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ALTRIA GROUP, INC.

Item 1. Businesses.

(a) General Development of Business

General

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

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

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

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

       Prior to June 13, 2001, Kraft was a wholly-owned subsidiary of ALG. On June 13, 2001, Kraft completed an initial public offering (''IPO'') of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. At December 31, 2002, ALG owned approximately 84.2% of the outstanding shares of Kraft's capital stock through its ownership of 50.2% of Kraft's Class A common stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has one vote per share while Kraft's Class B common stock has ten votes per share. Therefore, at December 31, 2002, ALG held approximately 98% of the combined voting power of Kraft's outstanding capital stock.

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

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

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Source of Funds—Dividends

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

(b) Financial Information About Industry Segments

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

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

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

(c) Narrative Description of Business

Tobacco Products

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

Domestic Tobacco Products

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

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

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

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

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

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

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

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International Tobacco Products

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

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

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

Distribution, Competition and Raw Materials

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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	•		provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law; and
	•		allow state and local governments to restrict the sale and distribution of cigarettes.

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

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

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

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

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

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

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

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

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

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Food Product

Acquisitions and Divestitures

    Nabisco Acquisition

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

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

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

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

    Other Acquisitions and Divestitures

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

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

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

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

North American Food

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

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

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

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

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

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

International Food

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

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

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

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

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

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

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    Distribution, Competition and Raw Materials

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

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

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

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

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

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

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

Regulation

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

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

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

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

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

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

Financial Services

       PMCC is primarily engaged in leasing activities. Total assets of PMCC were $9.2 billion at December 31, 2002, up from $8.9 billion at December 31, 2001, reflecting an increase in finance assets, net. PMCC's finance asset portfolio includes leases in the following investment categories: aircraft, electrical power, real estate, manufacturing, surface transportation and energy industries. Finance assets, net, are comprised of total lease payments receivable and the residual value of assets under lease, reduced by non-recourse third-party debt and unearned income. PMCC has no obligation for the payment of the non-recourse third-party debt issued to purchase the assets under lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is non-recourse to all other assets of PMCC or Altria Group, Inc. As required by U.S. GAAP, the non-recourse third-party debt has been offset against the related rentals receivable and has been presented on a net basis, within finance assets, net, in Altria Group, Inc.'s consolidated balance sheets.

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

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

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

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

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

Other Matters

Customers

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

Employees

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

Trademarks

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

Environmental Regulation

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

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(e) Available Information

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

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

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