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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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                                   FORM
FORM 10-K
              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                             ---------------------
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                         COMMISSION FILE NUMBER 1-8940
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                          PHILIP MORRIS COMPANIES
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2002
OR
[   ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                to       
COMMISSION FILE NUMBER 1-8940 
ALTRIA GROUP, INC.
             (Exact
(Exact name of registrant as specified in its charter)
                         ------------------------------
 


                        VIRGINIA                                                 13-3260245
            (State
Virginia
(State or other jurisdiction of                                   (I.R.S. Employer
             
incorporation or organization)                                 Identification No.)
 
                    

120 PARK AVENUE,
                     NEW YORK,Park Avenue,
New York, N.Y.                                                10017
        (Address
(Address of principal executive offices)                                 (Zip		13-3260245
(I.R.S. Employer
Identification No.)

10017
(Zip Code)

 
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        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 917-663-5000
          SECURITIES REGISTERED PURSUANT TO SECTION
Registrant's telephone number, including area code: 917-663-4000
Securities registered pursuant to Section 12(b) OF THE ACT:
 
of the Act:

                                                                          NAME OF EACH EXCHANGE ON
                  TITLE OF EACH CLASS                                         WHICH REGISTERED
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Title of each class
Name of each exchange
on which registered
Common Stock, $0.33 1/1/3 par valueNew York Stock Exchange

 
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      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/[X]   No / /[ ]
      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/
                            ------------------------[X]
      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X]   No [ ]
      The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of such stock on February 26, 1999,June 28, 2002, was approximately $95$93 billion. At such date,As of February 28, 2003, there were 2,425,864,3662,033,459,440 shares of the registrant's Common Stock outstanding.
 
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                      DOCUMENTS INCORPORATED BY REFERENCE
Documents Incorporated by Reference
      Portions of the registrant's annual report to stockholdersshareholders for the year ended December 31, 1998,2002 (the ''2002 Annual Report''), are incorporated in Part I, Part II and Part IV hereof and made a part hereof. ThePortions of the registrant's definitive proxy statement for use in connection with its annual meeting of stockholdersshareholders to be held on April 29, 1999,
is24, 2003, filed with the Securities and Exchange Commission on March 17, 2003, are incorporated in Part III hereof and made a part hereof.
 
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PART I
 
ITEM
Item 1. DESCRIPTION OF BUSINESS.
 
(A) GENERAL DEVELOPMENT OF BUSINESS
 
                                    GENERALBusinesses.

(a) General Development of Business
General
      In April 2002, the stockholders of Philip Morris Companies Inc. is a holdingapproved changing the name of the parent company whose principalfrom 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 Incorporated,USA Inc. (''PM USA''), Philip Morris International Inc., (''PMI'') and its majority-owned (84.2%) subsidiary, Kraft Foods Inc. (''Kraft''), and Miller Brewing Company, are engaged in the manufacture and sale of various consumer products. A wholly-owned
subsidiary of the Company,products, including cigarettes and foods and beverages. Philip Morris Capital Corporation engages(''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 financing and investment activities.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 term "Company" means Philip Morris Companies Inc.consolidated financial position, results of operations and its subsidiaries. The Company iscash flows of the Altria family of companies. ALG's family of companies forms the largest consumer packaged goods companybusiness in the world.*
 
    Philip Morris Incorporated ("
PM Inc."),USA, which conducts business under the trade name "Philip''Philip Morris U.S.A.," and its subsidiaries and affiliates areUSA,'' is engaged in the manufacture and sale of cigarettes. PM Inc.USA is the largest cigarette company in the United States. Philip Morris International Inc.
("Philip Morris International" or "PMI")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. A subsidiary of
Philip Morris International is the leading United States exporter of cigarettes.
MARLBORO, Marlboro, the principal cigarette brand of these companies, has been the world's largest-selling cigarette brand since 1972. Certain subsidiaries and affiliates
of Philip Morris International
      Kraft is engaged in the manufacture and sell a wide varietysale of food
products in Latin America.
 
    Kraft Foods, Inc. ("Kraft"), is the largest processorbranded foods and marketer of retail
packaged foods in the United States. A wide variety of cheese, processed meat
products, coffee and grocery products are manufactured and marketedbeverages in the United States, Canada, Europe, the Middle East and Canada by Kraft. SubsidiariesAfrica, Latin America and affiliates ofAsia Pacific. Kraft conducts its global business through its subsidiaries: Kraft Foods North America, Inc. (''KFNA'') and Kraft Foods International, Inc. ("(''KFI''). Kraft Foods International"),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 manufacturecompleted 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 market coffee, confectionery, cheese, grocery100% 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 processed meat
products primarilySAB 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 Europeexchange for Miller, which had $2.0 billion of existing debt. The shares in SABMiller owned by ALG resulted in a 36% economic interest and the Asia/ Pacific region.
 
    Miller Brewing Company ("Miller") is the second-largest brewing companya 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 United States.
 
                           SOURCE OF FUNDS--DIVIDENDSthird quarter of 2002. Beginning with the third quarter of 2002, ALG's ownership interest in SABMiller is being accounted for under the equity method. Accordingly, ALG records its share of SABMiller's net earnings, based on its economic ownership percentage, in minority interest in earnings and o ther, net, on the consolidated statement of earnings.
—————
* 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.
1
Source of Funds—Dividends
      Because the CompanyALG is a holding company, its principal sourcesources of funds isare from the payment of dividends and repayment of debt from its subsidiaries. The Company'sExcept 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
 
    In 1998, the Company's significant industry
(b) Financial Information About Industry Segments
      Altria Group, Inc.'s reportable segments wereare domestic tobacco, international tobacco, North American food, international food, beer (prior to July 9, 2002) and financial services. OperatingNet revenues and operating companies incomeincome* (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, 1998, 19972002, 2001 and 1996)2000) are set forth in Note 1214 to the Company'sAltria Group, Inc.'s consolidated financial statements and are(''Note 14'') which is incorporated herein by reference to the Company's annual report to stockholders
for the year ended December 31, 1998 (the "19982002 Annual Report").
 
    In 1998,Report.
      The relative percentages of operating companies income forattributable to each reportable segment were as follows:
   2002
 2001
 2000
             Domestic tobacco     29.0%       30.1%       33.0% 
             International tobacco     32.8        30.9        32.1 
             North American food     28.6        27.4        21.9 
             International food     7.7        7.1        7.4 
             Beer     1.6        2.8        4.0 
             Financial services     0.3        1.7        1.6 
       
        
        
 
       100.0%       100.0%       100.0% 
       
        
        
 
      The decrease in the relative percentage attributable to domestic tobacco was approximately
13.1%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 consolidated operating companies income, down from 25.7% in 1997 and
32.7% in 1996. Boththe merger of Miller into SABMiller, while the decrease from 1996 to 1997 and the decrease from 1997 to
1998 were due primarily to charges recorded in 1998 and 1997 in
 
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*   References to the Company's competitive ranking in its various businesses
    are based on sales data or, in the case of cigarettes and beer, shipments,
    unless otherwise indicated.
 
                                       1

connection with tobacco litigation settlements discussed below in Item 3. LEGAL
PROCEEDINGS. International tobacco contributed 44.4% of consolidated operating
companies income in 1998, compared with 35.7% and 31.7%, respectively, in 1997
and 1996. North American food and international food contributed 27.0% and 9.9%,
respectively, to consolidated operating companies income in 1998, compared with
22.4% and 10.3%, respectively, in 1997 and 20.5% and 10.1%, respectively, in
1996. Beer and financial services contributed 4.0% and 1.6%, respectively, to
consolidated operating companies income in 1998, compared with 3.6% and 2.3%,
respectively, in 1997, and 3.4% and 1.6%, respectively, in 1996. The higher
contributionrelative percentage attributable to financial services in 1997 reflects a $103$290 million pre-tax gain onprovision for exposure to the saleU.S. airline industry.
(c) Narrative Description of its real estate operations.
 
(C) NARRATIVE DESCRIPTION OF BUSINESS
 
                                TOBACCO PRODUCTSBusiness
Tobacco Products
      PM Inc.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 Philip Morris InternationalPMI and their licensees manufacture, market and sell tobacco products outside the United States and
export tobacco products from the United States.
 
DOMESTIC TOBACCO PRODUCTS
Domestic Tobacco Products
      PM Inc.USA is the largest tobacco company in the United States, with total cigarette shipments in the United States of 227.6191.6 billion units in 1998,2002, a decrease of 3.2%7.5% from 1997.2001. PM Inc.USA accounted for 49.4%48.9% of the domestic cigarette industry's total shipments in the United States in 1998 (an increase2002 (a decrease of 0.72.1 share points from 1997)2001). The domestic industry's cigarette shipments decreased by 3.7% in 2002. The industry's volume
—————
* 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 decreased by 4.6%of America (''U.S. GAAP'').
2
decrease during 2002 was due primarily to weak economic conditions, increases in 1998.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(+)table sets forth the industry's cigarette shipments in the United States, PM Inc.'sUSA's shipments and its share of United Statesdomestic industry shipments:

YEARS ENDED                                                                                 PM INC.
DECEMBER 31                                                  INDUSTRY*     PM INC.     SHARE OF INDUSTRY
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                                                             (IN BILLIONS OF UNITS)           (%)
1998......................................................       460.8        227.6             49.4
1997......................................................       482.9        235.2             48.7
1996......................................................       483.2        230.8             47.8

             Years Ended
December 31
 Industry*
 PM USA
 PM USA
Share of Industry
   (in billions of units)  (%)
             2002     391.4      191.6      48.9 
             2001     406.3      207.1      51.0 
             2000     419.8      211.9      50.5 
PM Inc.'sUSA's major premium brands are MARLBORO, VIRGINIA SLIMS, BENSON &
HEDGES, MERIT Marlboro, Virginia Slims and PARLIAMENT. Parliament. Its principal discount brands are BASIC and
CAMBRIDGE. brand is Basic. All of its brands are marketed to take into account differing preferences of adult smokers. MARLBORO Marlboro is the largest-selling cigarette brand in the United States, with shipments of 162.5148.6 billion units in 19982002 (down 0.9%5.8% from 1997)2001), equating to 35.3%37.9% of the United Statesdomestic market (up(down 0.9 share points from 34.0% in 1997)2001).
      In December 1998, PM Inc. paid $150 million for options to purchase the
United States rights to manufacture and market three cigarette trademarks, L&M,
Lark and Chesterfield, the international rights to which are already owned by
Philip Morris International. The exercise of the options is subject to certain
conditions. Including the $150 million paid in December, the total acquisition
price for these trademarks will be $300 million. L&M, Lark and Chesterfield
accounted for less than 0.2% of domestic cigarette industry volume in 1998. In
February 1999, PM Inc. announced that it plans to phase out cigarette production
at its Louisville, Kentucky manufacturing plant by December 2000.
 
    In 1998,2002, the premium and discount segments accounted for approximately 73% and 27%, respectively, of the domestic cigarette industry volume, versus 72.3%volume. In 2001, the premium and 27.7%discount segments accounted for approximately 74% and 26%, respectively, in 1997.of the domestic cigarette industry volume. PM Inc.'sUSA's share of the premium segment was 58.4%60.7% in 1998, an increase2002, a decrease of 0.80.9 share points over 1997.from 2001. Shipments of premium - ------------------------
 
+   Data presented in this table differ in some cases from data discussed above
    due to rounding differences.
 
*   Source: Management Science Associates.
 
                                       2
cigarettes accounted for 86.4%90.2% of PM Inc.'s 1998USA's 2002 volume, up from 85.7%89.3% in 1997.2001. In 1998, United States2002, industry shipments within the discount segment declined
6.9%category increased 0.4% from 19972001 levels; PM Inc.'s 1998USA's 2002 shipments within this category declined
8.1%decreased 15.6%, resulting in a share of 25.0%17.6% of the discount segmentcategory (down 0.33.3 share points from 1997)2001).
      PM Inc.USA cannot predict future changechanges or rates of change in domestic tobacco industry volume, in the relative sizes of the premium and discount segments or in PM Inc.'sUSA's shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipmentsUSA's results have been and may continue to be materially adversely affected by price increases related to theincreased excise taxes and tobacco litigation settlements, and, if enacted,as well as by increased excise taxes orthe other tobacco legislation discussed below.
 
INTERNATIONAL TOBACCO PRODUCTS
 
    Philip Morris International's
As set forth in Note 18 to Altria Group, Inc.'s consolidated financial statements (''Note 18''), which is incorporated herein by reference to the 2002 Annual Report, on May 7, 2001, the trial court in the Engle class action approved a stipulation among PM USA, certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, a $500 million pre-tax charge was recorded in the operating companies income of the domestic tobacco business during the first quarter of 2001. In July 2001, PM USA also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM USA should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2002 and 2001 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly.
* Source: Management Science Associates.
It should be noted that Management Science Associates' current measurements of the domestic cigarette industry's total shipments and related share data do not include all shipments of some manufacturers that Management Science Associates is presently unable to monitor effectively. Accordingly, it should also be noted that the discussion herein of PM USA's performance within the industry is based upon Management Science Associates' estimates of total industry volume.
3
International Tobacco Products
PMI's total cigarette shipments grew 1.0%increased 3.5% in 1998,2002 to 716.9723.1 billion units. Philip Morris InternationalPMI estimates that its share of the international cigarette market (excluding(which is defined as worldwide cigarette volume excluding the United States)States and duty-free shipments) was 13.9%approximately 14.7% in 1998,2002, up from 13.6%14.1% in 1997. Philip Morris International2001. PMI estimates that international cigarette industrymarket shipments (excluding the United States) were approximately 5.24.8 trillion units in 1998, down slightly2002, a slight decrease from 1997, due to the
impact of regional economic crises.2001. PMI's leading brands—Marlboro, L&M, Philip Morris, International unit shipments
(including brands acquired through acquisitions) have grown at a compounded
annual growth rate of 9.3% over the last five years, versus compounded annual
industry growth of approximately 1.3% over the same period. Philip Morris
International's leading international brands--MARLBORO, L&M, PHILIP MORRIS, BOND
STREET, CHESTERFIELD, PARLIAMENT, LARK, MERIT Bond Street, Chesterfield, Parliament, Lark, Merit and VIRGINIA SLIMS--collectivelyVirginia Slims—collectively accounted for approximately 10.8%11.4% of the international cigarette market, (excluding the United States) in 1998, up from 10.7%10.8% in 1997. Unit sales2001. Shipments of Philip Morris International'sPMI's principal brand, MARLBORO, increased 3.8%Marlboro, decreased 0.6% in 1998,
to 330 billion units, representing2002, and represented more than 6% of the international cigarette market (excluding the United States).
 
    Philip Morris Internationalin 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 4060 markets, including Argentina, Australia,Austria, Belgium, Brazil, the Czech Republic, Finland, France, Germany, Greece, Hong Kong, Hungary,Israel, Italy, Japan, Malaysia, Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Singapore, Spain, Switzerland, Turkey and Turkey.the Ukraine.
      In 1998, Philip Morris International took a number of measures2002, PMI continued to invest in and expand its international manufacturing base. Philip Morris International
acquiredbase, including significant investments in facilities located in Germany, Korea, the assets of its former licensee in Indonesia, produced L&MNetherlands, the Philippines, Poland, Portugal and BOND
STREET at a new manufacturing facility in Romania,Russia.
Distribution, Competition and began construction of new
manufacturing plants in St. Petersburg, Russia and in Almaty, Kazakhstan.
 
DISTRIBUTION, COMPETITION AND RAW MATERIALSRaw Materials
      PM Inc.USA sells its tobacco products principally to wholesalers (including distributors), large retail organizations, including chain stores, and the armed services. Subsidiaries and affiliates of Philip Morris InternationalPMI and their licensees market cigarettes and othersell their tobacco products worldwide directly or
through export sales organizationsto distributors, wholesalers, retailers and state-owned enterprises and other entities with which they have
contractual arrangements.
 
    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 the Company'sALG'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 in Management's
Discussionbelow under Taxes, Legislation, Regulation and Analysis of Financial ConditionOther Matters Regarding Tobacco and Results of Operations
("MD&A") on pages 21-35 of the Company's 1998 Annual Report, incorporated herein
by reference,Smoking—State Settlement Agreements, PM Inc.USA and other domestic tobacco manufacturers have agreed to other marketing restrictionsre strictions in the United States as part of the settlements of state health care cost recovery actions.
 
                                       3

      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 Inc. and Philip Morris International's subsidiaries and affiliates and
their licensees purchase domesticUSA'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 types each year, primarilystyles. 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 domestic auction. In addition, oriental
tobaccoauction and certainthrough other tobaccos are purchased outsidesources.
      Tobacco production in the United States. The
tobaccoStates is then graded, cleaned, stemmed and redried prior to its storage for
aging up to three years. Large quantities of leaf tobacco inventory are
maintained to support cigarette manufacturing requirements. Tobacco is an
agricultural commodity subject to United States government controls, including the tobacco pricetobacco-price support (subject to Congressional review) and production adjustmentcontrol programs administered by the United States Department of Agriculture (the "USDA"''USDA''), either. 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 canmay include tobacco subsidies and tobacco production control programs. All of
4
those controls and programs in the United States and internationally may substantially affect market prices.prices for tobacco.
      PM Inc.USA and Philip Morris InternationalPMI 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
Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking
      The tobacco industry, both in the United States and abroad,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 Inc.,
Philip Morris InternationalUSA, PMI and the Company.Altria Group, Inc.
      These issues, some of which are more fully discussed below, include
legislation or other governmental action seeking to ascribe to the industry
responsibility and liability for the purported adverse health effects associated
with both smoking and exposure to environmental tobacco smoke ("ETS"); increased
smoking and health litigation; price increases in the United States related to
the settlement of certain tobacco litigation; actual and proposed excise tax
increases; the issuance of final regulations by the United States Food and Drug
Administration (the "FDA") that, if upheld by the courts, would regulate
cigarettes as "drugs" or "medical devices"; governmental and grand jury
investigations; actual and proposed requirements regarding disclosure of
cigarette ingredients and other proprietary information, as well as the testing
and reporting of the yields of "tar," nicotine and other constituents found in
cigarette smoke; governmental and private bans and restrictions on smoking;
actual and proposed price controls and restrictions on imports in certain
jurisdictions outside the United States; actual and proposed restrictions on
tobacco manufacturing, marketing, advertising and sales (including two European
Union directives that, if implemented, will (i) ban virtually all forms of
tobacco advertising and sponsorship in the European Union other than at the
retail point of sale, and (ii) abolish duty-free tobacco sales among member
states of the European Union); proposed legislation to eliminate the U.S. tax
deductibility of tobacco advertising and promotional costs; proposed legislation
in the United States to require the establishment of ignition propensity
performance standards for cigarettes; the diminishing social acceptance of
smoking and increased pressure from anti-smoking groups and unfavorable press
reports; and other tobacco legislation that may be considered by the Congress,
the states and other countries.
 
    EXCISE TAXES--Cigarettesinclude:
•a $74.0 billion punitive damages verdict against PM USA in the Engle smoking and health class action case, a compensatory and punitive damages verdict totaling approximately $10.1 billion against PM USA in the Price Lights/Ultra Lights class action and punitive damages verdicts against PM USA in individual smoking and health cases discussed below in Item 3. Legal Proceedings (''Item 3'');
•the civil lawsuit filed by the United States federal government seeking disgorgement of approximately $289 billion from various cigarette manufacturers, including PM USA, and others discussed in Item 3;
•pending and threatened litigation and bonding requirements as discussed in Item 3 and in ''Cautionary Factors that May Affect Future Results;''
•legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects caused by both smoking and exposure to environmental tobacco smoke (''ETS'');
•price increases in the United States related to the settlement of certain tobacco litigation, and the effect of any resulting cost advantage of manufacturers not subject to these settlements;
•actual and proposed excise tax increases in the United States and foreign markets;
•diversion into the United States market of products intended for sale outside the United States;
•the sale of counterfeit cigarettes by third parties;
•price disparities and changes in price disparities between premium and lowest price brands;
•the outcome of proceedings and investigations involving contraband shipments of cigarettes;
•governmental investigations;
•actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information;
•governmental and private bans and restrictions on smoking;
•actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States;
•actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales inside and outside the United States;
•the diminishing prevalence of smoking and increased efforts by tobacco control advocates to further restrict smoking; and
•actual and proposed tobacco legislation both inside and outside the United States.
Excise Taxes: Cigarettes are subject to substantial federal, state and statelocal 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 $0.24$0.39 per pack of 20 cigarettescigarettes. In the United States, state and is scheduled to increase to $0.34 per pack in the year 2000local sales and then to $0.39 per pack in 2002. In general, excise taxes and other taxes on
cigarettes have been increasing. These taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may currently be as high as $1.50$4.10 per pack of 20 cigarettes. Further tax increases in various jurisdictions are currently under consideration or pending. In 2002, 20
5
states, the District of Colombia and the Commonwealth of Puerto Rico enacted excise tax increases, ranging from $0.07 per pack in a given localityTennessee to as much as $1.81 per pack in the United States.New York. Congress has been
consideringconsidered significant increases in the federal excise tax or other payments from tobacco manufacturers, and the Clinton Administration's fiscal year 2000
budget proposal includes an additional increase of $0.55 per packsignificant increases in the federal
excise tax. Increases inand other cigarette-related taxes have been proposed or enacted at the state and local levellevels 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 Inc.USA and Philip Morris International,PMI, increases in excise and similar taxes have had an adverse impact on sales of cigarettes.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, couldmay result in volume declines for the cigarette industry, including PM Inc.USA and Philip Morris
International,PMI, and might also cause sales to shift from the premium segment to the non-premium, including the discount, segment.
 
    FEDERAL TRADE COMMISSION ("FTC")--In September
      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 FTCUnited States Federal Trade Commission (''FTC'') issued a request for public commentscomment on its proposed revision of its "tar"tar and nicotine test methodology and reporting procedures
 
                                       4
 established by a 1970 voluntary agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and three other domestic cigarette
manufacturers filed comments on the proposed revisions. In November 1998, the FTC wrote torequested assistance from the Department of Health and Human Services requesting its
assistance(''HHS'') in developing specific recommendations on the future of the FTC'sa testing program for testing the "tar,"tar, nicotine, and carbon monoxide content of cigarettes. In 2001, the National Cancer Institute issued a report stating that there was no meaningful evidence of a difference in smoke exposure or risk to smokers between cigarettes with different machine-measured tar and nicotine yields. In September 2002, PM USA petitioned the FTC to promulgate new rules governing the disclosure of average tar and nicotine yields of cigarette brands. PM USA asked the FTC to take action in response to evolving scientific evidence about machine-measured low-yield cigarettes, including the National Cancer Institute's Monograph 13, which represents a fundamental departure from the scientific and public health community's prior thinking about the health effects of low-yield cigarettes. Public health officials in other countries and the EU have stated that the use of terms such as ''lights'' to describe low-yield cigarettes is misleading. Some jurisdictions have questioned the relevance of the method for measuring tar, nicotine, and carbon monoxide yields established by the International Organization for Standardization. The EU Commission has been directed to establish a committee to address, among other things, alternative methods for measuring tar, nicotine and carbon monoxide yields. In addition, public healt h authorities in the United States, the EU, Brazil and other countries have prohibited or called for the prohibition of the use of brand descriptors such as ''Lights'' and ''Ultra Lights.'' See Item 3, which describes pending litigation concerning the use of brand descriptors.
Food and Drug Administration (''FDA'') Regulations: In 1996, the FDA REGULATIONS--The FDA has promulgated regulations asserting jurisdiction over cigarettes as "drugs"''drugs'' or "medical devices"''medical devices'' under the provisions of the Food, Drug and Cosmetic Act. TheseAct (''FDCA''). The regulations, includewhich included severe restrictions on the distribution, marketing and advertising of cigarettes, and would requirehave required the industry to comply with a wide range of labeling, reporting, recordkeeping,record keeping, manufacturing and other requirements. The FDA's exerciserequirements, 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 jurisdiction, if not
reversedthe FDCA, it would support new legislation that would provide for reasonable regulation by judicial or legislative action, could lead to more expansive
FDA-imposed restrictions on cigarette operations than those set forth in the
regulations, and could materially adversely affect the business, volume, results
of operations, cash flows and financial position of PM Inc. and the Company. In
August 1998, the Fourth Circuit Court of Appeals ruled that the FDA does not
haveof cigarettes as cigarettes. Currently, there are bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products, and declared the FDA's
regulations invalid and, in November 1998, that court denied the FDA's petitionproducts; PM USA has expressed support for rehearing. The FDA is now petitioning the U.S. Supreme Court to review the
judgmentcertain of the Fourth Circuit Courtbills. The bills take a variety of Appealsapproaches 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 this case.
6
substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of this litigationany Congressional action regarding the pending bills cannot be predicted.
 
    INGREDIENT DISCLOSURE LAWS--The
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 has enacted legislation to require cigarette manufacturers to report yearly the flavorings and other ingredients used in each brand stylebrand-style of cigarettes sold in the Commonwealth, and on a qualified, by-brand basisCommonwealth. Cigarette manufacturers sued to provide "nicotine-yield
ratings" for their products based on standards to be established byhave the Commonwealth. Enforcement of the ingredient disclosure provisions of the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In December 1997, a federalSeptember 2000, the district court in Boston granted the tobacco company
plaintiffs a preliminary injunctionplaintiffs' motion for summary judgment and permanently enjoined the Commonwealthdefendants from enforcingrequiring cigarette manufacturers to disclose brand-specific information on ingredients in their products, and defendants appealed. In December 2002, the ingredient disclosure provisionsUnited States Court of the legislation. In November 1998,Appeals for the First Circuit, Court of Appeals sitting en banc, affirmed this ruling. In addition, both parties'
cross-motions for summary judgment are pending before the district court.court's entry of summary judgment. The ultimate outcome of this lawsuit cannot be predicted. Similardeadline 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. Somestates 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 some formlegislation that wo uld require the submission of ingredient disclosure
legislation or regulation.
 
    HEALTH EFFECTS OF SMOKING AND EXPOSURE TO ETS--Reportsinformation 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 alleged harmful physical effectshealth 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. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human ServicesHHS 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 recommendingrecommended various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus uponfocused on the "addictive"addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, and the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularlyparticu larly the "addictive"addictive nature of cigarette smoking induring adolescence.
      Studies with respect to the alleged 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. In 1993, the U.S. Environmental Protection Agency (the "EPA") issued a
report relating to certain alleged health effects of ETS. The report included a
risk assessment relating to the alleged association between ETS and lung cancer
in nonsmokers, and a determination by the EPA to classify ETS as a "Group A"
carcinogen. In July 1998, a federal district court vacated those sections of the
report relating to lung cancer, finding that
 
                                       5

the EPA may have reached different conclusions had it complied with certain
relevant statutory requirements. The federal government has appealed the court's
ruling. The ultimate outcome of this litigation cannot be predicted.
 
    In October 1997, at the request of the United States Senate Judiciary
Committee, the Company provided the Committee with a document setting forth the
Company's position onSince then, a number of issues. Ongovernment agencies around the issues of the role played by
cigarette smoking in the development ofworld have concluded that ETS causes diseases—including lung cancer and otherheart 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 smokers,non-smokers.
      It is the policy of each of PM USA and whether nicotine, as found in cigarette smoke, is "addictive," the
Company stated that despite the differences that may exist between its views and
those of the public health community, it would, in orderPMI to ensure that there
will besupport a single, consistent public health message on these issues, refrain from
debating the issues other than as necessary to defend itself and its opinions in
the courts and other forums in which it is required to do so. The Company also
stated that in relation to these issues, and the alleged health effects of exposure to ETS,cigarette smoking in the Companydevelopment of diseases in smokers and on smoking and addiction. It is preparedalso their policy to defer to the judgment of public health authorities as to whatthe content of warnings in advertisements and on product packaging regarding the health warningeffects 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 will best serveof 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
7
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 interest.
 
    OTHER LEGISLATIVE INITIATIVES--Inshould be guided by the conclusions of public health officials regarding the health effects of ETS in deciding whether to be in places where ETS is present or, if they are smokers, when and where to smoke around others. In addition, PM USA and PMI state on their web sites that they believe that particular care should be exercised where children are concerned, and adults should avoid smoking around children. PM USA and PMI also state that the conclusions of the public health officials concerning ETS are sufficient to warrant measures that regulate smoking in public places, and that where smoking is permitted, the government should require the posting of warning notices that communicate public health officials' conclusions that second-hand smoke cause s diseases in non-smokers.
The World Health Organization's Framework Convention for Tobacco Control: The World Health Organization (''WHO'') and its member states are negotiating a proposed Framework Convention for Tobacco Control. The proposed treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things:
•establish specific actions to prevent youth smoking;
•restrict and gradually eliminate tobacco product marketing;
•inform the public about the health consequences of smoking and the benefits of quitting;
•regulate the ingredients of tobacco products;
•impose new package warning requirements that would include the use of pictures or graphic images;
•eliminate cigarette smuggling and counterfeit cigarettes;
•restrict smoking in public places;
•increase cigarette taxes;
•prohibit the use of terms that suggest one brand of cigarettes is safer than another;
•phase out duty-free tobacco sales; and
•encourage litigation against tobacco product manufacturers.
      PM USA and PMI have stated that they would support a treaty that member states could consider for ratification, based on the following four principles:
•smoking-related decisions should be made on the basis of a consistent public health message;
•effective measures should be taken to prevent minors from smoking;
•the right of adults to choose to smoke should be preserved; and
•all manufacturers of tobacco products should compete on a level playing field.
      The sixth round of treaty negotiations was recently concluded and the WHO has indicated that the draft treaty will be presented for ratification to the World Health Assembly in May 2003. The outcome of the treaty negotiations cannot be predicted.
Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would would:
•subject cigarettes to various regulations under the HHS or regulation under the Consumer Products Safety Act;
•establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities;
•further restrict the advertising of cigarettes;
•require additional warnings, including graphic warnings, on packages and in advertising;
•eliminate or reduce the tax deductibility of tobacco advertising;
8
•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 variousimplement regulations underthat:
•reduce maximum permitted levels of tar, nicotine and carbon monoxide yields to 10, 1 and 10 milligrams, respectively;
•require manufacturers to disclose ingredients and toxicological data on ingredients;
•require rotational health warnings that cover no less than 30% of the front panel of each pack of cigarettes and warnings that cover no less than 40% of the back panel;
•require the health warnings to be surrounded by a black border;
•require the printing of tar, nicotine and carbon monoxide numbers on the side panel of the pack at a minimum size of 10% of the side panel; and
•prohibit the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others.
      EU Member States are in the Departmentprocess of Healthimplementing these regulations over the course of 2003 and Human Services or regulation under the Consumer
Products Safety Act, establish anti-smoking educational campaigns or
anti-smoking programs, or provide additional funding2004. The European Commission is currently working on guidelines for governmental
anti-smoking activities, further restrict the advertising of cigarettes,
including requiring additionalgraphic warnings on packagescigarette packaging which are expected to be issued in 2003. The EU is also considering a new directive that would restrict radio, press and Internet tobacco marketing and advertising that cross Member State borders. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions.
      In August 2000, New York State enacted legislation that requires the State's Office of Fire Prevention and Control to promulgate by January 1, 2003, fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. On December 31, 2002, the New York State Office of Fire Prevention and Control published a proposed regulation to implement this legislation. PM USA plans to submit comments concerning the proposed regulation, and will continue to participate in the public comment process. It is, however, not possible to predict the impact of the New York State law until the regulation is promulgated. Similar le gislation is being considered in other states and localities, at the federal level, and in advertising, provide
thatjurisdictions outside the Federal Cigarette Labeling and Advertising Act and the Smoking
Education Act could not be used as a defense against liability under state
statutory or common law, allow state and local governments to restrict the sale
and distribution of cigarettes, and further restrict certain advertising of
cigarettes and eliminate or reduce the tax deductibility of tobacco advertising.United States.
      It is not possible to determine the outcome of the FDA regulatory initiative
or the related litigation discussed above, or to predict what, if any, otheradditional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM Inc., Philip Morris InternationalUSA, PMI and the CompanyAltria Group, Inc. could be materially adversely affected.
 
    GOVERNMENTAL AND GRAND JURY INVESTIGATIONS--PM
Governmental Investigations: Altria Group, Inc. has received requests
for information (including grand jury subpoenas) in connection withand its subsidiaries are subject to governmental investigations on a range of the tobacco industry, and is cooperating with respect to such
requests. Present and former employeesmatters, including those discussed below. ALG believes that Canadian authorities are contemplating a legal proceeding based on an investigation of PM Inc. have testified or have been
asked to testify in connection with certain of these matters. The investigations
include four grand jury investigations being conducted by: the United States
Attorney for the Eastern District of New York relating to The Council for
Tobacco Research-U.S.A., Inc., a research organization of which PM Inc. was a
sponsor; the United States Department of Justice in Washington, D.C., relating
to issues raised in testimony provided by tobacco industry executives before
Congress and other related matters; the United States Department of Justice
Antitrust Division in the Eastern District of Pennsylvania relating to tobacco
leaf purchases; and the United States Attorney for the Northern District of New
York relating to alleged contraband transactions primarily in Canadian-brand
tobacco products. Philip Morris InternationalPMI and its subsidiary, Philip Morris Duty Free Inc., have also received subpoenasrelating to allegations of contraband shipments of cigarettes into Canada in the last referenced
investigation. Whileearly to mid-1990s. During 2001, the outcomescompetition 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
9
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 cannotor whether additional investigations may be predicted,
PM Inc., Philip Morris Internationalcommenced.
Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and Philip Morris Duty Free Inc. believe
they have acted lawfully.
 
    TOBACCO-RELATED LITIGATION AND SETTLEMENTS--Seecertain foreign jurisdictions. See Item 3. LEGAL PROCEEDINGS.
below3 for a discussion of the tobacco-related litigation pending againstsuch litigation.
State Settlement Agreements: As discussed in Item 3, during 1997 and 1998, PM Inc., Philip Morris International and, in some cases, the Company and its other
subsidiaries and related entities. As noted in the MD&A on pages 21-35 of the
Company's 1998 Annual Report, PM Inc.USA and other major domestic tobacco product manufacturers have entered into agreements with states and various U.S.United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlement agreements, among other things,settlements provide for 6
substantial annual payments, restrictpayments. They also place numerous restrictions on the tobacco industry's business operations, including restrictions on the advertising and marketing of tobacco
products,cigarettes. Among these are restrictions or prohibitions on the following:
•targeting youth;
•use of cartoon characters;
•use of brand name sponsorships and brand name non-tobacco products;
•outdoor and transit brand advertising;
•payments for product placement; and
•free sampling.
      In addition, the settlement agreements require companies to affirm corporate principles directed at:
•reducing underage use of cigarettes;
•imposing requirements regarding lobbying activities;
•mandating public disclosure of certain industry documents;
•limiting the industry's ability to challenge certain tobacco control and underage use laws; and
•providing for the dissolution of certain tobacco-related organizations and placing restrictions on the establishment of any replacement organizations.

Food Product
Acquisitions and Divestitures
Nabisco Acquisition
      On December 11, 2000, Kraft acquired all of certain industry documents, impose
requirements applicablethe 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 lobbying activities,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 limit the industry's ability
to challenge certain tobacco control and underage use laws.
 
                                 FOOD PRODUCTS
 
    Kraft and Kraft Foods International have taken2002. The closure of a number of actions to
improve their business portfoliosNabisco domestic and operating efficiencies. During 1998, Kraft
Foods International sold four international food businesses. During 1997, Philip
Morris International sold its Brazilian ice cream businesses, Kraft sold North
American maple-flavored syrup businessesfacilities resulted in severance and Kraft Foods International sold a
Scandinavian sugar confectionery business. During 1996, Kraft sold its bagel
business, and Kraft Foods International sold margarine businessesother exit costs of $379 million, which are included in the U.K.adjustments for the allocation of the purchase price. The closures will result in the termination of approximately 7,500 employees and Italy.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 salesintegration 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 havein 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
11
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 the Company'sAltria Group, Inc.'s consolidated results of operations. In the fourth quarter of
1997, the international food businesses recorded pre-tax realignment charges of
$630 million, related primarily to the downsizing or closure of manufacturing
and other facilities, as well as the discontinuance of certain low-margin
product lines. Included in the charges were provisions for incremental
postemployment benefits, primarily related to severance. During 1998, certain
actions contemplated by the charges were undertaken, including the divestiture
or closure of four businesses, the commencement of two manufacturing facilities
closures and consolidation of certain sales force and headquarters functions,
and began to make periodic postemployment payments to severed employees, the
duration of such payments being dictated by the severed employees' salary
grades, years of service and the customs of the respective countries in which
actions were taken. Kraft Foods International anticipates that the majority of
the remaining postemployment payments will be made by the end of the year 2000.
 
NORTH AMERICA
 
    Kraft is the largest retail packaged food company in 
North America. Kraft's
principal products include cheese and cheese products, processed meat and
poultry products, coffee, ready-to-eat cereals, salad and other dressings,
powdered and ready-to-drink beverages, frozen pizza, packaged and ready-to-eat
desserts and snacks, packaged pasta dinners, lunch combinations, barbecue
sauces, frozen toppings, confections and other cultured dairy and grocery
products. ItsAmerican Food
      KFNA's principal brands span five consumer sectors and include KRAFT, VELVEETA, CRACKER BARRELthe following:
Snacks: Oreo, Chips Ahoy!, Newtons, Nilla, Nutter Butter, Stella D'Oro and SnackWell's cookies; Ritz, Premium, Triscuit, Wheat Thins, Cheese Nips, Better Cheddars, Honey Maid Grahams and Teddy Grahams crackers; Planters nuts and salted snacks; Life Savers, Creme Savers, Altoids, Gummi Savers and Fruit Snacks sugar confectionery products; Terry's and Toblerone chocolate confectionery products; Handi-Snacks two-compartment snacks; Balance nutrition and energy snacks; and Jell-O refrigerated gelatin and pudding snacks and Handi-Snacks shelf-stable pudding snacks.
Beverages: Maxwell House, General Foods International Coffees, Starbucks, Yuban, Sanka, Nabob and Gevalia coffees; Capri Sun, Tang, Kool-Aid and Crystal Light aseptic juice drinks; and Kool-Aid, Tang, Capri Sun, Crystal Light and Country Time powdered beverages.
Cheese: Kraft and Cracker Barrel natural cheeses; Philadelphia cream cheese; Kraft and Velveeta process cheeses; Kraft grated cheeses; Cheez Whiz process cheese sauce; Easy Cheese aerosol cheese spread; and Knudsen and Breakstone's cottage cheese and sour cream.
Grocery: Jell-O dry packaged desserts; Cool Whip frozen whipped topping; Post ready-to-eat cereals; Cream of Wheat and Cream of Rice hot cereals; Kraft and Miracle Whip spoonable dressings; Kraft salad dressings; A.1. steak sauce; Kraft and Bull's-Eye barbecue sauces; Grey Poupon premium mustards; Shake 'N Bake coatings; and Milk-Bone pet snacks.
Convenient Meals: DiGiorno, Tombstone, Jack's, California Pizza Kitchen and Delissio frozen pizzas; Kraft macaroni & cheese dinners; Taco Bell, It's Pasta Anytime and Stove Top Oven Classics meal kits; Lunchables lunch combinations; Oscar Mayer and Louis Rich cold cuts, hot dogs and bacon; Boca soy-based meat alternatives; Stove Top stuffing mix; and Minute rice.
International Food
      KFI's principal brands within the five consumer sectors include the following:
Snacks: Milka, Suchard, Cote d'Or, Marabou, Toblerone, Freia, Terry's, Daim, Figaro, Korona, Poiana, Prince Polo, Alpen Gold, Siesta, Lacta and Gallito chocolate confectionery products; Estrella, Maarud, Kar Gida, Cipso and Lux salted snacks; Oreo, Chips Ahoy!, Ritz, Terrabusi, Canale, Club Social, Cerealitas, Trakinas and Lucky biscuits; and Sugus and Artic s ugar confectionery products.
Beverages: Jacobs, Gevalia, Carte Noire, Jacques Vabre, Kaffee HAG, Grand' Mère, Kenco, Saimaza, Maxim, Maxwell House, Dadak, Onko, Samar and Nova Brasilia coffees; Suchard Express, O'Boy, and Kaba chocolate drinks; Tang, Clight, Kool-Aid, Royal, Verao, Fresh, Frisco, Q-Refres-Ko and Ki-Suco powdered beverages; and Maguary juice concentrate.
Cheese: Philadelphia cream cheese; Sottilette, Kraft, Dairylea, El Casèrio and Invernizzi cheeses; Kraft and Eden process cheeses; and Cheese Whiz process cheese spread.
Grocery: Kraft spoonable and pourable salad dressings; Miracel Whip spoonable dressing; Royal dry packaged desserts; Kraft and ETA peanut butters; and Vegemite yeast spread.
Convenient Meals: Lunchables lunch combinations; Kraft macaroni & cheese dinners; Kraft and Mirácoli pasta dinners and sauces; and Simmenthal canned meats.
12
Distribution, Competition and POLLY-O cheese and cheese products; PHILADELPHIA cream cheese; CHEEZ WHIZ cheese
sauce; OSCAR MAYER luncheon meats, hot dogs, bacon, ham and other meat products;
LOUIS RICH luncheon meats, poultry franks, turkey bacon and other poultry
products; LUNCHABLES lunch combinations; CLAUSSEN pickles; MAXWELL HOUSE, YUBAN,
GEVALIA and NABOB coffees; GENERAL FOODS INTERNATIONAL COFFEES flavored coffees;
POST ready-to-eat cereals; MIRACLE WHIP salad dressing; KRAFT spoonable and
pourable salad dressings; KOOL-AID, TANG, CAPRI SUN, CRYSTAL LIGHT and COUNTRY
TIME powdered and ready-to-drink beverages; TOMBSTONE and JACK'S frozen pizzas
and DI GIORNO pastas, sauces, cheeses and frozen pizzas; JELL-O desserts;
HANDI-SNACKS snack combinations and desserts; ALTOIDS confections; KRAFT
Macaroni & Cheese dinners; KRAFT and BULL'S-EYE barbecue sauces; COOL WHIP
whipped toppings; STOVE TOP stuffing mix; MINUTE rice; SHAKE 'N BAKE coatings;
LIGHT N' LIVELY, BREYERS, KNUDSEN and BREAKSTONE'S cultured dairy products; and
TACO BELL groceryRaw Materials
      KFNA's products (acquired in 1996). During 1998, Kraft entered into a
licensing agreement to manufacture, market and sell CALIFORNIA PIZZA KITCHEN
frozen pizzas and a licensing agreement to market, sell and distribute STARBUCKS
coffees to grocery customers.
 
INTERNATIONAL
 
    Subsidiaries and affiliates of Kraft Foods International manufacture and
market a wide variety of coffee, confectionery, cheese, grocery and processed
meat products in Europe, with distribution to the Middle East and Africa. In the
Asia/Pacific region, select grocery products are produced locally, and other
Company branded products are sourced from Europe and the United States. In Latin
America, subsidiaries and affiliates of Philip Morris International manufacture
and market a wide variety of food products, including confectionery products,
various powdered soft drinks, and other grocery products sold by Kraft. In 1998,
approximately 83% of operating revenues for the international food businesses
were derived from
 
                                       7

sales made in Europe. International brands include JACOBS, GEVALIA, CARTE NOIRE,
JACQUES VABRE, KAFFEE HAG, GRAND' MERE, KENCO, SAIMAZA and SPLENDID coffees;
MILKA, SUCHARD, COTE D'OR, MARABOU, TOBLERONE, FREIA, TERRY'S, DAIM and CALLARD
& BOWSER confectionery products; HOLLYWOOD chewing gum; DAIRYLEA, EL CASERIO and
INVERNIZZI cheeses; MIRACOLI pasta dinners and sauces; VEGEMITE spread; ESTRELLA
and MAARUD snacks; and SIMMENTHAL meats, as well as a variety of products sold
by Kraft in the United States, including PHILADELPHIA cream cheese. In 1996,
Philip Morris International acquired nearly all of the remaining voting shares
of Industrias de Chocolate Lacta S.A., a Brazilian confectionery company.
 
DISTRIBUTION, COMPETITION AND RAW MATERIALS
 
    Kraft's products in North America are generally sold to supermarket chains, wholesalers, supercenters, club stores, mass merchandisers, distributors, convenience stores, individual storesgasoline 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 Kraft Foods International
and Philip Morris InternationalKFI sell their food products primarily in the same manner and also engage the services of independent sales offices and agents.
Advertising is tailored by product and country to reach targeted audiences.
      Kraft is subject to highly 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, pork, 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 alla substantial portion of its milk requirements from independent agricultural cooperatives and individual producers, and a substantial portion of its cheese requirements from independent sources, principally from cooperatives
and individual producers.sources. The prices for milk and other dairy product purchases are substantially influenced by government programs, as well as by market supply and demand. During 1998, the cost of certain United States dairy commodities
reached record high levels. TheseDairy commodity costs began to moderate earlyon average were lower in 1999.2002 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 declined during the
last three quarters of 1998 after reaching a 20-year high2002 were lower than in May 1997.2001.
      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. The purchase price of poultry and meat cuts is the major factorCocoa bean prices during 2002 were higher than in the cost
of Kraft's processed meat products. Poultry and meat prices are cyclical and are
affected by market supply and demand.
 
    Kraft is also a major user of packaging materials purchased from many
suppliers.2001.
      The prices paid for raw materials and agricultural materials used in food products generally reflect external factors such as weather conditions, commodity market activities,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 government actions and/or market forces (which would directly
affect the cost of products and
 
                                       8

value of inventories),these factors, Kraft and Philip Morris International believebelieves such raw materials to be in adequate supply and generally available from numerous sources. REGULATION
 
    Almost allKraft uses hedging techniques to minimize the impact of Kraft'sprice 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 (andand packaging materials
therefor) are subject to regulations administered by the FDA or, with respect to products containing meat and poultry, the USDA. Among
13
other things, these agencies enforce statutory prohibitions against misbranded and adulterated foods, establish safety standards for food processing, establish ingredients and/orand manufacturing procedures for certain
standard foods, establish standards of identity for food,certain foods, determine the safety of food substances,additives and establish labeling standards and nutrition labeling requirements for food products.
      In addition, various states regulate the business of Kraft's United StatesKFNA'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 Kraft'sKFNA'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 the Company's foodKraft's operations outside of the United States are subject to local and national regulations similar to those applicable to Kraft'sKFNA's United States businesses and, in some cases, international regulatory provisions, (suchsuch as those of the European Union)EU relating to labeling, packaging, food content, pricing, marketing and advertising and related areas.
 
                                      BEER
 
PRODUCTS
 
    Miller's brands include MILLER LITE, MILLER LITE ICE, MILLER GENUINE DRAFT,
MILLER GENUINE DRAFT LIGHT, MILLER BEER
      The EU and ICEHOUSE in the premium segment; the
MILLER HIGH LIFE family, including MILLER HIGH LIFE, MILLER HIGH LIFE LIGHT and
MILLER HIGH LIFE ICE, and RED DOG in the near-premium segment; LOWENBRAU, in the
above-premium segment, whichcertain 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 brewed and sold in theno basis for similar mandatory labeling under current United States pursuant to
a license agreement thatlaw.
Financial Services
      PMCC is scheduled to expire on September 30, 1999; MEISTER
BRAU, MILWAUKEE'S BEST and MAGNUM MALT LIQUOR in the below-premium segment; and
SHARP'S non-alcohol brew. Miller's brands in the specialty segment are
LEINENKUGEL, CELIS and SHIPYARD. Miller also owns a majority interest in Molson
USA, LLC, one of the largest beer importers in the United States, whose brands
include MOLSON and FOSTER'S. Other brands in the import segment include
PRESIDENTE and SHANGHAI (available February 1999).
 
    Miller's total shipment volume (which excludes international shipments of
Miller products by other brewers under license and contract brewing
arrangements) of 42.7 million barrels for 1998 decreased 2.3% from 1997. Export
shipments decreased 18.6%, with a planned, corresponding increase in licensee
volume. Domestic shipments of 41.7 million barrels decreased 1.8% from 1997.
Miller's estimated market share of the U.S. malt beverage industry (based on
shipments) was 21% in 1998, down from 21.7% in 1997. Wholesalers' sales of
Miller's products to retailers in 1998 decreased 1.3% from 1997. Domestic
shipments of premium-priced brands in 1998 increased slightly to 81.6% of total
domestic shipments.
 
                                       9

    The following table sets forth, based on shipments (including imports and
exports), the U.S. industry's sales of beer and brewed non-alcohol beverages, as
estimated by Miller; Miller's unit sales; and Miller's estimated share of
industry sales:
 


YEARS ENDED                                                                             MILLER'S
DECEMBER 31                                                  INDUSTRY    MILLER     SHARE OF INDUSTRY
- -----------------------------------------------------------  ---------  ---------  -------------------

                                                               (IN THOUSANDS OF
                                                                   BARRELS)                (%)
1998.......................................................    203,646     42,674            21.0
1997.......................................................    201,246     43,675            21.7
1996.......................................................    200,627     43,799            21.8


 
    During 1997, Miller sold its 20% interest in Molson Breweries of Canada, and
a minority ownership interest in Molson USA, LLC. During 1996, Miller initiated
a number of actions intended to restore growth, streamline its organization and
reduce costs, including a workforce reduction.
 
    In February 1999, Miller announced an agreement to acquire four trademarks
from the Pabst Brewing Company and the Stroh Brewery Company, subject to
regulatory review. Miller also agreed to increase its contract manufacturing of
Pabst products, including brands that Pabst has agreed to acquire from Stroh in
a separate agreement. Miller estimates that the acquisition and increased
contract manufacturing could result in incremental 1999 operating companies
income, depending upon the timing of regulatory review and the subsequent
beginning of production.
 
DISTRIBUTION, COMPETITION AND RAW MATERIALS
 
    Beer is distributed primarily through independent wholesalers. During 1998,
the agreement by which Miller and its independent wholesalers conduct business
was changed to better define wholesalers' responsibilities and to promote
increased focus on Miller's brands.
 
    The United States malt beverage industry is highly competitive, with the
principal methods of competition being product quality, price, distribution,
marketing and advertising. Miller engages in a wide variety of advertising and
sales promotion activities. Barley malt, hops, corn grits and water represent
the principal ingredients used in manufacturing Miller's products, and are
generally available in the market. The production process, which includes
fermentation and aging periods, is conducted throughout the year. Containers
(bottles, cans and kegs) for beer are purchased from various suppliers.
 
REGULATION
 
    The malt beverage industry is highly regulated at both the state and federal
levels. The Alcoholic Beverage Labeling Act of 1988 requires all alcoholic
beverages manufactured for sale in the United States to include the following
statement on containers: "GOVERNMENT WARNING: (1) According to the Surgeon
General, women should not drink alcoholic beverages during pregnancy because of
the risk of birth defects. (2) Consumption of alcoholic beverages impairs your
ability to drive a car or operate machinery, and may cause health problems." The
statute empowers the Bureau of Alcohol, Tobacco and Firearms to regulate the
size and format of the warning.
 
    The federal excise tax is 32 cents per package of six 12-ounce containers.
Excise taxes, sales taxes and other taxes affecting beer are also levied by
various states, counties and municipalities. In the opinion of Miller, increases
in excise taxes have had, and could continue to have, an adverse effect on
shipments.
 
    Advertising of alcoholic beverages, including beer, has come under increased
scrutiny by governmental agencies and others. Pursuant to a Congressional
request in 1998, the FTC ordered Miller, along with seven other alcohol beverage
manufacturers, to file a Special Report regarding the industry's self-regulating
efforts related to alcohol advertising and underage consumption. Miller expects
the FTC to report its findings to Congress during the first quarter of 1999.
 
                                       10

    In 1997, key changes were made to the Beer Institute's Advertising and
Marketing Code, including the following: a revised introduction clarifying that
the Code applies to advertising and marketing in cyberspace, including the
Internet; an undertaking that the Beer Institute will make a list of brewer web
sites available to all major Internet service providers so that the sites can be
included in parental control software; and an obligation for brewers to include
additional notices on their web sites reminding users of the legal purchase age.
Consistent with the brewers' commitment to marketing their products only to
persons of legal purchase age, the revised Code requires that television survey
data purchased by brewers reflect the proportion of viewers in the sample survey
who are over legal purchase age. The revised code also obligates brewers to
review their advertising placements at least every six months to ensure that the
majority of viewers of brewer-sponsored television programs are above the legal
purchase age.
 
                               FINANCIAL SERVICES
 
    Philip Morris Capital Corporation ("PMCC") invests in leveraged and direct
finance leases, other tax-oriented financing transactions and third-party
financial instruments. During 1997, PMCC sold its wholly-owned subsidiary,
Mission Viejo Company, which was engaged in land planning, development and sales
activities in Southern California and in the Denver, Colorado area.leasing activities. Total assets of PMCC were $6.5$9.2 billion at December 31, 1998,2002, up from $5.9$8.9 billion at December 31, 1997,2001, reflecting an increase in finance assets, net. PMCC's finance asset portfolio includes leases in the following investment categories: aircraft, electrical power, real estate, manufacturing, surface transportation and energy industries. Finance assets, net, are comprised of total lease payments receivable and the residual value of assets under lease, reduced by non-recourse third-party debt and unearned income. PMCC has no obligation for the payment of the non-recourse third-party debt issued to purchase the assets under lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is non-recourse to all other assets of PMCC or Altria Group, Inc. As required by U.S. GAAP, the non-recourse third-party debt has been offset agains t the related rentals receivable and has been presented on a net basis, within finance assets.
 
                                 OTHER MATTERS
 
CUSTOMERSassets, 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.
14
      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 Company's 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 the Company'sAltria Group, Inc.'s consolidated results of operations.
 
EMPLOYEES
Employees
      At December 31, 1998, the Company2002, ALG and its subsidiaries employed approximately 144,000166,000 people worldwide.
 
    In February 1998, the Company announced voluntary early retirement and
separation programs for salaried and hourly employees, primarily at PM Inc.'s
manufacturing facilities in Richmond, Virginia and Louisville, Kentucky.
Approximately 2,100 employees were affected by the programs, which were
completed during 1998 at a cost of $337 million, of which $319 million was
charged against domestic tobacco operating results and $18 million, reflecting
actions concerning corporate headquarters' employees, was charged to general
corporate expense. During January 1999, Kraft announced that it will take a
pre-tax charge of approximately $150 million during 1999, primarily for
voluntary retirement and separation programs for employees in the United States.
As previously discussed, in February 1999, PM Inc. announced that it plans to
phase out cigarette production at its Louisville, Kentucky manufacturing plant
by December 2000. PM Inc. estimates that this will result in a pre-tax charge of
approximately $200 million, principally for severance, in the first half of
1999, and will affect approximately 1,400 employees.
 
TRADEMARKS
Trademarks
      Trademarks are of material importance to all three of the Company'sALG's consumer products businessessubsidiaries and are protected by registration or otherwise in the United States and most other markets where the related products are sold.
 
ENVIRONMENTAL REGULATION
 
    The Company
Environmental Regulation
      ALG and its subsidiaries are subject to various federal, state, local and localforeign 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 11
Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as ''Superfund''), which imposes joint and several liability on each responsible party
(commonly known as "Superfund").party. In 1998,2002, subsidiaries (or former subsidiaries) of the CompanyALG were involved in approximately 160105 active matters subjecting them to potential remediation costs under Superfund or otherwise. The Company and itsALG'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 the Company'sAltria Group, Inc.'s consolidated results of operations, capital expenditures, financial position, earnings and competitive position.
 
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
 
    The Company
Cautionary Factors That May Affect Future Results
Forward-Looking and its representativesCautionary Statements
      We* may from time to time make written or oral forward-looking statements, including statements contained in the Company's
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 reportsvarious operating subsidiaries or when any distinction is clear from the context.
15
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 stockholders.invest in or remain invested in Altria Group, Inc.'s securities. In connection with the "safe harbor"''safe harbor'' provisions of the Private Securities Litigation Reform Act of 1995, the Company is herebywe 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 statementstatements made by or on behalf of the
Company;us; any such statement is qualified by reference to the following cautionary statements. The tobacco industry continuesWe elaborate on these and other risks we face throughout this document, particularly in Item 1. Businesses—(c) Narrative Description of Business and Item 3, as well as in the ''Business Environment'' sections of the Management's Discussion and Analysis of Financial Condition a nd Results of Operations, on pages 22 to 42 of the 2002 Annual Report, which are incorporated herein by reference to the 2002 Annual Report. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be subjecta complete discussion of all potential risks or uncertainties. We do not undertake to health concerns relatingupdate 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 use2002 Annual Report, and Item 3 for a detailed discussion of tobacco productsrelated 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, legislation, includingETS. 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 governmental regulation, privatelyhave been and continue to be imposed smoking restrictions,
governmentalon cigarettes in the United States at the federal, state and grand jury investigations, litigation, and the effects oflocal levels, as well as in foreign jurisdictions. The resulting price increases relatedhave caused, and may continue to concludedcause, 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 settlements. 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
16
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 the
Company's operatingour consumer products subsidiaries is subject to intense competition, changes in consumer preferences the effects of changing prices for its raw materials,and local economic conditionsconditions. To be successful, they must continue:
•to promote brand equity successfully;
•to anticipate and respond to new consumer trends;
•to develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products in a consolidating environment at the retail and manufacturing levels;
•to improve productivity; and
•to respond effectively to changing prices for their raw materials.
      The willingness of consumers to purchase premium cigarette brands and premium food and beverage brands depends in part on local economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label and other economy brands and the volume of our consumer products subsidiaries could suffer accordingly.
      Our finance subsidiary, PMCC, invests in finance leases, principally in transportation, power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If counterparties to PMCC's leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our profitability.
Grocery Trade Consolidation. As the retail grocery trade continues to consolidate and retailers grow larger and become more sophisticated, they demand lower pricing and increased promotional programs. Further, these customers are reducing their inventories and increasing their emphasis on private label products. If Kraft fails to use its scale, marketing expertise, branded products and category
17
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 impactis 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 century date change
(or "Year 2000") issue. In addition, Philip Morris International,growth strategies of Kraft Foods
International and KraftPMI is to strengthen their brand portfolios through active programs of selective acquisitions and divestitures. These subsidiaries are subject to the effects of foreign economies,
currency movementsconstantly investigating potential acquisition candidates and the conversion to the Euro. Developments in any of these
areas, which are more fully described elsewhere in Part I hereof and in the MD&A
on pages 21-35 of the Company's 1998 Annual Report, each of which is
incorporated into this section by reference, could cause the Company's results
to differ materially from results that have been or may be projected by or on
behalf of the Company. The Company cautions that the foregoing list of important
factors is not exclusive. The Company does not undertake to update any
forward-looking statement that may be made 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 behalf of
the Company.
 
(D) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALESKraft's busines s.
(d) Financial Information About Foreign and Domestic Operations and Export Sales
      The amounts of operatingnet revenues and long-lived assets attributable to each of the Company'sAltria 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 12
to the Company's consolidated financial statements, incorporated herein by
reference to the Company's 1998 Annual Report.14.
      Subsidiaries of the CompanyALG export tobacco and tobacco-related products, coffee products, grocery products, cheese and processed meats and beer.meats. In 1998,2002, the value of all exports from the United States by these subsidiaries amounted to approximately $6$4 billion.
 
ITEM
(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.
18
      ALG makes available free of charge on or through its web site (www.altria.com), its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after ALG electronically files such material with, or furnishes it to, the SEC. Investors can access ALG's filings with the SEC by visiting www.altria.com/secfilings.
      The information on ALG's web site is not, and shall not be deemed to be, a part of this report or incorporated into any other filings ALG makes with the SEC.
Item 2. DESCRIPTION OF PROPERTY.
 
TOBACCO PRODUCTSProperties.
Tobacco Products
      PM Inc.USA owns sevenand operates five tobacco manufacturing and processing facilities--fourfacilities—four in the Richmond, Virginia area two in Louisville, Kentucky and one in Cabarrus County, North Carolina. As noted above, cigarette production at one of PM Inc.'s
Louisville, Kentucky plants is scheduled to be phased out. Subsidiaries and affiliates of Philip Morris InternationalPMI own, lease or have an interest in 5556 cigarette or component 12
manufacturing facilities in 3032 countries outside the United States, including cigarette manufacturing facilities in Bergen Op Zoom, the Netherlands, Berlin, Germany and in
Berlin, Germany.
 
FOOD PRODUCTS
 
    The Company's subsidiaries have 54St. Petersburg, Russia.
Food Products
      Kraft has 207 manufacturing and processing facilities, 69 of which are located in the United States. Outside the United States, Kraft has 138 manufacturing and 261processing facilities located in 46 countries. Kraft owns 196 and leases 11 of these facilities. In addition, Kraft has 419 distribution centers and depots, throughout the United States, as well as
92 foreign manufacturing and processing facilities in 34 countries, and various
distribution and other facilitiesof which 79 are located outside the United States. All significant
plants and properties used for production of food products are owned, although
the majority of the domesticKraft owns 82 distribution centers and depots, arewith the remainder being leased.
 
BEER
 
    Miller owns and operates eight breweries, located in Milwaukee, Wisconsin
(two); Fort Worth, Texas; Eden, North Carolina; Albany, Georgia; Irwindale,
California; Trenton, Ohio; and Chippewa Falls, Wisconsin. Miller owns a majority
interest
      The integration of Nabisco into the operations of Kraft has resulted in the Celis Brewery in Austin, Texasclosure of seven Nabisco facilities during 2001 and the Shipyard Brewery in
Portland, Maine. Miller also owns a hops-processing facility in Wisconsin and
owns or leases warehouses in several locations. As part of the Pabst/Stroh
transaction described above, Miller agreed to purchase a brewery in Tumwater,
Washington.
 
GENERALten Nabisco facilities during 2002.
General
      The plants and properties owned and operated by the Company'sALG's subsidiaries are maintained in good condition and are believed to be suitable and adequate for present needs.
 
    During 1997, the Company's international food businesses recorded a pre-tax
charge of $342 million, related primarily to the downsizing or closure of
manufacturing and other facilities, as well as the discontinuance of certain
low-margin product lines. Facility write-downs included in the charge totaled
$209 million.
 
ITEM
Item 3. LEGAL PROCEEDINGS.Legal Proceedings.
      Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against the Company,ALG, its subsidiaries and affiliates, including PM Inc.USA and Philip Morris International,
andPMI, 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
Overview of Tobacco-Related Litigation
Types and Number of Cases
      Pending claims related to tobacco products generally fall within threethe 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, and (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. Governmental plaintiffs have
included local, statesmoking and/or disgorgement of profits, and certain(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 governmental entities.
Non-governmental plaintiffsgovernments seeking to recover damages resulting from the allegedly illegal importation of
19
cigarettes into various jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in these cases include union healthconnection with the defense and welfare
trust funds ("unions"), Blue Cross/Blue Shield groups, health maintenance
organizations ("HMOs"), hospitals, native American tribes, taxpayerspayment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and others.various antitrust suits. Damages claimed in some of the smoking and health class actions, and health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. Plaintiffs' theories of recovery and the defenses raised in thosethe smoking and health and health care cost recovery cases are discussed below. Exhibit 99.1 hereto lists the smoking and health class actions, health care cost recovery and certain other actions pending as of February 14, 2003, and discusses certain developments in such cases since November 13, 
    In recent years, there has been a substantial increase in the number of
tobacco-related cases being filed.2002.
      As of March 1, 1999,February 14, 2003, there were approximately 5001,400 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc.USA and, in some cases, the Company,instances, ALG, compared with approximately 3751,500 such cases on December 31, 1997,2001 and approximately 185 such cases on December 31, 1996. Many of these2000. In certain jurisdictions, individual smoking and health cases are pendinghave been aggregated for trial in Florida,a single proceeding; the largest such proceeding aggregates 1,100 cases in West Virginia and New York.
Eighteenis currently scheduled for trial in June 2003. An estimated 15 of the individual cases involve allegations of various personal injuries allegedly related to exposure to ETS.environmental tobacco smoke (''ETS''). In addition, asapproximately 2,800 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of March 1, 1999,an ETS smoking a nd health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages.
      As of February 14, 2003, there were approximately 65an estimated 37 smoking and health putative class actions pending in the United States against PM Inc.USA and, in some cases, the CompanyALG (including eighttwo that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 50
such cases on December 31, 1997, and approximately 20 such cases on December 31,
1996. Most of these actions purport to constitute statewide class actions and
were filed after May 1996 when the Fifth Circuit Court of Appeals, in the
CASTANO case, reversed a federal district court's certification of a purported
nationwide class action on behalf of persons who were allegedly "addicted" to
tobacco products.
 
    During 1997 and 1998, PM Inc. and certain other United States tobacco
product manufacturers entered into agreements settling the asserted and
unasserted health care cost recovery and other claims of all 50 states and
several commonwealths and territories of the United States. The settlements are
in the process of being approved by the courts, and some of the settlements are
being challenged by various third parties. As of March 1, 1999, there were
approximately 95 health care cost recovery actions pending in the United States
(excluding the cases covered by the settlements), compared with approximately
105 health care cost recovery cases pending on December 31, 1997, and 25 such cases on December 31, 1996.2001, and approximately 36 such cases on December 31, 2000.
As of February 14, 2003, there were an estimated 41 health care cost recovery actions, including the suit discussed below under ''Federal Government's Lawsuit'' filed by the United States government, pending in the United States against PM USA and, in some instances, ALG, compared with approximately 45 such cases pending on December 31, 2001, and 52 such cases on December 31, 2000. In addition, health care cost recovery actions are pending in Israel, the Province of British Columbia, Canada, France and Spain.
      There are also a number of other tobacco-related actions pending outside the United States against Philip Morris InternationalPMI and its affiliates and subsidiaries, including approximately 31an estimated 89 smoking and health cases initiated by
one or morebrought on behalf of individuals (Argentina (21)(43), Australia, Brazil (1)(28), Canada (1),Czech Republic, Germany, Ireland, (1)Israel (2), Italy (1)(5), Japan, (1), the Philippines, (1)Poland, Scotland, Spain (2) and Venezuela), Scotland (1), Spain (1)compared with approximately 64 such cases on December 31, 2001, and Turkey
(2)), and six68 such cases on December 31, 2000. In addition, as of February 14, 2003, there were eight smoking and health putative class actions (Brazil (2), Canada (3)
and Nigeria (1)). In addition, health care cost recovery actions have been
brought in Israel, the Marshall Islands and British Columbia, Canada, and, inpending outside the United States by Bolivia, Guatemala, Panama, Nicaragua, Thailand(Brazil, Canada (4), and Venezuela.
 
VERDICTS IN INDIVIDUAL CASES
 
    There have been a number of jury verdictsSpain (3)), compared with 11 such cases on December 31, 2001 and nine such cases on December 31, 2000.
Pending and Upcoming Trials
Trial is currently underway in an individual smoking and health cases over the past three years. In February 1999,case in which PM USA is a California jury awarded
$1.5 milliondefendant in compensatory damages and $50.0 million in punitive damages
against PM Inc. PM Inc.Florida (Eastman v. Brown & Williamson et al.). Trial is appealing the verdict and the damage award. Prior to
that, juries had returned verdicts for defendants in three individual smoking
and health cases and in one individual ETS smoking and health case. In January
1999, a Florida court set aside a $1.0 million jury award in a smoking and
health case against another United States cigarette manufacturer and ordered a
new trial in the case. In June 1998, a Florida appeals court reversed a $750,000
jury verdict awarded in August 1996 against another United States cigarette
manufacturer. Plaintiff is seeking an appeal of this ruling to the Florida
Supreme Court. In Brazil, a court in 1997 awarded plaintiffs in a smoking and
health case the Brazilian currency equivalent of $81,000, attorneys' fees and a
monthly annuity for 35 years equal to two-thirds of the deceased smoker's last
monthly salary. Neither the Company nor its affiliates were parties to that
action.
 
PENDING AND UPCOMING TRIALS
 
    As of March 1, 1999, trials against PM Inc. and, in one case, the Company
werealso currently underway in the ENGLEa smoking and health class action in Florida (discussed
below),Louisiana in which PM USA is a union health care cost recoverydefendant and in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs (Scott, et al. v. The American Tobacco Company, Inc. et al.).
      As set forth in Exhibit 99.2 hereto, additional cases against PM USA and, in some instances, ALG, are scheduled for trial through the end of 2003. They include a class action in Ohio (discussed below)California in which plaintiffs seek restitution under the California Business and Professions Code for the costs of cigarettes purchased by class members during the class period, a case in West Virginia that aggregates 1,100 individual smoking and health cases, a Lights/Ultra Lights class action in OregonOhio and Tennessee.
 
                                       14

    Additionala class action in Kansas in which plaintiffs allege that defendants,
20
including PM USA, conspired to fix cigarette prices in violation of antitrust laws. An estimated 12 individual smoking and health cases are scheduled for trial during 1999,through the end of 2003, including one union
health care cost recovery actiontwo trials scheduled to begin in Washington (September), one smokingApril in California and health class actionFlorida and two trials scheduled to begin in May in Illinois (August), a "Proposition 65" case (discussed
below) in California (June), and an "asbestos contribution" case (discussed
below) in New York (November). Also, six individual smoking and healthMissouri. In addition, 12 cases against PM Inc. and, in one case, the Company,brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by ETS are currently scheduled for trial during 1999.through the end of 2003; one of the cases brought by flight attendants is scheduled to begin trial in May. Cases against other tobacco companies are also scheduled for trial through the end of 2003. Trial dates, however, are subject to change.
 
LITIGATION SETTLEMENTS
 
    In November 1998, PM Inc.
Recent Trial Results
      Since January 1999, jury verdicts have been returned in 30 smoking and certain other United States tobacco product
manufacturers entered into a Master Settlement Agreement (the "MSA") with 46
states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the
United States Virgin Islands, American Samoahealth, Lights/Ultra Lights and the Northern Marianas to settle
asserted and unasserted health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other claims. PM Inc.defendants were returned in 19 of the 30 cases. These 19 cases were tried in California, Pennsylvania, Rhode Island, West Virginia, Ohio (2), New Jersey, Florida (6), New York (3), Mississippi and certain other United States tobacco product manufacturersTennessee (2). Plaintiffs' appeals or post-trial motions challenging the verdicts are pending in West Virginia, Ohio and Florida; a motion for a new trial has been granted in one of the cases in Florida. In December 2002, the court in an individual smoking and health case in California dismissed the case at the end of trial after ruling that plaintiffs had previously settled
similarnot introduced sufficient evidence to support their claims, and plaintiffs have appealed. In addition, in May 2002, a mistrial was declared in a case brought by a flight attendant claiming personal injuries allegedly caused by ETS, and the case was subsequently dismissed. In 2001, a mistrial was declared in New York in an asbestos contribution case, and plaintiffs subsequently voluntarily dismissed the case. The chart below lists the verdicts and post-trial developments in the 11 cases that have gone to trial since January 1999 in which verdicts were returned in favor of plaintiffs.
21
Date
Location of Court/Name of Plaintiff
Type of Case
Verdict
Post-Trial
Developments
March 2003Illinois/
Price (formerly, Miles)		Lights/Ultra Lights$7.1005 billion in compensatory damages and $3 billion in punitive damages.At the request of PM USA, the judge stayed enforcement of the judgment for 30 days. Thereafter, under the judgment, enforcement will be stayed only if an appeal bond in the amount of $12 billion is presented and approved. PM USA believes that requiring a bond in such an amount, in order to stay execution pending appeal, would be unconstitutional and would also violate Illinois law. It is not possible for PM USA to post such a bond, and, absent judicial or legislative relief, PM USA would not be able to stay enforcement of the judgment in Illinois. PM USA will take all appropriate steps to seek to prevent this from occurring.
October 2002California/
Bullock		Individual Smoking & Health$850,000 in compensatory damages and $28 billion in punitive damages against PM USA.In December 2002, the trial court reduced the punitive damages award to $28 million; PM USA and plaintiff have appealed.
June 2002Florida/FrenchFlight Attendant ETS Litigation$5.5 million in compensatory damages against all defendants, including PM USA.In September 2002, the court reduced the damages award to $500,000; plaintiff and defendants have appealed.
June 2002Florida/ LukacsIndividual Smoking and Health$37.5 million in compensatory damages against all defendants, including PM USA.Defendants have filed post-trial motions challenging the verdict.
22
Date
Location of Court/Name of Plaintiff
Type of Case
Verdict
Post-Trial
Developments
March 2002Oregon/ SchwarzIndividual Smoking and Health$168,500 in compensatory damages and $150 million in punitive damages against PM USA.In May 2002, the trial court reduced the punitive damages award to $100 million, and in July 2002, the trial court denied PM USA's post-trial motions challenging the verdict. PM USA and plaintiff have appealed.
June 2001California/ BoekenIndividual Smoking and Health$5.5 million in compensatory damages, and $3 billion in punitive damages against PM USA.In August 2001, the trial court reduced the punitive damages award to $100 million; PM USA and plaintiff have appealed.
June 2001New York/Empire Blue Cross and Blue ShieldHealth Care Cost Recovery$17.8 million in compensatory damages against all defendants, including $6.8 million against PM USA.In February 2002, the trial court awarded plaintiffs $38 million in attorneys' fees. Defendants have appealed.
July 2000Florida/EngleSmoking and Health Class Action$145 billion in punitive damages against all defendants, including $74 billion against PM USA.See ''Engle Class Action,'' below.
March 2000California/ WhitelyIndividual Smoking and Health$1.72 million in compensatory damages against PM USA and another defendant, and $10 million in punitive damages against PM USA and $10 million in punitive damages against the other defendant.Defendants have appealed.
23
Date
Location of Court/Name of Plaintiff
Type of Case
Verdict
Post-Trial
Developments
March 1999Oregon/ WilliamsIndividual Smoking and Health$800,000 in compensatory damages, $21,500 in medical expenses and $79.5 million in punitive damages against PM USA.The trial court reduced the punitive damages award to $32 million, and PM USA appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. The Oregon Supreme Court refused to hear PM USA's appeal in December 2002. PM USA will petition the United States Supreme Court for further review. In view of these developments, although PM USA intends to continue to defend this case vigorously, it has recorded a provision of $32 million in the consolidated financial statements as its best estimate of the probable loss in this case.
February 1999California/ HenleyIndividual Smoking and Health$1.5 million in compensatory damages and $50 million in punitive damages against PM USA.The trial court reduced the punitive damages award to $25 million and PM USA appealed. A California District Court of Appeals affirmed the trial court's ruling, and PM USA appealed to the California Supreme Court. In October 2002, the California Supreme Court vacated the decision of the District Court of Appeals and remanded the case back to the District Court of Appeals for further consideration. In March 2003, the District Court of Appeals again affirmed the trial court's ruling. PM USA intends to appeal to the California Supreme Court.
With respect to certain adverse verdicts currently on appeal, excluding amounts relating to the Engle case, PM USA has posted various forms of security totaling $324 million to obtain stays of judgments pending appeals.
24
      In addition, since January 1999, jury verdicts have been returned in 13 tobacco-related cases in which neither ALG nor any of its subsidiaries were defendants. Verdicts in favor of defendants were returned in eight of the 13 cases in cases tried in Connecticut, Texas, South Carolina, Mississippi, Louisiana, Missouri and Tennessee (2). Plaintiffs' appeal is pending in Mississippi. Verdicts in favor of plaintiffs were returned in 5 of the 13 cases in cases tried in Australia, Kansas, Florida Texas(2) and Minnesota (together
withPuerto Rico. Defendants' appeals or post-trial motions are pending. In December 2002, the MSA,appellate court reversed the "State Settlement Agreements")ruling in favor of plaintiff in the case in Australia. In October 2002, the court granted defendants' motion for judgment as a matter of law in the case in Puerto Rico, and an ETSentered judgment in favor of defendant. In addition, in a case in France the trial court found in favor of plaintiff; however, the appellate court reverse d the trial court's ruling and dismissed plaintiff's claim.
Engle Class Action
      Verdicts have been returned and judgment has been entered against PM USA and other defendants in the first two phases of this three-phase smoking and health class action brought on behalftrial in Florida. The class consists of airline flight attendants. The State
Settlement Agreementsall Florida residents and certain ancillary agreements are filed as exhibitscitizens, and their survivors, ''who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to variouscigarettes that contain nicotine.''
      In July 1999, the jury returned a verdict against defendants in phase one of the Company's reports filedtrial concerning certain issues determined by the trial court to be ''common'' to the causes of action of the plaintiff class. Among other things, the jury found that smoking cigarettes causes 20 diseases or medical conditions, that cigarettes are addictive or dependence-producing, defective and unreasonably dangerous, that defendants made materially false statements with the Securitiesintention of misleading smokers, that defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes, and Exchange
Commission,that defendants were negligent and such agreementsengaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional distress.
      During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs.
In July 2000, the same jury returned a verdict assessing punitive damages on a lump sum basis for the entire class totaling approximately $145 billion against the various defendants in the case, including approximately $74 billion severally against PM USA. PM USA believes that the punitive damages award was determined improperly and that it should ultimately be set aside on any one of numerous grounds. Included among these grounds are the following: under applicable law, (i) defendants are entitled to have liability and damages for each plaintiff tried by the same jury, an impossibility due to the jury's dismissal; (ii) punitive damages cannot be assessed before the jury determines entitlement to, and the ETS settlementamount of, compensatory damages for all class members; (iii) punitive damages must bear a reasonable relationship to compensatory damages, a determination that cannot be made before compensatory damages are discussedassessed for all class members; and (iv) punitive damages can ''punish'' but cannot ''destroy'' the defendant. In March 2000, at the request of the Florida legislature, the Attorney General of Florida issued an advisory legal opinion stating that ''Florida law is clear that compensatory damages must be determined prior to an award of punitive damages'' in detail
therein.cases such as Engle. As noted above, compensatory damages for all but three members of the class have not been determined.
      Following the verdict in the second phase of the trial, the jury was dismissed, notwithstanding that liability and compensatory damages for all but three class members have not yet been determined. According to the trial plan, phase three of the trial will address other class members' claims, including issues of specific causation, reliance, affirmative defenses and other individual-specific issues regarding entitlement to damages, in individual trials before separate juries.
      It is unclear how the trial plan will be further implemented. The trial plan provides that the punitive damages award should be standard as to each class member and acknowledges that the actual size of the class will not be known until the last class member's case has withstood appeal, i.e., the punitive damages amount would be divided equally among those plaintiffs who, in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal.
25
      Following the jury's punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature.
      The trial judge in the state court, without a hearing, then immediately denied the defendants' post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM Inc. recorded pre-tax chargesUSA and ALG believe that the entry of $3.1judgment by the trial court is unconstitutional and violates Florida law. PM USA has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM USA has also posted a $100 million bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages (''bond cap legislation'').
Plaintiffs had previously indicated that they believe the bond cap legislation is unconstitutional and $1.5 billion during
1998might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM USA to post a bond in the full amount of the judgment and, 1997, respectively,absent appellate relief, PM USA would not be able to accrue for its sharestay any attempted execution of the judgment in Florida. PM USA and ALG will take all appropriate steps to seek to prevent this worst-case scenario from occurring. In May 2001, the trial court approved a stipulation (the ''Stipulation'') among PM USA, certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all fixedjudicial review. As a result of the Stipulation and determinable portionsin addition to the $100 million bond it previously posted, PM USA placed $1.2 billion into an interest-bearing escrow account for the benefit of the Engle class. Should PM USA prevail in its obligations underappeal of the tobacco settlements,case, both amounts are to be returned to PM USA. PM USA also placed an additional $500 million into a separate interest-bearing escrow account for the benefit of the Engle class. If PM USA prevails in its appeal, this amount will be paid to the court, and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. In connection with the Stipulation, ALG recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001.
PM USA and ALG remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. PM USA has filed an appeal challenging the class certification and the compensatory and punitive damages awards, as well as $300 million during 1998 for its unconditional obligation under an agreement
in principle to contribute to a tobacco growers trust fund, discussed below. As
of December 31, 1998, PM Inc. had accrued costs of its obligations under the
settlements and to tobacco growers aggregating $1.4 billion, payable principally
before the end of the year 2000. The settlement agreements requirenumerous other reversible errors that the
domestic tobacco industry make substantial annual payments in the following
amounts (excluding future annual payments contemplated by the agreement in
principle with tobacco growers discussed below), subject to adjustment for
several factors, including inflation, market share and industry volume: 1999,
$4.2 billion (of which $2.7 billion related to the MSA and has already been paid
by the industry); 2000, $9.2 billion; 2001, $9.9 billion; 2002, $11.3 billion;
2003, $10.9 billion; 2004 through 2007, $8.4 billion; and thereafter, $9.4
billion. In addition, the domestic tobacco industry is required to pay settling
plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well
as additional amounts as follows: 1999, $450 million; 2000, $416 million; and
2001 through 2002, $250 million. These payment obligations are the several and
not joint obligations of each settling defendant. PM Inc.'s portion of the
future adjusted payments and legal fees, which is not currently estimable, will
be based on its share of domestic cigarette shipments in the year preceding that
in which the payment is made.
 
    The State Settlement Agreements also include provisions, more fully
discussed in the MD&A, relating to advertising and marketing restrictions,
public disclosure of certain industry documents, limitations on challenges to
certain tobacco control and underage use laws, lobbying activities and other
provisions.
 
    As set forth in Exhibit 99.2, the MSA has been initially approved by trial
courts in all settling jurisdictions. If a jurisdiction does not obtain "final
judicial approval" (as defined in Exhibit 99.2) of the MSA by December 31, 2001,
the agreement will be terminated with respect to such jurisdiction.
 
    As part of the MSA, the settling defendants committed to work cooperatively
with the tobacco growers to address concerns about the potential adverse
economic impact of the MSA on that community. To that end, in January 1999, the
four major domestic tobacco product manufacturers, including PM Inc., agreed in
principle to participate in the establishment of a $5.15 billion trust fund to
be administered by the tobacco-growing states. It is currently contemplated that
the trust will be funded by industry participants over 12 years, beginning in
1999. PM Inc. has agreed to pay $300 million into the trust in 1999, which
amount has been charged to 1998 operating companies income. Subsequent annual
industry payments are
 
                                       15

to be adjusted for several factors, including inflation and United States
cigarette consumption, and are to be allocated based on each manufacturer's
market share.
 
    The Companyit believes that the State Settlement Agreements may materially
adversely affect the business, volume, results of operations, cash flows or
financial position of PM Inc. and the Company in future years. The degree of the
adverse impact will depend, among other things, on the rates of decline in
United States cigarette sales in the premium and discount segments, PM Inc.'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. As of March 1, 1999, manufacturers
representing almost all domestic shipments in 1998 had agreed to become subject
to the terms of the MSA.
 
    Certain litigation has arisen out of the MSA. In December 1998, a putative
class action was filed against PM Inc. and certain other domestic tobacco
manufacturers on behalf of a class consisting of citizens of the United States
who consume tobacco products manufactured by defendants. One count of the
complaint alleges that defendants conspired to raise the prices of their tobacco
products in order to pay the costs of the MSA in violation of the federal
antitrust laws. The other two counts allege that the actions of defendants
amount to an unconstitutional deprivation of property without due process of law
and an unlawful burdening of interstate trade. The complaint seeks unspecified
damages (to be trebled under the antitrust count), injunctive and declaratory
relief, costs and attorneys' fees.
 
    In February 1999, a putative class action was filed on behalf of tobacco
consumers in the United States against the States of California and Utah, other
public entity defendants, certain domestic tobacco manufacturers, including PM
Inc., and others, challenging the MSA. Plaintiffs are seeking, among other
things, an order (i) prohibiting the states from collecting any monies under the
MSA; (ii) restraining the domestic tobacco manufacturers from further collection
of price increases related to the MSA and compelling them to reimburse to
plaintiffs all monies paid by plaintiffs in the form of price increases related
to the MSA; and (iii) declaring the MSA "unfair, discriminatory,
unconstitutional and unenforceable."
 
    Also in February 1999, a putative class action was filed on behalf of
Wisconsin Medicaid recipients against the State of Wisconsin and certain
domestic tobacco manufacturers, including PM Inc., challenging the State of
Wisconsin's authority to enter into the MSA and asking, among other things, that
"any funds to be paid the state by the tobacco defendants pursuant to the master
settlement agreement which exceed the amount of assistance granted to plaintiff
and to similarly situated Medicaid recipientsoccurred during the applicable statute of
limitations period by the state priortrial to execution of the master settlement
agreement must be paid to plaintiffdate. The appellate court heard oral argument on defendants' appeals in November 2002.
Smoking and similarly situated Medicaid recipients
and their estates."
 
    A description of the smoking and health litigation, health care cost
recovery litigation and certain other proceedings pending against the Company
and/or its subsidiaries and affiliates follows.
 
                         SMOKING AND HEALTH LITIGATIONHealth Litigation
      Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal Racketeer Influenced and Corrupt
Organization Act ("RICO") 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. 16
In May 1996, the Fifth CircuitUnited States Court of Appeals for the Fifth Circuit held that a putative class consisting of all "addicted"''addicted'' smokers nationwide did not meet the standards and requirements of the federal rules governing class actions (CASTANO, ET AL. V.
THE AMERICAN TOBACCO COMPANY, ET AL.).actions. Since this class decertification, lawyers for plaintiffs have filed numerous
26
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"''addiction'' claims similar to those raised in the CASTANO case and, in many cases, claims of physical injury as well. As of March 1, 1999,February 14, 2003, smoking and health putative class actions were pending in Alabama, Arkansas, California, the District of Columbia,
Florida, Hawaii, Illinois, Indiana, Iowa, Kansas,Kentucky, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oklahoma, Pennsylvania, Puerto Rico,
South Carolina, Tennessee, Texas,Oregon, Utah Virginia,and West Virginia, and Wisconsin, as well as in Brazil, Canada, BrazilIsrael and Nigeria.Spain. Class certification has been denied or reversed by courts in 1330 smoking and health class actions involving PM Inc.USA in Louisiana,Arkansas, the District of Columbia (2), Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, New Jersey (5),South Carolina, Texas and Wisconsin, and Kansas, while classes remain certified in three
casesthe Engle case in Florida (discussed above) and a case in Louisiana in which plaintiffs seek the creation of funds to pay for medical monitoring and Maryland. A number of thesesmoking cessation programs for class certification
decisions are on appeal. Class certification motions are pending in a numbermembers. In May 1999, the United States Supreme Court declined to review the decision of the other putativeUnited States Court of Appeals for the Third Circuit affirming a lower court's decertification of a class. In November 2001, in the first medical monitoring class action case to go to trial, a West Virginia jury returned a verdict in favor of all defendants, including PM USA, and plaintiffs have appealed. In February 2003, the West Virginia Supreme Court agreed to hear plaintiffs' appeal.
      Exhibit 99.1 hereto lists the smoking and health class actions. As mentioned above, one ETS
smokingactions pending as of February 14, 2003, and health class action was settled in 1997.
 
ENGLE TRIAL
 
    Trial in this Florida class action case began in July 1998. The presentation
of the defense case begandiscusses certain developments on March 1, 1999. Plaintiffs seek compensatory and
punitive damages ranging into the billions of dollars, as well as equitable
relief including, but not limited to, a medical fund for future health care
costs, attorneys' fees and court costs. The class consists of all Florida
residents and citizens, and their survivors, who claim to have suffered,
presently suffer or have died from diseases and medical conditions caused by
their addiction to cigarettes that contain nicotine.
 
    The current trial plan calls for the case to be tried in three "Phases." The
court has stated, however, that the trial plan may be modified further. Phase
One, which is currently underway, involves evidence concerning certain "common"
class issues relating to the plaintiff class's causes of action. Entitlement to
punitive damages will be decided at the end of Phase One, but no amount will be
set at that time.
 
    If plaintiffs prevail in Phase One, the first two stages of Phase Two will
involve individual determination of specific causation and other individual
issues regarding entitlement to compensatory damages for the class
representatives. Stage three of Phase Two will involve an assessment of the
amount of punitive damages, if any, that individual class representatives will
be awarded. Stage four of Phase Two will involve the setting of a percentage or
ratio of punitive damages for absent class members, assuming entitlement was
found at the end of Phase One.
 
    Phase Three of the trial will be held before separate juries to address
absent class members' claims, including issues of specific causation and other
individual issues regarding entitlement to compensatory damages.
 
                                       17

                      HEALTH CARE COST RECOVERY LITIGATIONsuch cases since November 13, 2002.
Health Care Cost Recovery Litigation
Overview
      In certain of the pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including unions,union health and welfare funds (''unions''), Native American tribes, insurers and self-insurers such as Blue Cross/Cross and Blue Shield groups, HMOs,plans, hospitals, native American tribes, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, forof future expenditures and damages as well. Certain of these cases purport to be brought on behalf of a class of
plaintiffs and, in some cases, the class has been certified by the court. In one
health care cost recovery case, private citizens seek recovery of alleged
tobacco-related health care expenditures incurred by the federal Medicare
program. In others, Blue Cross subscribers seek reimbursement of allegedly
increased medical insurance premiums caused by tobacco products. In the native
American cases, claims are also asserted for alleged lost productivity of tribal
government employees. Other reliefRelief sought by some but not all plaintiffs includes punitive damages, treble/multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs.
The claims asserted in thesethe health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched"''unjustly enriched'' by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes.
      Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands"''unclean hands'' (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of proximate
cause, remoteness of injury, lack of statutory authority to bring suit, and statutestatutes of limitations. In addition, defendants argue that they should be entitled to "set-off"''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''standing in the shoes"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.
 
    Excluding
      Exhibit 99.1 hereto lists the cases covered by the State Settlement Agreements described
above, as of March 1, 1999, there were approximately 95 health care cost recovery cases pending as of February 14, 2003, and discusses developments in such cases since November 13, 2002.
27
Although there have been some decisions to the contrary, most courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In addition, eight federal circuit courts of appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia circuits, as well as California, Florida, New York and Tennessee intermediate appellate courts, relying primarily on grounds that plaintiffs' claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs' appeals from the cases decided by the courts of appeals for the Second, Third, Fifth, Ninth and District of Columbia circuits. As of February 14, 2003, there were an estimated 41 health care cost recovery cases pending in the United States against PM Inc.USA, and in some cases,instances, AL G, including the Company, of which
approximately 75 werecase filed by unions. Healththe United States government, which is discussed below under ''Federal Government's Lawsuit.'' The cases brought in the United States include actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11 Brazilian states and 11 Brazilian cities. The actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 10 Brazilian states and 11 Brazilian cities were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. The district court dismissed the cases brought by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and the dismissals are now final. The district court has remanded to state courts the remaining cases, except for the ca ses brought by Bolivia and Panama. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the cases brought by Venezuela and the Brazilian state of Espirito Santo were dismissed by the state court, and Venezuela appealed. In September 2002, the appellate court affirmed the dismissal of the case brought by Venezuela, and Venezuela has petitioned the state supreme court for further review. In addition to cases brought in the United States, health care cost recovery actions have also been brought in Israel, the Marshall Islands and(dismissed), the Province of British Columbia, Canada, France and in the United States, by Bolivia, Guatemala, Panama, Nicaragua, ThailandSpain (dismissed for lack of jurisdiction; appeal pending), and Venezuela. Other foreignother entities including a local agency of the French
social security health insurance system, and others have stated that they are considering filing such actions.
      In March 1999, in the first health care cost recovery actions.case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In January 1999, President
Clinton announced that the United States DepartmentJune 2001, a New York jury returned a verdict awarding $6.83 million in compensatory damages against PM USA and a total of Justice is preparing$11 million against four other defendants in a
litigation plan to take tobacco companies to court and to use recovered funds to
strengthen Medicare.
 
    Courts have ruled on preliminary motions to dismiss various claims in
approximately 50 health care cost recovery actions. Although many of the rulings
in cases not settled by the State Settlement Agreements have been favorable to
the industry, a number have been adverse, including rulings in the union cases
scheduled for trial in 1999. In late January and in February of 1999, the Third
and Second Circuit Courts of Appeal heard oral argument on appeals from lower
court rulings on motions to dismiss various claims in health care cost recovery
actions filed by unions. The Company cannot predict the ultimate outcome of such
appeals.
 
                                       18

OHIO IRON WORKERS
 
    Trial in this union health care cost recovery action beganbrought by a Blue Cross and Blue Shield plan. In February 2002, the court awarded plaintiff approximately $38 million for attorneys' fees. Defendants, including PM USA, have appealed.
Settlements of Health Care Cost Recovery Litigation
      In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the ''MSA'') with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the ''State Settlement Agreements''). The MSA has received final judicial approval in February 1999,all 52 settling jurisdictions. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional annual payments of $250 million through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM USA's portion of ongoing adjusted payments and legal fees is based on March 16its relative share of the case wentsettling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM USA records its portions of ongoing settlement payments as part of cost of sales as product is shipped.
28
      The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.
      As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota-holders. To that end, four of the major domestic tobacco product manufacturers, including PM USA, and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (2003 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM USA records its portion of these pay ments as part of cost of sales as product is shipped.
      The State Settlement Agreements have materially adversely affected the volumes of PM USA and may adversely affect future volumes. ALG believes that they may also materially adversely affect the results of operations, cash flows or financial position of PM USA and Altria Group, Inc. in future periods. The degree of the adverse impact will depend, among other things, on the rate of decline in United States cigarette sales in the premium and discount segments, PM USA's share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the juryMSA and the other State Settlement Agreements.
      Certain litigation, described in Exhibit 99.1, has arisen challenging the validity of the MSA and alleging violations of antitrust laws.
Federal Government's Lawsuit
      In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers and others, including PM USA and ALG, asserting claims under three federal statutes, the Medical Care Recovery Act (''MCRA''), the Medicare Secondary Payer (''MSP'') provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act (''RICO''). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants' fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans' health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of what it alleges to be equitable and declaratory relief, including disgorgement, an injunction prohibiting certain actions by the defendants, and a verdictdeclaration 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 "Phase I"numerous grounds, including that the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government's MCRA and MSP claims, but permitted discovery to proceed on the government's claims for relief under RICO. In October 2000, the government moved for reconsideration of the trial (see discussioncourt's order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. In February 2001, the government filed an amended complaint attempting to replead the MSP claims. In July 2001, th e court denied the government's motion for reconsideration of trial Phases below). Thisthe dismissal of the MCRA claims and dismissed the government's amended MSP claims. In January 2003, the government and defendants submitted preliminary proposed findings of fact and conclusions of law; rebuttals are due in April. The government's January filing included the government's allegation that disgorgement by defendants of approximately $289 billion is an appropriate remedy in the case. Trial of the case is being broughtcurrently scheduled for September 2004.
29
Certain Other Tobacco-Related Litigation
Lights/Ultra Lights Cases: As of February 14, 2003, there were 13 putative class actions pending against PM USA and, in some instances, ALG in California, Florida, Illinois, Massachusetts, Minnesota, Missouri, New Hampshire (2), Ohio (2), Oregon, Tennessee and West Virginia on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plainti ffs in these cases allege, among other things, that the use of the terms ''Lights'' and/or ''Ultra Lights'' constitutes deceptive and unfair trade practices, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. Classes have been certified in Illinois, Massachusetts and Florida.
Trial in the Illinois class action (the Price case, formerly known as Miles) in which PM USA is the defendant, commenced in January 2003 and was tried before a judge rather than a jury. On March 21, 2003, the judge found in favor of the plaintiff class and awarded approximately $7.1 billion in compensatory damages and $3 billion in punitive damages. PM USA believes that the Price case should not have been certified as a class consistingaction and that the judgment should ultimately be set aside on any one of approximately 114 employer-employee trust funds
in Ohio. Plaintiffs seek compensatory damages in excess of $600 million,
statutory treble damages under RICO, and declaratory and injunctive relief
(including disgorgement of profits) as well as equitable relief, attorneys' fees
and court costs. Most of plaintiffs' original causes of action have either been
dismissed or voluntarily withdrawn. At present, plaintiffs have two remaining
claims, one under the Ohio RICO law and the other under general conspiracy law.
 
    The current trial plan calls for the case to be tried in three Phases. Phase
I will determine liability for the named plaintiffs and all other class members.
Phase II will determine damages for the six class representatives. Phase III
will set damages for all absent class members.
 
                    CERTAIN OTHER TOBACCO-RELATED LITIGATION
 
    ASBESTOS CONTRIBUTION CASES--Since September 1997, a number of legal and factual grounds that it intends to pursue on appeal. At the request of PM USA, the judge stayed enforcement of the judgment for 30 days. Thereafter, under the judgment, enforcement will be stayed only if an appeal bond in the amount of $12 billion is presented and approved. PM USA believes that requiring a bond in such an amount, in order to stay execution pending appeal, would be unconstitutional and would also violate Illinois law. It is not possible for PM USA to post such a bond and, absent judicial or legislative relief, PM USA would not be able to stay enforcement of the judgment in Illinois. PM USA will take all appropriate steps to seek to prevent this from occurring.
      While class certification has not yet been granted, trial in one of the Ohio cases is scheduled for August 2003.
Cigarette Contraband Cases: As of February 14, 2003, the European Community and ten member states, various Departments of Colombia, Ecuador, Belize and Honduras had filed suits in the United States against ALG and certain of its subsidiaries, including PM USA and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into various jurisdictions. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In February 2002, the courts granted defendants' motions to dismiss all of the actions. In the Colombia and European Community actions, however, the RICO and fraud claims predicated on allegations of money laundering claims were dismissed without prejudice. Plaintiffs in each of the cases have beenappealed. In October 2001, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a cigarette contraband case filed byagainst another cigarette manufacturer. Plaintiff in that case petitioned the United States Supreme Court for further review, and in October 2002, the Supreme Court denied plaintiff's petition.
Asbestos Contribution Cases: As of February 14, 2003, an estimated seven suits were pending on behalf of former asbestos manufacturers asbestos manufacturers' personal
injury settlement trusts and an insurance companyaffiliated entities against domestic tobacco manufacturers, including PM Inc. and others.USA. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. The trial of an asbestos contribution case in the Southern
District of New York is scheduled to begin in November 1999.
 
    MARLBORO LIGHT/ULTRA LIGHT CASES--Since June 1998, six class actions have
been filed against PM Inc. and the Company, in Florida, New Jersey,
Pennsylvania, Massachusetts and Tennessee (2), on behalf of individuals who
purchased and consumed MARLBORO LIGHTS and, in one case, MARLBORO ULTRA LIGHTS,
as well. These cases allege, in connection with the use of the term "Lights"
and/or "Ultra Lights," among other things, deceptive and unfair trade practices,
unjust enrichment, and seek injunctive and equitable relief.
 
    RETAIL LEADERS CASE--In March 1999, R.J. Reynolds Tobacco Company
Retail Leaders Case: Three domestic tobacco manufacturers filed suit against PM Inc.USA seeking to enjoin the PM Inc. "Retail Leaders"USA ''Retail Leaders'' program that became available to retailers in October 1998. The complaint allegesalleged that this retail incentivemerchandising program is exclusionary, and creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiff seeksplaintiffs sought unspecified treble damages, attorneys' fees, costs and interest. PROPOSITION 65 CASES--SinceIn May 2002, the court granted PM USA's motion for summary judgment and dismissed all of plaintiffs' claims with prejudice. Plaintiffs have appealed.
Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM USA has violated the Robinson-Patman Act in connection
30
with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. The initial complaint was amended to bring the total number of plaintiffs to 211, but by stipulated orders, all claims were stayed, except those of ten plaintiffs that proceeded to pre-trial discovery. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys' fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs' motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. In August 2001, the court granted PM USA's motion for summary judgment and dismissed, with prejudice, the claims of the ten plaintiffs. In October 2001, the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following the stipulation of all plaintiffs that the district court's dismissal would, if affirmed, be bin ding on all plaintiffs.
Tobacco Price Cases: As of February 14, 2003, there were 39 putative class actions and one additional case pending against PM USA and other domestic tobacco manufacturers, as well as, in certain instances, ALG and PMI, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. The cases are listed in Exhibit 99.1. Seven of the putative class actions were filed in various federal district courts by direct purchasers of tobacco products, and the remaining 33 were filed in 14 states and the District of Columbia by retail purchasers of tobacco products. The seven federal class actions were consolidated in the United States District Court for the Northern District of Georgia. In November 2001, plaintiffs' motion for class certification was granted in a case pending in state court in Kansas, and trial in this case is scheduled fo r September 2003. In November 2001, plaintiffs' motion for class certification was denied in a case pending in state court in Minnesota. In June 2002, plaintiffs' motion for class certification was denied in a case pending in Michigan, and plaintiffs' motion for reconsideration of this ruling was denied. In May 2002, the Arizona Court of Appeals reversed the trial court's decision to dismiss an action. Defendants appealed to the Arizona Supreme Court, which has accepted defendants' appeal. In July 2002, the court hearing the seven consolidated cases granted defendants' motion for summary judgment dismissing the consolidated case in its entirety. Plaintiffs have appealed. In February 2003, defendants' motion to dismiss the case pending in state court in Florida was granted.
Cases Under the California Business and Professions Code: In June 1997 and July 1998, two suits have beenwere filed in California courts alleging that domestic cigarette manufacturers, including PM Inc.USA and others, have violated a California statute known as "Proposition 65" by
not informing the public of the alleged risks of ETS to non-smokers. Plaintiffs
also allege violations of California's Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Plaintiffs seek statutory penalties,
injunctions barringClass certification was granted as to plaintiffs' claims that defendants violated sections 17200 and/or 17500 of California Business and Professions Code pursuant to which plaintiffs allege that class members are entitled to reimbursement of the salecosts of cigarettes restitution, disgorgementpurchased during the class periods and injunctive relief. In September 2002, the court granted defendants' motions for summary judgment as to all claims in one of profitsthe cases. Plaintiffs have appealed. Trial in the other case is scheduled for August&n bsp;2003.
Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a purported class of tobacco growers and other relief.quota-holders, and amended complaints were filed in May 2000 and in August 2000. The courts havesecond amended complaint alleges that defendants, including PM USA, violated antitrust laws by bid-rigging and allocating purchases at tobacco auctions and by conspiring to undermine the tobacco quota and price-support program administered by the federal government. In October 2000, defendants filed motions to dismiss the amended complaint and to transfer the case, and plaintiffs filed a motion for class certification. In November 2000, the court granted defendants' motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amende d complaint to add tobacco leaf buyers as defendants. This motion was granted, and the additional parties were served in February 2001. In March 2001, the leaf buyer defendants filed a motion to dismiss the case. In July 2001, the court denied the manufacturer and leaf buyer defendants' motions to dismiss the case, and in bothApril 2002 granted plaintiffs' motion for class certification. Defendants' petition for interlocutory review of these cases. One of these casesthe class certification order was denied in June 2002. Trial is scheduled for April 2004.
Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court in the Eastern District of New York that purported to beginconsolidate punitive damages claims in ten tobacco-related actions then pending in federal district courts in New York and
31
Pennsylvania. In July 2002, plaintiffs filed an amended complaint and a motion seeking certification of a punitive damages class of persons residing in the United States who smoke or smoked defendants' cigarettes, and who have been diagnosed by a physician with an enumerated disease from April 1993 through the date notice of the certification of this class is disseminated. The following persons are excluded from the class: (1) those who have obtained judgments or settlements against any defendants; (2) those against whom any defendant has obtained judgment; (3) persons who are part of the certified Engle class; (4) persons who should have reasonably realized that they had an enumerated disease prior to April 9, 1993; and (5) those whose diagnosis or reasonable basis for knowledge predates their use of tobacco. In September 2002, the court granted plaintiffs' motion fo r class certification. Defendants petitioned the United States Court of Appeals for the Second Circuit for review of the trial in June 1999.
 
                            ------------------------
 
    Onecourt's ruling, and the Second Circuit has agreed to hear defendant's petition. Trial of the case has been stayed pending resolution of defendants' petition.
Certain Other Actions
Italian Tax Matters: Two hundred eighty-eight tax assessments, alleging thethat allege nonpayment of taxes in Italy (value-added taxes for the years 1988 to 19951996 and income taxes for the years 1987 to 1995)1996) have been served upon certain affiliates of the Company.ALG. The aggregate amount of alleged unpaid taxes assessed to date is alleged to be the Italian
liraeuro equivalent of $2.6$2.5 billion. In addition, the Italian liraeuro equivalent of $3.5$4.1 billion in interest and penalties has been assessed. The CompanyALG anticipates that value-added and income tax assessments may also be received with respect to subsequent years. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 105188 of the assessments. The
 
                                       19

decisionsassessments, and the tax authorities have appealed to overturn 66 assessments have been appealedthe regional appellate court in Milan. To date, the regional appellate court has rejected 84 of the appeals filed by the tax authorities. The tax authorities have appealed 48 of the 84 decisions of the regional appellate court to the Italian Supreme Court, and a hearing on 45 of the 48 cases was held in December 2001. Six of the 84 decisions were not appealed and are now final. In March, May, July and December 2002, the Italian Supreme Court issued its decisions in the 45 appeals that were heard in December 2001. The Italian Supreme Court rejected 12 of the 45 appeals and these 12 cases are now final. The Italian Supreme Court vacated the decisions of the regional appellate court in 33 of the cases and remanded these cases back to the regional appellate court for further hearings on the merits. In a separate proceeding in Naples, in October 1997, a Naples court dismissed charges of criminal association against certain present and former officers and directors of affiliates of the Company,ALG, but permitted charges of tax evasion and related charges to remain pending. In February 1998, the tax evasion charges were dismissed by the
criminal court in Naples following a determinationdetermined that jurisdiction was not proper, and the case file was transmittedtran smitted to the public prosecutor in Milan. In March 2002, after the Milan who
will determineprosecutor's investigation into the matter, these present and former officers and directors received notices that an initial hearing would take place in June 2002 at which time the ''preliminary judge'' hearing the case would evaluate whether to bringthe Milan prosecutor's charges in which case a preliminary
investigations judge will make a new finding as to whether there should be sent to a trial on these charges. The Company,criminal judge for a full trial. At the June 2002 hearing, the ''preliminary judge'' ruled that there was no legal basis for the prosecutor's charges and acquitted all of the defendants; the prosecutor has appealed. ALG, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings.
 
                            ------------------------
      It is not possible to predict the outcome of the litigation pending against the CompanyALG and its subsidiaries. Litigation is subject to many uncertainties,uncertainties. As discussed above under ''Recent Trial Results,'' unfavorable verdicts awarding substantial damages against PM USA have been returned in 11 cases in recent years and itthese cases are in various post-trial stages. It is possible that some ofthere could be further adverse developments in these actionscases 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 a pending smoking and health or health care
cost recovery casetobacco-related litigation could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and
32
other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation.
 
    Management
      ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed elsewhere in this Item 3. Legal Proceedings: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related litigation; (ii) management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending litigation.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 Company's 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. The CompanyALG 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 allthe 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, the CompanyALG and its subsidiaries may enter into settlement discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company'sALG's stockholders to do so.
      Reference is made to Note 16, incorporated herein by reference to the
Company's 1998 Annual Report,18 for a description of certain pending legal proceedings. Reference is also made to Exhibit 99.1 to this Form 10-K for a list of pending smoking and health class actions, health care cost recovery actions, and certain other actions, and for a description of certain developments in such proceedings; Exhibit 99.2 for the status of the MSA in each of the settling
jurisdictions; and Exhibit 99.399.2 for a schedule of the case under the California Business and Professions Code and the consolidated individual smoking and health class
actions,cases, as well as the health care cost recovery, Lights/Ultra Lights and certain other actions thatTobacco Price cases, which are currently scheduled for trial through 2000.the end of 2003. Copies of Note 1618 and Exhibits 99.1 99.2 and 99.399.2 are available upon written request to the Corporate Secretary, Philip
Morris CompaniesAltria Group, Inc., 120 Park Avenue, New York, NY 10017.
 
ITEM
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.Submission of Matters to a Vote of Security Holders.
      None.
 
                                       20

EXECUTIVE OFFICERS OF THE COMPANY
 
    The following are the executive officers of the Company as of March 1, 1999:
 


NAME                                                                          OFFICE                              AGE
- -----------------------------------------------------  -----------------------------------------------------      ---

Geoffrey C. Bible....................................  Chairman of the Board and Chief Executive Officer              61
John D. Bowlin.......................................  President and Chief Executive Officer of Kraft Foods           48
                                                         International, Inc.
Murray H. Bring......................................  Vice Chairman, External Affairs, and General Counsel           64
Bruce S. Brown.......................................  Vice President, Taxes                                          59
Louis C. Camilleri...................................  Senior Vice President and Chief Financial Officer              44
Siw de Gysser........................................  Vice President, Corporate Planning                             55
Nancy J. De Lisi.....................................  Vice President and Treasurer                                   48
Robert A. Eckert.....................................  President and Chief Executive Officer of Kraft Foods,          44
                                                         Inc.
Paul W. Hendrys......................................  President and Chief Executive Officer of Philip                51
                                                         Morris International Inc.
G. Penn Holsenbeck...................................  Vice President, Associate General Counsel and                  52
                                                         Corporate Secretary
John N. MacDonough...................................  Chairman and Chief Executive Officer of Miller                 55
                                                         Brewing Company
Steven C. Parrish....................................  Senior Vice President, Corporate Affairs                       48
Timothy A. Sompolski.................................  Senior Vice President, Human Resources and                     46
                                                         Administration
Michael E. Szymanczyk................................  President and Chief Executive Officer of Philip                50
                                                         Morris Incorporated
Frank T. Toscano.....................................  Vice President and Controller                                  47
William H. Webb......................................  Chief Operating Officer                                        59


 
    All of the above-mentioned officers, with the exception of Mr. Holsenbeck,
have been employed by the Company in various capacities during the past five
years. Mr. Holsenbeck was elected to his current position with the Company in
January 1995. Previously, Mr. Holsenbeck held various positions with Bethlehem
Steel Corporation, including Secretary and Deputy General Counsel from 1992 to
January 1995.
 
                                    
33
PART II
 
ITEM
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.Market for Registrant's Common Equity and Related Stockholder Matters.
      The information called for by this Item is hereby incorporated by reference to the paragraph captioned "Quarterly''Quarterly Financial Data (Unaudited)"'' on page 5973 of the Company's 19982002 Annual Report and made a part hereof.
 
ITEM
Item 6. SELECTED FINANCIAL DATA.Selected Financial Data.
      The information called for by this Item is hereby incorporated by reference to the information with respect to 1994-19981998-2002 appearing under the caption "Selected''Selected Financial Data"Data'' on pages 36 and 37page 43 of the Company's 19982002 Annual Report and made a part hereof.
 
                                       21

ITEM
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS.Management's Discussion and Analysis of Financial Condition and Results of Operations.
      The information called for by this Item is hereby incorporated by reference to the paragraphs captioned "Management's''Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations'' (''MD&A'') on pages 2122 to 3542 of the Company's 19982002 Annual Report and made a part hereof.
 
ITEM
Following a $10.1 billion judgment on March 21, 2003 against PM USA in the Price litigation described in Item 3, the judge granted PM USA's request for a stay of enforcement of the judgment for a period of 30 days. Thereafter, under the judgment, enforcement will be stayed only if an appeal bond in the amount of $12 billion is presented and approved. PM USA believes that requiring a bond in such an amount, in order to stay execution pending appeal, would be unconstitutional and would also violate Illinois law. It is not possible for PM USA to post such a bond and, absent judicial or legislative relief, PM USA would not be able to stay enforcement of the judgment in Illinois. PM USA will take all appropriate steps to seek to prevent this from occurring.
      As a result of these developments, the three major credit rating agencies placed ALG's credit ratings on watch with negative implications. While Kraft is not a party to, and has no exposure to, this litigation, its credit ratings are affected by those of ALG and, accordingly, its ratings were also placed on watch with negative implications. The rating agencies' actions are expected to result in higher short-term borrowing costs for ALG and Kraft. None of ALG's or Kraft's debt agreements require accelerated repayment in the event of a decrease in credit ratings.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Quantitative and Qualitative Disclosures About Market Risk.
      The information called for by this Item is hereby incorporated by reference to the paragraphs in the MD&A captioned "Market Risk"''Market Risk'' and "Value''Value at Risk"Risk'' on pages 3339 to 3540 of the Company's 19982002 Annual Report and made a part hereof.
 
ITEM
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Financial Statements and Supplementary Data.
      The information called for by this Item is hereby incorporated by reference to the Company's 19982002 Annual Report as set forth under the caption "Quarterly''Quarterly Financial Data (Unaudited)"'' on page 5973 and in the Index to Consolidated Financial Statements and Schedules (see Item 14)15) and made a part hereof.
 
ITEM
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
  FINANCIAL DISCLOSURE.
 
    Not applicable.
 
                                    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
      None.
34
PART III
 
ITEM
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
 
ITEMDirectors and Executive Officers of the Registrant.
Executive Officers as of February 28, 2003:
Name
Office
Age
Bruce S. BrownVice President, Corporate Taxes63
André CalantzopoulosPresident and Chief Executive Officer of Philip Morris International Inc.46
Louis C. CamilleriChairman of the Board and Chief Executive Officer48
Nancy J. De LisiSenior Vice President, Mergers and Acquisitions52
Roger K. DeromediCo-Chief Executive Officer of Kraft Foods Inc.; and President and Chief Executive Officer of Kraft Foods International, Inc.49
Dinyar S. DevitreSenior Vice President and Chief Financial Officer55
Amy J. EngelVice President and Treasurer46
David I. GreenbergSenior Vice President and Chief Compliance Officer48
Betsy D. HoldenCo-Chief Executive Officer of Kraft Foods Inc.; and President and Chief Executive Officer of Kraft Foods North America, Inc.47
G. Penn HolsenbeckVice President, Associate General Counsel and Corporate Secretary56
Kenneth F. MurphySenior Vice President, Human Resources and Administration47
Steven C. ParrishSenior Vice President, Corporate Affairs52
Michael E. SzymanczykChairman and Chief Executive Officer of Philip Morris USA Inc.54
Joseph A. TiesiVice President and Controller44
Charles R. WallSenior Vice President and General Counsel57
      With the exception of Dinyar S. Devitre, all of the above-mentioned officers have been employed by ALG or its subsidiaries in various capacities during the past five years. Dinyar S. Devitre was appointed Senior Vice President and Chief Financial Officer of ALG effective April 25, 2002. From April 2001 to March 2002, he acted as a private business consultant. From January 1998 to March 2001, Mr. Devitre was Executive Vice President at Citigroup Inc. in Europe.
Item 11. EXECUTIVE COMPENSATION.
 
ITEMExecutive Compensation.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
 
ITEMSecurity Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
      The number of shares to be issued upon exercise and the number of shares remaining available for future issuance under ALG's equity compensation plans at December 31, 2002 were as follows:
   Number of Shares to be Issued Upon Exercise of Outstanding Options and Restricted Stock
 Weighted Average Exercise Price of Outstanding Options
 Number of Shares Remaining Available for Future Issuance under Equity Compensation Plans
      Equity compensation plans approved by stockholders     114,468,840     $37.62      94,305,259 
       
      
      
 
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.Certain Relationships and Related Transactions.
      Except for the information relating to the executive officers ofset forth above in Item 10 and the Companyinformation relating to equity compensation plans set forth in Part I of this Report,Item 12, the information
35
called for by Items 10-13 is hereby incorporated by reference to the Company'sALG's definitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 29, 1999,24, 2003, filed with the SEC on March 17, 2003, and, except as indicated therein, made a part hereof.
 
                                       22

Item 14. Controls and Procedures
      Within the 90 days prior to the filing date of this report, Altria Group, Inc. carried out an evaluation, under the supervision and with the participation of Altria Group, Inc.'s management, including ALG's Chairman and Chief Executive Officer, and Chief Financial Officer, of the effectiveness of the design and operation of Altria Group, Inc.'s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934. Based upon that evaluation, ALG's Chairman and Chief Executive Officer and Chief Financial Officer concluded that Altria Group, Inc.'s disclosure controls and procedures are effective in timely alerting them to material information relating to Altria Group, Inc.'s (including its consolidated subsidiaries) required to be included in ALG's periodic SEC filings. Since the date of the evaluation, there have been no significant changes in Altria Group, Inc.'s internal controls or in other factors that could significantly affect the controls.
36
PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
      (a) Index to Consolidated Financial Statements and Schedules

                                                                                    REFERENCE
                                                                           ----------------------------

                                                                             FORM
Reference
Form 10-K        1998
                                                                           ANNUAL REPORT  ANNUAL REPORT
                                                                               PAGE           PAGE
                                                                           -------------  -------------

Annual Report
Page
2002
Annual Report
Page
Data incorporated by reference to the Company's 1998Altria Group, Inc.'s 2002 Annual Report:
    Consolidated Balance Sheets at December 31, 19982002 and 1997                   --           38 - 392001—44-45
    Consolidated Statements of Earnings for the years ended December 31,
      1998, 1997
         2002, 2001 and 1996................................................       --             402000		—46
    Consolidated Statements of Stockholders' Equity for the years ended
        December 31, 1998, 19972002, 2001 and 1996...................................       --             422000		—47
    Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997
         2002, 2001 and 1996............................................       --           40 - 412000		—48-49
    Notes to Consolidated Financial Statements...........................       --           43 - 59Statements—50-73
    Report of Independent Accountants....................................       --             60
Accountants—74
Data submitted herewith:
    Report of Independent Accountants....................................       S-1            --Accountants on Financial Statement Schedule--ValuationScheduleS-1—
    Financial Statement Schedule—Valuation and Qualifying Accounts......       AccountsS-2            --
—
      Schedules other than those listed above have been omitted either because such schedules are not required or are not applicable.
 
    (b) Reports on Form 8-K: During the last quarter of the period for which
       this Report is filed, the Company filed a Current Report on Form 8-K
       dated November 25, 1998, and a Form 8-K/A dated December 24, 1998,
       relating to the MSA. Subsequent to the last quarter of the period for
       which this Report is filed, the Company filed a Current Report on Form
       8-K dated January 27, 1999, relating to its 1998 financial statements.
 
                                       23

    (c) The following exhibits are filed as part of this Report (Exhibit Nos.
       10.1-10.15 are management contracts, compensatory plans or arrangements):
 


 3.1.      Restated Articles of Incorporation of
(b)Reports on Form 8-K: The Registrant filed a Current Report on Form 8-K on January 29, 2003 containing the Company. (1)
 
 3.2.      By-Laws, as amended, ofRegistrant's consolidated financial statements for the Company.
 
 4.1.      Indenture dated as of August 1, 1990, betweenyear ended December 31, 2002. The Registrant filed a Current Report on Form 8-K on January 29, 2003 relating to the Company and The Chase Manhattan
           Bank (formerly known as Chemical Bank), Trustee. (2)
 
 4.2.      First Supplemental Indenture dated as of February 1, 1991, to Indenture dated as of
           August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known as
           Chemical Bank), Trustee. (3)
 
 4.3.      Second Supplemental Indenture dated as of January 21, 1992, to Indenture dated as of
           August 1, 1990, between the Company and The Chase Manhattan Bank (formerly known as
           Chemical Bank), Trustee. (4)
 
 4.4.      Indenture dated as of December 2, 1996, between the Company and The Chase Manhattan
           Bank, Trustee. (5)
 
 4.5.      5-Year Revolving Credit Agreement dated as of October 14, 1997, among the Company,
           and the Initial Lenders named therein and Citibank, N.A., and The Chase Manhattan
           Bank, as Administrative Agents, and Credit Suisse First Boston, as Syndication
           Agent, and Deutsche Bank AG, New York Branch, as Documentation Agent. (6)
 
10.1.      Financial Counseling Program. (7)
 
10.2.name change from Philip Morris Benefit Equalization Plan,Companies Inc. to Altria Group, Inc.
(c)The following exhibits are filed as amended. (8)
 
10.3.part of this Report (Exhibit Nos. 10.1-10.16 and Exhibits 10.27 and 10.28 are management contracts, compensatory plans or arrangements):

3.1— Articles of Amendment to the Restated Articles of Incorporation of ALG and Restated Articles of Incorporation of ALG
3.2— By-Laws, as amended, of ALG
4.1— Indenture dated as of August 1, 1990, between ALG and JPMorgan Chase Bank, Trustee.(1)
4.2— First Supplemental Indenture dated as of February 1, 1991, to Indenture dated as of August 1, 1990, between ALG and JPMorgan Chase Bank (formerly known as Chemical Bank) Trustee.(2)
4.3— Second Supplemental Indenture dated as of January 21, 1992, to Indenture dated as of August 1, 1990, between ALG and JPMorgan Chase Bank (formerly known as Chemical Bank) Trustee.(3)
4.4— Indenture dated as of December 2, 1996, between ALG and JPMorgan Chase Bank, Trustee.(4)
4.5— Indenture dated as of October 17, 2001, between Kraft Foods Inc. and JPMorgan Chase Bank, Trustee.(20)
37
 
4.6— The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries to the Commission upon request.
10.1— Financial Counseling Program.(5)
10.2— Benefit Equalization Plan, as amended.(6)
10.3— Form of Employee Grantor Trust Enrollment Agreement.(7)
10.4— Automobile Policy.(5)
10.5— Form of Employment Agreement between ALG and its executive officers.(8)
10.6— Supplemental Management Employees' Retirement Plan of ALG, as amended.(5)
10.7— 1992 Incentive Compensation and Stock Option Plan.(5)
10.8— 1992 Compensation Plan for Non-Employee Directors, as amended.(9)
10.9— Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996.(7)
10.10— Form of Executive Master Trust between ALG, JPMorgan Chase Bank and Handy Associates.(8)
10.11— 1997 Performance Incentive Plan.(10)
10.12— Long-Term Disability Benefit Equalization Plan, as amended.(5)
10.13— Survivor Income Benefit Equalization Plan, as amended.(5)
10.14— 2000 Performance Incentive Plan.(18)
10.15— 2000 Stock Compensation Plan for Non-Employee Directors, as amended.
10.16— Post-Retirement Consulting Agreement between ALG and Geoffrey C. Bible.(21)
10.17— Comprehensive Settlement Agreement and Release dated October 17, 1997, related to settlement of Mississippi health care cost recovery action.(5)
10.18— Settlement Agreement dated August 25, 1997, related to settlement of Florida health care cost recovery action.(11)
10.19— Comprehensive Settlement Agreement and Release dated January 16, 1998, related to settlement of Texas health care cost recovery action.(12)
10.20— Settlement Agreement and Stipulation for Entry of Judgment, dated May 8, 1998, regarding the claims of the State of Minnesota.(13)
10.21— Settlement Agreement and Release, dated May 8, 1998, regarding the claims of Blue Cross and Blue Shield of Minnesota.(13)
10.22— Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order, dated July 2, 1998, regarding the settlement of the Mississippi health care cost recovery action.(14)
10.23— Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated July 24, 1998, regarding the settlement of the Texas health care cost recovery action.(14)
10.24— Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated September 11, 1998, regarding the settlement of the Florida health care cost recovery action.(15)
10.25— Master Settlement Agreement relating to state health care cost recovery and other claims.(16)
10.26— Stipulation and Agreed Order Regarding Stay of Execution Pending Review and Related Matters.(19)
10.27— Agreement between ALG and William H. Webb.(22)
10.28— Agreement among ALG, PM USA and Michael E. Szymanczyk.(22)
12 — Statements re: computation of ratios.(17)
13 — Pages 21 to 74 of the 2002 Annual Report, but only to the extent set forth in Items 1, 3, 5-7, 7A, 8 and 15 hereof. With the exception of the aforementioned information incorporated by reference in this Annual Report on Form 10-K, the 2002 Annual Report is not to be deemed ''filed'' as part of this Report.
21 — Subsidiaries of ALG.
38
 
23 — Consent of independent accountants.
24 — Powers of attorney.
99.1— Certain Pending Litigation Matters and Recent Developments.
99.2— Trial Schedule.
99.3— Additional Exhibits.
(1)Incorporated by reference to ALG's Registration Statement on Form of Employee Grantor Trust Enrollment Agreement. (9)
 
10.4.      Automobile Policy. (7)
 
10.5.      Form of Employment Agreement between the Company and its executive officers. (10)
 
10.6.      Supplemental Management Employees' Retirement Plan of the Company, as amended. (7)
 
10.7.      The Philip Morris 1992 Incentive Compensation and Stock Option Plan. (7)
 
10.8.      1992 Compensation Plan for Non-Employee Directors, as amended. (11)
 
10.9.      Unit Plan for Incumbent Non-Employee Directors, effective January 1, 1996. (9)
 
10.10.     The Philip Morris 1987 Long Term Incentive Plan. (7)
 
10.11.     Form of Executive Master Trust between the Company, The Chase Manhattan Bank
           (formerly known as Chemical Bank) and Handy Associates. (10)
 
10.12.     1997 Performance Incentive Plan. (12)
 
10.13.     Philip Morris Long-Term Disability Benefit Equalization Plan, as amended. (7)
 
10.14.     Philip Morris Survivor Income Benefit Equalization Plan, as amended. (7)
 
10.15.     Amended and Restated Employment Agreement between the Company and Murray H. Bring.
 
10.16.     Comprehensive Settlement Agreement and Release dated October 17, 1997, related to
           settlement of Mississippi health care cost recovery action. (7)
 
10.17.     Settlement AgreementS-3 (No. 33-36450) dated August 25, 1997, related22, 1990.
(2)Incorporated by reference to settlement of Florida health
           care cost recovery action. (13)


 
                                       24

10.18.     Comprehensive Settlement Agreement and ReleaseALG's Registration Statement on Form S-3 (No. 33-39059) dated February 21, 1991.
(3)Incorporated by reference to ALG's Registration Statement on Form S-3 (No. 33-45210) dated January 16, 1998, related to
           settlement of Texas health care cost recovery action. (14)
 
10.19.     Settlement Agreement and Stipulation for Entry of Judgment, dated May 8, 1998,
           regarding the claims of the State of Minnesota. (15)
 
10.20.     Settlement Agreement and Release, dated May 8, 1998, regarding the claims of Blue
           Cross and Blue Shield of Minnesota. (15)
 
10.21.     Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order,
           dated July 2, 1998, regarding the settlement of the Mississippi health care cost
           recovery action. (16)
 
10.22.     Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree,
           dated July 24, 1998, regarding the settlement of the Texas health care cost recovery
           action. (16)
 
10.23.     Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree,
           dated September 11, 1998, regarding the settlement of the Florida health care cost
           recovery action. (17)
 
10.24.     Master Settlement Agreement relating to state health care cost recovery and other
           claims. (18)
 
12.        Statements re computation of ratios. (19)
 
13.        Pages 21-60 of the Company's 1998 Annual Report, but only to the extent set forth in
           Items 1-3, 5-7, 7A, 8 and 14 hereof. With the exception of the aforementioned
           information incorporated22, 1992.
(4)Incorporated by reference in thisto ALG's Registration Statement on Form S-3/A (No. 333-35143) dated January 29, 1998.
(5)Incorporated by reference to ALG's Annual Report on Form 10-K for the Company's 1998year ended December 31, 1997 (File No. 1-08940).
(6)Incorporated by reference to ALG's Annual Report is not to be deemed "filed" as part of this Report.
 
21.        Subsidiaries ofon Form 10-K for the Company.
 
23.        Consent of independent accountants.
 
24.        Powers of attorney.
 
99.1.      Certain Pending Litigation Matters and Recent Developments.
 
99.2.      Status of the Master Settlement Agreement.
 
99.3.      Trial Schedule.


 
- ------------------------
 
(1) year ended December 31, 1996 (File No. 1-08940).(7)Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 1995 (File No. 1-08940).(8)Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 1-08940).(9)Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 1-08940).(10)Incorporated by reference to ALG's proxy statement dated March 10, 1997 (File No. 1-08940).(11)Incorporated by reference to ALG's Current Report on Form 8-K dated August 25, 1997 (File No. 1-08940).(12)Incorporated by reference to ALG's Current Report on Form 8-K dated January 16, 1998 (File No. 1-08940).(13)Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended March 31, 1998.(14)Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended June 30, 1998.(15)Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended September 30, 1998.(16)Incorporated by reference to ALG's Current Report on Form 8-K dated November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.(17)Incorporated by reference to ALG's Current Report on Form 8-K dated January 29, 2003.(18)Incorporated by reference to ALG's proxy statement dated March 10, 2000.(19)Incorporated by reference to ALG's Current Report on Form 8-K dated May 8, 2001.(20)Incorporated by reference to Kraft Foods Inc.'s Registration Statement on Form S-3 (No. 333-67770) dated August 16, 2001.(21)Incorporated by reference to ALG's Annual Report on Form 10-K for the year ended December 31, 2001.(22)Incorporated by reference to ALG's Quarterly Report on Form 10-Q for the period ended June 30, 2002.
39
SIGNATURES
Pursuant to the Company's Quarterly Reportrequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on Form 10-Q forits behalf by the period ended March 31, 1997.
 
(2) Incorporated by reference to the Company's Registration Statement on Form
    S-3 (No. 33-36450) dated August 22, 1990.
 
(3) Incorporated by reference to the Company's Registration Statement on Form
    S-3 (No. 33-39059) dated February 21, 1991.
 
(4) Incorporated by reference to the Company's Registration Statement on Form
    S-3 (No. 33-45210) dated January 22, 1992.
 
(5) Incorporated by reference to the Company's Registration Statement on Form
    S-3/A (No. 333-35143) dated January 29, 1998.
 
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
    the period ended September 30, 1997.
 
(7) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1997.
 
                                       25

(8) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1996.
 
(9) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1995.
 
(10) Incorporated by reference to the Company's Annual Report on Form 10-K for
    the year ended December 31, 1994.
 
(11) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
    for the period ended June 30, 1997.
 
(12) Incorporated by reference to the Company's proxy statement dated March 10,
    1997.
 
(13) Incorporated by reference to the Company's Current Report on Form 8-K dated
    August 25, 1997.
 
(14) Incorporated by reference to the Company's Current Report on Form 8-K dated
    January 16, 1998.
 
(15) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
    for the period ended March 31, 1998.
 
(16) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
    for the period ended June 30, 1998.
 
(17) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
    for the period ended September 30, 1998.
 
(18) Incorporated by reference to the Company's Current Report on Form 8-K dated
    November 25, 1998, as amended by Form 8/K-A dated December 24, 1998.
 
(19) Incorporated by reference to the Company's Current Report on Form 8-K dated
    January 27, 1999.
 
                                       26

                                   SIGNATURES
 
    PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
undersigned, thereunto duly authorized.

                                PHILIP MORRIS COMPANIES
ALTRIA GROUP, INC.
By:            /s/ GEOFFREY/s/ LOUIS C. BIBLE
                                     -----------------------------------------
                                                (GeoffreyCAMILLERI
(Louis C. Bible,
                                             Camilleri,
Chairman of the Board and
Chief Executive Officer)
Date: March 27, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
Signature
Title
Date
/s/ LOUIS C. CAMILLERI
(Louis C. Camilleri)		Director, Chairman of the Board and
   Chief Executive Officer		March 27, 2003
/s/ DINYAR S. DEVITRE
(Dinyar S. Devitre)		Senior Vice President and Chief
   Financial Officer		March 27, 2003
/s/ JOSEPH A. TIESI
(Joseph A. Tiesi)		Vice President and ControllerMarch 27, 2003
*ELIZABETH E. BAILEY,
    HAROLD BROWN,
    MATHIS CABIALLAVETTA,
    JANE EVANS,
    J. DUDLEY FISHBURN,
    ROBERT E. R. HUNTLEY,
    THOMAS W. JONES,
    BILLIE JEAN KING,
    JOHN D. NICHOLS,
    LUCIO A. NOTO,
    JOHN S. REED,
    CARLOS SLIM HELÚ,
    STEPHEN M. WOLF		Directors
*BY:            /s/ LOUIS C. CAMILLERI
  (Louis C. Camilleri,
Attorney-in-fact)
March 27, 2003
40
CERTIFICATIONS
I, Louis C. Camilleri, Chairman and Chief Executive Officer of Altria Group, Inc., certify that:
1.I have reviewed this annual report on Form 10-K of Altria Group, Inc.;
2.Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the ''Evaluation Date''); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.
The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: March 17, 1999
27, 2003/s/ LOUIS C. CAMILLERI
     Louis C. Camilleri,
         Chairman and Chief Executive Officer

 
    PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED:
 
              SIGNATURE                          TITLE                 DATE
- -------------------------------------  -------------------------- --------------
        /s/ GEOFFREY C. BIBLE          Director, Chairman of the
- -------------------------------------    Board and Chief          March 17, 1999
         (Geoffrey C. Bible)             Executive Officer
 
       /s/ LOUIS C. CAMILLERI
- -------------------------------------  Senior Vice President and  March 17, 1999
        (Louis C. Camilleri)             Chief Financial Officer
 
        /s/ FRANK T. TOSCANO
- -------------------------------------  Vice President and         March 17, 1999
         (Frank T. Toscano)              Controller
 
* ELIZABETH E. BAILEY, MURRAY H.
    BRING, HAROLD BROWN,
    WILLIAM H. DONALDSON, JANE
    EVANS, ROBERT E. R. HUNTLEY,
    RUPERT MURDOCH, JOHN D.
    NICHOLS, LUCIO A. NOTO,
    RICHARD D. PARSONS,
    JOHN S. REED, CARLOS SLIM HELU,
    STEPHEN M. WOLF                    Directors
 
     *BY: /S/ LOUIS C. CAMILLERI
- -------------------------------------
         (Louis C. Camilleri                                      March 17, 1999
          Attorney-in-fact)
 
                                       27

41
CERTIFICATIONS
 I, Dinyar S. Devitre, Senior Vice President and Chief Financial Officer of Altria Group, Inc., certify that:
1. I have reviewed this annual report on Form 10-K of Altria Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a)designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b)evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the ''Evaluation Date''); and
c)presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a)all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: March 27, 2003/s/ DINYAR S. DEVITRE
    Dinyar S. Devitre,
      Senior Vice President and Chief
      Financial Officer
42
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
ALTRIA GROUP, INC.:
      Our report on our audits of the consolidated financial statements referred to in our report dated January 27, 2003 appearing in the 2002 Annual Report to Shareholders of Philip
Morris CompaniesAltria Group, Inc. has been(which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K from
page 6010-K) also included an audit of the 1998 annual report to stockholders of Philip Morris Companies
Inc. In connection with our audits of such financial statements, we have also
audited the related financial statement schedule listed in the index in Item 14(a) on page 2315(a) of this Form 10-K. In our opinion, thethis financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be
included therein.
 
                                          /s/ PRICEWATERHOUSECOOPERSset forth therein when read in conjunction with the related consolidated financial statements.
/S/ PRICEWATERHOUSECOOPERS LLP
New York, New York
January 25, 1999
 
                                      27, 2003
S-1
                 PHILIP MORRIS COMPANIES
ALTRIA GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER
For the Years Ended December 31, 1998, 1997 AND 1996
                                 (IN MILLIONS)
 


                 COL. A                      COL. B               COL. C              COL. D       COL. E
- -----------------------------------------  -----------  --------------------------  -----------  -----------
                                                                ADDITIONS
                                                        --------------------------
                                           BALANCE AT   CHARGED TO    CHARGED TO                 BALANCE AT
                                            BEGINNING    COSTS AND       OTHER                     END OF
               DESCRIPTION                  OF PERIOD    EXPENSES      ACCOUNTS     DEDUCTIONS     PERIOD
- -----------------------------------------  -----------  -----------  -------------  -----------  -----------
                                                                          (a)           (b)

1998:
CONSUMER PRODUCTS:
  Allowance for discounts................   $       8    $     607     $      --     $     606    $       9
  Allowance for doubtful accounts........         157           36            27            28          192
  Allowance for returned goods...........           6           79            --            64           21
                                                -----        -----           ---         -----        -----
                                            $     171    $     722     $      27     $     698    $     222
                                                -----        -----           ---         -----        -----
                                                -----        -----           ---         -----        -----
FINANCIAL SERVICES:
  Allowance for losses...................   $     101    $      15     $      --     $      --    $     116
                                                -----        -----           ---         -----        -----
                                                -----        -----           ---         -----        -----
1997:
CONSUMER PRODUCTS:
  Allowance for discounts................   $       5    $     534     $      --     $     531    $       8
  Allowance for doubtful accounts........         167           35           (13)           32          157
  Allowance for returned goods...........           5           66            --            65            6
                                                -----        -----           ---         -----        -----
                                            $     177    $     635     $     (13)    $     628    $     171
                                                -----        -----           ---         -----        -----
                                                -----        -----           ---         -----        -----
FINANCIAL SERVICES:
  Allowance for losses...................   $     101    $      --     $      --     $      --    $     101
                                                -----        -----           ---         -----        -----
                                                -----        -----           ---         -----        -----
1996:
CONSUMER PRODUCTS:
  Allowance for discounts................   $      12    $     492     $      --     $     499    $       5
  Allowance for doubtful accounts........         163           27            16            39          167
  Allowance for returned goods...........           3           64            --            62            5
                                                -----        -----           ---         -----        -----
                                            $     178    $     583     $      16     $     600    $     177
                                                -----        -----           ---         -----        -----
                                                -----        -----           ---         -----        -----
FINANCIAL SERVICES:
  Allowance for losses...................   $     101    $      --     $      --     $      --    $     101
                                                -----        -----           ---         -----        -----
                                                -----        -----           ---         -----        -----


 
- ------------------------
 
2002, 2001 and 2000
(in millions)
Col. A
 Col. B
 Col. C
 Col. D
 Col. E
      Additions
        
Description
 Balance at Beginning of Period
 Charged to Costs and Expenses
 Charged to Other Accounts
 Deductions
 Balance at End of Period
          (a) (b)    
2002:                    
CONSUMER PRODUCTS:                    
      Allowance for discounts    $13     $710     $2     $713     $12 
      Allowance for doubtful accounts     207      32      (51)     32      156 
      Allowance for returned goods     7      166      —      157      16 
      
      
      
      
      
 
     $227     $908     $(49)    $902     $184 
      
      
      
      
      
 
FINANCIAL SERVICES:                    
      Allowance for losses    $132     $324     $—     $12     $444 
      
      
      
      
      
 
2001:                    
CONSUMER PRODUCTS:                    
      Allowance for discounts    $9     $709     $4     $709     $13 
      Allowance for doubtful accounts     210      27      5      35      207 
      Allowance for returned goods     8      145      —      146      7 
      
      
      
      
      
 
     $227     $881     $9     $890     $227 
      
      
      
      
      
 
FINANCIAL SERVICES:                    
      Allowance for losses    $121     $11     $—     $—     $132 
      
      
      
      
      
 
2000:                    
CONSUMER PRODUCTS:                    
      Allowance for discounts    $7     $815     $      —     $813     $9 
      Allowance for doubtful accounts     180      3      62      35      210 
      Allowance for returned goods     8      111      —      111      8 
      
      
      
      
      
 
     $195     $929     $62     $959     $227 
      
      
      
      
      
 
FINANCIAL SERVICES:                    
      Allowance for losses    $118     $3     $—     $—     $121 
      
      
      
      
      
 
Notes:
 (a) RelatedPrimarily related to divestitures, acquisitions the consolidation of previously
    unconsolidated subsidiaries and currency translation.
 (b) Represents charges for which allowances were created.
S-2