needs of the business.

Leases - PMCC’s investment in leases is included in finance assets, net, on the condensed consolidated balance sheets as of March 31, 2004 and December 31, 2003. At March 31, 2004, PMCC’s net finance receivable of $7.7 billion in leveraged leases, which is included in Altria Group, Inc.’s condensed consolidated balance sheet as finance assets, net, consists of lease receivables ($27.7 billion) and the residual value of assets under lease ($2.2 billion), reduced by third-party nonrecourse debt ($18.6 billion) and unearned income ($3.6 billion). The payment of the nonrecourse debt is collateralized only by lease payments receivable and the leased property, and is nonrecourse to all other assets of PMCC. As required by U.S. GAAP, the third-party nonrecourse 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 condensed consolidated balance sheets. Finance assets, net, at March 31, 2004 also includes net finance receivables for direct finance leases of $0.8 billion and an allowance for losses ($0.4 billion).

Equity and Dividends

During the first quarter 2003, ALG completed its three-year, $10 billion share repurchase program and began a one-year, $3 billion share repurchase program that expired in March 2004. Following the rating agencies’ actions in the first quarter of 2003, discussed above in “Credit Ratings,” ALG suspended its share repurchase program. Cumulative repurchases under the $3 billion authority totaled approximately 7.0 million shares at an aggregate cost of $241 million.

During the first quarters of 2004 and 2003, Kraft repurchased 4.9 million and 2.7 million shares of its Class A common stock at a cost of $163 million and $82 million, respectively. As of March 31, 2004, Kraft had repurchased 6.5 million shares of its Class A common stock, under its $700 million authority, at an aggregate cost of $213 million.

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As discussed in Note 1. Accounting Policies, in January 2004, Altria Group, Inc. granted approximately 1.4 million shares of restricted stock to eligible U.S.-based employees of Altria Group, Inc. and also issued to eligible non-U.S. employees rights to receive approximately 1.0 million equivalent shares. Restrictions on the shares lapse in the first quarter of 2007.

Dividends paid in the first quarters of 2004 and 2003 were $1.4 billion and $1.3 billion, respectively, an increase of 5.8%, primarily reflecting a higher dividend rate in 2004. During the third quarter of 2003, Altria Group, Inc.’s Board of Directors approved a 6.3% increase in the quarterly dividend rate to $0.68 per share. As a result, the present annualized dividend rate is $2.72 per share.

Market Risk

ALG’s subsidiaries operate globally, with manufacturing and sales facilities in various locations around the world. ALG and its subsidiaries utilize certain financial instruments to manage foreign currency and commodity exposures. Derivative financial instruments are used by ALG and its subsidiaries, 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. Hedging activity affected accumulated other comprehensive earnings (losses), net of income taxes, as follows (in millions):

	For the three months ended March 31,
		2004			2003
Loss at beginning of period		$	(83	)	$	(77	)
Derivative losses transferred to earnings			1			2
Change in fair value			12			28
Loss as of March 31,		$	(70	)	$	(47	)

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 and balances. The primary currencies to which Altria Group, Inc. is exposed include the Japanese yen, Swiss franc and the euro. At March 31, 2004 and December 31, 2003, Altria Group, Inc. had foreign exchange option and forward contracts with aggregate notional amounts of $14.4 billion and $13.6 billion, respectively. Included in the foreign currency aggregate notional amounts at March 31, 2004 and December 31, 2003, were $2.6 billion and $3.4 billion, respectively, of equal and offsetting foreign currency positions, which do not qualify as hedges and that will not result in any significant 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 March 31, 2004 and December 31, 2003. At March 31, 2004 and December 31, 2003, the notional amounts of foreign currency swap agreements aggregated $2.4 billion and $2.5 billion, respectively.

Altria Group, Inc. also designates certain foreign currency denominated debt as net investment hedges of foreign operations. During the quarters ended March 31, 2004 and 2003, losses of $37 million, net of income taxes, and losses of $65 million, net of income taxes, respectively, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive earnings (losses) within currency translation adjustments.

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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 March 31, 2004 and December 31, 2003, Kraft had net long commodity positions of $144 million and $255 million, respectively. In general, commodity forward contracts qualify for the normal purchase exception under U.S. GAAP. The effective portion of unrealized gains and losses on commodity futures and option contracts is deferred as a component of accumulated other comprehensive earnings (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 March 31, 2004 and December 31, 2003.

Contingencies

See Note 9 to the Condensed 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 stockholders 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’ 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 related to tobacco products in the United States and certain foreign jurisdictions. We anticipate that new cases will continue to be filed. Damages claimed in some of the tobacco-related litigation range 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 13 cases on appeal in which verdicts were returned against PM USA, including a compensatory and punitive damages verdict totaling approximately $10.1 billion in the Price case in Illinois. Generally, 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

______________

* 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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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 enter into settlement discussions in particular cases if we believe it is in the best interest of our stockholders to do so. Please see Note 9 for a discussion of pending 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. Cigarettes are subject to substantial excise taxes in the United States and to substantial taxation abroad. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted within the United States, the EU and in other foreign jurisdictions. These tax increases are expected to continue to have an adverse impact on sales of cigarettes by our tobacco subsidiaries, due to lower consumption levels and to a shift in sales from the premium to the non-premium or discount segments or to sales outside of legitimate channels.

Increased Competition in the Domestic Tobacco Market. Settlements of certain tobacco litigation in the United States have resulted in substantial cigarette price increases. PM USA faces increased competition from lowest priced brands sold by certain domestic and foreign manufacturers that have cost advantages because they are not parties to these settlements. These manufacturers may fail to comply with related state escrow legislation or may take advantage of certain provisions in the legislation that permit the non-settling manufacturers to concentrate their sales in a limited number of states and thereby avoid escrow deposit obligations on the majority of their sales. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, the sale of counterfeit cigarettes by third parties, the sale of cigarettes by third parties over the Internet and by other means designed to avoid collection of applicable taxes and increased imports of foreign lowest priced brands.

Governmental Investigations. From time to time, ALG and its 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 descriptors, such as “Lights” and “Ultra Lights.” 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 constituents in tobacco smoke identified by public health authorities as harmful 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 income will be reduced because the local currency will translate into fewer U.S. dollars.

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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;

• anticipate and respond to new consumer trends;

• 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;

• improve productivity; and

• 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, holds investments in finance leases, principally in transportation (including aircraft), 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 our 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 Kraft sells businesses that are outside its core categories or that do not meet its 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.

Food Raw Material Prices. The raw materials used by our food businesses 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 costs, 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

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income. We do not fully hedge against changes in commodity prices and our hedging strategies may not work as planned.

Food Safety, Quality and Health 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 and North America, whether or not valid, may discourage consumers from buying Kraft’s products or cause production and delivery disruptions. Recent publicity concerning the health implications of obesity and trans-fatty acids could also reduce consumption of certain of Kraft’s products. 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.

Limited Access to Commercial Paper Market. As a result of actions by credit rating agencies during 2003, ALG currently has limited access to the commercial paper market, and may have to rely on its revolving credit facilities as well.

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Item 4.Controls and Procedures.

Altria Group, Inc. carried out an evaluation, with the participation of Altria Group, Inc.’s management, including ALG’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Altria Group, Inc.’s disclosure controls and procedures (pursuant to Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, ALG’s Chief Executive Officer and Chief Financial Officer concluded that Altria Group, Inc.’s disclosure controls and procedures are effective in timely alerting them to information relating to Altria Group, Inc. (including its consolidated subsidiaries) required to be included in ALG’s reports filed or submitted under the Securities and Exchange Act of 1934, as amended. There has been no change in Altria Group, Inc.’s internal control over financial reporting during the quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, Altria Group, Inc.’s internal control over financial reporting.

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Part II - OTHER INFORMATION

Item 1. Legal Proceedings.

See Note 9. Contingencies, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of legal proceedings pending against Altria Group, Inc. and its subsidiaries. See also Exhibits 99.1 and 99.2 to this report.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

On February 26, 2003, ALG’s Board of Directors approved a one-year, $3 billion share repurchase program. ALG began purchasing under the program in March 2003. Following the rating agencies’ actions in the first quarter of 2003, discussed in the Debt and Liquidity section of this report, ALG suspended its share repurchase program. ALG’s one-year, $3 billion share repurchase program expired in March 2004.

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

ALG’s annual meeting of stockholders was held in East Hanover, New Jersey on April 29, 2004. 1,726,993,015 shares of Common Stock, 84.3% of outstanding shares, were represented in person or by proxy.

The ten directors listed below were elected to a one-year term expiring in 2005.

	Number of Shares
	For	Withheld
Elizabeth E. Bailey	1,689,524,006	37,469,009
Mathis Cabiallavetta	1,698,328,533	28,664,482
Louis C. Camilleri	1,689,988,371	37,004,644
J. Dudley Fishburn	1,695,554,081	31,438,934
Robert E. R. Huntley	1,688,429,605	38,563,410
Thomas W. Jones	1,698,707,669	28,285,346
Lucio A. Noto	1,696,585,880	30,407,135
John S. Reed	1,698,729,471	28,263,544
Carlos Slim Helú	1,691,874,304	35,118,711
Stephen M. Wolf	1,688,308,568	38,684,447

The selection of PricewaterhouseCoopers LLP as independent auditors was approved: 1,681,572,498 shares voted in favor; 27,560,896 shares voted against and 17,859,621 shares abstained.

Five stockholder proposals were defeated:

Stockholder Proposal 1 – Philip Morris And Ways Of More Adequately Warning Pregnant Women: 48,413,739 shares voted in favor; 1,162,228,643 shares voted against and 516,350,633 shares abstained (including broker non-votes).

Stockholder Proposal 2 – Report On Health Risks Associated With Filters: 45,259,301 shares voted in favor; 1,186,132,837 shares voted against and 495,600,877 shares abstained (including broker non-votes).

Stockholder Proposal 3 – Political Disclosure Resolution: 87,714,146 shares voted in favor; 1,134,473,480 shares voted against and 504,805,389 shares abstained (including broker non-votes).

Stockholder Proposal 4 – Cease Promoting Light and Ultralight Brands: 60,516,255 shares voted in favor; 1,171,156,851 shares voted against and 495,319,909 shares abstained (including broker non-votes).

Stockholder Proposal 5 – Voluntarily Place Canadian—Type Warnings On All Its Cigarette Packs Worldwide: 60,322,327 shares voted in favor; 1,171,022,744 shares voted against and 495,647,944 shares abstained (including broker non-votes).

One stockholder proposal was withdrawn:

Stockholder Proposal 6 – Amend The By-Laws To Require That An Independent Director Who Has Not Served As The Chief Executive Of The Company Serve As Board Chair. This proposal was withdrawn by the proponent and therefore was not voted on at the annual meeting of stockholders.

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Item 6. Exhibits and Reports on Form 8-K.

(a)Exhibits
3	Amended By-Laws
12	Statement regarding computation of ratios of earnings to fixed charges.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Certain Pending Litigation Matters and Recent Developments.
99.2	Trial Schedule for Certain Cases.

(b) Reports on Form 8-K. The Registrant (i) filed a Current Report on Form 8-K on January 28, 2004, covering Item 5 (Other Events) and Item 7 (Financial Statements and Exhibits), containing the Registrant’s consolidated financial statements for the year ended December 31, 2003; (ii) furnished a Current Report on Form 8-K on January 28, 2004, covering Item 7 (Financial Statements and Exhibits) and Item 12 (Results of Operations and Financial Condition), containing the Registrant’s earnings release dated January 28, 2004; (iii) furnished a Current Report on Form 8-K on April 5, 2004, covering Item 9 (Regulation FD Disclosure), containing Philip Morris International Inc.’s press release dated April 3, 2004 concerning negotiations with the European Commission regarding a draft cooperation agreement; and (iv) furnished a Current Report on Form 8-K on April 20, 2004 covering Item 7 (Financial Statements and Exhibits) and Item 12 (Results of Operations and Financial Condition) containing the Registrant’s earnings release dated April 20, 2004.

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Signature

Pursuant to the requirements 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.

/s/ DINYAR S. DEVITRE

Dinyar S. Devitre
Senior Vice President and
Chief Financial Officer

May 10, 2004

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EX-3

Exhibit 3

BY-LAWS
of
ALTRIA GROUP, 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 United States of America 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.

April 1, 2004

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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 holder’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 ten (10).

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 “Altria Group, 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-12

Exhibit 12

ALTRIA GROUP, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(in millions of dollars)

	Three Months Ended March 31, 2004
Earnings before income taxes and minority interest	$	3,428
Add (deduct):
Equity in net earnings of less than 50% owned affiliates		(45	)
Dividends from less than 50% owned affiliates		40
Fixed charges		446
Interest capitalized, net of amortization		2
Earnings available for fixed charges	$	3,871
Fixed charges:
Interest incurred:
Consumer products	$	356
Financial services		26
		382
Portion of rent expense deemed to represent interest factor		64
Fixed charges	$	446
Ratio of earnings to fixed charges		8.7

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Exhibit 12

ALTRIA GROUP, INC. AND SUBSIDIARIES
Computation of Ratios of Earnings to Fixed Charges
(in millions of dollars)

	For the Years Ended December 31,
	2003			2002			2001			2000			1999
Earnings before income taxes, minority interest and cumulative effect of accounting change	$	14,760		$	18,098		$	14,284		$	14,087		$	12,821
Add (deduct):
Equity in net earnings of less than 50% owned affiliates		(205	)		(235	)		(228	)		(228	)		(197	)
Dividends from less than 50% owned affiliates		45			32			29			70			56
Fixed charges		1,731			1,643			1,945			1,348			1,363
Interest capitalized, net of amortization		10			10			10			7			(2	)
Earnings available for fixed charges	$	16,341		$	19,548		$	16,040		$	15,284		$	14,041
Fixed charges:
Interest incurred:
Consumer products	$	1,370		$	1,331		$	1,665		$	1,087		$	1,118
Financial services		105			100			102			114			89
		1,475			1,431			1,767			1,201			1,207
Portion of rent expense deemed to represent interest factor		256			212			178			147			156
Fixed charges	$	1,731		$	1,643		$	1,945		$	1,348		$	1,363
Ratio of earnings to fixed charges (A)		9.4			11.9			8.2			11.3			10.3

(A) Earnings before income taxes and minority interest for the year ended December 31, 2002 include a non-recurring pre-tax gain of $2,631 million related to the Miller Brewing Company transaction. Excluding this gain, the ratio of earnings to fixed charges would have been 10.3 for the year ended December 31, 2002.

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EX-31

Exhibit 31.1

Certifications

I, Louis C. Camilleri, Chairman and Chief Executive Officer of Altria Group, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Altria Group, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) [Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E.]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2004

/s/ LOUIS C. CAMILLERI

Louis C. Camilleri
Chairman and Chief Executive Officer

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EX-31

Exhibit 31.2

Certifications

I, Dinyar S. Devitre, Senior Vice President and Chief Financial Officer of Altria Group, Inc., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Altria Group, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared;

(b) [Omitted in reliance on SEC Release No. 33-8238; 34-47986 Section III.E.]

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2004

/s/ DINYAR S. DEVITRE

Dinyar S. Devitre
Senior Vice President and
Chief Financial Officer

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EX-32

Exhibit 32.1

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 Quarterly Report of Altria Group, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Louis C. Camilleri, Chairman 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
Chairman and Chief
Executive Officer
May 10, 2004

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version 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.

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EX-32

Exhibit 32.2

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 Quarterly Report of Altria Group, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2004 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
May 10, 2004

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version 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.

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EX-99

Exhibit 99.1

CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS

As described in Note 9. Contingencies of this Quarterly Report on Form 10-Q, 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, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding, (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 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.

The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since March 12, 2004 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 April 30, 2004, and describes certain developments in these cases since March 12, 2004.

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 in state court 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 filed in or transferred to the court by September 13, 2000 are to be included in a single consolidated trial. Nine hundred and sixty-seven (967) 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. The first phase of the trial is scheduled to begin in March 2005.

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 April 30, 2004, 2,722 of these suits were pending in the Circuit Court of Dade County, Florida against PM USA and three other cigarette manufacturers. The court has 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

-1-

Exhibit 99.1

exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded. To date, an estimated one such case is scheduled for trial through the end of 2004.

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 Note 9. Contingencies, 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 class and providing class members with smoking cessation programs. In July 2003, following the first phase of the trial the jury returned a verdict in favor of defendants, including PM USA, in connection with plaintiffs’ medical monitoring claims, but also found that plaintiffs could benefit from smoking cessation assistance. The jury also found that cigarettes as designed are not defective but that the defendants failed to disclose all they knew about smoking and diseases and marketed their products to minors. The jury was not permitted to award damages during the first phase of the trial. The second phase of the trial began in March 2004 and is currently underway. In this phase, the jury is determining the parameters and funding of a statewide smoking cessation program. Plaintiffs have estimated the cost of their program to be approximately $1.18 billion. The court has ruled that all class-wide liability issues were decided in the verdict in the trial’s first phase and that the defendants are not entitled to any affirmative defenses in the second phase of the trial.

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 May 2004, the West Virginia Supreme Court affirmed the judgment entered by the trial court.

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. In January 2004, the court dismissed the case.

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.

Simms, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed May 23, 2001. Proceedings in the case have been stayed until September 2004.

Lowe, et al. v. Philip Morris Incorporated, et al., Circuit Court, Multomah, Oregon, filed November 19, 2001. In September 2003, the court granted defendants’ motion to dismiss the complaint, and plaintiffs have appealed.

Birchall, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 10, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

-2-

Exhibit 99.1

Ellington, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 31, 2002. In July 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Vandina, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 31, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Vavrek, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed July 31, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Martinez, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 4, 2002. In July 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Ramsden, et al. v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed September 6, 2002. In July 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Gagne v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Garnier v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Goodman v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Griffin v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Huckeby v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Raimo v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Ramstetter v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 29, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

Sampson v. Philip Morris Incorporated, et al., United States District Court, Nevada, filed October 31, 2002. In October 2003, the court denied plaintiffs’ motion for class certification. In March 2004, the court dismissed the case without prejudice.

-3-

Exhibit 99.1

Martinez, et al., v. Philip Morris Incorporated, et al., United States District Court, Utah, filed January 7, 2003. In March 2004, the court dismissed the case without prejudice.

Elliott, et al. v. Philip Morris USA Inc., et al., United States District Court, Western District, Oklahoma, filed July 17, 2003.

International Class Actions

Caputo (formerly LeTourneau) v. Imperial Tobacco Limited, et al., Ontario Court of Justice, Toronto, Canada, filed January 13, 1995. In February 2004, the court denied plaintiff’s motion for class certification.

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. In February 2004, the trial court issued an order finding that the action was valid under the Brazilian Consumer Defense Code. The order contemplates a second stage of the case in which individuals are to file their claims, and defendants have filed a motion seeking clarification of the order. In April 2004, the trial court denied defendants’ motions for clarification and granted plaintiff’s motion for clarification, setting the amount for moral damages awarded in any second phase of the case at the equivalent of approximately $350 per smoker per year of smoking. Defendants will appeal the decision.

Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada, filed on or about September 11, 1998. Plaintiffs’ motion for class certification is pending.

Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior Court, Canada, filed November 20, 1998. Plaintiffs’ motion for class certification is pending.

Ragoonanan, et al. v. Imperial Tobacco Limited, et al., Superior Court of Justice, Ontario, Canada, filed January 11, 2000.

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 April 30, 2004 and describes certain developments in these cases since March 12, 2004. As discussed in Note 9. Contingencies, 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. PM USA 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 June 2005.

-4-

Exhibit 99.1

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 Note 9. Contingencies, 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 USA, et al., Jerusalem District Court, Israel, filed September 28, 1998. Defendants’ motion to dismiss the case has been denied by the district court. Defendants intend to file a motion for leave to appeal the district court’s decision with the Israeli Supreme Court.

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 Caisse Primaire d’Assurance Maladie of Saint-Nazaire v. SEITA, et al., Civil Court of Saint-Nazaire, France, filed June 1999. In September 2003, the court dismissed the case, and plaintiff has appealed.

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 remanded the cases brought by Belize, Ecuador, Honduras, the Russian Federation, Tajikistan, Venezuela, nine Brazilian states listed and the 11 Brazilian cities to Florida state courts and remanded the case brought by one Brazilian state to Louisiana state court. 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, a Florida intermediate appellate court affirmed the ruling dismissing the case brought by Venezuela. In June 2003, the Florida Supreme Court denied Venezuela’s petition for further review. In August 2003, the trial court granted defendants’ motions to dismiss the cases brought by Tajikistan and one Brazilian state, and plaintiffs in the other 21 cases pending in Florida voluntarily dismissed their claims without prejudice.

-5-

Exhibit 99.1

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 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.

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. In June 2003, the court granted defendants’ motion to dismiss the case, and plaintiff has appealed.

Junta de Andalucia, et al. v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, filed February 21, 2002.

Native American Cases

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.

Insurer and Self – Insurer Cases

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. Defendants, including PM USA, appealed. In February 2002, the court awarded plaintiff approximately $38 million for attorneys’ fees. In September 2003, the United States Court of Appeals for the Second Circuit reversed the portion of the judgment relating to subrogation, certified questions relating to plaintiff’s direct claims of deceptive business practices to the New York Court of Appeals and deferred its ruling on the appeal of the attorneys’ fees award pending the ruling on the certified questions.

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. This case has been consolidated with Anderson, et al., v. The American Tobacco Company, Inc., et al., discussed below for appeal. PM USA and several other appellees filed a motion to dismiss the appeal based on appellants’ failure to file a timely notice of appeal, and the motion was denied.

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

-6-

Exhibit 99.1

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. See Temple, et al., v. The State of Tennessee, et al., discussed above.

Other Cases

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, and plaintiffs appealed. In September 2003, the United States Court of Appeals for the Second Circuit affirmed the trial court’s ruling. In December 2003, the Second Circuit denied plaintiffs’ petition for rehearing. In March 2004, plaintiffs petitioned the United States Supreme Court for further review.

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 April 30, 2004, and describes certain developments since March 12, 2004.

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, and defendants have appealed. In May 2003, the Single Justice sitting on behalf of the Massachusetts Court of Appeals decertified the class. In June 2003, plaintiffs petitioned for reconsideration or, in the alternative, for the decision to be reported to an appellate panel for further consideration. In October 2003, Massachusetts’ highest court granted plaintiffs’ application for direct appeal to that court.

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. In September 2003, plaintiffs’ motion for class certification was granted as to plaintiffs’ claims that defendants violated Ohio’s Consumer Sales Practices Act pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods. Class membership is limited to the residents of six Ohio counties. Defendants have appealed the class certification order.

Price, et al. v. Philip Morris Incorporated, Circuit Court, Madison County, Illinois, filed February 10, 2000. See Note 9. Contingencies, for a discussion of this case.

Craft (formerly, Ratliff), et al. v. Philip Morris Companies Inc., et al., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000. In December 2003, the court granted plaintiffs’ motions for class certification, and defendants have moved for reconsideration.

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, and defendants appealed. In December 2003, a Florida District Court of Appeal decertified the class. In March 2004, plaintiffs filed a motion for rehearing, en banc review or certification to the Florida Supreme Court.

Philipps, et al. v. Philip Morris Incorporated, et al., Court of the Common Pleas, Medina County, Ohio, filed April 30, 2001. In September 2003, plaintiffs’ motion for class certification was granted as to plaintiffs’ claims that defendants violated Ohio’s Consumer Sales Practices Act pursuant to which plaintiffs allege that class

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Exhibit 99.1

members are entitled to reimbursement of the costs of cigarettes purchased during the class periods. Class membership is limited to the residents of six Ohio counties. Defendants have appealed the class certification order.

Moore, et al. v. Philip Morris Incorporated, et al., Circuit Court, Marshall County, West Virginia, filed August 10, 2001.

Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth Judicial District Court, Hennepin County, Minnesota, filed November 28, 2001. In January 2004, the court denied plaintiffs’ motion for class certification and defendants’ motions for summary judgment. In March 2004, an intermediate court of appeals declined plaintiffs’ application for an interlocutory appeal.

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., Circuit Court, Multnomah County, Oregon, filed November 20, 2002.

Sullivan v. Philip Morris USA, Inc., et al., Circuit Court, Western District, Louisiana, filed March 28, 2003.

Virden v. Altria Group, Inc., et al., Circuit Court, Hancock County, West Virginia, filed March 28, 2003.

Stern, et al. v. Philip Morris USA, Inc. et al., Superior Court, Middlesex County, New Jersey, filed April 4, 2003.

Piscetta, et al. v. Philip Morris Incorporated, State Court, Fulton County, Georgia, filed April 10, 2003.

Arnold, et al. v. Philip Morris USA Inc., Circuit Court, Madison County, Illinois, filed May 5, 2003.

Watson, et al. v. Altria Group, Inc., et al., United States District Court, Eastern District, Arkansas, filed May 29, 2003.

Paldrmic, et al. v. Altria Group, Inc., et al., United States District Court, Eastern District, Wisconsin, filed June 5, 2003.

Holmes, et al. v. Philip Morris USA Inc., et al., Superior Court, New Castle, Delaware, filed August 18, 2003. In March 2004, plaintiff stipulated to the dismissal of ALG and PMI as defendants.

El Roy v. Philip Morris Incorporated, et al., Tel Aviv-Jaffa District Court, Israel, filed January 18, 2004.

Davies v. Philip Morris USA Inc., et al., Superior Court, King County, Washington, filed April 8, 2004 (not yet served).

Tobacco Price Cases

The following are the cases filed by smokers, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws.

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.

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Exhibit 99.1

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 was granted in April 2003. The New Mexico Court of Appeals has agreed to hear defendants’ appeal of the class certification decision.

Wholesale Leaders Cases

Smith Wholesale Company, Inc., et al. v. Philip Morris USA Inc., United States District Court, Eastern District, Tennessee, filed July 10, 2003. See Note 9. Contingencies, for a discussion of this case.

Victory Brand, L.L.C., Michigan v. Philip Morris USA Inc., et al., United States District Court, Eastern District, Michigan, filed December 10, 2003.

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. See Note 9. Contingencies, for a discussion of this case.

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. Defendants’ motions for summary judgment are pending.

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.

Asbestos Contribution Cases

Fibreboard Corporation, et al. v. The American Tobacco Company, Inc., 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 appealed. In April 2004, the Mississippi Supreme Court affirmed the trial court’s order and dismissed plaintiffs’ appeal.

Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served).

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Exhibit 99.1

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.

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 appealed. In January 2004, the United States Court of Appeals for the Second Circuit affirmed the trial court’s ruling. In April 2004, plaintiffs petitioned the United States Supreme Court for further review.

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 plaintiffs appealed. In January 2004, the United States Court of Appeals for the Second Circuit affirmed the trial court’s ruling. In April 2004, plaintiffs petitioned the United States Supreme Court for further review.

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. See Note 9. Contingencies, for a discussion of this case.

MSA-Related Cases

In the following case, plaintiff has challenged the validity of the Master Settlement Agreement described in Note 9. Contingencies.

Freedom Holdings, Inc., et al. v. Spitzer, et al., United States District Court, Southern District, New York, filed April 16, 2002.

Steve Sanders v. Philip Morris USA, Inc., et al., Superior Court, Los Angeles County, California, filed April 7, 2004.

CERTAIN OTHER ACTIONS

The following lists certain other actions pending against subsidiaries of ALG and others as of April 30, 2004.

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 the parties currently are involved in settlement negotiations.

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Exhibit 99.1

In October 2002, Mr. Mustapha Gaouar filed suit in the Commercial Court of Casablanca against Kraft Foods Maroc (“KFM”), a subsidiary of Kraft, and Mr. Omar Berrada claiming damages of approximately $31 million arising from a non-compete undertaking signed by Mr. Gaouar allegedly under duress. In June 2003, the court issued a preliminary judgment against KFM and Mr. Berrada holding that Mr. Gaouar is entitled to damages for being deprived of the possibility of engaging in coffee roasting from 1986 due to such non-compete undertaking. At that time, the court appointed two experts to assess the amount of damages to be awarded. In December 2003, these experts delivered a report concluding that they could see no evidence of loss suffered by Mr. Gaouar. Mr. Gaouar has asked the court that this report be set aside and new court experts be appointed. On April 15, 2004, the court delivered a judgment upholding the defenses of KFM and rejecting the claims of Mr. Gaouar. Mr. Gaouar has not yet appealed this judgment. KFM believes that in the event that it is ultimately found liable for damages to plaintiff in this case, it may have claims against Mr. Berrada for recovery of all or a portion of the amount of any damages awarded to plaintiff.

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EX-99

Exhibit 99.2

TRIAL SCHEDULE FOR CERTAIN CASES

Set forth below is the health care cost recovery case currently scheduled for trial in 2004 against PM USA and ALG.

Case (Jurisdiction)	Type of Action	Trial Date
The United States of America v. Philip Morris Incorporated, et al. (Washington, D.C.)	Health Care Cost Recovery Case	September 13, 2004

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 that are currently scheduled for trial through the end of 2004.

2004

June (1)

August (1)

September (2)

October (1)

November (1)

December (1)

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