8009533480

8009533480
 8009533481

8009533481
 Financial Highlights
(in rnillions of dollars, except per share data) 2006* % Change
Net revenues $67,051 10.13
Operating income 12,887 2.73
Earnings from continuing operations 9,329 (l.83)
Net earnings 12,022 (18.63)
Basic earnings per share:
Continuing operations 4.47 (2.53)
Net earnings 5.76 (19.13)
Diluted earnings per share:
Continuing operations 4.43 (2.33)
Net earnings 5.71 (19.13)
Cash dividends declared per share 3.32 (8.13)

2006* % Change

Net revenues $18,474 0.13

Operating companies income** 4,812 (6.13)

Net revenues 23,752 12.33

Operating companies income** 3,516 18.73

Net revenues 9,972 21.83

Operating companies income** 2,065 175%

Net revenues 10,142 9.4%

Operating companies income"' 1,869 (3.6%)

Net revenues 4,394 17.6%

Operating companies income** 1,008 (48.43)
4 Letter to Shareholders
9 Board of Directors Net revenues $ 317 (30.63)
10 2007 Business Review Operating companies income** 176 100+3
16 Responsibility
have
17 Financial Review/
Guide to Select Disclosures rnanagcrncnt reviews income before corporate
expenses of intangibles, to and allocate resources. reconciliation of
95 Shareholder Information operating companies income to operating income, sec Reporting in the consolidated financial statements.

8009533482

8009533482
 Dear Shareholder
Louis C. Camilleri
Former Chairman of the Board
and Chief Executive Officer
8009533483
We took numerous steps in 2007
and early 2008 to res:ructure
Altria, in order to better equip
its component parts to more
effectively and successfully grow
their respective operations
and enhance shareholder value
in today's complex and fast-
changing economic, regulatory
and competitive environment.
Let me share a few of the
highlights:
The successful execution of
the Kraft spin-off in March 2007,
followed by the distribution of
PMI shares on March 28, 2008.
Highlights of the PMI spin-off are
listed on the inside front cover
of this report, and additional
details of the transaction were
made available in the Information
Statement mailed to shareholders
Announcement of two-year
share repurchase programs of
$7.5 billion at Altria and
$13.0 billion at PMI,
reflecting more
efficient capital
structures and
the prudent
use of Altria's and PMl's strong
balance sheets to support
further enhancement of share-
holder value while preserving
financial flexibility;
Establishment of dividend
policies and initial dividend rates
for Altria and PMI, which together
with the share repurchase
programs mentioned above
represent a combined cash
outflow to shareholders of more
than $33 billion over the next
two years;
Altria is expected
to pay a dividend at the initial
annualized rate of $1.16 per
common share, while PMI is
expected to pay a dividend at the
initial annualized rate of $1.84
per share. Thus, Altria sharehold-
ers who retain their PMI shares
will receive, in the aggregate, the
same dividend amo.mt of $3.00
per share that existed before
the spin-off;
Identification of the initial
Boards of Directors of Altria and
PMI as separately traded public
companies, and the management
teams leading those businesses;
Business development initia-
tives that extend the capabilities
of both our U.S. and international
tobacco businesses, including the
acquisition of 100% of privately
held cigar manufacturer John
Middleton, Inc. (Middleton); the
acquisition of an additional 30%
stake in PMl's Mexican tobacco
business from Grupo Carso;
and the acquisition by PMI of an
additional stake in Lakson Tobacco
Company in Pakistan, bringing
its total ownership interest to
approximately 98%;
Cost-reduction programs
across all businesses and at
Altria's corporate headquarters,
which has been significantly
downsized and relocated to
Richmond, Virginia, comple-
mented by plans to optimize
PMI and PM USA's manufacturing
infrastructures;
Continued advances on soci-
etal alignment ini:iatives, litigation
and compliance and integrity
initiatives;
Strong performance of
our 28.6% ownership stake in
SABMiller, which had a market
value on a pre-tax basis of
approximately $9 billion on
February 29, 2008; and
Total shareholder return for
8009533483
 Dr. Elizabeth E. Bailey
Director since 1989
Dr. Harold Brown
Director 1983-2003
Re-elected December 2004
Mathis Cabiallavetta
Director 2002
Louis C. Camilleri
Director since 2002
J. Dudley Fishburn George Munoz John S. Reed
Director since 1999 Director since 2004 Director 1975-2003
Re-elected April 2004
Robert E. R. Huntley Lucio A. Noto
Director since 1976 Director since 1998 Stephen M. Wolf
Director since 1993
Thomas W. Jones
Director since 2002

the year ended December 31,
2007, of 22.2%, exceeding that
of the S&P 500 for the sixth
consecutive year.
With the completion of the
PMI spin-off in 2008 and the
Kraft spin-off in 2007, I believe
that Altria has fulfilled the corpo-
rate restructuring objectives
first outlined more than three
years ago.
The PMI spin-off created two
powerful tobacco companies,
PMI and PM USA, with significant
scale, industry leading positions,
experienced management teams,
strong cash flows and financial
wherewithal, and a wide array of
opportunities to increase their
respective growth profiles.
Notably, PMI in its own right
is now the world's most profitable
publicly-traded tobacco company,
while PM USA is the world's third-
most-profitable such company in
the global tobacco industry, and
significantly ahead of its direct
competitors in the U.S.
In conjunction with lhe reslruc-
turing of our businesses, the
independent members of the
former Altria Board (listed above)
have essentially split evenly to
form the initial core for the
Boards of Directors of Altria and
PMI. In addition, we have identi-
fied a number of highly qualified
new members for both boards
and appointed strong manage-
ment teams at each company.
Altria's Board of Directors
post-spin includes four continuing
members from the current Altria
Board of Directors. They are
Elizabeth E. Bailey, Robert E. R.
Huntley, Thomas W. Jones and
George Munoz. They are joined by
four new directors: Thomas F.
Farrell II, Chairman, President and
Chief Executive Officer of
Dominion Resources, Inc.; Gerald
L. Baliles, Director of the Miller
Center of Public Affairs at the
University of Virginia and former
Governor of Virginia; Dinyar S.
Devitre, who stepped down as
Chief Financial Officer of Altria
following the spin-off; and Michael
E. Szymanczyk, who will serve as
Chairman of the Boar:::! and Chief
Executive Officer of Altria.
PMl's Board of Directors post-
spin includes five members who
22.2%
S&P500 MO
stepped down from the Altria
Board of Directors. They are
Harold Brown, Mathis Cabiallavetta,
J. Dudley Fishburn, Lucio A Noto
and Stephen M. Wolf. In addition,
Sergio Marchionne, Chief Executive
Otticer ot Fiat S.p.A., and Carlos
Slim Helu joined lhe PMI Board of
Directors at the time of the PMI
spin-off, and Graham Mackay, Chief
Executive Otticer ot SABMiller, has
agreed to join the PMI Board of
Directors later in 2008.
The 2008 proxy state-
ment contains a comprehensive
description of Altria's Board of
Directors and its committees, as
well as the nominees for election
to the Board at the 2008 Annual
Meeting of Shareholders, which
will be held in Richmond, Virginia,
on May 28, 2008. I urge you to
read the full statement and return
your proxy card as soon as
possible with your vote.
On the pages immediately
following this letter, you will find a
message from Mike Szymanczyk,
who now serves as Chairman and
Chief Executive Officer of Altria,
following my resignation from
those positions to serve in a simi-
lar role at PMI. I have known Mike
and worked closely with him for
more than 1/' years, and have the
highest regard for his immense
business acumer, intellect, cour-
age and leadership qualities. I
have no doubt that he will flourish
in his new role and lead Altria to
ever-greater heights.
I am also delighted that Andre
Calantzopoulos has agreed to
serve as Chief Operating Officer
of PMI, reporting to me. PMI will
issue a separate /\nnual Report

8009533484

8009533484
 in 2009, prior to its first Annual
Shareholder Meeting.
On a personal note, I want to
thank the members of the Altria
Board for their invaluable advice,
their enthusiastic support and
their wise counsel as we imple-
mented the mcmentous changes
made by your company over the
past several years. In particular,
I want to thank John S. Reed, who
has elected to retire from the
Altria Board of Directors. He is
one of the longest-serving mem-
bers of the Board of Directors
and has provided outstanding
leadership throughout his more
than 30 years of distinguished
service to the company and
its shareholders.
2007 was an excellent year by
most measures. Our consolidated
financial results were strong, and
of particular note is that, absent
the unfavorable impact of trade
inventory reductions that affected
both PM USA's and PMl's results,
Altria's fourth-quarter perfor-
mance was marked by a sus-
lained improvement in business
fundamentals.
For the full year ?007,
8009533485
revenues net of excise taxes
increased 5.8% to $38.1 bil-
lion, driven by increases in both
U.S. tobacco and international
tobacco. Operating income
increased 2.7% to $13.2 billion,
reflecting a number o" items,
including higher results from
operations of $512 million
and favorable currency
of $471 million.
Earnings from continuing
operations decreased 1.8%
to $92 billion, reflecting the
factors mentioned above and a
higher tax rate in 2007. Net
earnings, including discontinued
operations, decreased 18.6%
to $9.8 billion, reflecting the
Kraft spin-off.
Diluted enrnings per shnre
Excluding
Diluted EPS from continuing operations
Gain on sale of business
Asset impairment. exit and implementation costs
Italian antitrust charge
(Recoveries) Provision for airline industry exposure (0.06) 0.03
Tax items
Interest on tax reserve transfers to Kraft
Diluted above items
from continuing operations
were down 2.3% to $4.33 for the
full year. Adjusted for items identi-
fied in the accompanying table,
diluted earnings per share from
continuing operations increased
8.1% to $4.38.
Philip Morris USA fared remark-
ably well in a year that was
marked by a step-up in Master
Settlement Agreement payments
and an above-trend erosion
in cigarette consurrption. Its
retail market share performance
was strong, led by Marlboro. In
addition, PM USA took several
actions to further its adjacency
strategy, including the successful
test mnrketing of Marlboro
Full Year
2007 2006
$4.33 $4.43 (23%)
(0.15)
0.21 0.05
0.03
(0.12) (035)
0.02 0.01
4.38 4.05
Snus and Marlboro Moist
Smokeless Tobacco. This was
complemented by Altria's
December acquisition of cigar
maker John Middleton, Inc.
Revenues net of excise taxes
increased 1.2% to $15.0 billion
for Altria's U.S. tobacco segment,
which includes both PM USA and
Middleton. Operating companies
income of $4.5 billion was down
6.1%, but would have increased
1.9% for the full year 2007 when
adjusted for asset impairment, exit
and implementation costs and a
$26 rrillion provision in 2007 for
the Scott case in Louisiana.
In the second half of 2007,
PM USA began the success-
ful implementaticn of a major
manufacturing reconfigumtion.
That program remained on track
in terms of both timing and sav-
ings delivery as the year unfolded,
and, in addition, PM USA delivered
overhead savings of more than
$300 million in 2007.
Marlboro continued to drive
PM USA's performance, reaching
a record market share of 41.0%,
up 0.5 percentage points versus
2006. The brand's growth bene-
fited from the strong performance
of Marlboro Menthol, aided by the
8009533485
 March 2007 introduction of
Marlboro Smooth at retail, a new
menthol product that extends
PM USA's leadership in the
premium category.
For 2008, Altria is project-
ing solid operating performance
for the U.S. tobacco business,
although PM USA will face some
transitional and temporary head-
winds that will affect its earn-
ings growth rate. These include a
temporary absorption of higher
manutacturing overheads as PM
USA winds down its contract
manufacturing for PMI and further
investments to support PM USA's
entry in the smokeless category.
Looking ahead, I expect that
Altria and PM USA will benefit
from an enhanced focus on the
U.S. tobacco market, a greater
sense of urgency and an accelera-
tion in the pace of innovation.
Philip Morris International
generated strong income growth
for the full year 2007, buoyed
by currency, and registered
encouraging volume performance,
with improved trends in 17 of its
top 25 volume markets in the
tourth quarter of 2007 compared
8009533486
with the previous nine months.
Revenues net ot excise taxes
were up 9.6% to $22.8 billion,
while cigarette shipment volume
increased a solid 2.2% versus
2006, including the acquisition of
Lakson in Pakistan.
Operating companies income
increased 5.5% to $8 9 billion
for the full year 2007. but was
up 12.5% when adjusted for
the 2006 Dominican Republic
transaction and the 2006 Italian
antitrust charge, as well as asset
impairment and exit costs.
PMl's full year 2007 market
share performance improved in
many markets. However, share
performance in Japan cast a
shadow on an otherwise very
strong year, due mainly to a share
decline for Lark. I am confident
that PMI has a number of exciting
plans and innovative products to
enhance its market share fortunes
in Japan in 2008 and beyond.
For 2008, PMI is projecting
a robust earnings performance,
driven by pricing, cost reduc-
tions and continued currency
favorability at prevailirg rates.
Volume, however, is anticipated to
be essentially flat or slightly down
this year, reflecting continued total
cigarette consumption erosion in
several markets. Nevertheless, PMI
anticipates that its product mix will
continue to improve sequentially.
Over the long term, I am of the
tirm beliet that as an independent
company, PMI has an outstanding
opportunity to enhance its growth
rates through sharper focus, speed
to market and execution.
Over the last several years,
greater clarity has emerged in the
litigation environment as the result
of favorable developments in both
trial and appellate courts. Such
developments continued in 2007
and in the year to date in 2008,
and are fully discussed in Note 19
to the Consolidated Financial
Statements in this report.
We remain confident that
the strength of our defenses,
along with the developing law, will
provide for further success in the
litigation faced by company
into the future.
Altria enters 2008 a very different
company than it was just one
year ago. There is no doubt that
the U.S. tobacco business will
continue to tace a fiercely
competitive environment, but
I believe that the company's
principal subsidiary, PM USA,
is superbly prepared to success-
fully manage its challenges
and to take full advantage of the
opportunities ahead.
Finally, I want to take
this opportunity lo salute the
immensely talented and dedicated
employees of Altria, PM USA and
PMI. They have shown remarkable
loyalty and determination in
difficult and challenging circum
stances. Without them, we would
not have been able to complete
the restructuring of the company
in a seamless manner, to the
benefit of our shareholders,
and I thank them individually
and collectively from the bottom
of my heart.
Former Chairman of the Board and
Chief Executive O"ficer
March 31, 2008
8009533486
 With the completion of the Philip
Morris International (PMI) spin-off,
we are introducing a new Altria
that will provide substantial value
to shareholders through its power-
ful brands and its focus on leader-
ship in the U.S. tobacco industry.
I must begin by recognizing
Louis Camilleri and the Board of
Directors for their strategic vision
and wise counsel. Louis profoundly
influenced the company and deliv-
ered superior shareholder value.
We will miss him, and wish him
the best of luck at PMI.
As we begin this new chapter
in Altria's history, we will devote
most of our corporate resources
towards extending our leader-
ship position in the U.S. tobacco
industry. We will have the ability
to leverage resources, including
Philip Morris USA's distribution
network and strong field sales
force, across an array of tobacco
products, and we will have a more
flexible capital structure.
Importantly, Altria maintains
its historic strengths including
our ability to deliver consistent
and attractive returns to our
shareholders over the long term; a
8009533487
stable of strong brands; our com-
mitment to responsibly address
society's concerns about contro-
versial products; and an expe-
rienced, motivated and capable
management team.
Guiding our work is a new
corporate mission: To own and
develop financially disciplined
businesses that are leaders
in responsibly providing adult
tobacco consumers with superior
branded products.
Altria's new mission is sup-
ported by four core strategies.
Our mission begins with lead-
ership by investing in leading
brands and talented people. In
addition, Altria will continue to
address societal concerns relevant
to its business. And, to com-
pete ettectively, Altria will satisfy
evolving adult consumer prefer-
ences better than competitors.
Achieving these goals will allow
Altria to deliver on its fourth strat-
egy, to create substantial value for
shareholders.
Altria remains a large and
diverse enterprise. Philip Morris
USA (PM USA) is the largest
component of the company, with
its focus on domestic sales of
cigarettes and smokeless tobacco
products. In December 2007,
Altria expanded its category focus
by acquiring John Middleton, Inc.,
one of the leading manufacturers
of machine-made large cigars.
Beyond our U.S. tobacco
business, Altria also owns Philip
Morris Capital Corporation, where
we are managing a portfolio
of assets in order to maximize
financial contributions to Altria,
and a 28.6% interest in SABMiller,
an investment that has performed
well over the past few years.
Notably, Altria took significant
steps toward improving organi-
zational efficiencies in 2007.
PM USA reduced its sales, general
and administrative expenses by
more than $300 million. In
addition, its manufacturing
optimization program will result
in the closure of the Cabarrus
manufacturing facility for addi-
tional future annual savings.
Finally, Altria's move to Richmond
in 2008 allows the organization
to further reduce spending.
Listed on the facing page
are members of the initial Board
of Directors who will guide Altria
along with the talented manage-
ment team that brings deep expe-
rience in our businesses and will
lead the company into the future.
Altria's financial goal is to
achieve balanced and consistent
long-term earnings growth. The
company is committed to making
disciplined investment decisions
in its cigarette business and in
adjacent tobacco categories to
achieve growth. We also will focus
on reducing our cost base to
enhance margins, and use our
balance sheet to add value to
our shareholders.
As we look to the future,
I am confident that we have the
brands, the financial strength and,
most importantly; the outstand-
ing people to continue delivering
superior shareholder value.
Michael E. Szymanczyk
Chairman of the Board and
Chief Executive Officer
March 31, 2008
8009533487
 oard of irectors
Dr. Elizabeth E. BaileyLU,4,5 Dinyar S. Devitre·1 Thomas W. JonesLL. 3A CornmiUecs
Jo hr Retired Vice President Dnd Senior Pcirtner. TWJ Ccipital
and Public Chief Officer, Director
Altria Group. Inc.
George MunozuAs
Principal. Munoz Investment
Huntley, Chair
Gerald L Baliles 2 A 5
3 Member of Executive Committee
& Munoz Michael Chair
'Member of Cornrnitteo
Thomas W. Jones, Chair
former Governor of the
Michael E. Szymanczyk 3 s Member of Nominating,
Commonwealth of Virginia Social
and
Robert E. R. Huntley'' :i.is flr.

Denise F. Keane,

Back (left to right):

Howard A. Willard Ill,

Michael E. Sz\•mimc1zyk
Chairman of
and Chief

8009533488

8009533488

for Altria's U.S. tobacco segment,
which includes both PM USA and
John Middleton, Inc. (Middleton).
Operating companies income
for the U.S. tobacco segment
decreased 6.13 to $4.5 billion.
The decrease was primarily driven
by lower volume, increased resolu-
tion expenses, investments in
support of PM USA's smokeless
products, $371 million ot pre-tax
charges in 2007 related to asset
impairment, exit and implemen-
tation costs for the previously
(in millions)
announced closure of the
Cabarrus cigarette manufacturing
facility and a $26 million provision
for the Scott case in Louisiana.
Those factors were partially offset
by lower wholesale promotional
allowance rates and lower selling,
general and administrative costs.
tobacco segment in 2007 when
adjusted for the items shown in
the table below.
previous year, but was estimated
to be down approximately 3.63
when adjusted for changes in
trade inventories and calendar
differences. PM USA estimates
a decline of about 4% in total
cigarette industry volume for the
full year 2007.
share point each tor Virginia Slims,
Basic and the non-focus brands
in 2007. In the fourth quarter of
2007, share gains for Marlboro of
0.8 points were partially offset
by losses of 0.1 share point each
for Virginia Slims and Basic.

Full Year
2007 2006 that are based or a thorough

Reported Operating companies Income $4,518 $4,812 (6.1%) understanding of adult tobacco
consumers. During 2007, PM
Implementation costs 27
Asset impairment and exit costs related lo USA launched Marlboro Smooth,

Cabarrus plant closure 344 10 Marlboro Virginia Blend and several

Provision for Scott case
Adjusted Operating Companies Income
26 other new cigarette lire extensions.
These new products contributed
$4,915 $4,822 1.9%
to PM USA's retail share growth for
the year, and in the fourth quarter
of ?007 generated more than one
share point of business.

10

8009533489

8009533489
 PM USA continued to build on its leading portfolio of brands,
which includes Marlboro, Parliament, Virginia Slims, Basic and L&M.
Innovation was the theme for 2007,
With its industry leading position, Marlboro achieved significant as PM USA introduced new cigarette
packings expanded into new
share growth, while PM USA's other brands maintained strong categories.

positions in their respective segments. Marlboro continued to lead the U.S.

cigarette industry by relating to adult
tobacco consumers in innovative
and exciting ways, with new offerings
building on the brand's heritage and
further enhancing its equity Marlboro
Smooth, introduced in March 2007,
offers adult smokers a uniquely rich
and smooth menthol taste, while
Marlboro Virginia Blend has a distinc-
tive crisp and mellow taste intended
for adult smokers looking for a new
flavor experience.

As part of its growth strategy to develop

new revenue and income sources for
the future, PM USA initiated a test
market of Marlboro Snus, a smokeless
tobacco pouch product, in the Dallas/
Fort Worth area in 2007 and expanded
the test market to the Indianapolis area
The Middleton acquisition in December 2007
in early 2008.
marked Altria's entry into the growing machine-
made large cigar segment. Middleton's Black &
Mild five-cigar pack is the best-selling machine-
PM USA began test marketing Marlboro Moist Smoke- made large cigar package in the U.S.
less Tobacco in the Atlanta area in 2007, and based
on encouraging initial consumer and trade response
expanded the test market to include additional coun-
ties in the greater Atlanta area in early 2008,
Moist Smokeless lobacco is designed to provide a
premium-quality product at an attractive price for
adult moist smokeless tobacco consumers,

11

8009533490

8009533490

different smoking experience,
2003 2007
and helped drive Marlboro's
performance as the incustry's
fastest-growing menthol brand.
Also contributing to Marlboro's
growth was Marlboro Virginia
Blend, a single-leat, non-menthol
blend that reinforces tre Marlboro
brand's flavor heritage. In addition,
PM USA introduced L&M packings
in select geographies, offering a
unique, contemporary product in
the discount category.
Mi1:ldleto111 on December 11,
2007, from privately held Bradford
Holdings, Inc. for $2.9 billion
in cash. The net cost of the
acquisition, after deducting
approximately $700 million in
present value tax benefits arising
from the terms of the transaction,
12
8009533491
was $2.2 billion. The acquisition
was financed with existing cash
and is expected to be modestly
accretive to Altria's 2008 earn-
ings and generate ar attractive
double-digit economic return. It
had no material impact on Altria's
2007 fourth-quarter and full-year
earnings. For the full year 2007,
Middleton's volume, revenues
net of excise taxes, and operating
companies income were in line
with estimates provided when
the acquisition was announced
on November 1, 2007.
grown volumes at a compound
annual rate of approximately
4% to 5% over the 2003 to 2007
period. Retail market share for
Middleton's leading brand, Black
& Mild, increased 2.2 share points
in 2007 to 25.3% of the machine-
made large cigar segment. Retail
share performance is based on
data from Information Resources,
Inc. (IRI) Syndicated Reviews
Database, which is a tracking ser-
vice thal uses a sample of stores
to project market share perfor-
mance across multiple product
categories, including cigars.
the Food and Drug Administration
regulatory authority over tobacco
products. Legislation was reintro-
duced in both the Hcuse and
the Senate in 2007, but was
not enacted.
Critical to the success of PM
USA's revenue and income
enhancing programs is meeting
society's changing expectations
of a tobacco company. During
2007, it continued to implement
programs in response to these
evolving expectations.
its Youth Smoking Prevention
department and responsible-
retailing incentive payments.
It focused its work on the
high-impact areas of parent
communications, youth access
prevention initiatives and
grants focused on positive
youth development.
about the serious health
effects of smoking and offered
resources to those who have
decided to quit. QuitAssist™
continues to offer information
designed to help connect
smokers who have decided to
quit with expert information
from public health authorities
and others. These resources are
available in English and Spanish
at www.philipmorrisusa.com.
to determine specific societal
expectations of the company to
inform its efforts as it executes
its adjacency strategy and
introduces new products. Its
programs will continue to evolve
as its product portfolio expands.
8009533491
 units, to 850.0 billion units in
2007, due to the acquisition of
Lakson in Pakistan. Excluding
tobacco business. Operating com- Lakson and the acquisition of local
panies income increased 5.5% to trademarks in Mexico effective
$8.9 billion for the full year 2007, November 1, 2007, cigarette
due primarily to higher pricing, shipments were down 0.7% or
favorable currency of $471 million 5.6 billion units, due mainly to
and productivity and cost savings, lower shipments in Germany
partially offset by the impact of and Poland and the unfavorable
the 2006 gain on the Dominican impact of timing and trade
Republic transaction and higher inventory movements, primarily in
marketing and R&D. Japan and Mexico. Partially
offsetting the decline were
strong gains in Argentina. Egypt,
adjusted for the impact of the Indonesia, Korea and Ukraine,
Dominican Republic transaction as well as favorable timing in
and other items shown in the Italy. Absent acquisi:ions and
table below. the net impact of unfavorable
timing and inventory movements,
PMI shipments were essentially
flat in 2007.
(in millions) Full Year was down 1.5% in 2007, due
2007 2006 mainly to timing in Mexico
Reported Operating Companies Income $8,922 $8,458 5.5% and unfavorable distributor
Divested businesses (51) inventory movements in Japan,
Asset impairment and exit costs 195 126 partially offset by gains in
Gain on sale of business (488) Argentina, Bulgaria, Indonesia,
Italian antitrust 61 Korea and Russia. Absent timing
Adjusted Operating Companies Income $9,117 $8,106 12.5% and inventory distortions in
OCI Japan, Mexico and other markets,
Marlboro shipments were down
slightly by 0.2% in 2007. Marlboro
market share was up in Argentina,
8009533492
Brazil, Egypt, Greece, Hungary,
Indonesia, Israel, Korea, the
Philippines, Poland, Russia
and Ukraine.
grew by 1.5%, or 4.8 billion units,
to 327 billion units for the full
year 2007, driven by gains
in Parliament, Virginia Slims,
the Philip Morris brand, Merit,
Chesterfield, Bond Street and
Muratti, partially offset by lower
volume for L&M and Lark.
operating companies income
grew 18.7% to $L.2 billion in
2007, primarily driven by higher
pricing and tavorable currency
of $417 million. Operating
companies income grew 17.1%
in 2007 when adjusted for the
impact of asset impairment and
exit costs, and the 2006 Italian
antitrust charge.
was down 0.7% for 2007, as
declines in Germany and Poland
and unfavorable distributor
inventory movements in France
were partially offset by increased
shipments in Hungary and the
Salties, and the iripact of
13
8009533492
 I
PMI continued to build strong brand
equity through innovation in 2007.
International fhanCI Bortfolio Notable new product introduc-
tions included Marlboro Filter Plus in
With shipment volume of 311.2 billion units, Marlboro continued Kazakhstan, Korea, Romania, Russia,
to assert its position as the world's best-selling international Taiwan and Ukraine. Marlboro Filter Plus
tobacco brand, outselling the next three best-selling international combines innovative cigarette and filter
brands combined in 2007. Shipment volume tor PMl's other construction to deliver outstanding
international brands grew by or 4.8 billion units, to taste in the low-tar segment.
327 billion units in 2007, benefiting from gains in Parliament,
Slims, Chesterfield and the Philip Morris brand.

The July launch of Marlboro kretek helped PMl's

cigarette shipments in Indonesia grow 2.8%
l.&M
in 2007. while Marlboro shipments rose 14.73
Marlboro kretek brings together a perfect blend of
The entire L&M brand was replaced in
world-class tobaccos and Indonesia's finest cloves,
much of the EEMA region with a completely new,
and represents a real breakthrough in the full-flavor
smoother-tasting product line-up beginning in
machine-rolled kretek segment, which is one of the
April 2007 in response to changing adult con-
largest cigarette segments in Indonesia.
sumer preferences. Available in red, blue and
label variants, the new product features a
triple charcoal filter and a round-corner pack.
Shipment volume tor Virginia Slims increased 173
to ll.2 billion units in 2007, with growth corning from
all PMI regions, fueled by the launch of Virginia Slims
Uno in Greece, Kazakhstan, Russia and Ukraine. and
Virginia Slims Noire in Japan.

favorable inventory movements in
Italy. The total cigarette market in
the EU declined 0.7% in 2007.
was down 0.1 point
in 2007, primarily due to inven-
tory distortions in the Czech
Republic, Absent these distor-
tions, market share in the EU
was flat.
PMl's cigarette
shipments were down 4.8%
versus 2006. The total market
declined L5% in 2007, due to
higher pricing, Market share
for PMI of 42.4% was down
0.3 points, with Marlboro down
0.7 share points to 30.2%,
reflecting the temporary adverse
impact of crossing the €5.00
per pack threshold, In the mid-
price segment, the Philip Morris
brand gained 0.3 points to
6.2%. PMI achieved sequential
improvement in market
share every month since
September 2007.
PMl's in-market
cigarette sales were down 5.0%,
and market share of 36.5%
declined 0.4 points, due to lower
Marlboro share, partially offset
by share gains for L&M. PMl's
cigarette shipments were down
4.6% versus 2006. The cigarette
market declined 4.0% in 2007,
due mainly to the tax-driven
price increase in October 2006.
Market share in the fourth
quarter was up L4 points
to 37.6%.
PMl's in-market sales
rose 0.4%. The total market
was down 1.1% for the full year
2007, while PMl's cigarette
market share of 54.6% grew 0.8
points, driven by Chesterfield
and Merit Share for Marlboro in
Italy of 22.8% was essentially
unchanged. PMl's full-year 2007
cigarette shipments were up
2.9%, due mainly to favorable
timing of shipments compared
with 2006,
PMl's market share of
32.1% was down slightly. Marlboro
share declined 0.6 points to
16.5%, partially offset by gains
for Chesterfield, L&M and the
Philip Morris brand. The total
cigarette market was down
L2% for the full year 2007.
PMl's cigarette shipments rose
0.7% in 2007.

14

8009533493

8009533493

ing companies income increased
17.5% to $2.4 billion for the full
year 2007, due mainly to higher
pricing, improved volume/mix and
favorable currency of $90 million.
Operating companies income
grew 18.0% for the full year 2007
when adjusted for the impact of
asset impairment and exit costs.
up 0.9% as gains in Algeria,
Bulgaria, Egypt and Ukraine
were partially offset by declines
in Romania, Russia, Serbia and
Turkey.
PMl's cigarette ship-
ments rose 25.6% for the full
year 2007, while market share
advanced l.9 points to l?.0%,
driven by Marlboro, L&M and Merit.
shipment volume
declined ?.0% in ?007, as lower
volume for L&M was partially offset
by the continued growth of higher-
margin brands, including Marlboro,
Parliament, Chesterfield and Muratti.
PMI market share of 26.6% was
unchanged. In September ?007,
PMI replaced the entire L&M brand
family with a completely new,
smoother-tasting product line-up
in response to changing adult
consumer preferences.
the total market was
down slightly by 0.4% in 2007,
while PMl's market share declined
2.1 points to 40.4%, due mainly
to the decline of lower-margin
brands in PMl's portfolio.
shipments grew 4.7%
in 2007 and market share rose 0.8
points to 33.9%, driven by adult
8009533494
consumer uptrading to premium
brands, particularly Marlboro,
Parliament and Chesterfield.
Asia
opernting conpanies
income decreased 3.6% to $1.8
billion in 2007, primarily due to
lower volume in Japan and unfa-
vorable currency of $36 million,
partially offset by favorable pric-
ing. Operating companies income
decreased 3.1% for 2007 when
adjusted for asset impairment
and exit costs.
reflecting the acquisition
of Lakson in Pakistan and higher
volume in Indonesia and Korea,
partially offset by a decline in
Japan. Excluding the Lakson
volume, shipments were down
3.23 or 6.2 billion units, reflecting
the negative impact of inventory
movements and lower in-market
sales in Japan in the fourth quar-
ter of 2007.
lndon.esi:;i, PMI market share
was down slightly to 28.03,
reflecting the share decline of
A Mild and Dji Sam Sae, due to a
temporary stick-price disadvan-
tage versus competitors' brands,
partially offset by the growth of
Marlboro, which gained 0.4 points
to 4.0%. The total cigarette mar-
ket was up 3.9% for the full year
2007. PMl's cigarette shipments
grew 2.8%, while Marlboro ship-
ments rose 14.7%, driven by the
July 2007 Marlboro kretek launch.
PMl's in-market sales
were down 6.2% and market
share declined 0.4 points to
24.3%, due mainly lo Lark. The
total cigarette market declined
4.8% or 13.0 billion units in 2007,
due primarily to the impact of
the 2006 mid-year excise-tax-
driven price increase. Marlboro's
share at 9.9% was flat for 2007,
but up 0.2 points in the fourth
quarter of 2007 versus the year-
earlier period. Cigarette shipment
volume was down 12.6% in 2007,
reflecting lower in-market sales
and a reduction in distributor
inventory durations at year-end
2007 versus 2006.
PMl's shipments
rose 20.3% and market share
increased 1.3 points to 9.9%
in 2007. The total market was
up 4.6% in 2007. PMl's share
increase was driver by Marlboro,
Parliament and Virginia Slims and
benefited from recent new line
extensions, including Marlboro
Filter Plus.
Latin America
operating
companies income decreased
48.43 to $520 million in 2007,
due mainly to the impact of the
2006 Dominican Republic
transaction, partially offset by
higher pricing in 2007. Operating
companies income increased
14.5% for the full year 2007
when adjusted for the impact
of asset impairment and exit
costs, and the 2006 Dominican
Republic transaction.
in 2007, as higher volume in
Argentina was partially ottset
by declines in Mexico and the
Dominican Republic.
Ar1~en1tina, the total cigarette
rnarkel grew 3.0% in 2007. PMl's
market share increased 2.6
points to a record 68.9%, driven
by Marlboro and the Philip Morris
brand. PMI shipments grew 7.1%.
PMl's market share gain
of 0.8 points to a record 64.3%
was fueled by Benson & Hedges
and Delicados. Marlboro's share
at 47.7% was flat versus the prior
year. The total market declined
6.3% for the full year 2007, due
to lower consumption following
the price increases in January and
October 2007, as well as an unfa
vorable comparison with the prior
year, which included trade pur-
chases in advance of the January
2007 tax-driven price increase.
PMI supports strong and
effective regulation for both its
products and its industry, and is
committed to working with gov-
ernments and the public health
community towards that goal.
to communicate the public
health authorities' messages
about the healtr effects of
smoking, and to implement
measures that help prevent
youth smoking.
and backs youth smoking
prevention programs across
the globe, including preventing
kids from getting access
to cigarettes.
More information on PMl's
responsibility initiatives is
available at www.pmintl.com.
15
8009533494

Altria Group supported organi-
zations such as God's Love We
Deliver that provide meals to
people living with HIV/AIDS and
other critical illnesses.
16
8009533495
Our commitment to compliance
and integrity is spearheaded by
Altria senior officers c.nd driven
by our employees. In 2007, the
overwhelmingly positive employee
feedback in our second biennial
compliance and integrity survey
confirmed that our efforts to meet
this commitment are succeed-
ing. Survey results also helped
us strengthen our compliance
programs and identify areas of
focus for the future. Working with
compliance organizations, as well
as leading corporate :hinkers,
Altria continues to seek out and
pioneer best practices and proven
strategies in its ongoing pursuit of
high ethical standards.
Altria again partnered with not-
for-profit and community orga-
nizations to provide resources
to people in need. Our 2007
programs helped supply food and
nutritional services, assist victims
of domestic violPnce, support
artistic innovation and aid people
affected by natural disasters.
Our giving included grants
for programs to deliver nutritional
meals to people living with HIV/
AIDS and other critical illnesses.
We also supported service orga-
niLalions lhat provide food for
needy families and the home-
bound elderly, and organizations
leading the effort to end hunger
and malnutrition, including the
Congressional Hunger Center,
Food & Friends, God's Love We
Deliver and the Food Bank for
New York City.
In our continued commit-
ment to assisting victims and
survivors of domestic violence,
we supported organizations that
provide shelter and services to
battered women and their children.
We also funded the production of
the short film, UnSafe, part of a
national initiative by Safe Horizon's
SafeWork Project to increase
awareness of domestic violence
in the workplace.
We continued to encourage
diverse artistic expression in 2007.
Highlights include sponsorship
of an exhibition of contemporary
Latino and Latin-American artists
at New Ycrk City's El Museo del
Barrio; American Ballet Theatre's
Voices and Vision: The Women's
Choreography Project; and The
First Impressionist: Eugene Boudin,
at the Nalional Gallery of Arl in
Washington, D.C., and the Virginia
Museum of Fine Arts in Richmond.
When the worst wildfires
in California history forced the
evacuation ot more than halt a
million residents, Altria supported
relief efforts by the American Red
Cross and local organizations.
In 2007, our employees again
demonstrated their spirit of giving
through the donation of personal
time and money to charitable
causes. Their cortributions to
local and national not-for-profit
organizations were supplemented
by Altria's Employee Matching
Gifts programs.
8009533495
 Financial Contents

Management's Discussion and Analysis of Financial Condition and Results of Operations page 18
Selected Financial Data-Five-Year Review page 47

Consolidated Balance Sheets page 48

Consolidated Statements of Earnings page 50

Consolidated Statements of Stockholders' Equity page 51
Consolidated Statements of Cash Flows page 52

Notes to Consolidated Financial Statements page 54

Report of Independent Registered Public Accounting Firm page 92

Report of Management on Internal Control Over Financial Reporting page 93

Guide To Select Disclosures

For easy reference, areas that may be of interest to investors are highlighted in the index below.

Acquisitions-Note 5 page 60

Benefit Plans-Note 16 includes a discussion of pension plans page 70

Contingencies-Note 19 includes a discussion of litigation page 76

Finance Assets, net-Note 8 includes a discussion of leasing activities page 62

Kraft Spin-Off page 19

Philip Morris International Spin-Off Inside cover/page 18

Segment Reporting-Note 15 page 69

Stock Plans-Note 12 includes a discussion of stock compensation page 65

17

8009533496

8009533496
 aggreg<ite intrinsic value equal to the intrinsic value of the pre-spin Altria
Group, Inc. options:
Throughout Management's Discussion and Analysis of Financial Condition
a a new PMI option to acquire the same number of PMI
and Results of Operations, the term "Altria Group, Inc:' to consoli-
as the number of Altria Group, Inc. options held by
dated financial position, of operations and cash flows Altria
such on the PMI Distribution Date; and
family of companies and the term "ALG" solely to the parent com-
pany. ALG's wholly-owned subsidiaries, Philip Morris USA Inc. ("PM USA"), a an adjusted Altria Group, Inc. option for the same number of
Philip Morris International Inc. ("PMI") and John Middleton, Inc. of Altria Grouri, Inc. common stock with a reduced price.
in the manufacture and sale and other tobacco prod.Jets. Philip
Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary,
maintains a portfolio of and finance In addition, ALG
held a economic and voting in SABMiller pie ("SABMiller")
2007. ALG's access to the operating cash flows of sub- reslricled slock and until lhe completion of
sidiaries of from the payment of dividends and inter- the original restriction period (typically, three years from the of the
and the repayment of amounts borrowed from ALG by original Recip of Altria Group, Inc. stock awarded on
In 2007, ALG received $6.6 billion in dividends from PMI. January 30, 2008, who will be employed by Altria Group, Inc. after the PMI
On March 30, 2007, Altria Group, Inc. distributed all of remaining Distribution will receive odditional of deferred stock of Altrin
1n Kraft Inc. ("Kraft") on pro-rata to Altria Group, Inc. the intrinsic value of the award. Recipients of Altria
stockholders in a distribution. to stock awarded on January 30, 2008, who will he
the Kraft Spin-Off Altria Group, Inc. has and PMI Distribution Date, will
reflected the of Kraft prior to the Kraft Distribution Date as discontin- of stock of PMI to the intrinsic va of the award.
ued operaticns on the consolidated and the consoli- the extent that employees of the remaining Altria G'oup, Inc.
dated statements of cash flows for all periods priiseinted. PMI stock options, Altria Group, Inc. will reimburse PMI in for the
liabilities related to Kraft were and Black-Scholes fair value the stock options to be the extent
operations on the consolidated that PMI hold Altria Group, Inc. stock options, PMI will reimburse
Altria Group, Inc. in cash for the Black-Scholes fair value of the stock options.
PM! Spin-Off To the extent that of the remaining Altria Group, Inc. PMI
On January 30, 2008, the Board of Directors announced that Altria Group, Inc. will pay to PMI the fair value of the PMI
Inc. plans to spin off all of interest in PMI to Altria Group, Inc. stockhold- stock value of projected that PMI
ers in a distribution. The distrihution of all the PMI shares owned by employeE1s hold Altria Group, Inc. stock or
Altria Grnup, Inc. to made on March 28, 2008 (the "PMI Dis- reimburse Altria Group, Inc. in cash for the fair value of the or
tribution Date"), to Altria Group, Inc. stockholders record the of stock value of projected ;ind any amounts previ-
on March 19, 2008 (the "PMI Record Date"). Altria Group, Inc. will ously to PMI for the restricted or stock. Based upon the
distribute one of PMI common stock for cf Altria Group. number of Altria Group, Inc. stock awards outstanding December 31.
Inc. common stock outstanding as of PMI Dute. Following the net amount of these reimbursements to be approxi-
PMI Distribution Date, Altria Group, Inc. will not own any of PMI com- mately million from Altria Group, Inc. to PMI. Howeve,, this estimate
mon stock. Altria Group, Inc. intends to ad1ust its current dividend that subject to change ns stock awards (in tho of and
stockholders who retain their Altria Group, Inc. and PMI will stock) or (in the of
in the the same dividend dollars as the PMI Distribution PMI Record Date.
Date. Following the distribution, PMl's initial nnnualized dividend will be PMI currently included in the Altria Group, Inc. consolidated
$1.84 common share and Altria Group, lnc:s initial annualized dividend income tax return, ard PM l's federal income are
will $1.16 common All decisions divi- liabilities on lhe balance sheet of ALG (lhe parent company). Prior lo lhe
dends will be made independently by the Altria Group, Inc. Board Direc- distribution of PMI shares, ALG will reimburse PMI in cash liabilities,
tors and the PMI Board of Directors, for their respective companies. which approximately million.
Holders of Altria Group, Inc. stock options will similarly to A subsidiary of /\.LG currently provides PMI with corporate
public stockholders and will, accordingly, have their stock awards split into at plus a management After tho PMI Distribution Date,
two instruments. Holders of Altria Group, Inc. stock options will the PMI will independenty undertake activities, and provided to
following stock options, which. immediately the spin-off, will an PMI will in 2008. All intercompony accounts will be settled in cosh.
Certain employees of PMI participate in U.S. benef t plans
by Altria Group, Inc. Mter the PMI Distribution Date, the previously

8009533497

8009533497
 provided by Altria Group, Inc. will Kraft Spin-Off
will by PM!, and the plan (to the On March 30, (the "Kraft Distribution Date"), Altria Group, Inc. distrib-
benefit plans were previously funded) and liabilities will betrans1fen·ed to uted all of in Kraft on a pro-rata basis to Altria Group,
the new plans. The of these benefits will in PMI an Inc. stockholders of of the close of on March 16, 2007
additional liability of approximately $98 million in its consolidated balance (the "Kratt Record Date") in a distribution. I he distribution ratio was
sheet, partially by the related tax assets million) and the 0.692024 of a of Kraft for each of Altria Group, Inc. common
corresponding SFAS 158 adjustment to stockholders' ($23 million). stock outstanding. Altria Group, Inc. stockholders cash in lieu of
Altria Group, Inc. will pay PM! a corresponding amount of -nillion in fractional of Kraft. Following the distribution, Altria Group, Inc.
cash, which net of the related tax benefit. not own any of Kraft. the second quarter 2007, Altria
Altria Group, Inc. currently that, 1f the distribution had Group, Inc. adjusted its quarterly dividend to $0.69 per that
occurred on December it would have in a to stockholders who their Altria Inc. and Kraft
Altria Group, lnc:s stockholders' equity of approximately $15 billion. receive, in the the same dividend dollars as
tion. In 2007. Altria Group, Inc. its quarterly dividend
Dividends and Share Repurchases
$0.75 per share.
In conjunction with announcement of the Board of
Holders of /\ltria Group, Inc. stocl' options were treated similarly to
Directors reaffirmed its intention to adjust Altria lnc:s dividend
lie stockholders and accordingly, had their stock awards split into two instru-
irmnecj1alely following the spin-off that Allria Group, Inc. stockholders
ments. of Altria Group, Inc. stock options the following
who retain PM! will in the same annual
stock options, which, immediately after the spin-off, had an intrin-
of $3.00
sic value equal to intrinsic value of the pre-spin Altria Group, Inc. options:
Inc.
" a new Kraf: option to acquire the number of shares of Kraft Class A
common stock equal to the product of (a) the number of Altria
Group, Inc. options held by such person on the Kraft Distribution
quarter, or Date and (b) the distribution ratio of 0.692024;
common share on an annualized basis. PM! has established a divi-
" an adjusted Altria Group, Inc. option for the
dend
of Altria Inc. common stock with a reduced price.
Payment
Directors of lhe respeclive companies. new Kraft cpticn an exercise price equal the Kraft market
In addition, the Board of approved share repurchase price at time the distribution multiplied :iy the Option
programs as follows: Conversion Ratio, which the price original Altria
Group, Inc. option divided by the Altria Group, Inc. market price immediately
a for Altria Group, Inc. a $7.5 billion two-year share repurchase pro-
before the distribution reduced of the adjusted
gram that expected to in April 2008, completion of the
Altria Group, Inc. cption was determined by the Altria Group, Inc.
spin-off; and
market price immediately following the distribution the Option
repurchase program that Conversion Ratio.
Holders of Altria Group, Inc.
prior to January 31, 2007, retained their
Tender Offer for Altria Group, Inc. Notes
stock or stock of Kraft
In connection with Altria Group, lnc:s planned spin-off of PMI, on January 31,
2008, /\ltria Group, Inc. and subsidiary, /\ltria Finance (Cayman Islands)
Ltd. commenced tender to purchase for cash billion of and
Kraft options. All cf the stock and deferred stock will
dell)er1tures denominated in U.S. dollars and approximately billion in
completion of the original restriction period (typically, three years from the
euro-denominated bonds.
date of the original grant). Recipients Altria Group, Inc. deferred stock
While Altria Group, Inc. proposed spin-off of PM! not
awarded on January 31, 2007, did not stock or deferred
prohibited by lhe indentures, it that 1t is desirable lo eliminate any
stock of Kraft. Rat1er, they additional Altria
uncertainty by amending the indentures with the consent of note holders.
Group, Inc. to the intrinsic value of the original award.
In order to the tender Altria Group, Inc. a
the extent that of the remaining Altria Group, Inc.
$4.0 billion, 364-day loan agreement w,th substantially the
received Kraft stock opl1ons, Allria Group, Inc. reimbursed Kraft in cash for
terms as its credit facilities. Subsequent to the spin-off of PMI, Altria
the Black-Scholes fair value of the stock options the extent that
Group, Inc. intends to new public debt to refinance debt incurred
Kraft held Altria Group, Inc. stock options, Kraft reimbursed
the loan tender offer and consent solicitation
Altria Group, in cash for the Black-Scholes fair value of the stock options.
2008 of approximately
the extent th;:it holders of Altria Inc. deferred stock received Kraft
stock, Altria Group, Inc. paid to Kraft fair value of the Kraft
deferred stock the value of projected forfeitures. Based upon the num·
ber of Altria Group, Inc. stock awards outstanding at the Kraft Distribution
Date, the amo..int reimbursements in payment of

8009533498

8009533498
 Inc. in April
ment from Kraft is an to the additional paid- n capital
of Altria Group, Inc. on the December 31, consolidated balance The following executive summary intended to provide significant high-
Kraft was previously included in the Altria Group, Inc. consolidated lights of the Discussion and Analysis that follows.
income tax return, and federal income tax co1nt111gEmc1es
1111 Consolidated Operating Results- The changes in Altria Group, lnc:s
liabilities on balance of ALG. As tne intercom-
from continuing operations and diluted ("FPS")
pany account settlement below, ALG reimbursed Kraft in cash for
from continuing operations for the year December 31. 2007, from the
liabilities, which as of March 30, 2007, approximately $305 mil-
year ended December 31, 2006, due primarily to the following:
lion, plus interesc cf $63 million ($41 million ALG also
reimbursed Kraft in cash fnr the federal income tax of the Diluted EPS
("FASB") Interpretation from from
Continuing Continuing
No. 48, "Accounting for Uncertainty in interpretation Operations Operations
FASB Statement No.109" ("FIN (approximately $70 million plus pre-tax
of $14 million, $9 million after taxes). See Note 14. Income for
discussion of the RN 48 adoption and Sharing Agreement
between Altria Group, Inc. and Kraft
A subsidiary of ALG previously provided Kraft with certain at
plus management After the Kraft Distribution Date, Kraft
undertook these activities, and any remaining limited provided to
Kraft ceased during 2007. All interccmpany accounts in cash
within 30 days of the Kraft Distribution Date. The settlement of the inter-
company accounts (including the amounts above related to stock
awards and contingencies) 1n net payment from Kraft to ALG
of $85 million in /\pril
The distribution in a net to Altria Group, lnc:s
stockholders' equity of $27.4 billion on the Kraft Distribution Date.
Other
On December 11, 2007, in con1unction with PM USA's adjacency
Altria Group, Inc. acquired 100% of John Middleton, Inc., a manufac-
turer of machine-made $2.9 billion 1n cash. fhe acquisition
financed with cash. John Middleton, lnc:s balance sheet
been consolidated with Altria Group, lnc:s as of December 31, Earn-
from December 12, 2007 to December 31, amounts of which
in5ignificant, have included in Altria Group, lnc.'s conso idated 111 Asset Impairment, Exit and Implementation Costs- In June 2007,
operating Altria Group, Inc. announced plans by its tobacco subsidiaries to optimize
In November 2007, Altria Group, Inc. announced that it had worldwide production by moving U.S.-based production
agr·ee111e11t to building in New York City for non-U.S. markets to PMI facilities in Europe. Due to declining U.S. ciga-
mately $525 million and will record gain approximately rette volume, as well as PM l's decision to its production, PM USA
million upon closing the transaction. Under the terms of the ag1reemE1nt, will close Cabarrus, North Carolina manufacturing facility and consolidate
Altria Group, Inc. plans to close the no later than April 1, 2008. manufacturing for the U.S. marl,et at its Richmond, Virginia manufacturing
RP1~1nn1no with the second quarter of 2007, Altria Group, Inc. revised center. 2007 through PM USA to incur total pre-tax
reportable to PMl's operations by Altria asset impairment, exit and implementation of approximately
Group, lnc:s revised U.S. tobacco; Union; including $371 million ($23L million after
Europe, Middle East and Africa; Asia; Latin America; and Financial During 2006, PM USA recorded pre-tax asset
Accordingly, prior have been revised. impairment and :osts $10 million ($6 million During
Certain of PM! have always reported their and 2006, PM! recorded pre-tax asset impairment and exit of
ten days the end of December, rather than on f)1>1c1ernh1>r $195 million million after taxes) and $126 million ($86 million after
respe1:t1ve1v. In addition, and 2006, pre-tax asset impair-
costs of $111 million million and million

8009533499

8009533499
 111 Recoveries/Provision from/for Airline Industry Exposure-As ,. Higher U.S. tobacco incorne, lower promotional
in Note 8. ("Note 8") PMCC a pre-tax allowance and lower marketing, administration and
of million ($137 million after taxes) on the ownership partially by lower volume and higher
and bankruptcy claims in certain leveraged investments in and
aircraft which partial in cash. of amounts that had
11 Higher Latin America income, reflecting higher pricing, partially off-
written down. During 2006, PMCC
by marketing, administration and
by million ($66 million after taxes), due to within
airline industry. partially by:
111 Interest on Tax Reserve Transfers to Kraft-As further in " Lower financial income (after excluding the impact of the
Note L of Presentation and Note 14. Income the recoveries/provision from/for airline industry exposure), reflecting
interest on tax to Kraft is to the Kraft spin-off, lower from management activity and lower
adoption of FIN 48 in 2007 and the conclusion an IRS audit in 2006. and
111 Italian Antitrust Charge-During the first ciuarter nf PMI " Lower Asia income. lower volume/mix and higher market-
recorded $61 million to an Italian antitrust action. adrninislralion and research partially offset by higher
pricing.
1111 Gain on Sale of Business- The 2006 gain on
was to a $488 million million
exchange of PMl's 1n beer business in return for cash proceeds
of $427 million and 1003 ownership of a business ir the
Dominican Republic. 1111 2008 F'orecasted Results- In January 2008. Altria Group, Inc.
announced that 2008 full-year diluted per from
111 Currency- The favorable to the weak- continuing operations, excluding PMI, which will be accounted tor as a
the U.S. dollar versus the euro, continued operation for the full-year 2008, following the PMI spin-off, to
by the strength of the U.S. dollar in the of $1.63 to $1.67, a growth of approximately
to 11% for the full-year 2008, from a base of $1.50 per in 2007.
111 income Taxes-Altria Group, lnc:s effective tax rate increased 4.3
reflects a higher effective tax the contribution of income
2007 includes net
John Middleton, Inc. and the impact of
and associated
per share growth expected be in the
from the expiration of of limitations million
half of 2008.
in the third quarter and $56 million in the fourth quarter) and million
related to the reduction of tax liabilities resulting from future lower Reconciliation 2007 Reported Diluted EPS from Continuing Operations to
in Germany in the third quarter. The in 2007 2007 Adjusted Diluted EPS from Continuing Operations
of tax accruals of $98 million no longer required in the
2006 tax rate includes $631 million of non-cash $
principally the of tax after the (0.09)
U.S. Internal Revenue Service ("IRS") concluded its examination of Altria
Group, lnc:s consolidated tax returns 1996 through 1999 in the
quarter of 2006. The 2006 also includes the tax 0.15
no longer required at PMI of $105 million.
111 Shares Outstanding- Higher outstanding during 2007 primar-
ily of omployeo stock options (which become outstanding The forecast excludes the impact of any potential
when exercised) and the incremental impact ot stock options d1vest1tures (other than PMI Altria Group,
outstanding. headquarters in New York related to
Altria Group, lnc:s notes and a number of other factors including the items
111 Operations- The in from continuing shown in the above. described in the Cautionary
operations was primarily to the following: section of the following u1scui;s1c1n a1x11qna11vs1s
Eastern Middle East and Africa income, reflecting continuing risks to this
higher pricing and higher volume/mix, partially off5et by
marketing, administration and research
a Higher Union income, reflecting higher pricing, and lower
marketing, administration and partially by
lower volume/mix;

8009533500

8009533500
 During and Altria Group, Inc. rmnnlPt,,ri annual
review of goodwill and intangible assets, and no
Critical reviews.
sta1ternents includes a summary of 111 Marketing and Advertising Costs-As required by U.S. GAAP, Altria
the significant accounting policies and methods used in the preparation Group, Inc. reccrds marketing an in the to which such
of Altria Group, lnc:s consolidated financial statements. In most Altria Group, Inc. does not defer amounts on con-
Altria Group, Inc. must an accounting policy or method balance with to Altria Group, Inc.
the only policy or method permitted under accounting principles generally advertising in the year incurred. Consumer incentive and
accepted in United States of America ("U.S. GAAP"). trade promotion activities are recorded as a reduction of on
The preparation of financial statements includes the amounts estimated as being due to customers and consumers at the end of
and assumptions that affect the amounts period, principally on historical utilization and redemption
the of contingent liabilities at the
SJch programs include, but not limited to, discounts, coupons,
ments and the reported amounts of revenues and during the display incentives and volume-based incentives. Fer interim
periods. If actual amounts ultimately different from purposes. and certain consumer incentive
e::.11rrr<d1es, lhe revisions are includeo in Allria Group, lnc:s consolidated charged to operations as a of based on estimated sales
of operations for the period in which the actual amounts become and relaled for the full
known. I listorically, the if any, Altria Group,
lnc:s and actual amounts in any have not had a significant 1111 Contingencies-As discussed in Note 19. ("Note 19 .. ) to
impact on consolidated financial statements. the consolidated fina1cial covering a wide
I he selection and of Altria Group, lnc:s critical accounting of pending or in various U.S. and foreign juris-
have with Altria Group, lnc:s Audit ALG, its and affiliates, including PM USA and
Committee. The following is a review of the more significant assumptions PMI, their respeclive 1ndernnitees. In 1998, PM USA and
and as well as accounting policies and methods in the other U.S. tobacco pr:iduct manufacturers entered into the Master Settle-
preparation of Altria Group, consolidated financial statement;; ner1tf!1gno;erner1t (the "MSA") with 46 states and various other """'"""rnm1Pnl«
and jurisdictions to and hearth recovery
111 Consolidation- I he consolidated financial statements include ALG. as and other claims. PM USA and certain other U.S. tobacco woduct manufac-
well its wholly-owned and majority-owned Investments in turers had previously similar claims brought by Mississippi, Florida,
which ALG exercises s1gn1t1cant influence (20%-t:i0% ownership irterest), Minnesota (together with the MSA, the "State Settlement
accounted for under the equity method of accounting. Investments in ments"). PM USA's portion of ongoing ad1usted payments and
which ALG has an ownership of than not on relative share of the settling manufacturers' domestic
significant influence. accounted for with the cost method of accounting. shipments, including roll-your-own in the
All intercompany transactions and balances have eliminated. which the payment due. PM USA
111 Revenue Recognition-As required by U.S. GAAP, Altria Group, lnc:s ment payments part of as product shipped. During
consumer products net of nAr:RmhAr 31, 2007, 2006 and 2005, PM USA recorded
and including shipping and handling billed to customers, upon of $5.5 billion, $5.0 billion and $5.0 billion, respectively, as part of
shipment or delivery of goods when title and risk of loss pass to cu~;to 1me1rs. for the payments under the State Settlement and
ALG's consumer products also include billed locus- payments for tobacco growers and quota-holders.
tomers in Shipping and handling costs ALG and its subsidiaries provisions in the consolidated financial
cost of sales. statements for pending litigation when they determine an unfavorable
outcome is probable and the amount of the loss can be rez1sona101v
111 Depreciation, Amortization and Goodwill Valuation-Altria Group, Inc. mated. as discussed in Note 19: at the time. while
de1xec1ates property, plant and equipment and its definite life reasonably possible lhal an unfavorable outcome in a
intangible a;;sets using the straight-line rnetr1od over the estimated useful (i) management has concluded that it not probable that
lives of tne incurred in any of the pending totJacco··relatE:d
Altria Group, Inc. is required to conduct an annual review of goodwill unable to estimate the or range of
and intangible for potential impairment. Goodwill impairment an unfavorable outcome of any of the pending tobacco-related cases; and
requires a comparison between the carrying value and fair value each (iii) accordingly, management has not provided any amourts in the consoli-
reporting unit. It carrying value exceeds the tair value, goodwill is consid- dated financial statements for unfavorable if any. Legal
ered impaired. The amount of impairment as the oiffer- incurred.
ence between the carrying value and implied fair value of goodwill, which
determined discounted cash flows. Impairment testing for non- 1111 Employee Benefit Plans-As discussed in Note 16. Plans
amortizable intangible assets requires a comparison between the fair value ("Note 16") of the notes to the consolidated financial statements, Altrin
and rnrrying value of the intangible If the carrying value fair Group, Inc. provides a of to employ-
value, the i11langible a;;set i;; impaired and reduced lo fair including postrctircmcnt hcnlth cnre nnd postcmploymcnt
value. These calculations may be by interest benefits (primarily Altria Group, Inc. records annual amounts
economic conditions and growth relating to plans on calculations by U.S. GAAP,which

8009533501

8009533501
 to 111 determining income
turnover tax provisions in evziluz;ting
actuarial assump- On January 1, 2007, Altria
and makes modifications to the as~;un1ptions Interpretation a recognition threshold and measurement
when it deemed appropriate to do so. attribute tor the financial statement recognition and measurement of tax
As permitted by U.S. GAAP, any of tne modifications generally amor- positions taken or be taken in a tax For those to
Altria Group, Inc. believes that assumptions be a tax position must more-likely-than-not to sustained
utilized in recording obligations under plans, which in upon examination by taxing authorities. The amount mea-
rea5onable on advice from it5 actuarie5. sured as the largest amount of benefit that than 50 percent likely
Se10te1ml1er 2006, the Financial Accounting Stanrlards Board of heing upon ultimate settlement. a result of the January l,
Statement of Financial Accounting ("SFAS") 2007 adoption of FIN 48, Altria Group, Inc. lowered liability for
"Ernollov1;rs' Accounting for Defined Benefit Pension and Other benefits by $1,021 million. This resulted 1n an to
Postretirement ("SFAS No.158"). SFAS No.158 that employ- holders' equity of $857 million ($835 million, net of minority interest),
'"~' "''·'u''"'''"' the funded of their defined benefit pension and other reduction of Kraft's goodwill of $85 million and reduction of federal
postn;tirement plans on the consolidated balance sheet and record as a deferred of $79 million.
component of other comprehensive income, net of tax, or Altria Group, Inc. adopted the provisions of FASB Staff Position No. FAS
and prior service or credits that not 13-2, "Accounting for a in the Timing of
of net periodic benefit Altria Group, Inc. adopted recognition Flows to Lease Transac-
disclosure provisions of SFAS No. 158, prospectively, on tion" ("FAS 13-2") effective January 1, Staff Position requires the
adoption of SFAS No. 158 by Altria Group, Inc. resulted revenue recognition calcu1ation to reevaluated if a revision to the
in to total of $3,096 million, an in total liabilities projected timing of income tax cash flows by a lease.
of $290 million and to stocKholders' equity of $3,386 million. adoption of this Staff Position by Altria Group, Inc.
Included in amounts were a to Kraft's total of tion to stockholders' equity of million as of January l,
$2,286 million, to Kraft's total liabilities of $235 mi lion and In October 2004, the American Jobs Creation Act ("the Jobs Act") was
to Kraft's stockholders' equity of into law. Tre Jobs Act includes a deduction for of
SFAS No. 158 also an entity to plan assets and earnings that In 2005. Altria Group, Inc. repatriated $5.5 bil-
obligations as of fiscal of financial posi- lion of earnings under the provisions of the Jobs taxes had
tion December 2008. Altria Group, lnc:s non- previously provided for a portion of the dividends
U.S. pen5ion plan5 mea5ured at September 30 of each Subsidiarie5 sal cf the taxe5 more than the tax to repatriate the
of PMI will adopt the measurement date provision in 2008 and will record earnings and resulted in net tax reduction of $344 million in the 2005
the impact of the measurement which not to be consolidated income tax provision.
significant, as an adjustment to earnings. tax provision in 2007 includes of $1ll million
At December 31, Altria Group, lnc:s discount related to the of tax and interest from
increased 6.20%, from ti.90% at December 31, the expiration of of limitations ($tl5 million in the third and
postretirement plans, and its weighted $56 million in the fourth quarter) and million related to the reduction of
tion for non-U.S. pension plans to tax resulting from future lower tax in Ger-
ber 31, 2006. Altria Group, Inc. anticipates that this and other many in the third 2007 tax provision also includes the
significant a55urnption changes, coupled with the amortization of in the fourth quarter of tax accruals of $98 million no required. The
gains and losses, will result in a decrease in 2008 pre-tax U.S. and non-U.S. tax provision in 2006 includes $631 million of non-casr tax benefits princi-
pension and postretil'ement of $30 million, which pally the after the U.S. IRS concluded
due primarily to PMI, and not include amounts in related to early its examination of Altria Group, lnc:s consolidated tax
retirement programs. A fifty point in Altria Group, lnc:s dis- 1996 through 1999 in the of 2006. The 2006 also includes
count would Altria Group, lnc:s pension and postretirement the in the fourth tax no longer required
by approximately $81 million, whereas, fifty point increase at PMI of $105 mi lion. The tax provision in 2005 includes the $344 million
would lower by approximately $54 million. Similarly, a fifty benefit related to dividend repatriation under Jobs in 2005, well
(increase) in the return on plan assets would other 1nclud1ng the impact of domestic manufacturers'
(de1crE1asE;)Altria Group, pension by approximately deduction under the Jobs Act and lower repatriation
Note 16 for sensitivity discussion of the assumed health
Ill
cost trend rates.
1111 income Taxes-Altria Group, Inc. accounts for income 1n accor-
dance with SFAS No. 109, "Accounting for Income Under SFAS No.
109, tax assets and liabilities determined on the differ-
the financial statement and tax bases of assets and liabilities,
u5ing enacted tax in effect for the year in which the differences
transaction is also

8009533502

8009533502
 If Altria Inc. had not to invrost111ents in
accounting provisions permitted under U.S. in cash, of amounts that had
in stockholders' equity as of December 31, 2006 and 2005, PMCC this allowance for
2006 and 2005, would have been recorded in net and $200 million, primarily in recognition of
airline industry, It possible that additional developments may
1111 Impairment of Long-Lived Assets-Altria Group, Inc. reviews long-lived
PMCC to its allowance for losses in future
including amorti?able intangible assets, for impairment whenever
cwcumstances indicate that the carrying
may not fully recoverable. Altria Group, Inc. flnAr~•tir10 Results
forms undiscounted operating cash flow analyses to determine if an impair- See d1scu,<s1c1n of Cautionary May Affect
ment are affected by interest r<:ffe~,ge1 rerar Future Results.
conditions and projected growth For
(in millions) 2007
measurement of an impairment of held far Altria Group, Inc.
groups assets and liabilities at the lowest level for which Net Revenues
serJar<ately iaentifiable. If an impairment determined to any related U.S. tobacco $18,485 $18,134
impairment loss calculated based on fair value. Impairment losses on 26,682 23,752
to disposed of, if based on the estimated to be
received, costs of
1111 in related
to to is recorded initially
unearned income, which included in line item finance assets, net,
on Altria Group, lnc:s consolidated balance sheets, and subsequently
Net
recorded as net over the life of the related leases at a constant
of return. The remainder PMCC's
marily of amounts related direct finance
(in rni!lions) 2007
recorded as unearned and subsequently in not Excise Taxes on Products
the life of the constant pre-tax rate of return. As U.S. tobacco $ 3,452 $ 3,617 $ 3,659
in Note 8 to consolidated financial PMCC 1'""'"s c2rrn1n 17,869 15,859 15,372
that were affected by bankruptcy filings,
PMCC's investment in included in the line item finance assets,
net, on the consolidated balance as of December 31, 2007 and 2006,
At December 31, PMCC's net finance receivable of $5.8 billion in
leases, which included in the line item on Altria Group, lnc:s consoli-
dated balance of finance of
billion) and the residual value under lease ($1.5 billion),
third-party non recourse debt ($12.8 billion) and unearned
billion), The of debt collateral-
payments receivable and and non-
to the general of PMCC. As required by GAAP,the $ 4,518 $ $ 4,581
third-party nonrecourse debt has offset
4,173
receivable and has been nrc><;PnlP·rl
finance in Altria Group, lnc:s consolidated balance
assets, net, at December 31, include net finance
($0.4 billion) and an allowance for

residual values represent PMCC's estimate at

the fair value of assets under lease at the end of the
reviewed annually by PMCC's management
and activity in the relevant industry. If
sary, revisions to reduce the residual values are recorded. Such
resulted in of $11 million and $14 million in 2007 and 2006,
respe(:t1vely, to PMCC's net and of operations. Such residual
in no adjustment in 2005, To the extent that
due PMCC may be uncollectible, PMCC an allowance for
PMCC recorded pre-tax of
ownership and bankruptcy claims in

8009533503

8009533503
 program to
in 2008, with total estimated annual cost
million 2011, of which $179 millicn will be by PM!
1111 Asset Impairment and Exit Costs-For years ended 31,
(by 2009) and million will be realized by PM USA (by 2011).
2007, 2006 and 2005, asset impairment and exit costs consisted of
the following; Philip Morris International Asset Impairment and Exit Costs
During ?007, and PIVll announced plans for the streamlining of
various administrative functions and plans in the
2006 announced or partial closure of 9 production through
December 31, 2007, the largest of which the closure factory in
$ 10 Munich, Germany announced in 2006. As a result of these announcements,
99 30 PMI of $195 million, $126 million and $90 million
ended December 31, 2007, 2006 and 2005, respe(:t1ve1v.
and Africa 12 2 to
28 19
Latin America 18 1 tory closure. The 2005 pre-tax charges primarily related to the
17 32 49 obsolele equiprnenl, benefils and irnpairrnenl associ-
521 104 ated with the clcsure of factory in Republic, and the streamlin-
of various to of
35 approximately
5 19 expected during 2008.
related to million, mil-
and Afrca 5 lion and 2006 and
Asia 9
Latin America
2005, Future cash
10 expected to be approximately
streamlining of various funcl1ons and operalions expecled
35 15
to result in the elimination of approximately 3,400 positions. of Decem-
94 31, 2007, approxirnalely 2,400 of posilio11s have been elirni11aled.
$650 $139 Gor'Pot'ate Asset im~1airme1nt
In 2006 and corporate mil-
Manufacturing Optimization Program lion, $42 million and $49 rm Ilion, respectively. These were primarily
In June 2007, Altria Group, Inc. announced plans by its subsidiaries related investment banking and legal in ?007 associated with the
to oplimiLe worldwide produclion by moving U.S.-based Kraft and contemplated PMI as well as
production for non-U.S. to PMI facilities in Europe. Due declining corporate functions in
U.S. volume. as well as PM l's decision to its production,
111 Italian Antitrust Charge- During of 2006, PM!
PM USA will its Cabarrus, North Carolina manufacturing facility and
recorded a $61 million to an Italian antitrust action. This
consolidote manufacturing for the U.S. morkct at Richmond, Virginia
included in the operating companies income of the Furopean
manufacturing center. PIVll to shift all of PM USA-sourced produc-
tion, which approximates 57 billion to PM! facilities in by
October 2008 and PM USA will Cabarrus manufacturing facility by con-
the end of 2010. solidated financial statements, in October 2004, Fair and Equitable
result of tr1is program, from through 2011, PM USA expects Reform Act of 2004 (''FETRA") was into law. Under the provi-
to incur total of approximately $670 million, comprised of sions of FETRA, PM USA was obligated to cover of potential losses
ac<:elEirated depreciation of $143 million (including the above mentioned lhat tlie government may incur on the disposition of pool lobacco stock
impairment of $35 million in 2007), employee sepa- accumulated under the previous tobacco price support program. In 2005,
ration of $353 million and other of million, primarily PM USA a $138 million of the
related to the relocation of employees and equipment, net of estimated
on of land and buildings. Approximately $440 million, or 111 U.S. Tobacco Quota provisions of FETRA require PM
USA, along with other and importers of tobacco products, to
the total pre-tax will result in cash expenditures. PM USA
total pre-tax million in 2007 related to this rnake quarterly payments that will be to compensate tobacco
and quota holders by the legislation. Payments made by PM USA
under FETRA amounts due under provisions of the National
("NTGST'), a trust formerly established to
compensate tobacco quota holders. to the
applicability of FETRA to 2004 NTGST payments. During the third quarter of
2005, North Carolina Supreme ruling determined that FETRA enact-

8009533504

8009533504
 provisions and that 111 Discontinued Operations-As result
companies required make full n;;,,1mPni· t0 more fully Note 1. to the
of 2004. The ruling, along with billings from the United States consolidated financial statements, Altria Group, Inc., has reclassified and
Department Agriculture ("USDA"), established that FEfRA was reflected the of Kraft prior to the Kraft Distribution Date discontin-
beginning in PM USA had accrued tor ~URA ued operations on the consolidated of earnings and the consoli-
the clarification of the court ruling, PM USA dated of cash flows for all periods assets and
FETRA payments in the amount of million. liabilities related to Kraft were and as discontinued
operations on the consolidated balance at December 31, 2006.
111 Inventory Sale in Italy-During the quarter of 2005, PMI made
a one-time inventory sale of 4.0 billion units to its new distributor in Italy,
resulting in $96 million pre-tax benefit to operating companies income for
the Union During the second quarter of the new following compares consolidated operating results for the
distributor reduced its inventories by 1.0 billion units, ended December 31, with the ended December 31, 2006.
in lower shipments for PM!. The net impact of actions was a Net revenues, which include taxes billed to customers, increased
fit to the Union pre-tax operating companies income of $6.8 billion (10.13). nel bil-
ended December 2005. lion (5.83), due primarily to the favorable impact of currency and higher
revenues from the Eastern Middle East and Africa the
111 Gain on Sale of a Business-Dunng 2006, ooerr1tin2 c:on10;1ni.es Union segment, the Latin America Asia
income of the Latin America included mil- and the impact acquisitions at PM!, partially offset by lower revenues
lion related to the
from the financia1 ::.t"v'c""''"e:'"'"'"·
cash of million and 1003 ownership of a Excise taxes on products billion (15.0%) due primarily to
in the Dominican Republic. currency movements ($2.3 billion) and higher tax ($2.4 billion).
111 Recoveries/Provision from/for Airline Industry Exposure-As As discussed in Tobacco Environment, is a trend toward gov-
in Note 8 to the consolidated financial statements, during 200/, increz1sin1g excise taxes in all of the markets in which Altria Group,
PMCC recorded pre-tax of million on the of ownership expected to continue to
and investments in $1.0 billion primarily to higher
rer>re<;ented a partial recovery, in cash, amounts that had ongoing resolution ($489 million), currency movements ($447 mil-
rm1vic>us1v written down. During 2006, PMCC allowance lion) and acquisitions ($85 million). Generally, tobacco and materials
million, due to within the airline industry. During have not significantly and productivity initiatives have tended to
allowance for by $200 million, higher depreciation and salary
exposure to the airline industry, particularly Delta Air Lines, Inc. ("Delta") and Marketing, administration and research $141 million
Northwest Airlines, Inc. ("Northwest"), both of which filed for bankruptcy primarily to currency movements ($260 million), acquisitions
protection during 2005. and divestitures ($124 million), expenses related to the ternination of a
distributor relationsh pin Indonesia ($30 million), and h1ohAr r''~""rr·h
111 Income Tax Benefit- The tax provision in inclurled net tax bene- and development million), partially by lower marketing
fits of $111 million related to the reversal of tax reserves and as~;oc1atEld ex~)ense~; aria lower and administrative Generally,
resulting from the expiration of of limitations ($55 million have tended to increase, reflecting to develop
in the third and $56 million in fourth quarter) and $42 million the of tobacco Marketing and selling
related to reduction of liabilities resulting from lower re,;tr11:t1cins on advertising and
tax enacted in Germany in the third quarter. The provision in
included the in the fourth quarter of tax accruals of $98 million
no longer IRS concluded its examination of Altria Group, lnc:s
consolidated tax returns for 1996 through 1999, and a final and the
Revenue Report ("RAR") on March 2006. Co,nsequ13ntly, an
Altria Group, Inc. recorded non-cash lax benefits of from assets which had previously written down versus a prov.sion in
principally represented the of tax 2006 for its airline industry the favorable impact of currency; and
and with RAR. Altria Group, Inc. reirnbtJrsEid the 2006 Italian antitrust charge. These items were partially offset by higher
cash to Kraft for portion of the $1.0 billion in and the 2006
tax interest of million. The amounts related to Krnft were rec:1as;s1t1ed
earnings from discontinued operations. l he tax reversal resulted an Currency movements increased net by $3,513 million
to from continuing operations of approximately $631 mil- impact of currency movements on
December 31, 2006. The 2006 tax provision million. These due
included reversal in the fourth of foreign tax no longer primarily to the weakness prior year of the U.S. dollar against the
required PM! of $105 million. The provision in 2005 included eurn, Russian ruble a-irl the Turkish lira, partially by nf
$344 million benefit related to dividend repatriation under the American the U.S. dollar against u >e• Jaµa> 1<::0'"
Jobs Creation Act.

8009533505

8009533505
 mil- a lower provision for airline industry PMCC.
I h,esE>incrE~aseswere oart1allv ottset by the unfavorable impact of currency,
an unfavorable co11parison 2005, when PM USA benefited from the
of a 2004 related to the tobacco quota buy-out legislation,
and the 2006 Italian antitrust charge in the l:.uropean Union
Currency movements net by $651 million
($340 million after excluding the impact of currency movements on
taxes) and operating income by $183 million. These due
primarily to the versus prior year of the U.S. dollar
Japanese yen and the Turkish lira.
Interest and ether debt net, of million
lion due primarily to lower debt levels and higher
Altria Group, lnc:s tax by 2.9 points
to 2006 effecbve tax rate includes $631 million of non-cash tax
benefits principally the reversal after the U.S.
IRS concluded examination of Altria Group, lnc:s consolidated tax returns
and minority interest, net, was $237 million for 2007, 1996 through 1999 in the quarter of 2006
compared with $209 million for primarily also includes the of foreign tax accruals no at PMI
higher equity from SABMiller. of $105 million in fourth 2005 rate includes a
from continuing operations of $9.2 billion decreased $168 mil- $344 million benefit related to dividend repatriation under the Jobs Act, as
lion (1.83), due primarily to a higher tax partially by well as other including lower repatriation
higher income and lower interest and other debt net. Equity earnings and minority interest, net, was $209 million for
Diluted and basic EPS from continuing operations cf $4.33 and $4.36, compared with $260 million for 2005. The change primarily
respectively, and respectively. higher minority in in Turkey and Mexico, partially offset by
Earnings from discontinued operations, net income taxes and higher equity from SABMiller.
minority (which the cf Kraft prior to the spin-off). from continuing operations of $9.3 billion bil-
decreased $2.1 billion. due primarily to income, lower and
Net of $9.8 billion $2.2 billion (18.63). Diluted and net, and lower tax Diluted and basic EPS
ba5ic EPS from net earnings of $4.62 and $4.66, re5pectively, de(;re13sed cor1tinuing operations of $4.43 and re:;pectively, increased by
I he1sede(:re.ase1s reflect the spin-off of Kraft at the end of March respectively.
from discontinued operations, net of income and minor-
ity interest, of $2.7 billion $428 million (18.9%), due to higher net
earnings at Kraft.
following consolidated for the
Net of $12.0 billion $1.6 billion (15.23). Diluted and
vP:1r e•n'1P'1December 31, 2006, with ended December 31, 2005.
basic EPS from net earnings of $5.71 and $5.76, respectively, by
Net revenues, which include billed to customers,
14.43 and 14.33, respectively.
$3.3 billion
lion (3.33), due primarily to
impact of acquisitions), Eastern Middle East and Africa
U.S. tobacco segment and Latin America
acquisitions), partially by lower
Tobacco
"'"" "'~"' """ unfavorable currency.
hr·«P t;;·'""On products increased $;7.1 billion due primarily tn
hig11er tax ($1.9 billion) and acquisitions million), partially Business Environment
by currency movements ($311 million).
Taxes, Legisfation, Regulation and Other Matters Regarding
Cost of sales $621 million due primarily to acquisi-
Tobacco and Smoking
tions ($290 million), volume ($231 million) and higher product
million). The tobacco industry, both in the United States and abroad, faces number
Marketing, administration and of challenges that may the volume, of
favorable ($153 million) and lower marketing exf>""'~"'" 011~'" nn,9r;itini1s.c;is;h flows and financial position ALG and our tobacco com-
million), higher and administrative challenges, which below and in the Ca1Jtic1na1'v
and development I hiitl\qav Allec:t huture ,n:e~;u/ts section, include:
Operating income million (8.83), due primarily to the
" pending and threatened litigation and bonding requirements
nf higher operating frnm ;ill
in Note 19. ("Note 19");
the 2005 charge for PM portion
government on disposition of its pool " competitive disadvantages related to price in the United
States attributable the settlement

8009533506

8009533506
 worldwide or to !cw-priced or low-taxed tobacco products or coun-
and contraband products.
1111 Minimum Retail Selling Price Laws: Several EU Member States have
laws establishing a minimum retail selling price for and,
of tobacco products by third parties over Internet and by
in some other tobacco products. The Commission has
other means designed to avoid the collection of applicable
commenced infringement proceedings Member claim-
oncega11s and in between premium and lowest that minimum retail infringe EU law. Subsequently,
price brands; in March the Commiss,on announced that it was bringing
Fra1ce, and on January 31, 2008. Austria and Ire-
,. diversion into one market of products intended for sale in another; European Court of Justice claiming
11 lhe oulcome of proceedings and investigations, and polenlial mum retail selling price systems infringe EU law. The Commission
assertion of claims, relating contraband shipments of cigarE,tteis; previously announced that it had formally called upon Austria, Ireland and
Italy to amend their legislation minimum retail for
,. governmental investigations; r1a;momAS Should the Commission prevail in Court
,. actual and proposed requirements and disclosur·e of Justice, tax levels and/or price in those markets could be
of tobacco product flavors and other proprietary adversely affected.
information; 111 Tar and Nicotine Test Methods and Brand Descriptors: A number of
restrictions on imports in certain jurisdictions governments and public health throughout the world have
determined that the machine-based methods for mea-
tar and nicotine in do not provide information
,. actual and proposed restrictions affecting tobacco manufacturing, abcul lar and nicotine deliveries and thal such misleading lo
marketing, advertising and smokers. For example, in the 2001 publication of Monograph 13, U.S.
,. governmental and private bans and restrictions on smoking; National Cancer Institute ("NCI') concluded that measurements on
the Commission ("FTC") method "do not offer
,. the diminishing of smoking and by smokers meaningful information on the amount of tar and nicotine they will
tobacco control advocates to further from a or "on relative amounts and nicotine
likely to ,eceived from smoking different brands of cig:anittEis:'
,. governmental requirements ignition propensity standards for
Th1°rP;~ft,,r the FTC indicating that it would be working
c1garE1ttes; and
should be made to its
11 actual and proposed tobacco legislation and regulation bo:h inside method to "correct limitations" identified in Monograph 13. In 2002, PM
and outside the United USA petitioned the promulgate new governing the of
in12: stan<jardiz:ed machine-based methodologies tar and nico-
ordinary our tobacco companies are sub1ect
petition remains pending. In addition, the
influences that can impact the timing of
Oriw11iz<itio1n ("WHO") has concluded that these st<indarcl1zE1d
of holidays and other annual or special the timing of
"seriously flawed" and that measurements based upon
promotions, customer incentive and customer inventory pro-
currentstandarclizEld methodology misleading and should not be
grams. well as the actual or speculated timing of pricing and tax-
displayed:' The International Organization for Standardization ("ISO") estab-
driven
lished a working groLp, chaired by the WHO, to propose a
111 Excise Taxes: Tobacco products subject to substantial Av1•1s,, t"'v"' ment method that would more accurately reflect human smoking behavior.
in United States and to substantial taxation abroad. Significant PM USA and PMI have supported the concept cf suppleme1ting the ISO
in tobacco-related have been proposed or enacted and method wilh more intensive rnelhod, which PM USA and PMI believe would
likely continue or enacted within the United States, the illustrate the variability in the delivery of tar, nicotine and carbon
Member of lhe European Union (the "EU") and in other monoxide, depending on how an individual smokes a
dictions. Legislation has by the United States working has final report proposing two alternative
would the by $0.61 measurement methods. Currently, ISO in the of deciding whether
President vetoed this legislation. It to predict whether to further of the two methods or to wait for additional
such legislation will be reintroduced and become law. In addition, n certain f'Anf,,ro'""' of the Parties.

1urisdictions, PMl's products subject to tax that discriminate In light of public health concerns about the limitations of current
premium priced products and manufactured and to machine measurement methodologies, governments and public health
inconsistent rulings and interpretations on complex methodologies to organi.calions have ircreasingly challenged lhe use of descriplors-such
determine and other tax burdens. "light;' "mild;' and "low are based on measurements produced by
discriminatory tax structures expected tc con- methods. Scientific Advisory Committee of the WI 10
impact on of tobacco products by our concluded that such "light ultra-light, mild and low tar"
tobacco to lower consumption levels and to a in "misleading terms" and should be banned. In 2003, the WHO proposed the
consumer purchases from the premium to the non-premium or discount 1-ramework Convention on fobacco Control (''1-C IC"), a that

8009533507

8009533507
 nations to adopt and implement to recon1nH"nc1s (and in nations
terms do not "the impression that a particular tobacco legislation that would, among other things;
product harmful than other tobacco Such terms "may
" establish actions to prevent youth smoking;
include 'low tar,' 'light; 'ultra-light; or 'mild:" Many countries pre hibit 1n
of prohibiting descriptors such as "lights:· In most countries " restrict and/or eliminate all tobacco product advertising, marketing,
where descriptors banned, tar, nicotine and carbon monoxide yields promotions and sponsorships;
still required to printed on packs of PMI au,;ocan~s
rle>,;rrinhnrs are banned, governments should also prohibit the
11 initiate public education campaigns to inform public about the
health of smoking and the henefits of quitting;
tar, nicotine and carbon monoxide yields on packs of u"'""" "''~-
19, which pending litigation concerning the of brand " implement regulations imposing product disclosure and
tors. in Note 19, in 2006, federal trial court
judgment in favor of United government in lawsLit var-
ious manufacturers and ethers, including PM USA and ALG, and " impose health warning requirements on packaging;
enjoined the defendants from brand such as "lights;· " adopt measures that would eliminate
"ultra-lights" and "low tar." In October 2006, the of l\ppeals stayed counterfeit cigarettes;
enforcement of the judgment pending review of the trial court's decision.
" restrict smoking in public places:
1111 rood and Drug Administration ("F'DA") Regulations: In 2007,
bipartisan legislation introduced in the United States and House " implement fiscal policies (tax and price increases;);
of that, enacted, would grant the FDA broad authority to " adopt and implement that that descriptive terms
manufocture and marketing of tobacco and do not the impression that one brand of
related information. This legislation would also FDA safer than another;
the authority to impose certain recordkeeping and reporting obligations
counterfeit and contraband tobacco products and would " phase out duty-free tobacco and
to pay for the cost regulation and other matters. ALG and PM
tobacco product manufacturers.
support lhis In Augusl lhe Heallr1, t.at..1cauon,
and approved version of this legislation. In addition, some of the proposals currently under consideration by the
will grant the FDA broad aulhorily over lobacco procJucls, Conference of lhe lhe body of lhe FCTC, could have lhe
nature of that authority if granted, cannot be potential to substantially the ability of our tobac:::o to
manufacture and -narket their products. It not to predict the out-
1111 Tobacco Quota Buy-Out: In October 2004, the and
come of regulations under consideration.
Tobacco Reform Act of 2004 ("FITRA") was into law. FITRA provides
elimination of the tohacco quota and price support program 111 Ingredient Laws: Jurisdictions inside and the United
through an industry-funded buy-out of tobacco and quota holde(S. have or legislation or tha: would
cost of the buy-out approx,mately billion and paid over tobacco product manufacturers to disclose to the government and, in some
by manufacturers and importers of each kind of tobacco product. instances, publicly the in the manufacture of tobacco prod-
cost being allocated based on relative market of manufac- and, in certain to provide toxicological information. In some 1uris-
turers and of kind of tobacco product. The buy-out dictions, governments have prohibited the of certain ingredients, and
will scheduled payments to the NationalTobaccc have been to further prohibit or limit the oi ingredi-
"NTGST'), trust fund established in 1999 by ents and flavo(S. Under an EU tobacco product tobacco companies
four of the major domestic tobacco product manufacturers provide aid to now required to and toxicological information to
tobacco growers and quota holders. Manufacturers and importers of each Member Sta:e. In May 2007, the Commission published guidelines for
tobacco products obligaled lo cover any (up to $500 million) full by-brand reporting requirernenls. PMI has made ingredient disclosu1ces
that the government may incur on disposition of tobacco pool stock in compliance with the laws of all Member States, and followed
accumulated under the previous tobacco support program. PM USA in most Member States, mak,ng full by-brand in a
has paid $138 million for its share of the tobacco pool stock losses. For a manner that in those Member
discussion of the NTGST, see Note 19. The quota buy-out did have a mate-
111 laws Addressing F'lavor Varieties or Characterizing F'lavors: In
rial impact on Altria Group, lnc:s consolidated in 2007
U.S. legislation has been proposed which would prohib,l lhe of
Inc. not anticipate that the quota buyout will have
certain flavor of tobacco products or tobacco products with char-
impact on ccnsolidated results in 2008 and beyond.
flavors. The proposed legislation varies in cf the of
1111 The WHO's Framework Convention on Tobacco Control ("F'CTC"): tobacco products sub1ect to prohibition, the conditions the
FCTC entered into force on 27, 2005. of January 2008, 152 of such products would be prohibited, and exceptions to the prohibitions. To
countries, well as the Community, have become the date, Maine the only in wh,ch such prohibiticn been enacted,
FCTC is the fi(st inbrnational public health treaty and objective but provisions affocting cigarette and products do not take
to establish a global for tobacco regulation with the purpose of until July 1, 2009, and covered products also may exemptions
reducing initiation of tobacco and encouraging

8009533508

8009533508
 law. Whether other legislation in this
and legislation 1f cannot predicted.
111 Restrictions and Bans on the Use of Ingredients: Some governments
have prohibited the of ingredients and further prohibi-
tions limit;, For example, the of the Parties considering
It is not possible to predict the of ongoing scientific or
guidelines providing detailed product regulation requirements that likely
future scientific research into the health risks of tobacco expo-
to include for the of tobacco product including
Although most regulation of ETS to date been done at
flavorings. PM USA and PMI support regulations requiring all manufacturers
the local level through bans in public establishments, the S:ate of California
to determine that the of ingredients not the inherent
in the of regulating FTS exposure in ambient air at the
toxicity in smoke.
level. In January the California Air Resources ("CARB")
111 Bans and Restrictions on Advertising, Marketing, Promotions and ETS as a toxic air contaminant under state law. CARB now required to con-
Spom;orships: For many countries have impcsed partial or total sider the adoption of appropriate control available
on arlvertising, marketing anrl promotion. The FC:TC: calls for control technology" in order to public exposure to ETS in outdoor air
a "comprehensive ban on promotion and sponsorship" and to the "lowest level achievable:' In addition, in June California
requires governments that have no constitutional constraints to ban all Office of Environmental Health Hazard ("OEHHA") listed ETS as
forms of advertising. Where constitutional constraints exist, the FCTC a contaminant known to the State of California to
requires governments to or ban radio, television, print me::lia, other ity. Consequently, under California Proposition
media, including the internet, and sponsorships of international or more persons must post warning signs in certain stating that ETS
within 5 FCTC also requires disclosure of expenditures on known to the of California to a reproductive toxicant
tising, promotion and sponsorship that not prohibited. Some public It is the policy of PM USA and PMI to support single, consistent public
heallh have called for bans of producl displays, which some coun- health on the health of smoking in develop-
have adopted, and for packaging. PM USA and PMI oppose in smokers, smoking and addiction, and on exposure to
complete on advertising, but limitations on marketing, also their policy defer to the judgment of public health authorities
provided that the limitations within constitutional constraints and as to the content of warnings in advertisements and on product packaging
manufacturers arc able to communicate appropriately with adult smokers. health of smoking, addiction and to ETS.
PM USA and PMI established that nclude, among
11 Health Warning Many countries require substantial other things, the views of public health authorities on smoking, disease
health warnings on product packs. In the FU, for example, health causation in smokers, addiction and ETS. These reflect PM USA's and
warnings must 30% of the front and 40% of the back of PM l's agreement with the medical and scientific consensus that
packs. The FCTC health warnings that cover, at a minimum, 303 of smoking addictive, and lung emphysema
the front and back of the However, the treaty recommends warnings and other in and
covering 503 of the front and back of the pack. PM USA and PMI support those considering smoking, to rely on the of public health author-
health warning and the governments on the content in making all smoking-related ::lecisions. I he website du,ures::>t;s
of the warnings. In where health warnings are not required, PMI www.philipmorrisusa.com and www.pmintl.com. The information on PM
places them on packaging voluntarily in the official language or 1r1r1cr11r1c"" USA's and PM l's not, and shall not to be, part of this
of the country. For example, PMI is voluntarily placing health document or incorporated into any ALG makes with the
many African countries in official lornl and occupying and Commission.
front and back of the pack. PM USA and PMI do not support warn sizes
that deprive them of the ability to their distinctive trademarks and pack Ill Testing and Reporting of Other Smoke Constituents: In addition to tar,
which differentiate their products from those of their competitors. nicotine and carbon monoxide, public health authorities have
between 45 and 70 ether smoke constituents as potential causes of
11 Health Effects of Smoking and Exposure to Environmental Tobacco toloa<;co-relati9c diseases. Several countries manufacturers
Smoke ("ETS"): with the health of vide by-brand yields of constituents. The FCTC requires
smoking have been publiciLed for many including in June 2006 nations to adopt and implement for and measuring the
United States Surgeon General report on ETS entitled contents and emissicns of tobacco products:' PM USA and PMI measure
of Involuntary Exposure Smoke:' Many countries have most of these constituents for their product research and development
restricted smoking in public places. The and of public smoking and support such regulation. However, the capacity to conduct
bans has increased significantly, particularly in the EU, where Italy, Ireland, by-brand on a global basis does not exist today, and the of
the UK, I-ranee, I-inland and Sweden have banne::l virtually all indoor public by-brand annual testing would be significant.
smoking. Other countries around the world have adopted or li"ely to
adopt substantial public smoking restrictions. Some public health 11 Ceilings on Tar, Nicotine, Carbon Monoxide and Other Smoke
have called for, and municipalities have adopted or Constituents: A num:)er of countries and the ELI have established maximum
on smoking in outdoor places, and some tobacco control of tar, nicotine the ISO
advocated banning smoking in cars with minors in them. The standard test method. have
parties to the to adopt on public smoking, and questioned whether reducing machine-measured nicotine and carbon
Conference of proposed guidelines on regulations which are monoxide yields in meaningful reductions in risk. 1-urther,

30

8009533509

8009533509
 public health ap1xopnatene~>s of imposing to to to eliminate all forms of illicit including
nicotine ceilings op1· c1:;rnr·erre. counterfeiting, and states that national, regional and
date, no country has proposed or adopted for other smoke on this are components of tobacco control:' The Conference
constituents. However, in June the panel the Conference of of the Parties has announced that it working on protocol on illicit
a report that recommends limiting specific smoke con- to be negotiated in and proposed in 2009. According to draft
advisory panel that do not have be based on template, that the protocol will include1
proof of benefit, but only on a showing that "the substance be known
,. licensing for participants in the tobacco mea-
harmful and that diminution or removal." The advisory
to eliminate money laundering and the development of an
panel proposed ceilings on tobacco specific nitrosarnines, or TSNJI., smoke
international system that enables the tracking of tobacco
cor1st1tuents unique tobacco, based on data showing that a wide
prcducts;
variation in TSNA yields across brands. The advisory panel that the
levels of the TSNAs are "higher in air-cured/processed implementation of laws governing keeping and internet
in f1ue-cured bright tobacco" and that levels of TSNAs are much lower in of tobacco products;
markets where the predominant brands Virginia such
Australia and Canada, as opposed to markets, such the EU, where " the criminalizaticn of participation in illicit various forms;
American blended predominantly sold. The recommended " obligations for tobacco manufacturers tc control their supply chain
are "the lower of the median values for a international with penalties for those that fail do so;
brands or the median for the brands for the country implementing the
regulation:' Subsequently, members of the panel recommended that " prcgrams to increase the capacity of law enforcement bodies; and
be established for additional smoke constituents, also based on the " prcgrams to cooperation and technical as~;1stan(~e
median in the market. It not possible to predict whether or when this with to investigation and prosecutions and the
recommendation will by the Conference of the Parties if of information.
so, implemented by governments.
PM USA and PMI support strict regulations and enforcement
111 Reduced Cigarette Ignition Propensity Legislation: Legislation or to prevent all of illicit in tobacco products. They that
lation requiring to rneel reduced ignition propensity standards manufacturers should implement monitoring systems of their sales and
being considered in many at the federal and local levels and in distribution practices, and that where appropriately confirmed, manufactur-
jurisdictions outside the Uni led Stales. New York Stale implemented ignition ers should supplying vendors who have knowingly in illicit
propensity standards in date, the same standards have trade. For example, PM USA in a number of initiatives to help
by twenty-one effective as follows: Vermont (May cornraband trade in including: enforcement of PM USA
2006), California (January 200/), Oregon (April 200/), New Hampshire policies on trade in ccntraband and
(October 2007), Illinois (January 2008), Maine (January 2008), Massachu- engagement with and of law enforcement
(January 2008), Kentucky (April 2008), Montana (May 2008), Alaska and regulatory litigation to protect the trademarks;
2008), New (June 2008), Maryland (July 2008), Utah (July and support for federal and legislation. PM USA's legislative initiatives
2008), Connecticut (July 2008), Rhode Island (August 2008), to contraband trade in designed to control
(January ?009), Iowa (January ?009), Minnesota (January and the legitimate channels of distribution, impose more stringent
(January 2009), Louisiana (August 2009) and North Carolina (January penalties for the violation of and provide additiona tools for law
2010). Similar legislation has been enacted in Canada and being consid- enforcement. While PMI believes the approach all these measures
1n several other countries, notably Australia and several Member States to be adopted through legislation, it working witr a number of
of the EU. In 2007, the European Commission an official process ernments around the world on anc memoranda
through the Gcncrnl Product Directive to adopt reduced understanding to PMI has
propensity standards such implemented 1n New York. agreements with countries, including China, Switzerland,
and other jurisdictions. PM USA the of Thailand, Turkey, and, as below, the EU.
mandating uniform and technically national standard
for ignition propensity that would preempt state stan- 111 PMI Cooperation Agreements to Combat Illicit Tracie of Cigarettes:
dards and apply to all sold in the United States. Although PM USA PMI has entered into with governments to combat the
that a national the most appropriate way to illicit trade of continue to do so. In July 2004, PMI
it has actively supporting the adoption of laws at the level into an Commission (acting on behalf
that require all manufacturers to comply with the standard adopted in of the European Community) and 10 Member of the EU that provides
New Yori,, PMI believes that reduced ignition propensity standards should for broad cooperation with law enforcement on anti-
the in New York and other 1urisdictions to contraband and anti-counterfeit the 27 Member
that they uniform and technically feasible, and that they are applied States have the agreement. The all disputes
equally to all and all tobacco products. between the Community and the Member States that the
aorP.P.mf>nt. on the one hand, and PMI and on the other
111 Illicit Trade: Regulatory measures and related governmental actions to to these Under the terms of the PMI will
prevent the illicit manufacture and trade of tobacco products In of 2004, PMI
by number of jurisdictions. Article of the 1-C IC requires

8009533510

8009533510
 million for the 1niti<il payment. The In United 1n various of iec1en3101na
ag1,eemEmt calls for payments approximately $150 million on the governments introduced legislation that would subject
anniversary of the agreement (this payment was made in July 2005), and other tobacco products to various regulations; or eliminate the
approximately $100 million on the second anniversary (this payment of descriptors for such as or "ultra lights;" establish
made in July 2006), and approximately $/b million ""''h 'l""'rt'""''""·ftc;r educational campaigns relating tobacco consumption or tobacco control
10 years, each of which is to programs, or provide additional funding for governmental control
PMl's market share in activities; further advertising of and other tobacco
products; require additional warnings, including graphic warnings, on pack-
and in advertising of and other tcbacco product;; eliminate
tax deductihility of tobacco product provide that
and Advertising Act and the Smoking Educa-
as a liability under statutory
common law; allow and local governments to restrict the of flavors
in tobacco products: and allow and local governments to restrict the
and distribution tobacco products.
It is not possible to predict what, if any, additional legislation, regulation
or other governmental action will enacted or implemented relating to the
tions
manufacturing, advertising, sale or of tobacco products, or the tobacco
industry generally. It possible, however, that legislation, regulation or other
place numerous restrictions on PM USA's
governmental action could be enacted or implemented in the United
operations, including prohibitions and restrictions on tho advertising
and in other countries and jurisdictions that might materially
and marketing of Among prohibitions of outcoor and
business, volume. of operations and cash flows of o ..ir tobacco
transit brand payments for product placement; and sam-
subsidiaries, and ultimately their parent, ALG.
pling in facilities). also placed on the use
of brand name and brand name non-tobacco products. The 111 Governmental Investigations: From time to time, ALG and its sub-
Setllemenl also place prohibitions on youth and sidiaries to governmental investigations on a of rnallers.
the of cartoon characters. In addition, the State Settlement 8a··""'"'""nk In this that Canadian authorities contemplating
require companies lo affirm corpora le principles directed al proceeding 011 an investigaLion or ALG enlilies relating to
of impose requirements lobbying activi- allegations of contraband shipments of into Canada in the early
mandate public disclosure of certain industry documents; limit the to mid-1990s. ALG and its cannot predict the outcome of this
industry's ability to challenge tobacco control and laws; investigation or whet1er additional investigations may commenced.
and provide for the dissolution of certain tobacco-related and
Manufacturing Optimization Program
place restrictions on the establishment of any replacement organizations.
In June Group, Inc. announced plans by its tobacco subsidiaries
111 Other Legislation or Governmental Initiatives: L."""~"°'"" to optimize worldwide production by moving U.S.-based
tory initiatives affecting the industry have been production for non-U.S. markets to PMI facilities in Due to declining
being considered in a number of countries and jurisdictions. In 2001, the EU U.S. volume, as well PMl's decision to its production,
adopted a directive on tobacco product regulation requiring EU Member PM USA will close North Carolina manufacturing facility and
States to implement that reduce maximum permitted of consolidate manufacturing for the U.S. market Richmond, Virginia
tar, nicotine and carbon monoxide manufacturers to manufacturing PMI to all of PM USA-sourced produc-
inc'rP1iiPntc: and toxicological and require packs carry tion, which approximates billion to PMI facilities in Europe
health warnings covering no less than 303 of the front panel and no October 2008, and PM USA will its Cabarrus manufacturing facility
than 403 of lhe back panel. The directive also Member Stales lhe lhe end of 2010.
option of introducing graphic warnings of tar, nicotine a result of this program, from 2007 through PM USA
and carbon monoxide data to cover at 103 of the panel; and pro- to incur total $670 million, comprised of
hibits the of names, trademarks and figurative or other ern1plcJyee s'ep<ira·:ion costs of
that a particular tobacco product harmful than others. All 27 million, primarily related to the relo-
EU Member States have implemented the directive. t!u•111u'lf1tei 1t. net of estimated gains on sales of land
Commission guidelines for optiona of the total
warnings on packaging that Member States may apply
Graphic warning requirements have also been proposed or adopted in a
number or other jurisdictions. In 2003, !he EU adopted a directive prohibit-
ing radio, press and Internet tobacco marketing and advertising, which has
now been implemented in most [U Member control
tion the manufacture, marketing and of tobacco products
been proposed or adopted in numerous other jurisdictions. for the year ended December of approxi-
million during 2008 tor the program. In addition,

8009533511

8009533511
 approximately $230 million business. PMI into an with
the basis PMI to potentially acquire, or for Grupo Carso
program beginning in tially to PMI, Grupo remaining in
2008, with total estimated annual cost of approximately $335 mil- not material to Altria Group, lnc:s consolidated financial
lion by 2011, of which $119 million will by PMI (by 2009) and of operations or cperating cash flows in
$156 million by PM USA (by 2011). quarter of 2007, PMI an additional
in a Pakistan manufacturer, Lakson Tobacco Company Lim-
Philip Morris International Asset Impairment and Exit Costs
ited ("Lakson Tobacco"), and completed a mandatory tender for the
During 2006 and PMI announced plans for the streamlining
remaining which increased PMl"s total ownership interest in Lakson
of various administrative functions and operations. These plans resulted in
Tohacco from 403 to approximately 983, for $388 million. of
the announced closure partial closure of 9 production facilities through
this acquisition was not material to Altria Group, lnc:s consolidated financial
December 31, the of which was the of a factory in
position. of operations or operating cash flows 2007.
Munich, Germany announced in 2006. As a result of announcements,
In November 2006, a subsidiary of PMI exchanged its in
PMI recorded pre-tax of $195 million, $126 million and $90 million
E. Leon Jimenes, C. por. A. ("EU"), which included indirect interest in
for the ended December 2006 and 2005, respe,cti\1ely.
EU's beer subsidiary, Nacional Dominicana, por. A., for 100%
2007 pre-tax
ownership EU's subsidiary, lndustria Jimenes,
included million of cos ls relaled lo PM l's Munich, Germany
S.A. ("ITU") and million of cash, which contributed to ITU prior to
tory closure. The 2005 to the write-off of
the transaction. a result of the transaction, PMI now owns 1003 of the
equipment, associ-
business and no longer holds an interest in EU's business.
with the closure of streamlin-
of PMl's interest in EU's
ing of various operations. sevcrar1cc, of
of $488 million, which increased Altria
approximately million
by $0.15 diluted operating
during 2008.
subsidiary for the 31, 2007 and
In 2007, im~;ainT1er1t a11d included corpo-
2006 to December 2006, the amounts of which were not material, were
associated with the
included in Altria Group, lnc:s operating results in
In the fourth quarter of 2006, PMI purchased from British American
payments related to at PMI were $131 mill on, mil-
Muralli and Ambassador trademarks in certain markets, as well
lion and $40 million for ended December 31, 2007, 2006 and
to L&M and in Hong Kong, in for the
2005, cash payments for exit incurred to date
in certain African markets and
expected to be approximately $170 million.
million.
streamlining of these various functions and operations is
In 2005 PMI acquired of the outstanding of
in the elimination of approximately 3,400 positions. As of Decem-
an Indonesian tobacco company, for of $4.8 billion, and
2007, approximately of positions have been eliminated.
in Coltabacc, the 1:.r"""'t t()hflrro"
actions beginning 111 2005. with
of $300 million.
cumulative estimated annual cost of approximately $185 million
through December 31, of which million incremental Other
in 2007. Cumulative annual approximately In December 2005, PMI reached agreements with the China National
$329 million expected by the end of 2008. Tobacco Corporation ("CNTC") on the production of Marlboro in the
Republic China and the establishment of an international joint
Acquisitions
venture. PMI and CNTC each hold of the shares of joint venture
As in Note 5.,l\c(whsiti1Jns, to the consolidated financ al state-
company, which in Switzerland. The 1oint venture com-
acc1u1~;rncms occurred during 2007, 2006 and 2005.
pany will support the commercialization and distribution of a portfolio of
co111unct1or wilh PM USA's slrat-
Chinese heritage brands in international markets, expand the export of
John Middleton, Inc., man-
tobacco products and packaging matenals from China, and explore
lan!e c:121irs. for billion in
business development opportunities. While PMI views thE,seagreEom,eni:s
John Middleton, lnc:s balance
as important milestones, PMI not expect them to have
sheet has been consolidated w;th Altria lnc:s as of December 31,
significant impact on its financial for some time.
2007. 2007 to December 31,
been included in Alt~ia Group,

In November PMI acquired an additional 303 stake in its Mexi-

can tobacco business frorn Grupo Carso, S.A.B. C.V. Carso"),
which increased PM l's ownership interest to 803, for billion.
this transaction was completed, Grupo retained a L'.U"!n ~31ai\e

8009533512

8009533512
 The following PM USA's volurne
Ncl Opc:rating Companies lncorne by brand for 2007 and 2006:

31, (in billion unils) 2007

Marlboro 144.4 150.3
Parliament 6.0
i.O
13.2 14.5
on 178.3
Other 5.1
Total PM USA 183.4

PM USA's

2007 r''f'WY\rl~H'Ori with 2006

dis.cu1ssicm compares tobacco results 2007

1111U.S. tobacco: Net which include taxes billed to

tomers, increased $11 million (0.13). Excluding taxes, net revenues
$176 million to $15.0 billion, due primarily to lcwer whole-
promotional allowance ($1.l billion), partially offset by lower
volume ($906 million).
49.2
1.4 1.5
50.6%

PM USA reduced its wholesale promo-

tional allowances on Marlboro, and by $0.50 per carton,
from $4.00 to Virginia Slims by $2.00 per carton, from $4.00
to $2.00. In addition, PM USA the price on other brands by
$2.50 per thousand or $0.50 carton September 10,
2007 and by $9.95 per thousand or $1.99 per carton effective
12, 2007.
PM USA reduced it;; whole;;ale prorno-
brands by $1.00 per carton, from $5.00
the price of other brands by $1.00 carton.
nio,,om.hoc 19, 2005, PM USA reduced its wholesale oromotiorial
brands by $0.50 per carton, from to
liability costs were million,
December 2005, PM USA increased the
respectively. The factors that have influenced past product
its other brands by $2.50 thousand or $0.50 per carton.
to continue to influence PM
PM USA anticipates that U.S. industry volume will decline by approxi·
not that product liability
mately to annually over the next PM USA cannot
the future.
diet the relative sizes of the premium and discount segments or
PM USA's shipment volume was billion units,
shipment or retail market share. PM USA that its results may be
or 8.3 billion units, but was to be down approximately 3.6% when
materially affected by the items under the caption
for in trade inventories and calendar For the
full year 2007, PM USA a decline of about 43 in total cigarette
industry volume. In the premium PM shipment volume 1111 European Union: Net
Marlboro ;;hipment volume 5.9 billion units tomers, increased $2.9 billion
(3.93) to billion units. In discount PM USA's shipment increased $920 million
;ilsrH1Pr1·PF1sPC1 with shipment volume down 13.2 bil- currency
that consumption in 2008 may by lower volume/mix
decline by Operating companies income $657 million
to favorable currency million), price
million), lower marketing, administration and research
($/5 million) and the Italian antitrust in 2006 ($61 11dlion), partially

8009533513

8009533513
 by lower volume/mix ($201 million), higher for In shipments down 2.0%, L&M This
impairment and exit ($33 million) and bigher fixed manufacturing was partially offset continued growth of higher-margin brands, including
($23 million). Marlboro, MuraW. PMl's market was
In the Union, PMl's shipment volume ce<:re.ase'd unchanged at PMI the entire L&M
in Germany and Poland, and unfavorable brand family with a completely new, smoother
distributor inventory in France, partially by in to changing adult consumer pnite1rer1ces.
Hungary, the Baltic States, and the impact of favorable inventory move- shipments declined share
ments in Italy. PMl's market in the European Urion was points to primarily to a volume decline of the lower-margin
down 0.1 point frorn 2006, due primarily to trade inventory brands in PMl's portfolio.
distortions in the Republic. Absent distortions, market In Ukraine, shipments points to
in the European Union flat. 33.9%, driven by consumer up-trading to premium bra1ds, particularly
In PMl's shipment vclume due primarily to Marlboro. Parlian1ent arid Ci'Jes1!erf,ield.
lower market due to higher pricing. PMl's market share de<:re;3sed In distribu-
0.3 share points to due primarily to declines 1n Marlboro, reflecting tion network.
the temporary adverse impact of the €5.00 pad' threshold. In Bulgaria, shipments increased, driven by PM l's marl,et entry in July
In the mid-price the Philip Morris brand market share. 2006 as well higher of Marlboro following price repositioning, and
In Germany, PMl's shipment volume total portfolio expansion following the lifting of import duties in January
market in Germany declined 4.0%, due mainly to the tax-driven In Romania, shipments were down due primarily to a lower total
price in October 2006. PMl's market declined market and lower market share. PM l's volume decline was driven by declines
0.4 share points to partially by in L&M, partially by in Marlboro and Parliarner1l.
share for L&M.
111 Asia: Net revenues, which include
In Italy, the total market was down ship·
increased $957 million (9.4%). Excluding
ment volume due primarily to the favorable timing of
increased $108 million (1.9%) to $5.6 billion, due
shipments, and its marl,et share in Italy increased 0.8 points to
($146 million), Lakson Tobacco acquis,tion million)
driven by Chesterfield and Meril.
and favorable currency ($75 million), par!ially by lower volurne/rnix
In Poland, total market declined due to consumer
($231 million).
sensitivity within low-price following significant tax-driven
Operating companies income $67 million (3.6%), due pri-
as consumers switched to other tobacco prcd.<ets. PMl's
marily to lower vo ume/mix ($179 million), higher marketing, administration
shipment volume was down 6.0% and market LO share
and research ($70 million, including $30 million for a distributor
point to primarily
mination in Indonesia), unfavorable currency ($36 million) and higher pre-
local 70mm brands. However, Marlboro market
tax impairment and exit costs ($9 million), partially
to
by price and lower ($171 million), lower manufacturing
($44 million) and the Lakson Tobacco acquisition ($12 million).
ume
In shipment volume increased due to the Lakson Tobacco
market
acquisition in Pilkistan. Fxcluding this acquisibon, volume in was down
declines in Marlboro, partially
due primarily to the impact of inventory movements and
Philip Morris brand.
lower shipments in Japan, partially offset by in Indonesia and Korea.
111 Eastern Europe, Middle East and Africa: Net In Japan, the market declined 4.8%, driven by the July 1,
billed to customers, increased $2.2 billion 2006 tax-driven price Market in Japan 0.4 share
revenues increased million points to due mainly to Lark. PM l's shipments were down
primarily to favorable currency ($321 million), lower in-market and a reduction in distributor inventory
higher volume/mix million).
Operating companies income increased $362 million due pri- In Indonesia, PMl's market
marily to and lower costs ($285 million), higher volume/mix share 0.3
million) and favorable currency ($90 million), partially by higher Mild and Oji Sam to temporary stick-price disadvantage
marketing, administration and ($80 million), higher fixed competitor brands, partially by the growth of Marlboro, which
manufacturing ($18 million) and higher pre-tax 0.4 share points to 4.0%. PMI shipment volume driven by the
impairment and exit costs ($10 million). July launch of Marlboro kretek.
In Eastern Middle East and Africa, shipment volume increased In Korea, the marl,et increased PMl's sh pments increased
0.9%, driven by in Bulgaria, Egypt and Ukraine, partially 20.3%, due primarily to the performance of Marlboro, Parliament and Virginia
by in Romania, Russia. Serbia and Slims, driven by new line extensions, including Marlboro Market
improved economic conditions and tourism contin- 1n Korea 1.3 share points to 9.9% with Marlboro market
the growth of the total industry and premium brands. up0.8
PMl's shipments share advancec 1.9 points to 12.0%, driven
111 Latin America: Net revenues, which include taxes bi lied to
by Marlboro, L&M and Merit.
tu111t:r~,111uc:'"'"'u
$/ 12 million (11.6%). Excluding taxes, net revenues

8009533514

8009533514
 million $2.0 billion, primarily to price The following PM USA's volume
($130 million), the impact of acquisitions million), by brand for 2006 2005;
currency ($34 million) and favorable volume/mix million).
ce•creasE~d $488 million
marily to the gain 1n 2006 from of Dominican Republic 150.3 150.5
beer business million), the impact of divestitures ($51 million), Parliament 5.8
marketing, administration and ($18 million), and higher
14.5 15.2
for impairment and exit ($17 million), partially
by price increa5es, net of higher ($87 million).
5.1
In I atin Am8rica, shipment volume 0.83, driven ny in
Argentina, partially by in Mexico and the Dominican Republic.
In Argentina, the total market was up 3.0%, while PMI ship-
ments grew and share up 2.6 points to driven by PM
Marlboro and the Philip Morris brand.
In Mexico, the total market declined to lower consumption
following the price in January and October 2007, as well an
unfavorable comparison with the prior year, which included
in advance of the January 2007 tax-driven price PMI shipments
declined reflecting the decline in overall market. However, PMl's
0.8 share points to driven by Marlboro
Parliament 1.8 1.7
and
2.3 2.3
In the Dominican Republic, shipment volume declined
lower total market following price increases in January and
to partially compensate for a very significant increase imposed
on in January 2007.

2006 f''f'WYlr>O>rori with 2005 Union: Net which include

dis,cu1ssi<in compares tobacco operating tor million (0.5%). Excluding net
$7.9 billion, due primarily to lower vol-
ume/mix million), net price ($203 million) and unfavorable
1111 U.S. tobacco: Net which include
currency ($152 million).
tomers, increased $340 million (l.9%). Excluding net
Operating companies income decreased $418 million (10.6%), due
increased $382 million to $14.9 billion, due primarily to lower whole-
to lower volume/mix ($243 million), net of cost
promotional allowance rates ($604 million). partially by lower
"'"'mo·" 1 ' " million), the Italian antitrust charge ($61 million) and higher
vo1ume ($239 million).
impairment and million), partially
Operating companies income million (5.0%), due
by lower marketing, administration and ($90 million)
primarily to lower wholesale promotional allowance net of
and lower fixed manufacturing costs ($29 million).
resolution million) and several other items cai;:gnegzn-
In the Union. PM l's shipment volume de•creasE~d
ing million), partially offset by lower volume ($170 million), higher fixed
2.83. Excluding the inventory 1n Italy, PMl's volume 1n
manufacturing ($47 million) and higher marketing, administration and
the Union due largely to declines in Germany and
(including spending in 2006 for various tax ballot ini-
Republic. partially by gains in France, Hungary and Poland.
tiatives). The items a provision in 2005 for the
total market was down primarily to the
individual smoking case ($56 million) and the previously mentioned 2005
impact of and a new tobacco law implemented on Jan-
net related to tobacco quota legislation ($23 million).
uary 1, 2006. PM l's shipment volume decreased 12.83, reflecting increased
PM USA's shipment volume was billion units, a of 1.1%,
consumer down-trading to the low-price segment. a result of
but estimated to down approximately when adjustec
price gaps, PM l's market share in Spain declined 2.3 points to
inventory and timing of promotional shipments. In
On January 2006, the Spanish government
mium segment, PM USA's shipment volume decreased 0.7%. Marlboro ship-
which would have resulted in even
ment volume billion units (0.2%) to billion urits. In the
had been on to consumers. Accordingly, PMI reduced its
discount segment PM USA's shipment volume""'''""'"~''"
on January 26, 2006 to competitiveness of its
shipment volume was down billion units.
the Spanish government the level of
taxes, but also established minimum which PMI
raised back to prior levels. On November 10, 2006, the
government announced an increase in the minimum tax to
per thousand December 30, 2006, PMI raised prices on
all brands.

36

8009533515

8009533515
 In low-price However, PM! market in Turkey
tax-driven price in lower overall consumption and points to as consumers traded up to its higher
higher consumer cross-border purchases in Spain. PMl's shipment volume Parliament and Muratti.
de(:re;3se•d 13.0% and market share was down 5.0 points to
1111 Asia: Net revenues, which include
due to price competition, partially arising from competitors continu-
increased billion excise increased
to sell lower-priced product from inventory that was accumulated prior
$612 million (12.4%) to $5.5 hi Ilion, due primarily to the impact of acquisi-
the tax
tions ($587 million) and million), partially by
In Germany, PM l's total tobacco volume (which includes other tobacco
unfavorable currency million).
product;) 0.9%; however, PMl's volume declined
Operating companies income increased $76 million
Total tobacco consumption in Germany was down in ?006,
manly to the impact of acquisitions ($219 million) and price
the decline and ultimate of tobacco portions from the market The
($185 million), partially by unfavorable currency million),
total market 4.0%, affected by the Se1Jte111b•er
million) and higher marketing, administration and
tax-driven price increase as well as the of illicit cih'an'rn's '"
research million).
the German manufacturers' association. PMl's
In Asia, shipment volume acquisition of
share points to driven by the repositioning
Sampoerna in Indonesia. Excluding this acquisition, volume in Asia was
the fourth quarter of 2005, the European
down 1.0%, due to lower volume in Japan and Thailand. In Japan,
government's favorable tax treatment
the total market driven by the July 1, 2006 price
of tobacco portions was EU law. Accordingly, tobacco portions
Market 0.1 point to Market in
of April 1, 2006 now incur the same tax as that
Indonesia grew 1.9 share points to led by A Hijau and A Mild. In Thai-
levied on and as of October 2006, PM l's shipments of tobacco
land, a lower total market reflected a December 2005
portions ceased.
In the Republic, shipment volume market 111 Latin America: Net revenues, which include
price competition. tomers, increased $458 million (11.6%). Excluding excise net
In Italy, the total market rose 1.1% versus 1n 2005. increased $215 million (14.0%) to $1.8 billion, primarily to higher
when it was adversely impacted by the compounding volume/mix ($144 million), the impact cf acquisitions ($50 million) and
2005 legislation smoking in public places and December favorable currency ($14 million).
2004 tax-driven price PM l's shipment volume in Italy de1:re.asE~d Operating companies income $545 million (117.7%), due pri-
the inventory in 2005. Adjusting for the one- marily to a related to the of PMl's in a
time inventory shipment volume in Mar- in the Dominican Republic ($488 million), higher volume/mix
in Italy increased 1.3 points to million), ($23 million) and the impact of acquisitions
and Ch•est1-orfield. ($13 million), partially offset by marketing, administration and
In Poland, shipment volume up market million).
2.8 points to 40.0%, driven by L&M and Next. shipment volume 10.8%, driven by strong
In f-rance, shipment volume increased /.0%, driven by price stability, and Mexico, as well as higher volume in Colombia due to
moderate gaps and favorable timing of shipments. Market acquisit on of Coltabaco. this acquisition, volume was up
increased LO point to reflecting the performance of in Latin America. In Argentina, the total market advanced approxi-
Marlboro and the Philip Morris brand. mately while PM! shipments share was up share
pcints, due mainly to the Morris brand. In Mexico, the total market was
111 Eastern Europe, Middle East and Africa: Net which include
up approximately and shipments Market
taxes billed customers, increased $1.l billion (12.4%). Excluding
points to reflecting the continued performance of
increased $563 million (11.2%) to $5.6 billion,
Marlboro and
($391 million) and higher volume/mix
million), partially by unfavorable currency ($23 million).
Operating companies inccme increased $430 million due Financial Services
primarily to increases, net of higher ($381 million) and higher
volume/mix ($130 million), partially offset by hig11er marketing, administra-
Business Environment
tion and ($85 million).
In 2003, PMCC and no making new
Middle East and Africa, shipment volume increased
investments but instead focused on managing its existing portfolio of
driven by in Russia, Ukraine and partially by
finance assets in order to maximize cash flow from
declines in Romania and Turkey. In Russia, shipments up
asset and re ated activities. Accordingly, PMCC's
by Marlboro, Muralti, Parliament, and while market
income will fluctuate over time as investments mature or
down 0.4 share points to due primarily to declines of lcw-price
2006 and 2005, from asset maturities and bank-
brands and L&M. shipments in Ukraine mainly reflect higher market
ruptcy recoveries totaled $569 million, $357 million and $476 million,
as well as up-trading to higher margin brands. In Romania, shipments
respectively, and totaled $326 million, $132 million and $72 million,
declined market share was down 1.8 share points to
respectively, in companies income.
In shipments declined reflecting the continued decline of

8009533516

8009533516
 rPr·m11,r"'~ of amounts
to PMCC's Net Revenues

2007 2006

megavvatt ("MW") natural plant $220 $317

(located in Pasadena, Texas) to an indirect subsidiary of Calpine Corporation
("Calpine"). Calpine, which guaranteed the lease, is currently operating PMCC's net $97 million (30.63) from
under bankruptcy protection. The 5ubsidiary wa5 not included a5 :.iart tr1e 2006, due primarily to lower due to !ewer investment bal-
bankruptcy filing of Calpine. PMCC not record income on when and to !ewer gains from asset management activity. PMCC's
the guarantor in At December 31, 2007, PMCC's com~1an1es income for 2007 million increased $245 million
balance for this lessee was million. Based on PMCC's '1'-''v.c;r1'n' from due primarily to cash in 2007 on aircraft
as~;essment of the prospect for recovery on the Pasadena plant, a portion previously written down an to the provision in
of the outstanding finance asset balance has provided for in the 2006, partially by lower revenues.
allowance for losses. In July PMCC's interest in two 265 MW natural PMCC's net for 2006 $2 million (0.63) from
power plants (located in Tiverton, Rhode Island, and Rumford, 2005, due primarily to lower as a result of lower investment
Maine), which were part of bankruptcy filing, were foreclosed upon. balances, partially by higher from asset PMCC's
were and written off during 2006. companies income for 2006 of $176 million increased million
None of PMCC's aircraft operating under bankruptcy pro- from 2005. Operating companies income for 2006 includes
tection December 31, 2007. One of PMCC's aircraft Northwest Air- million increase to the provision for airline industry exposure a5
Inc. ("Northwest"), bankruptcy on May 31, and above, of million from the rrovision, and
PMCC's leases for three Airbus A-320 dlfU clll.rlVl\..A," higher from as~;et sales.
19 aircraft with Delta Air Lines, Inc. ("Delta") were sold in early
activity in the allowance for losses on finance for
ended December 31, 2007, 2006 and 2005
Financial Review
as follows:
1111Net Cash Provided by Operating Activities, Continuing Operations:
During 2007, net cash provided by activities on continuing oper-
billion, compared with $9.9 billion 2006. The
in cash provided by operating activities was due primarily to higher
earnings from continuing operations excluding non-cash reversal
in 2006), !he return of $1.3 billion cf escrow bond
uecernoer 2007 related to the U.S. tobacco case and lower

net impact to the allowance for losses in 2007, 2006 and 2005
primarily to various airline Amounts recovered of mil-
lion in 2007 related to partial recoveries of amounts
the allowance tor losses in prior years. In addition, PMCC
lion related to amounts previously to and written-off in
prior years. In total, resulted in additional compa-
income of million for the year
result of the $200 million
ratio did not meet its 1.25:1 requirement under a support with
ALG. Accordingly, as required support support payment
of million was made by PMCC in September It possible lower pension plan contributions and higher from continuing oper-
that additional developments may PMCC to its ations, partially by the reimbursement of Kraft's pcrtion of income tax
allowance for on the foreclosures of related to the RAR and a higher of cash to fund working capital.
written-off amounted to approximately $50 million and $80 million in working capital PM l's in antic-
in 2007 and 2006, in 2005. ipation of 2007 excise tax-driven
further in Note the IRS has disallowed
benefits pertaining to PMCC transactions 1111 Net Cash Used in Investing Activities, Continuing Operations: One
through 1999. element of PMl's growth is to strengthen its brand portfolio and/or
expand its reach through active acquisi-
tions. ALG and PM USA from time to time consider acquisitions as part of
their adjacency as evidenced by ALG's 2007 acquisition of John
Middleton, Inc.

8009533517

8009533517
 Mt"" "'c.ie"J" quality,
improved dramatically over the that apprnx.mate
of Single-A rated
Moody's that, should PMI be spun-off from A1tria Group, Inc.
expected, PM l's lo1g-term and short-term ratings could high as
and Prime-1, Standard & Poor's that the potential cor-
credit rating for PMI could high as A+ on busi-
ness nsk Fitch that, should PMI be spun-off from Altria
of Sampoerna. Group, Inc., PMl's long-term and short-term could A+ and Fl,
On December 11, in conjunction with PM USA's ad1acency resrectively.
Altria Group, Inc. acquired 1003 of John Middleton, Ire., a leading
Credit Lines: ALG and PMI maintain
manufacturer of machine-made large $2.9 billion 1n cash. The
ALG intends its revolving rrP·r11t t;>;, 1111ri.,~
0

acquisition was financed with cash. In November PMI

commercial pape1:
acquired an additional 30% stake in its Mexican tobacco business from
in Note ':1. c>norT- tEirm 801wvvin1;;s <ind Bo,rrowirig J\rra1ng,e-
Grupo Carso, which increased PM l's ownership interest to for $1.1 bil-
ments, the purchase price of the Sampoerna acquisitior was
lion. During quarter of 2007, PMI acquired an additional
financed lhrough billion of bank credit facililies arranged for PMI
in a Pakistan manufacturer, Lakson Tobacco, completed
and its subsidiaries in May 2005, consisting of a euro 2.5 billion thrPP-vP;1r
a mandatory tender offer for the remaining which increased PM l's
term loan (which, through had to
total ownership in Lakson Tobacco from 403 to approximately
L5 billion) a euro 2.0 billion five-year revolving crecit facility. On
$388 million.
December 4, 2007, PMI entered into new credit ag1·ccments
In November 2006, a subsidiary of PMI exc1ha11gE1d
a $3.0 billion revolving credit
E. Jimenes, C. por. A. ("EU"), which included 40% indirect in
revolving credit fa::;ility and a euro L5 billion loan facility. On
EU's subsidiary, Nae.anal Dominicana, C. por. A., for 100%
December 4, 2007, PMI borrowed euro L5 billion under the new term loan
ownership of EU's subsidiary, lndustria de Leon Jimenes,
facility to repay debt outstanding under its 2005 term loan
SA ("ITU") and million of cash, which was contributed to ITU prior to
facilities. which not require PMI maintain an
the transaction. of the transaction, PMI now owns 1003 of the
taxies, ·derire1:1ation and amortizaticn ("EBITDA") to
and no longer holds an interest in EU's business.
inleresl ratio of nol llian 3.5 lo LO. Al December 2007, PMl's ralio
Capital $L5 billion (of which
calculated in accordance with the to LO.
$1.1 billion related to PMI). The expenditures primarily for moderniza-
ALG has revolving credit facility in the amcunt of $LO billion,
tion and consolidation of manufacturing facilities, expansion o" and
which on March 2008. In addition, ALG maintains a multi-year
development, and expansion of production capacity.
credit facility in amount of $4.0 billion, which April 2010. The
2008 capital expenditures to slightly be1ow
ALG facilities requ the maintenance of an earnings to fixed charges ratio,
and are expected be funded by flows.
as defined by of not less than to 1.0. At December 31,
111 Net Cash Used in Financing Activities, Continuing Opera! ions: During the ratio calculaced in accordance with the was 19.6 to
?006 and ?005 net cash in financing activities on continuing the of the srin-off of PMI, ALG's multi-year credit
was $3.5 billion, $10.G billion and $L2 billion, respe<:tively. reduced from $4.0 billion $3.5 billion and
of $7.1 billion from 2006 was due primarily to the issuance of ratio will be replaced with ratio of EBITDA to interest
debt 1n as to the repayment of debt in increase of expense of not than 4.0 to LO. In addition, the facility will then
$9.4 billion from 2005 to 2006 was due primarily to the repayment of short the maintenance of a ratio of debt to EBITDA of not more than 2.5 to LO. If
and long-term debt in 2006 billion) and the issuance of debt for the the PMI spin-off had occurred of December 200/'. the of EBITDA
Sampoerna acquisition in 2005 ($4.l billion). to would have been 15.6 to LO, and the ratio of debt to
EBITDA would 0.9 to LO. On January 28, 2008, Altria Group, Inc.
111 Debt and Liquidity:
into $4.J billion, loan to finance
Credit Ratings: At December 31, 2007, ALG's debt ratings by major credit der offer and consent solicitation related to its outstanding con-
were as follows: sumer products debt prior to spin-off of PMI. The contains
the covenants mentioned above, and required to be prepaid or
reduced by the net amount of any capital markets transactions.
and PMI to continue to their covenants.
&
These facilities do not include any credit provisions
that could require posting of collateral. The multi-year facilities enable
the companies to short-term debt ::in a long-term basis.
On January 30, 2008, the major credit listed in the
At December 31, 2007, $2,205 million of short-term borrowings that PMI
table above affirmed ALG's debt following the announcement of the
to remain outstanding at 31, 2008 as
PMI spin-off, and Fitch upgraded outlook to positive.
long-terrn debt.

8009533518

8009533518
 At Uec:ember On January 2008, Altria Group, Inc. and subsidiary, Altria
activity, Islands) Ltd. commenced to purchase for cash
billion of notes and denominated in U.S. dollars and approx-
ALG billion in euro-denominated bonds. Altria Croup, Inc.
Commercial record of approximately $400 million upon completion of
Amount Lines the tender offer. In order to finance the tender offer, Altria Group, Inc.
Credit Lines Drawn Available "rr;"n"'"n" $4.0 billion, loan. Subsequent to the spin-off,
Altria Group, Inc. intends to access the public debt market to
incurred in connection with the tender offer.
Taxes: The IRS concluded examination of Altria Group, lnc:s consolidated
for the 1996 through 1999, and a final RAR on
2006. Altria Group, Inc. with the RAR, with the of
below. Consequently, in March 2006, Altria
of $1.0 billion, which principally
of tax following the of and
PM!
rnenl wilh lhe RAR. Allria Group, Inc. reimbursed $337 mill on in
Amount Lines Kraft for portion of the $1.0 billion in tax benefits, as well pre-tax 1nter-
Drnwn Available million. The amounts related to Kraft to
from discontinued operations. The tax reversal in an
$ - $3.0 to earnings from continuing operations of $631 million for the year ended
2006.
0.6 0.4 Altria Group, Inc. with all conclusions of the RAR, with
exception of the disallowance of benefits pertaining to PMCC lever-
2.2 lease transactions for the 1996 through 1999. PMCC will con-
2.4 0.5
$5.2 $3.9

In addition above, certain international subsidiaries

tain lines to working capital
whicr1 amounted to approximately $2.6 billion for the of
international Rorrowings on lines amounted to
approximately $0.G billion $0.4 billion at December 2007 and 2006,
respectively.
Debt: Altria Group, lnc:s total debt (consumer products and financial ser-
"'n" \\At"~ $11.0 billion and $8.5 billion 31, 2007 and 2006,
respectively. Total consumer products debt billion and billion
at December 31, 2007 and 2006, resper:trvely, a portion of these tax payments and However, should
debt includes PM l's thiro-party debt of PMCC's position not upheld, PMCC may have to accelerate the payment
December 31, 2007 and 2006, respei:tiv·ely. At of significant nmounts of federal income tax and significantly lowN
2006 (after giving to Kraft Altria Group, lnc:s ratio of to reflect the recalculation of the income from the
consumer products debt to total equity was 0.57 and 0.58, respectively. The which could have material on the earnings and
ratio of total debt to total equity was 0.60 and 0.67 at December 31, 2007 Altria Group, Inc. in a particular fiscal quarter or fiscal yei,r. l"MCC cc•nsidered
and 2006 to the Kraft spin-off), Fixed-rate this matter in its adoption of FIN 48 and FASB Staff Position No. FAS 13-2.
debt constituted approximately and of total consumer products
111 Off-Balance Sheet Arrangements and Aggregate Contractual
debt at December 31, 2007 and 2006, weighted
Obligations: Altria Group, Inc. has no off-balance shE~etarran15erner1ts,
inleresl on tolal consumer products debL including lhe impacl or swap
including special other than and contractual
agr'eemE~nts, vvas approximately and December 31, 2007 and
obligations that arE~ drsCLJSSr"d
2006, respectively.
At December ALG had approximately $2.8 billion of Guarantees: As discussed in Note 19, at December 31, 2007, Altria Group,
remaining under existing shelf registration statement. lnc:s third-party which are related to Rxrci~'' mx""
ALG does not guara1ntE~e the of PMI. d1vest1tu1·e activities, $72 million, of which million have no
expiration dates. The remainder expire through 2011. with none expiring
during 2008. Altria Group, Inc. required to perform under
tees in that a third party to make contractual payments or

40

8009533519

8009533519
 performance ""'""u'"'" mil-
lion on its consolidated balance to
"'":ir;ont,,,," For the remainder
on the consolidated balanoe at December 31, 2007 value of
guar;mt1,R'> is ins1gniticant, due to the tact that the probability ot
future payments under these remote. In the ordi1ary
of business, certain of ALG have to indemnify a limited
number of third in the event of future litigation. At 31,
subsidiaries of ALG also contingently liable for $3.0 billion of
to their own performance, consisting of the following1 nlenb C1re cance!c1b!e without a ~ignificcint penalty, C!fld with '.jhort notice (u'.jua!!y 30 CliJy'.j).
payable anc accruec
guar<mt•ees for tax and import
primarily to international shipments of tobacco
agreE~men1ts, financial institutions provide guar;mtees
ments to the government
to the financial institutions
revolving facililies lhal to shiprnenl
of tobacco products in international markets, and the u1derlying
recorded on Altria Group, lnc:s conS(llidlate;d
SettlemE~ntAgreemE:nts and related legal payments, and
discussed below and in Note 19,
a $0.3 billion of other guarantees, consisting principally of guara1nh?es
excluded from the table above, payments subject to adjustment
of lines of credil for certain PMI subsidiaries.
for including inflation, market and industry volume.
Although Altria lnc:s g u<;i d<nee;s In addition, the international tobacco E.C. agreement payments
frequently short-term in nature, they below are excluded from the table above, as the payments subject to
expiration, with similar of similar amounts. These adjuslrnenl on certain variables including PMl's market share in lhe
not had, and not to have, a significant impact on Altria Group, Union. Litigation discussed below and in Note
lnc:s liquidity. also excluded frorn lhe lable above since lhese will be
returned PM USA should prevail on appeal.
Aggregate Contractual Obligations: The following table surnrr1arizes
Altria Group, lnc:s contractual obligations from continuing operations at Payments Under State Settlement and Other Tobacco Agreements: As dis-
npr·PmhPr 31, 2007; cussed previously and in Note 19, PM USA has into State Settlement
Agreements with the and of the United and also
entered into a trust to provide certain aid to U.S. tobacco grow-
and quota holders, but PM USA's obligations under this trust have now
and eliminated the obligations imposed on PM USA by FETRA. During
Total 2008 2010 2012 Thereafter
2004, PMI entered into cooperation agreement with European Com-
munity. Each of calls for payments based on vari-
$3.441 57 $1.760
able factors, such as volume, market and inflation. PM USA
500
and PMI account for the cost of cost
8.203 2.445 3,941 57 1,760
product is shipped.
561 258 913 a result of these agreements and the enactment of FETRA, PM USA
and PMI recorded lhe following amounts in cosl of for lhe ended
Operating 639 133 180 79 December 31, 2006 and 2005:

8009533520

8009533520
 on and of volurie and
the estimated amounts that PM USA and PMI to
under these ag1reemE1nts be approximately as
(in billions) PM USA PMI Tctal
$5.6 $0.1 $5.7
2009 5.5 0.1
2010 0.1
2011 0.1
2012 5.6 0.1
2013 to 2017 annually 0.1 annually intrinsic value of the original award.
At December 3L 2007. the number of to upon
of outstanding stock options and of stock was
33.2 million, or outstanding.
estimated amounts of sales in each of the Dividends paid in and 2006 were billion and $6.8 billion,
would be paid in the following the respectively, decrease of primarily reflecting a lower dividend rate in
payments due under the terms of 2007 due to the Kraft spin-off, partially by number of
ment for several factors, including outstanding in 2007. the second of 2007, Altria Group, Inc.
contingent and, in ""'"P'"'"'" adjusted quarterly dividend to $0.69 that stockholders
market amounts shown in the table above who retained their Altria Group, Inc. and Kraft in the
and actual arnoums will differ as underlying assumptions differ from actual aggre,gate the same dividend dollars as before the distribution. During the
future results. See Note for a discussion of proceedings that may result in third quarter of Altria Group, lnc:s Board of Directors approved an
a downward adjustment of amounts paid Settlement Agree- increase in the quarterly dividend to $0.75 As a
ments for the years 2003 and the present annualized dividend $3.00
As a result of the PMI spin-off discussed above, Altria Group, Inc.
1111 Litigation Escrow Deposits:
intends to ad1ust current dividend so that stockholders who retain
$1.2 billion of funds held in an interest-IJe<irinr;r their Altria Group, Inc. and PMI will in the the
Fn.c71F; .r:l;i ;s Action was
1

same dividend dollars as before the PMI Distribution. In that PMl's

to the bonding annualized dividend will per common and Altria Group,
billion escrow
lnc:s annualized dividend rate will be $1.16 per common share.
million related the bonding requirement
On January 30, 2008, the Altria Group. Inc. Board of Directors approved
were included in December 31, 2006 consolidated balance as
a billion share repurchase program which to
ntt1Pr:is"'ts Interest income on the $1.2 billion escrow account, prior to
in April 2008, after completion of the PMI spin-off. The Board of
return to PM USA, was paid to PM USA quarterly and was recorded as
also approved a $13.0 billion two-year share repurchase
in interest and other debt net, in the consolidated
which is expected to in May 2008.
ments of earnings.
Also, in June 2006 under the order of the Illinois Supreme Ccurt, the
deposits of $2.2 billion related to the Market Risk
returned to PM USA, and PM obligations to deposit further cash ALG's subsidiaries globally, with manufacturing and 1n
various locations around the world. ALG and subsidiaries
verdicts currently on as financial instruments to manage foreign currency P1'1v1,11re•'
of December 31, has posted various forms of security total· financial instruments used by ALG and principally to
ing approximately $193 million, the majority of which have collateral- market risks from fluctuations in foreign
with cash deposits, to obtain of judgments pending rates, hy exposures. Altria Group, Inc. not
cash included in other assets on to leveraged derivatives and, by policy, not derivative finan-
balance for speculative
Although litigation subject to uncertainty and could result i1 material activity affected accumulated other comprehensive
consequences for the financial condition, cash flows or results of (losses), net of income during the years ended December 31,
operations of PM USA or Altria Group, Inc. in particular fiscal fis- 2006 and 2005, as follows:
cal management believes litigation environment has substantially
2007
improved and cash flow from operations, together with
credit facilities, to provide sufficient liquidity to meet ongoing of $ 13
the business.
(CJ5)
1111 and Dividends: in Note 1. Background and Basis of 133
r'rE:se11tat10n, on March 30, 2007. Altria Group, Inc. distributed all of
remaining in Kraft on a pro rata Altria Group, Inc. stockhold- $ 13 $
ers of reccrd as of the of on March in a

8009533521

8009533521
 in Altria Inc:s
instruments, primarily debt, under normal market
r"t"-''"r1~1+n1<>
potential one-day loss in pre-tax
1111 Foreign exchange rates: Altria Group, Inc.
from currency instruments under normal market conditions, as
exchange contracts, foreign currency and
calculated in VAR model. were as follows:
to rnitigace its exposure to changes in exchange
intercompany actual and forecasted primary cc1JrrP.ncciP.s Earnings Impact
to which Altria Group, Inc. include the Japanese yen, Al
euro, Turkish lira, ruble and Indonesian rupiah. At uecernb12r
2007 and 2006, Altria Group, Inc. had contracts with notional
amounts of $6.9 billion and $3.2 billion, respectively, of which $6.9 billion
$3.1 billion, were PMI. A portion of Altria Group, lnc:s
foreign currency swaps, while as economic do not qualify
!air Value Impact
for hedge accounting and therefore the (loss) to
contracts reported in Altria Group, lnc:s consolidated statements Al
High Low
For the years ended December 31, 2006 and 2005,
unrealiLed (loss) wilh lo lhe conlracls thal do not qualify for
accounting insignificant. $16 $ 9
In addition, Altria Group, Inc. currency to mitigate
its to changes in related to foreign currency Pre-T1x Earnings Impact
denominated debt. These typically convert fixed-rate foreign currency A\
denominated debt to debt denominated in the functional cur- Low
rency of the borrowing entity, and are accounted for cash flow
At December 31, and 2006, the notional amounts of foreign currency 7
swap $1.5 billion and $1.4 billion, respe(:t1vely.
Allria Group, Inc. also certain
Fair Value
debt and forwards as net investment

lion, respectively, and during the

in gain, net of income of
reported a component of accumulated other comprehensive earnings
within currency translation adjustments. statistically
1111 Value at Risk: Altria Group, Inc. a value at risk ("VAR") computa-
tion to estimate the potential one-day loss in the fair value of its interest
rate-sensitive financial instruments and to the potential one-day
loss in of its currency derivative financial instru-
ments. The VAR computation includes Altria Group, lnc:s short-term
investments; and foreign currency forwards, swaps and options. Anticipated
transactions, foreign trade payables and receivables, and net indicative of future movements in such market
investments in foreign which the instruments are of any actual impact that future
rnn.rio~.ioni·rifrvl' in market
intended lo excluded from lhe computation. may have on its future of operations or firnmcial position.
VAR were made assuming normal market conditions,
Altria Inc.
Note to the consolidated finrincial st21te1nents
rates and various currencies. These interrelationships were for discussion of new accounting standards.
rate and forward currency move-
ments over the quarter for the calculation of VAR amounts
December 31, 2007 and 2006, and over each of four quarters
consolidated financial statements for a discussion of
for the calculation of VAR amounts during each year. The values of
contingencies.
currency options do not change on a one-lo-one basis with lhe
underlying currency, and valued accordingly in the VAR computation.

8009533522

8009533522
 r :::111tir1n::in1 Factors That May Affect Future Results valid for
Forward-Looking and Cautionary Statements and will continue to
we· may from time to time make written or oral forward-lool,ing statements, sutisiciiar·ies may enter intc settlement
including statements contained in filings with SEC, in reports to discussions in particular if they believe it in the best of
holders and in and investor You can identify ALG's stockholders to do so. Please see Note 19 tor a discussion of pending
forward-looking by of words such as tobacco-related litigation.
"continues;' "plans;' "anticipates;' "believes;' "will;' "estirr1at<?s;' 1111 Corporate Restructuring: On January 30, 2008, the of Directors
"projects;' "goals;' and other words of similar meaning. You can of ALG the spin-off of PMI to ALG shareholders. The distribution
identify them by the fact that they do not relate strictly historical or will be made on March 28, 2008 to ALG shareholders of as of 5100
current facts. p.m. Time on March 19, 2008. It possible that an action may be
We cannot that any forward-looking statement will be brought to enjoin spin-off. Any such injunction would have to be
ized, although we believe we have prudent in our plans and based on a finding that Altria insolvent or would insolvent after giving
tions. Achievement of future sub1ect to risks, uncertainties and to the spin-off intends to delay, hinder or defraud In the
inaccurate assumptions. Should known or unknown risks or uncertainties event the spin-off is challenged, ALG will defend such action vigorously,
m;1tA1'irili7A. or should underlying assumptions prove inaccurate, actual including by prosecuting any necessary appeals. Although litigation sub-
could vary materially from those anticipated, or projected. ject to management that Allria should ullimalely prevail
Investors should in mind as they consider forward-looking state-
ments and whether to in or remain invested in Altria lnc.'s
In connection with the harbor" provisions of the Private 1111 Tobacco Control Action in the Public and Private Sectors: Our tobacco
Litigation Reform Act of 1995, identifying important fac- subsidiaries face significant governmental action, including efforts aimed
that, individually or in could actual and out- the incidence of smoking, restricting marketing and advertising,
comes to ditter materially from those contained in any forward-looking imposing regulations on warnings and disclosure of and flavors,
~t:itcirncint~ made by such statement is qualified by to the and seeking to hold us responsible for health ettects assc,c1a1ted
following cautionary statements. We elaborate on and other risks we with both smoking and to environmental smoke. Govern-
throughout this document, particularly in the "Business Environment" mental actions, combined with the diminishing social acceptance of
sections preceding our discussion of operating results cf our subsidiaries' smoking and private actions to restrict smoking, have in reduced
bu1sines~;es. You should understand that it not possible to or industry volume, and we that such actions will continue to reduce
tify all risk factors. Consequently, you should not consider the follcwing to be consumption Significant regulatory developments will over
complete of all potential er uncertainties. We do not the next few in most of PM l's markets, driven principally by the World
undertake to update any forward-looking statement that we may make from Health Framework Convention for Tobacco Control, or FCTC.
time to time. FCTC is the first i1ternational public health and objective
establish il globill for tohaccc reguliltion with the purpose of
1111 Tobacco-Related litigation: There is substantial litigation related to initiation of tobacco and encouraging In addition, the
tobacco products in lhe Uni led Stales and certain jurisdicticns. FCTC has led to by tobacco control advocates and public
Damages claimed in some the tobacco-related litigation significant, health organizations to the palatability and of tobacco
and in certain cases, into the billions of dollars. We anticipate that new products to adult
will continue to be It is possible that could Regulatory initiatives affecting our tobacco subsidiaries that have been
developments in pending An unfavon:iblc outcome or sottlement of proposed, introduced or enacted include:
pending tobacco-related litigation could en•COtJra,gethe
additional litigation. Although PM USA historically to obtain a the levying of substantial and increasing tax and duty
required bonds or relief from bonding requirements in order to prevent a restrictions or bans on advertising, marketing and sponsorship;
plaintiffs from to collect judgments while verdicts
been appealed, there remains a risk that such relief may not be obtainable • the display of larger health warnings, graphic health warnings and
in all risk has been substantially reduced given that 42 states other labeling requirements;
now limit the dollar amount of bonds or no bond all. • restrictions on packaging including colors and
It is possible that the consolidated of operations, cash flows or
financial position of PM USA, PM! or Altria Group, Inc. could materially
a restrictions or bans on the display of tobacco product "'"'k;,o-ir10- at
affected in particular quarter or year by an unfavorable out-
come or settlement of pending litigation. Nevertheless, although liti- the point of and restrictions or bans on ho:irF>ttR vRnrlino
gation is subject to uncertainty, management the litigation machines;
environment has substantially improved. ALG and each of its sutisicl1ar·ies a requirements regarding testing, disclosure and performance
named a defendant and each been so advised by counsel standards for tar, nicotine, carbon monoxide and other smoke
handling the it has numher of valid to constituents

terms "we" "our" and "us" when it is not necessary to distinguish among ALG and its various operating subsidiaries or when any distinction is dear from the context

8009533523

8009533523
 and of tobacco prod- of by third by third
uct ingredients over the Internet and by other means avoid collection of
applicable taxes, and imports of foreign lowest brands.
a increased restrictions on smoking in public and work places and, in
some instances, in private and outdoors; 111 international Competition: PMI primarily on the of
a implementation of
product quality, brand recognition, brand loyalty, service, marketing,
not create the advertising and price. PMI subject to highly conditions in all
than another; of competitive environment PM l's competitive
pcsition can significantly influenced by weak econoniic conditions, ero-
a elimination of duty allowances for travelers; and sion consumer confidence, competitors' introduction of low priced prod-
a encouraging litigation against tobacco companies. or innovative products, higher higher absolute
and price and products regulation that
of some or combination of lity to differentiate tobacco products. Competitors include
tobacco products in certain markets, principally Western international tobacco companies and regional and local
Japan, have been in general decline and PMI this trenc to continue. tobacco companies and, in some instances, government-owned tobacco
PMl's income could be significantly affected by any significant monopclies, principally in the PRC, Egypt, Thailand, Taiwan and Algeria.
in demand for products, any significant increase i-1 the of lnduslry consolidalion and privatiLations of governmental monopolies have
complying with new regulatory requirements and requirements that lead to led to an overall increase in competitive Some competitors have
commoditization of tobacco products. different profit and volume objectives and some international competitors
111 Excise Taxes: Tobacco products are subject to substantial less to in currency rates.
in the United States and substantial taxation Significant 111 Counterfeit Cigarettes in International Markets: Large quantities of
in tobacco product-related taxes or have been proposed enacted counlerfeit sold in U1e inlernalional market. PMI believes thal
and likely to continue to be proposed or within United Marlboro is the most heavily counterfeited internaticnal brand,
States, the Member of the Union (the "EU") and in other although PMI cannot quantify amount it as a
jurisdictions. example, was passed by the United this activity. In addition, PM l's revenues reduced by contraband and legal
in that would increase the federal cross-border transactions.
by a pack. The vetoed this net pcssible
predict whether such legislation will be reintroduced and become law. In 1111 Governmental Investigations: From time to time, ALG and tobacco
addition, in certain jurisdictions, PM l's products subject to tax smicrtirPs subsidiaries subject to governmental investigations on a rnnge of mat-
that discriminate premium priced products and manufactured investigations include allegations of contraband shipments
rettes and to inconsistent rulings and interpretations on complex mcthod- cigareottes, <1lle1~ationsof unlawful pricing activities within certain interna-
determine and other tax burdens. tional markets and or misleading of descriptors such as "Lights"
and discriminatory tax to con- and "Ultra Lights:' We cannot predict the outcome of those investigations or
impact on sales our tobacco products due to whether additional investigations may commenced, and it possible
lower consumption levels and to a in consumer purchases from the that our tcbacco subsidiaries' could be materially by an
premium lo lhe non-premium discounl or lo other low-priced unfavorable outcome of pending orfuture investig<1ticns.
or low-taxed tobacco products or to counterfeit and contraband products. 111 New Tobacco Product Technologies: Our tobacco continue
111 Minimum Retail Seiling Price Laws: EU Member States have to ways to develop and to commercialize new product technologies
laws establishing a minimum retail selling price for c1garenes ana, that may reduce the risk of tobacco while continuing to offer adult con-
in some other tobacco Commission has products meet their taste expectations. Potential solutions
commenced infringement Member being include attempting to constit~ents in tobacco

ing that minimum retail selling price smoke identified by public health authorities harmful and pro-
pean Commission's actions products that reduce or eliminate to tcbacco smoke. Our
tax levels and/or price gaps in lobacco subsidiar es rnay not in efforts. If do not
but one or more of their competitors do, our toba:co subsidiaries may
111 Increased Competition in the United States Tobacco Market: Settle- a competitive Further, we cannot whether
ments of certain tobacco litigation in United States in tors will permit the marketing of products with claims of reduced risk to
stantial PM USA faces competition from lowest consumers, which could significantly undermine the commercial viability
priced brands sold by certain United States and manufacturers that any products that might be developed.
have advantages not settlements.
manufacturers may fail to comply with related escrow 111 Adjacency Strategy: ALG, PM USA and PMI have acjacency growth
or may avoid escrow deposit obligations on the majority of their involving moves and potential moves into complementary
concentrating on certain states where escrow deposits are not required or tobacco or tobacco-related products or processes. We cannot guarantee
required on fewer than all such manufacturers' sold in that these or any products intrnduced in connection with
Additional competition has resulted from diversion into the United
States market of intended fer outside the United States, the

8009533524

8009533524
 Ill Acquisitions: Ore is to ~tn,nc1 th,•n
brand portfolio and/or expand through
of acquisitions. and PM USA from time to time consider
acquisitions part their adjacency evidenced by ALG's
acquisition of John Middleton, Inc. Acquisition opportunities are limited, and
acquisitions present 'isks of failing to achieve efficient and
tion, objectives and anticipated revenue improvements and
can no assurance that we will be able to continue to
acquire attractive on favorable term; or that all future acquisi-
tions will he quickly accretive to
111 Tobacco Availability and Quality: Government mandated prices,
duction control programs, shifts in driven by economic conditions 111 Asset Impairment: We periodically calculate the fair value of our
and weather patterns may or the cost reduce will and intangible for impairment. This calculation may be
the quality of tobacco and agricultural products used to manufacture by the market conditions noted above, as well as interest and
our products. with other agriculture commodities, the price of tobacco economic co1oitions. If an impairment determined to we
and cloves can influenced by imbalances in supply and oemand and will incur impairment which will reduce our earnings.
crop can be influenced by varialions in weather patlerns. Tobacco
111 IRS Challenges to PMCC Leases: Tho IRS concluded examinotion of
production certain countries is subject to a variety of controls, including
Altria Group, lnc:s consolidated tax returns for the 1996 through 1999
governmental mandated and production control programs.
and a final Report ("RAR") on March 2006. The
in the of demand agricultural products could cause farmers to
RAR disallowed pertaining to certain PMCC transac-
plant tobacco. Any significant change in tobacco leaf and clove prices,
tions for the years 1996 through 1999. Altria Group, Inc. has with all
quality and quantity could our tobacco profitability
conclusions or lhe RAR, wiU1 lhe exception or lhe disallowance of benefits
and
np1·t,.1nino to PMCC lease transactions the 1996
111 Attracting and Retaining Talent: Our ability to implement our through 1999. PMCCwill continue to position
of attracting and retaining global talent may be impaired by the transactions and contest approximately million of tax
decreasing social acceptance of smoking. The tobacco industry and net interest and paid with to them. The IRS moy in the
competes for talent with consumer products industry and other compa- and disallcw more of PMCC's
that enjoy societal As a result, our tobacco sub- an IRS Nctice subsequent law ad1dre,ssing
sidiaries may unable to attract and retain the global talent. cific types of leases (lease-in/lease-out ("LILO") and sa1,e-ir1/IE,as10-
out ("SILO") transactions). PIV1CC that the position and ~11rmi'>rtlr10
111 Competition and Economic Downturns: Each of our tobacco
law in the RAR, Revenue Rulings and the IRS Notice
subject tc intense competition, in consumer
incorrectly arrlied to transactions and that its
preferences and local economic conditions. To be successful, they must
and cistinguishable in material
continue to:
and ALG htend to vigorously defend
" promote brand equity successfully: on that position through litigation. In this on October
2006, PMCC filed c:'.lmplaint in the U.S. District Court for :he Southern Dis-
" anticipate and to new consumer trends;
trict of New York c aim refunds portion of tax payments and
,. develop new product; and markets and to broaden brand portfolios However, should PMCC's position not upheld, PMCC
in order to compete effectively with lower priced products; may have to the payment of significant amounts of
,. improve productivity; and income tax and s1gni"icantly lower to the reca1culation of
the income from the affected leveraged leases, which could have a material
to protect or enhance margins through errecl on the and cash flows of Allria Group, Inc. in parlicular
The willingness of consumers to purchase premium brands cal quarter or fiscal PMCC considered this matter in adoption of
depends in part on local economic conditions. In periods of economic FIN 48 and FASG Staff Position No. FAS 13-2.
uncertainty, consumers tend to purchase more private label and
omy brands, and the volume of our consumer products ~11t1<1111a1·,.,~
accordingly.
Our finance subsidiary, PMCC, holds investments in finance prin-
cipally in transportation (including aircraft), power generation and manufac-
turing equipment and facilities. Its also to intense
competition and economic conditions. If counterparties to PMCC's
fail to manage through difficult economic and competitive conditions, PMCC
may have to its allnwanrce for whirh would
our profitability.

46

8009533525

8009533525
 (in millions of dollars, except per share data)

2007

$ 73,801 $ 67,051 $ 63,741 $

2,569 3,502
16,547 14,919 13,678
3,452 3,617 3,659 3,694
32,298 21,953
13,235 10,568
215 510

13,0lW 12,520 11,319 10,058

17.63
4,096 3,400 3,409

8,924 9,120 7,910

237 209 260
9,161 9,329 8,170 7,153

625
9,786
4.36
0.30
4.66
4.33
0.29 1.28
4.62 5.71
3.05
2,101
2,116 2,105
1,458 1,285
952
Property, olant and equipment, (consumer products) 8,857 6,861
Inventories (consumer products) 10,571 7,241
57,211
7,963
10,546
500 1,119
18,554 39,619
cPS 65.53
66.0%
8.80
90.50-63.13
75.58
16 15 13
16 15 15 13
(millions) 2,108 2,097
84,000 175,000 156,000 165,000
should be read together with Condition and Results of Operations" and Note
P1esenlalion to the consolidated financial statements.

8009533526

8009533526
 (in millions of dollars, except share and per share data)

2007

$ 6,498 $
allowances of $18 in 2007 Ill 3,323
Inventories:
4,864
Other raw materials 1,365
Finished product 4,342
10,571

Other 2,498
22,890

plant and equipment, at

Land and land improvements 761
and building equipment 5,132
Machinery ;md enuirment 10,257
Construction in 1,161 1,073
17,311 14,882
8,454 7,301
8,857 7,581

8,001 6,197
4,953 1,908
1,320 761
3,960
of discontinued
1,167
Total consumer products assets 51,148

Financial services
net 6,029
Other assets 34 50
Total financial services assets 6,063 6,790

Total Assets $57,211

to consolidated financial

8009533527

8009533527
 at 3L 2007

Liabilities
Consumer products
Short-term horrowings $ 638
Current portion of long-term 2,445
Accounts 1,463
Accrued liabilities:
Marketing 802
4,593
756
3,986
Other 1,857
654
1,588

18,782
Long-term debt 7,463
2,182
388
po,;tret1rernent health 1.916
discontinued operntions
2,323
Total consumer products liabilities 33,054
Financial services
debt 500
income 4,911
Other liabilities 192
Total financial services liabilities 5,603
Total liabilities 38,657
Cor1tin1;:en·cies(Note 19)
Stockholders' Equity
Common stock, $0.33 935
Arldition;il f)<lid-in r;irit;;I 6,884
the 34,426
(237)
anc 708,880,389 shares in 2006) (23,454)
18,554
Total Liabilities and Stockholders' Equity $ 57,211

8009533528

8009533528
 Consolidated of
(in millions of dollars, except per share data)

2007

$73,801 $67,051 $63,741

16,547 15,540 14,919
35,750
21,504
7,805
4
138
(11!:>)
61
650 178 139
(488)
(214) 103
28 23 18
13,235 11,840
215 521
13,020 11,31()
4,096 3,409
8,924 7,910
237
9,161
625
$ 9,786 $12,022 $10,435

$ 4.36 $ $ 3.95
Discontinued operations 0.30 1.29 1.09
Net $ 4.66 $ 5.04
Diluted
$ 4.33 $ 3.91
0.29 1.08
Net $ 4.62 $ 5.71 $ 4.99

to consolidated financial

8009533529

8009533529
 (in rnillions of dollars. except per share data)

9,786

736 136 136

144 744 144
(18) (18) (18)
1,462
11,248
711 711
528 289 817
2,020 2,109
$6,884 $ (965) $ (237) $(23,454)
Notel.
to consolidated financ,al slalcrnenls.

8009533530

8009533530
 (in millions of dollars)

for 31, 2007

Cash Provided by (Used in) Operating Activities

$ 8,936 $ 9,205 $ 8,153
225
625 2,693
9,786 12,022
(625)

Consumer products
Depreciation and amortization 980 913
income provision (benefit) 80 (106)
earnings and minority interest, net (237) (209)
U.S. tobacco quota buy-out
1,300

410
(488)
(1,006)
from acquired and companies:
(705) 62
Inventories (889) (861)
Accounts (71) (133)
Income (681) (399)
Accrued liabilities and other 81 381
U.S. tob;acC<) accrned 434
plan contributions (132)
provisions and po~;trEitin,ment, m't 249
Other 596 661
Financial services
income {335)
Provision for airline industry exposure
Other (86)
Net 10,155
Net 161
Net 10,316 13,586 11,060

to consolidated financial statements.

8009533531

8009533531
 for the 2007

Cash Provided by (Used in) Investing Activities

Consumer products
expenditures $(1,458) $ $(1,035)
of net of acquired (4,417)
4
Other 26
Financial services
(5)
569
(5,281)
26
(5,255)

Cash Provided by (Used in) Financing Activities

Consumer products
Net (repayment) of short-term 2,389 4,119
debt issued 4,160
Long-term debt (3,881) (1,004)
Financial services
Long-term debt (617) (l,015)
Dividends paid on Altria Group, Inc. common stock (6,652) (6,191)
Issuance of Altria Group, Inc. common stock 423
Kraft Inc. dividends paid to Altria Group, Inc. 728 1,369
Other (53) (134)
(3,503)
(116)
(3,679)

346
1
341
continuing operations:
1,117
4,781
$ 6,498
$ 649
$ 62 $
Income $ 4,456 $

8009533532

8009533532
 stock options, whicr1, immediately the spin-off, had an intrin-
value equal to the intrinsic value of the pre-spin Altria G'oup, Inc. options:
Background and Basis of Presentation: new Kraft option to acquire the number of of Kraft A
common stock equal to product of (a) the number of Altria Group,
1111 Background: Throughout these financial statements, the term "Altria
Inc. options held by such person on the Kraft Distribution Date and (b)
Group, Inc:' to the consolidated financial position, results of
the distribution ratio of 0.692024 mentioned above; and
lions and flows of the Altria family of companies, and the ter-n "ALG"
the parent subsidiaries, • an adjusted Altria Group, Inc. option for the same number of
Philip USA Inc. ("PM USA"), Inc. ("PMI") and of Altria Inc. common stock with a reduced pnce.
John Middleton, Inc. in the manufacture and of
and other tobacco products. Philip Morris Capital Corporation new Krail option has an price equal to the Kraft market
another wholly-owned maintains portfolio of and at the time of distribution ($31.66) multiplied by the Option Con-
direct finance In addition, held a economic and voting version Ratio, which price of original Altria
interest in SABMiller pie ("SABMiller") at December 31, 2007. ALG's access Group, Inc. option divided by the Altria Group, Inc. market price immediately
to the operating flows of consists of cash before the distribution reduced price of the adjusted
from the payment dividonds and interest, and the repayment of amounts Altria Group, Inc. option is determined by Altria Group, Inc.
borrowed from ALG oy market immediately following the distribution by the Option
On March 30, 2007, Altria Group, Inc. distributed all of its Conversion Ratio.
interest 1n Krail Inc. ("Kraft") on a pro-rota to Altria Group, Inc. Holders of Altria Group, Inc. stock or stock awarded
stockholders in a distribution. prior to January 31, 2007. retained their existing award anc received
lhe discussion below. Altria Group, Inc. has reclassi f1ed and restricted stock or stock of Kraft Class A common stock. The
of Kraft prior to the Kraft Distribution Date as discontin- amount cf Kraft
ued operalicns on the consolidated statements of was calculated using the same formula to new
statements of cash flows for all periods prErse11te1j. Kraft options. All of the stock and stock will at the
liabilities related to Kraft were and completion of the original restriction period (typically, three years from the
operations on the consolidated balance at l1A1~Arnh1'r date of the original grant). Recipients of Altria Group, Inc. deferred stock
further in Note Subsequent
awarded on January 31, did not stcck
2008, Altna Group, lnc:s Board of Directors approved stock of Kraft Rather, they additional u"'"' ' """"'o"""
of PMI to Altria Group, lnc:s stockholders. Group, Inc. to the intrinsic value of the original award.
In November Altria Group, Inc. announced that it had the of the remaining Altria G'oup, Inc.
headquarters building in New York City received Kraft stock options, Altria Group, Inc. reimbursed Kraft in for
mately $525 million and will record of approximately mil- the 81ack-Scholes fair value of the stock opticns received. To the extent that
lion upon closing the transaction. Under the terms Kraft employees held Altria Group, Inc. stock options, Kraft reimbursed
Group, Inc. plans to the no later than April 1, 2008. Altria Group, Inc. in for the Black-Scholes fair value cf the stock options.
the extent that holders of Altria Group, Inc. stock Kraft
Kraft Spin-Off: On March 30, 2007 (the "Kraft Distribution Date"), Altria stock, Altria Group, Inc. paid to Kraft the fair value of the Kraft
Group, Inc. distributed all of its remaining interest in Kraft on a pro-rata stock less the value projected forfeitures. Based upon the num-
basis to Altria Group, Inc. stockholders of record of !he of Altria Group, Inc. stock awards outstanding the Kraft Distribution
on March 16, (the "Kraft Record Date") in a distribution. The net amount reimbursements resulted in a payment of
distribution 0.692024 of a of Kraft for each of Altria $179 million from Kraft to Altria Group, Inc. in April reimburse-
Group, Inc. common stock outstanding. Altria Group, Inc. stcckholders ment from Kraft as an increase to the additional paid-in capital
received cash in lieu of fractional shares of Kraft Following the distribution, Altria Group, Inc. on the December 31, consolidated balance
Altria Group, Inc. not own any of Kraft During the Kraft was previoJsly included in the Altria Group, Inc. consolidated
of Altria Group, Inc. adjusted its quarterly dividend to $0.69 oral income tax return, and federal income tax contingcnd3s were recorded
stockholders who their Altria Group, Inc. and Kraft as liabilities on balance of ALG. As part of the intercompany
agi~regate, the same dividend dollars as before account settlement below, ALG reimbursed Kraft in cash for
liabilities, which as of March 30, were approximately $305 million,
plus pre-tax of $63 million ($41 million ALG also
Holders of Altria Group, Inc. stock options similarly to pub- reimbursed Kraft in cash for lhe federal income lax consecuences or the
lic stockholders and accordingly, had their stock awards split into two instru- adoption of Financial Accounting Standards Board ("FASR") Interpretation
ments. Holders of Altria Group, Inc. stock options received following No. 48, "Accounting for Uncertainty in Income interpretation of
FASB Statement No. 109" ("FIN (approximately $70 million plus pre-tax

8009533533

8009533533
 of $14 million, $9 million Note for
a discussion of the FIN 48 adoption and
between Altria Group, Inc. and Kraft.
subsidiary of ALG previously provided Kraft with certain sPrv'"'""lf
plus a 53 management tee. Alter the Kratt Distribution Date, Kratt 111 Cash and cash equivalents: Cash equivalents include demand
undertook activities, and any remaining limited provided to with banks and all highly liquid investments w,th original maturities of three
Kraft during 2007. All intercompany accounts were in cash months or
within 30 days of the Kraft Distribution Date. The settlement of the inter-
111 Depredation, amortization and goodwill valuation: Property, plant
cornpany account; (including the amounts discussed above related to stock
and equipment are historical cost and depreciated by the
awards and contingencies) in payment from Kraft to Al G
line method over the estimated useful of the assets. Machinery and
of $85 million in April 2007.
equipment are over periods from 3 to and
distribution resulted in net to Altria Group, lnc:s
buildings and building improvements over periods up to 50
stockholders' equity of billion on the Kraft Distribution Date.
Definite intangible assets their estimated useful
11111Basis of prEfSenta1tion: ·rhe consolidated financial statements include lives. fl.ltria Group, Inc. required conduct an annual review of goodwill
ALG, as well as and intangible assets for potential impairment Goodwill impairment testing
significant influence ownership inleresl), accounted for comparison belween !he carrying value and fair value of each
under the equity method of accounting. Investments in which ALG has an reporting unit If the carrying value exceeds the fair value, goodwill consid-
ownership of than 203, not significant influ- impaired. The amount of impairment difference
accounted for under the method of accounting. All intercom- between the carrying value and implied fair value of goodwill, which
pany and have been eliminated. The of Kraft mined discounted flows. Impairment testing for non-amorbzable
prior to the Kraft Distribution Date have been and a comparison between the fair value and carrying
discontinued operations on the consolidated statements If the value fair value, the intan-
cash flows for all periods µ1 "'"''" ""u. gible considered impaired and is to fair value. During 2007
related tc Kraft were and discontinued operations and 2006, Altria Group, Inc. completed its annual review of goodwill and
on consolidaled balance al December 31, 2006. 111u3n~;101e ass<ns, and no resulled frorn
preparation of financial statements in conformity with accounting and other intangible assets, net, by follows:
principles accepled in lhe Uni led Stales or America (''U.S. GAAP") Other Intangible
management make and assumptions that affect the C'-.oodwill

and during the reporting Significant (in millions)

mates and assumptions include, among other things, pension and benefit U.S tobacco
plan and valuation assumptions of goodwill and other
intangible assets, marketing income and the allowance for
loan losses and estimated residual values cf finance Actual
could from and Africa 205 164
As in 1,457
Latin America 175 59
$4,953 $1,908

were as follows:

December 31, 2007 31.2006

Gross
Carrying Accumulated Carrying Accumulated
(in millions) Amount Amortization Amount Amorti,:ation
Non-amortizable
$4,231

802 $80
$5,033 $80

Non-arnortizable intangible assets substantially brand names

from Altda Group, lnc:s acquisition of John Middleton, Inc. and PM l's
2005 acquisition of a business in Indonesia. Amortizable intangible assets
consist primarily of certain trademark non-coripete "'"'00mc,nt~

8009533534

8009533534
 and for intangible
ended December 31, 2007, 2006 and 2005, was
million, and $18 million, respectively. Amortization
for each of the next five estimated to $40 million or values are reviewed annually by PMCC's management based on a number
assuming no additional transactions occur that require the amortization of factors and activity in the relevant industry. 11
of intangible assets. to values. Such reviews in de1creasE1s
Goodwill due primarily to PM l's acquisitions in Indonesia, Mexico, $11 million and $14 million in 2007 and 2006, respectively, to PMCC's
Serbia, Colombia and movement in goodwill and net and of operations. reviews in 2005 resulted in
carrying amount of intangible a5 follow5; no adjustments.

1111 Foreign currency translation: Altria Group, Inc.

operations of exchange
(in millions) Goodwill each period, whereas balance accounts are translated
at January 1 $6,197 $1,954 $5,571 $1,700 rates at the end of period. Currency translation adjustments
due to: recorded as component of stockholders' equity. Transaction gains and
Acquisitions 1,634 2,968 115 are recorded in the consolidated statements of earnings and
Currency 183 8 531 129 nol significant for any of lhe periods presented.
Other (13) 103 41 10
111 Guarantees: Altria Group, Inc. accounts for in accordance
$8,001 $1,954
with Financial Accounting Standards Board ("FASB'') Interpretation No. 45,
"Guarantor's Accounting and Requirements for GuarantE1es,
in goodwill from acquisitions
Including Indirect of Indebtedness of Others:• Interpretation No.
preliminary allocations of
45 lhe disclosure of certain and the
lions in Mexico and increase in intangible assets fro11
tion of a liability for the fair value of the obligation of qualifying guarantee
lions during was primarily to Altria Group, lnc:s acquisition of
See Note 19. a further discussion m lJIJ;irrnmf,fOS.
John Middleton, Inc. The allocations of purchase for PM l's acquisitions
in Mexico and Pakistan, and Altria Group, lnc:s acquisition of John Middleton, 1111 Hedging Instruments: Derivative financial instruments
Inc. upon preliminary and assumptions and subject fair value on the consolidated balance sheets as assets or liabilities.
to revision when appraisals finalized in in goodwill in the fair value of derivatives recorded each period in
from acquisitions d11ring ?006 was primarily to exchange of accumulated other comprehensive or in earnings, depend-
PM l's in a for 100% ownership a on whether derivative
in the Dominican Republic. The in intangible assets from acquisi- transaction and, if it type
tions during 2006 related to PMl's purchase of various trademarks derivative instruments reported in accumulated other comprehensive earn-
from British American Tobacco. See Note 5. Acquisiltons for further (losses) reclassified to the consolidated of in
discussion of acquisitions. the periods in which results item. Cash
flows from instruments are classified in
1111 Environmental costs: Altria Group, Inc. subject to laws and
item in the consolidated statements of
lions to the protection cf the environment. Altria Group, Inc. pro-
as1soc:ia1:ed with environmental remediation obligations 1111impairment of long-lived assets: Altria Group, Inc. reviews long-lived
when such amounts probable and can including amortizable intangible impairment whenever
sonably estimated. Such accruals adjusted as new information develops events or changes in business circumstances indicate that the carrying
or change. amount of the assets may not be fully recoverable. Altria Gr:iup, Inc. per-
not possible to quantify with certainty the potentia impact forms undiscounted operating cash f1ow to deterriine if an
of actions environmental remediation and compliance that impairment For purposes of recognition and measurement of an
Altria Group, Inc. may undertake in the in the opinion of impairment for asset5 held for use, Altria Group, Inc. assets and liabil-
menl, environmental remediation and compliance cosls, beiore laking into lhe lowest level for which cash flows are separately identifiable. If an
account any from third parties, will not have material impairment determined to any related impairment is calculated
on Altria lnc:s consolidated financial position, of on assets to be disposed of, if any,
lions or flows. to be received, of disposal.

1111 Finance leases: Income attributable to 111 Income taxes: Atria Group, Inc. accounts income in
dance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting Income Under SFAS No. 109, tax assets and
net investment Investments 1n liabilities determi1ed
stated net of related non recourse debt obligations. statement and tax bases
Income attributable to direct finance initially recorded as for the
unearned income and subsequently over the terms cant judgment required in determining income tax provisions and in
of the at constant evaluating tax positions.
investment balances.

8009533535

8009533535
 On January 1, Inc. FIN computer
Interpretation a recognition threshold and a measurement and software development incurred in connectior with developing or
attribute for the financial statement recognition and measurerient of obtaining computer software for internal software
positions taken or to be taken in tax return. benefits to included in property, plant and equiprient on the consclidated balance
rec1ognized. a position must be more-likely-than-not to and on a straight-line over the estimated useful
upon examination by taxing authorities. The amount rec1ogniz1ed lives of the software. which do not
amount of benefit that likely
111 Stock-based compensation: January 1, 2006, Altria Group, Inc.
upon ultimate settlement a result of the January 1,
adopted the provisions of SFAS No. 123 (Revised "Share-Based Pay-
adoption of FIN Altria Group, Inc. lowered it; liability for
ment" ("SFAS No. 123(R)") the modified prospective riethod, which
$1,0?l million. This in an to stock-
measurement of compensation cost tor all awards at
holders' equity million million, net of minority interest), a
fair value on of grant and recognition of compensation over the
reduction of Kraft's goodwill million and a reduction
periods awards expected to fair value of stock and
tax benefits of $79 million.
stock is determined and
Altria Group, Inc. adopted provisions of FASB Staff Position No. FAS
the market value at of fair value of stock options
13-2, "Accounting a Change or Projected Change in the Timing of Cash
mined using a modified Black-Scholes methodology. The impact of adoption
Flows to Income Taxes by a Lease
nol material.
tion" ("FAS effective January L Staff Position requires the
adoption of SFAS No. 123(R) resulted in cumulative of
revenue recognition calculation to be reevaluated if there is a revision to
of $2 million in taxes, in the consolidated statement
projected timing of income tax cash flows by a
ended December 31, 2006. This gain from
adoption of this Staff Position by Altria Group, Inc. resulted in a
the impact of estimating future forfeitures on restricted stock and deferred
reduction to stockholders' equity $124 million as of January 1, 2007.
stock in the determination of periodic for unvested awards,
111 Inventories: Inventories are or market. The than recording only when they cumulative
last-in, first-out ("LIFO") method is used substantially all U.S. tobacco markE,tinf!. administration and costs for the
inventories. The cost of inventories of the international tobacco is
the first-in, first-out and cost methods. It Altria Group, Inc. previously applied lhe recognition and rneasurernenl
to classify leaf tobacco inventory principles of Accounting Principles Board Opinion No. 25, "Accounting for
although part of such inventory, oecause of lhe duration Stock ls:>ued lo ("APB and provided Lile pro ionna d1sclo-
ordinarily would not utilized within one year. by No. 123, "Accounting for Stock-Based Compensa-
Altria Group, Inc. adopted the provisions of SFAS No. "Inventory tion" ("SFAS No.123"). No compensation for employee stock
prospectively as of January 1, S~AS No. requires that options was in net 1n all stock options granted
abnormal idle facility and handling under those plans had an price not than tre market value
nized as current-period In addition, SFAS No. reqLires that allo- of the common stock on the date of the grant Historical consolidated state-
cation of fixed production overhead costs to inventories based on the ments of already include the compensation for
normal capacity of the production facility. effect of adopticn did not stock and stock. The following table illustrates :he effect on net
have m;itemil impact on Altria Group, lnc:s consolidated results of earnings and ("FPS") if Altria Group, Inc. had applied the
operations, financial position or flows. fair value recognition provisions of SFAS No. measure compensation
for stock option awards for the year ended December 31, 2005:
111 Marketing costs: ALG's subsidiaries promote their products with adver-
consumer incentives and trade promotions. Such include,
but are not limited to, discounts, coupons, $10,435
and volume-based incentives. Advertising costs are
incurred. Consumer incentive and trade promotion aclivilies Total stock-based
a reduction of based on amounts estimated as be determined under
customers and consumers at the end of a period, principally on his-
torical utilization and redemption For interim reporting purposes,
advertising and certain consumer incentive expenses are to
operations as of on
forthe full 5.04
111 Revenue consumer products uuo11 '"',''"'"
revenues. net of incentives and including shipping and handling
billed to customers, upon shipment or delivery of goods when title
and risk of loss t0 customers. ALG's consumer products busines~;es
include excise taxes billed to customers in revenues. and
handling costs are as part of of

8009533536

8009533536
 Altria Group, Inc. 111 New Accounting Standards: In the FASB
amount shown as compensation SFAS No, 2007)
Ownership Stock Options ("EOSOs"), Under certain cir- SFAS 14l(R) for
outstanding stock options, January 1, 2009, the day of Altria Group, lnc:s annual reporting period
and received t.OSOs beginning after Oecember
equal to the number of feature during 2007. acquired, liabilities assumed
ended December 31, 2007, 2006 and 2005, Altria Group, acquiree to be measured at fair value
0.5 million, 0.7 million and 2.0 million EOSOs, respectively. costs incurred to acquisition
Altria Group, Inc. elected to calculate the initial pool of tax from the acquisition and expensed as incurred,
resulting from tax deductions in nf the stock-based employee com- Additinnally, in ?007, the FASB SFAS No. 160
pensation in the statement tax "Ncncontrolling in Consolidated Financial Statements" ("SFAS
benefits") under the FASB Staff Position 123(R)-3, "Transition 160"), SFAS 160 the reporting minority by reporting
Related to Accounting for the Effects of Share-Based Payment Awards:' as noncontrolling within equity, Moreover, SFAS
Excess tax benefits occur when the tax deduction claimed at vesting that any transactions between an entity and noncontrolling 1mArc·~r"r"
exceeds the fair value compensation accrued under SFAS No. be accounted for as equity transactions, SFl\S 160 effective for financial
123(R). Excess tax of $141 million and $195 million statements fo, fiscal beginning December 2008.
for the ended 31, 2007 and 2006, res1Jectively, SFAS 160 is to be applied prospectively, except for the presentation and
flows. Previously, excess tax benefits requirements, which shall applied for all
included in operating cash Under SFAS No. 123(R), tax shortfalls occur periods
when actual deductible compensation than cumulative Altria Group, Inc. currently in the process of evaluating the impact of
stock-based in the financial staterner1ts. pronouncements.

Note 3.

Asset Impairment and Exit Costs:

For the ended Dec:ember31. 2007. 2006 and

(in rni!lions) 2007

$309
Separation program 137
program
12
28
Latin America 18
17
521
35
19

5
9
Latin America

35 15 35
94
$650 $178 $139

8009533537

8009533537
 impairment and liabilities for Altria
ended December 2007 and 2006 as follows:
Asset
(in million::;) Severance Wrih>down'.::I Other Total

$ $ $ $
138 15 178
(6~)

related to exit cosb PMI were $124 million, $44 mil-

lion and ended December 31, 2006 and
2005, Future cash
Manufacturing Optimization expected to be approximately
In June 2007, Altria Group, Inc. announced plans tobaccc subsidiaries streamlining various functions and operations
to optimize worldwide production by moving U.S.-based to result in the elimination of approximately 3.400 positions. of Decem-
production non-U.S. to PMI facilities in Due to declining ber 31, approximately 2,400 of positions have been eliminated.
U.S. volume, as well PM l's decision to re-source production,
PM USA will close Cabarrus, North Carolina manufacturing facility and
consolidate manufacturing for the U.S. market at its Richmond, Virginia 2006 and 2005, general corporate pre-tax $111 mil-
manufacturing center. PM! expects lo shift all of its PM USA-sourced produc- lion, million and $49 million, respe<:tively.
tion, which approximates billion to PM! facilities n by related to investment banking and legal fees in with the
the third quarter of 2008 and PM USA will manufacturing Kraft and petential PM! spin-off, as well as the streamlining of various corpo-
facility by the end of 2010. rate functions in each year.
As a result this program, from 2007 through 2011, PM USA expects
to incur total pre-tax of approximately $670 million, comprised of
acc:elc?rated depreciation of $143 million (including the above mentioned
irnpairrnent of $35 million recorded in employee sepa-
$353 mdlinn and other of $174 million, primarily
Divestitures:
to the relocation employees and equipment, net of E?stimated Discontinued Operations
on of land and buildings. Approximately $440 milli::in,
fmthP1r rli"r"~''"'n in Note 1. Background and Basis of on
the total pre-tax will result in cash expenditures. PM USA
March 30, ?007, Altria Group, Inc. distributed all of remaining interest in
total pre-tax of $371 million in 2007 related to this program. These
Kraft on a pro-rata to Altria Inc. stockholders in a distri-
were comprised of pre-tax asset impairment and exit of
bution. Altria Group, Inc. stockholders 0.692024 of a share of Kraft
$344 million, and $27 million of implementation co~;tsassoc:iat.ed
for each of Altria Group, Inc. common outstanding. Altria Group,
with the program. The implementation primarily to
Inc. stockholders received in lieu of fractional of Kraft The
ac(:elE~ra1ted depreciation and included in of in the con-
distribution was accounted for dividend and as rosultcd in a
solidated statement of earnings for the year ended December 31,
net billion to Altria Group, lnc:s stockholders' equity on
Pre-tax cf approximately $140 million expected during 2008
March 30,
for the program.
Altria Group, Inc. has reflected the of Kraft prior to the distribu-
tion date as discontinued operations on the consolidated statements
and lhe consolidated slaternenls of cast1 flows for all periods
assets and liabilities related to Kraft were and
as discontinued operations on conselidated sheet at
December 31, 2006.

8009533538

8009533538
 Summarized financial information for discontinued ooera1tio11s
ll>"rP>rnh,,, 31, 2007, 2006 and 2005 as follows;

2007 Acquisitions:
$8,586 John Middleton, Inc.
On December 11, in conjunction with PM USA's adjacency
$ 4,016 $ Altria Group, Inc. acquired 100% of John Middleton, Inc., a manufac-
(951) (1,225)
turer of machine-made tor $2.9 billion in cash. I he acquisition
was financed with cash. John Middleton, lnc:s balance has
been consolidated with Altria Group, lnc:s as of December 31, 2007. Earn-
(78) (372) ings from 12, 2007 to December 31, 2007, the amounts of which
were insignificant, have included in Altria Group, lnc:s consolidated

and minority interest $ 625 $ 2,693 $ 2,265 purd1ased consist prnnarily of non-arnortiLable inlangible
assets related to acquired brands of $2.6 billion, amcrtizable intangible
Summari.rnd and liabililies of discontinued operations as or of $0.1 billion, goodwill of $0.1 billion and other assets of $0.1 billion,
December 31, 2006 as follows: partially by liabilities assumed in the acquisition. These
amounts represent the preliminary allocation of purchase price and
subject to revision when appraisals finalized in 2008.

PVll acquired an additional 30% stake in its Mexican

from Grupo Carso, SAB. C.V. ("Grupo Carso"), which
PM l's ownership interest to 80%. for $Ll billion. After this trans-
action was completed, Grupo Carso a 20% stake in the business.
PMI into an agreement with Grupo which provides the
10,177 PMI to potentially acquire, for Grupo to potentially sell
1,168 to PMI, Grupo remaining 20% in future. I his agreement will
valued part of allocation
purchased consist
of million,
1.715 other intangible (primarily brands) of $32 million. Liabilities assumed
1/118 in the acquisition corsist principally of accrued liabilities. Tlese amounts
the preliminary allocation of and to
revision when appraisals are in 2008.
151
PA,11-· µ,,1r1,1nm in
In November 2006, a subsidiary of PMI exchanged its in E
3,930 Le6n Jimenes, C. por. A. ('"EU"), which included a 40% indirect interest in
Accrued rension costs 1,0?? ELJ's subsidiary, Nacional Dominicana, C. por. A., for 100%
ownersnip of ELJ's subsidiary, lndustria Le6n Jimenes,
3,109 SA ("ITI J") and million of cash, which was contributed to ITI .J prior to
a ~esult of the transaction, PMI now owrs 100% of the
and no longer holds an in ELJ's business.
cf PMl's interest in ELJ's subsidiary resulted in a
gain on sale of $488 million, which increased Altria Group, lnc:s 2006 net
earnings by $0.15 diluted
As 01,;cuss<oo in Note in in subsidiary for the ended n,,.~,,rnh,or
business in the Dominican Republic for a 2006 to December 31, 2006, amounts of which
Dominican Republic and million of cash. This transaction resulted in a included in Altria lnc:s operating
pre-tax ga.n on sale of $488 mi:lion. The ag,gre:gate
Sampoema
nrnPs1·1rnrPs during were $520 million. These a1\1est1tLire1> were
material to Altria Group, lnc:s consolidated financial position, operating In March suhsidiary of PMI acquired 40% of th2 outst;inding
results or cash flows in any of the PT HM Sampoerna Tbk ("Sampoerna"), an Indonesian tobacco company.
In May 2005, PMI purchased an additional a total of total

60

8009533539

8009533539
 of transaction was ;inni·nxirrn1tP1lv $4.8 billion, including Sarnpo-
casb of $0.3 billion and debt of the U.S. dollar equiva-
lent of approximately $0.2 purchase price primarily financed
Investment in SABMiller:
through PM l's credit facilities further in Note 9. ::ih()rt-lerm
At December 31, 2007, ALG had economic and voting in
acquisition of Sampoerna allowed PMI to enter the profitable SABMiller. ALG's investment in SABMiller being accounted for under the
category in Indonesia. Sampoerna's financial position and equity method and was $4.0 billion and $3.7 billion December 31,
of operations have been fully consolidated with PMI of June 1, and 2006, respectively. ALG had tax liabilities of $1.3 billion and
2005. From March 2005 to May 2005, PMI recorded equity earnings in $1.2 billion to investment in SABMiller December 31, 2007 and
Sampoerna. During the ended December 31, and 2006, income from SABMiller in equity
Sampoerna contributed mdlion, $G08 mdlion and $315 million, net, in Altria Group, Inc's consolidated statements
respectively, of operating income and $268 million, $249 million and
$128 million, respectively, of net earnings. Summary financial data of SABMiller as follows:
During 2006, the allocation of purchase
Sampoerna was completed. Assets purchased co11s11st t)rirna1nlv
will $3.5 billion, other intangible assets (primarily brands) of
inventories of $0.5 billion and property, plant and equipment $0.4 billion.
Liabilities in the acquisition principally of long-term debt
of $0.3 billion and accrued liabilities.

Olher
2007, PMI an additional in
manufacturer, Lakson Tobacco Company Limited ("Lakson
Tobacco"), and completed a mandatory tender offer for the remaining (in millions)
shares, which increased PMl's total ownership interest 1n Lakson Tobacco
from 40% to approximately for $388 million.
In fourth of 2006, PMI purchased from British American
Tobacco the Muratti and Ambassador trademarks in markets, as well
the to L&M and Chesterfield in Kong, in exchange for the
mairkE,t\i•alLie of /l.LG's investment in SABMiller was
rights to in certain African markets and a payment of
$9.9 billion at December 31, and
$115 million.
In October 2005, SABMiller purchased a in
During 2005, PMI acquired a in Coltabaco,
the second-largest brewer in South America, in exchange for the
tobacco company in Colombia, for apprcximately $300 million.
225 million SABMiller ordinary of common ordinary
of other acquisitions, in the agi;;regate, 1were
shares had a value of approximately $3.5 billion. The remaining shares of
rial to Altria Group, lnc:s consolidated financial position,
tbrough a Following the comple-
operating cash in any of the periods presented.
ALG's economic ownership in SABMiller
In addition, ALG to all of
its non-voting and a increased voting
interest from of SABMiller ordinary common
Inventories: in exchange for controlling interest in Bavaria Sil. resulted in a
of owners1ip gain for ALG of $402 million, net cf income taxes, that
ap1Jrox1n1ately 16% and in 2007 and 2006,
was recorded in stockholders' equity in tbe fourth of 2005.
resr)ectivelv. was using the LIFO method. The stated LIFO
amounts of inventories were approximately $0.7 billion lower than the
current of inventories at December 31, 2007 and 2006.

61

8009533540

8009533540
 Finance net:
In 2003, PMCC shifted its focus and no longer making new
investments but is instead focused on managing companies income as~;oc1ate:d
finance assets in order to maximize gains and recovc,ne,s, which included in the shown above, was
sales and Accordingly, the ended December 31, 2007.
income will over time as investments mature or sold. During At December 31, 2001, finance assets, net, ot $6,029 million were com-
2007, 2006 and 2005. from maturities and bank- of investments in finance leases of $6,221 million and other
ruptcy recoveries totaled $569 million, $357 million and mi lion. ables of $12 million, reduced by the allowance for of $204 million. At
respec:Uvelv,and lolaled $326 million, $132 million and $72 million, December 31, 2006, finance of $6,740 million comprised
respe<:tively, in operating companies income. of investments in finance of $7,207 million and other of
$13 million, reduced by the allowance for of $480 million.

A summary of the net investment in finance

Total
2007
$ $ 311
89
(30)

430
(273)
$157

For unpaic rentals, Maine), which were the b<:mkruptcy filing, were foreclosed upon.
net principal and interest payments on third-party nonrecourse oebt. leases were and written off during 2006.
PMCC's rights to rentals receivable subordinate to the third-party nonre- None of PMCC's operating under bankruptcy
debtholders, and the lea:sed equipment as collateral to the protection at December 31. 2007. One of PMCC'r; aircraft ler;seer;, Northwest
debtholders. The payment the nonrecourse deht is collaterali?e:i hy Airlines, Inc. ("Northwest"), exited bankruptcy on 31, and
payments receivable and the property, and is nonrecourse to the assumed PMCC's leases three Airbus aircraft. PMCC's
general assets of PMCC. As required by U.S. GAAP,the third-party nonre- for 19 aircraft with Delta Air Inc. ("Delta") were sold in
course debt of $12.8 billion and billion at December 31, and early 2007.
2006, respectively, has been offset against the rentals receivable. The activity in the allowance for losses on finance assets for the
no with contingent rentals in 2007, 2006 and 2005. ended December 31, 2007, 2006 and 2005 as follows:
At December 31, 2007, investment in finance princi-
pally comprised of the following investment ca1:egories:
(303), aircraft (233), rail and transport manufacturing
(143), and real (113). located outside the United
PMCC's

or guarantor in ba11krupl:cv.
finance asset balance for this
as,>esrsrnenl of the prospecl for on lhe Pasadena planl, a porlion
of the outstanding finance asset balance has been provided for in the
allowance for In July 2007, PMCC's in two 265 MW natural
ratio did not its
power plants in Tiverton, Rhode Island, and Rumford,
agr·ee1ne1ntwith ALG. Accordingly, as

8009533541

8009533541
 support agreernerit, December million of short-tern bo1·ro 11'11r1gs
PMCC in ::>e,)te1nber PMI to remain outstanding December 31, 2008
ments may PMCC to increase its allowance for as long-term debt
of taxes on the foreclosures of written-off amounted to short-term borrowings at December 31, 2007 were all related
approximately million and $80 million in 200/ and respectively. to PMI. 1he fair values of Altria Group, lnc:s short-term borrowings at
toreci<)sures in 2005. December 31, ano upon current market
approximate the amounts disclosed above.
nonrecourse debt related to Oe>1·ennh,,r 31, 2007, ALG's by major credit rating
direct finance

Total
$ 345
Fitch
249
155 in Note 5. Acquisilions, the
poorna acquisition was primarily financed through a 4.5 billion bank
credit facility arranged tor PMI and in May 2005,
of a euro 2.5 billion three-year term loan facility (which, through
ments had reduced to euro billion) and a euro 2.0 oillion
Included in for the ended 31, revolving credit fa:ility. On 2007, PMI into new
reven1,es of $?04 million, $302 million and a21·ee1~1e1nlsconsisling of a $3.0 billion five-year revolving credit facility, a
of $15 million, billion three-)'ear revolving credit facility and a euro 1.5 billion 364-day
term loan facility. In addition, on 4, 2007, PMI borrowed
1.5 billion under the new term loan facility to repay the debt outstanding
under its 2005 torm loan which not guaranteed
by ALG, require PMI to maintain an earnings deprecia-
tion and amortization ("EBITDA") to interest ratio of not than 3.5 to
LO. At December 31, 2007, PMl's ratio calculated in with the
a2r·eprner1ts •>Mas 44.6 to 1.0.
has disallowed benefits pertaining to several PMCC revolving credit facility in the amcunt of $1.0 billion,
transactions ior lhe 1996 lhrougri 1999. which on ?008. In addition, ALG maintains multi-year
credit facility in amount of $4.0 billion, which April 2010. The
ALG facilities requ the maintenance of an earnings to fixed ratio,
as defined by the of not than to LO. At December 31,
Short-Term 1-<A1n"f'11A11r1oc: the ratio calculated in accordance with the was 19.6 to
LO. After the of the spin-off of PMI, ALG's multi-)'ear credit
Borrowing An·::inoi:>rni::>nt·c:·
reduced from $4.0 billion to $3.5 billion and earnings tc
At December 31, 2007 and 2006, Altria Group, lnc:s short-term borrowings will be with a ratio cf EBITDA to
and related interest rates of the following: of not than to 1.0. In addition, the facility will then require
the maintenance of a ratio of debt to EBITDA of not more than 2.5 to LO. If
2006
lhe PMI spin-off had occurred of December 2007, lhe ralio of EBITDA
to interest would have been 15.6 to LO, and the ratio of debt to
Amount Amount
(in millions) Outstanding Rate Outstanding EBITDA would have been 0.9 LO.
and PMI their covenants.
These facilities do not include an)' credit rating or any provisions
$ 2,205 5.1% $ that could require of collateral. The multi-year facilities enable
Bank loans 638 7.1 the short-term debt on a long-term basis.
Amount
long-term (2,205)
$ 638

8009533542

8009533542
 At uec:ember and PMI, and the
activity,

ALG Debt:
Commercial At December 31, 2007 and 2006, Altria Group, lnc:s long-term debt
consisted the following:

(in millions) 2007

Consumer products:
Shtirt·tenn borrowir.gs, reclassified
debt $ 2,205 $

3,210 2,350
750

PMI
Amount Lines Other foreign
Drawn Available Other

$ - $3.0

0.6 0.4
$ 500 $ 499
2.2
$ 500 $1,119
2.4 0.5
$5.2 $3.9
Included i~ Altria Group, lnc:s long-term debt amounts above the
following amounts to PMI at December 2007 and 2006:
In addition to ahove, certain international subsidiaries of PMI main-
tain credit to meet working capital credit 2007 2006
lines, which amounted to approximately $2.6 billion of
international Borrowings on lines amounted to $2,205 $
approximately $0.6 billion $0.4 billion December 31, 2007 and
1,360

1,698 1,965
Other foreign 406
5,669
(91) (145)
$5,578 $?,???

AggrE•gate matu,ities of Altria lnc:s

short-term borrowings rec:la~;sified
r>roducts
Other

(in millions) PMI

2008 $ 91
2009 135 $500
2010 3,112
2011 34
2012 23
2013 10 1,000
2027

64

8009533543

8009533543
 on market where
to Altria Grnup, Inc. for 1ssua11unJ1
remaining maturities, the fair value of consumer products
and financial long-term debt, including the current portion
Stock Plans:
long-term deot, at December 200/ and 2006 was $10.6 bi lion and Under the Altria G'oup, Inc. 2005 Performance Incentive Plan (the "2005
$8.4 billion, res.oe•cti\•elv, Plan"), Altria Grouo, Inc. may grant to eligible employees stock options,
ALG not the debt of PM!. stocl' appreciation rights, stocl,, deferred stock, and other
stcick··OW>ed awards. as well as annual anc long-term incentive
Up to 50 million of common stock may be under the
2005 Plan. In addition, Altria Group, Inc. grant up to one million
of common stock to members of the of Directors who are not
employees of Altria Group, Inc. under the 2005 Stock Compensation Plan
Shares of authorized common stock billion; rer:•tm:hased and Non-Employee (the "2005 Directors Plan"). At December 31,
outstanding were as follows: 2007, options to 29,536,591 of Altria Group, lnc:s common
stock were outstanding. available to granted under the 2005 Plan
and the 2005 Directors Pinn at December 2007 were 43,360,958 and

of PrE>ser1tation,
January L
stock and
2005 2,805,961,317
stock
options and
of other
stock awards

31, than fair market value on the

2005 (121,696,918) exE,rcisable six months after the date. fhis
of stock
options and
of other Stock Option Plan
stock awards In connection with the Kraft spin-off, Altria Group, Inc. employee stock
options were modified through the of Kraft employee stocK
options and the adjustment of the stock option for the
2006 2,805,961,317 (708,880,389) 2,097,080,928
Altria Group, Inc. awards. For each employee stock option outstanding the
ag1;>:regal:e intrinsic value of the option immediately the spin-off was
than the intrinsic value of the option immediately
the spin-off. Due to the fact that the Black-Scholes fair values the
awards immediately and immediately the equiva-
lent, as measured in accordance with the provisions of SFAS No. 123(R),
no incremental compensation of the
modification cf the Altria Group, Inc. awards.
Pre-tax cost and the tax benefit for stock option
December 31, common
awards totaled million and $3 million, respectively,
for stock options and other stock awards under Altria Group, lnc:s
December 31, Pre-tax compensation cost and the
stock plans, and 10 million shares of Serial Stock, $1.00 par value,
for stock option awards totaled million and million, respectively, for
authorized, none of which been
the year ended December 2006. The foir value of the awards was
mined modified l:31ack-Scholes methodology the following
weighted assumptions:

8009533544

8009533544
 Altria Group, Inc. stock option activity In January Inc. million of
December 31, 2007: stock eligible U.S.-based and non-U.S, employees. Restrictions on
in the first quarter of market value per was
$87.36 on the o" grant. Recipients of Altria Group, Inc. deferred
stock or deterred stock of Kratt upon
0.6 million additional

January L 2007 40,093,392 $33.84

stock and
2007, 2006 and 2005 was mil-
respe1:tively, or $65.62, and $62.05 per restricted or deferred
for Altria Group, lnc:s common stock
total fair value of Altria Group, Inc. stock
we•igr1te1:l-ave1·agegrant fair value of options
ano stock vested during December 31, 2007,
Uec:ember 31, 2006 and 2005 was
2006 and 2005 $184 million, $215 million and $4 million, respectively,
respectively. The total intrinsic value of options exercised
ended December 31, 2006 and 2005 was mil-
million and $756 million, respe1~t1vely,

Restricted Stock Plans

F::;ir·nir"""' per Share:
Altria Group, Inc. may grant of restricted stock and stock to
Basic and diluted EPS from continuing discontinued operations
eligible giving them in most instances all of rights of stock-
calculated using the following:
holders, that they may not sell, assign, or otherwise encumber
such are subject to forfeiture if certain employment (in millions)
conditions are not met Restricted and deferred stock generally on U1e For the Yenrs Ended December 31, 2007 2006 2005
third anniversary of $9,161 $ $ 8,170
fair value of the and of
amortized to ratably over the restriction period, which 625
generally three Altria Group, Inc. recorded compensation $9,786 $12,022 $10,435
related to restricted and deferred stock for the ended
December 31, 2006 and 2005 of $135 million, $114 million and 2,101 2,087 2,070
$115 million, tax recorded related to this
compensation was $50 million, million and $'12 million for the
ended December 31, 2007, 2006 and pre-tax stock 3
compensation for the year ended December 31, includes the 12 14 14
cumulative of $5 million from lhe adoption of SFAS No.
unamortized compensation to Altria Group, Inc. 2,116 2,105 2,090
stock and stock was $163 million at December 31,
and to over a weighted period of 2 computation, no antidilutive stock options. For
Altria Group, Inc. restricted stock and deferred stock activity and computations, the number of stock options excluded
follows for the ended December 31, 2007: from the calculation of for diluted EPS
their effects were antiddutive was immaterial.
Number of Grant
Shares

66

8009533545

8009533545
 and law addrE1ss•in>!
(le<ise-in;'lease-ou: ("LILO") and ("SILO") transactions).
PMCC believes that the position and supporting case law described in the
Income Taxes: RAR, Revenue Rulings and the IRS Notice are incorrectly applied to PMCC's
rn:rm""'"rom continuing operations income taxes, anc equity earn- transactions and that leases tactually and legally distin-
and minority net, and provision for income consisted in mate'ial respects from the IRS's position. PMCC and ALG intend
the following for the ended December 31, 2007, 2006 and 2005: to vigorously any challenges on that position through
litigation. In this on October 16, 2006, PMCC a complaint in the
U.S. Di:;trict Court for the Southern Di:;trict of New York claim refunds for
a portion of tax payments and as~;oc1a!E?d
PMCC's position not be upheld, PMCC may to the payment
of significant amounts federal income tax and significantly lower its
to reflect the recalculation of the income from the affected
leases, which could have a material on the earnings and cash flows of
/\ltria Group, Inc. in a particular fiscal quarter or fiscal PMCC considered
matter in adoption of FIN 48 and FASB Staff Position No. FAS 13-2.
In October Jobs Creation ("the Jobs Act")
into law. Tre Jobs Act includes a deduction for of certain
earnings that are repatriated. In 2005, Altria Group, Inc. repatriated
lion of under the provisions of the Jobs Act.
previously provided a portion of the dividends
sal cf the than offset the tax costs to the
reduction of $344 million in the 2005
consolidated income tax provision.
Altria Group, lnc:s U.S. subsidiaries JOin in filing of a U.S. federal con-
solidated income tax return. The U.S. of limitations remains
open for 2000 and onward with 2000 to 2003 currently
under examination by the Internal ("IRS"). and U.S.
jurisdiction:; have of limitation:; generally from 3 to
At December 31, 2007, United States taxes
5 years. Years still open to examination by foreign tax authorities in major
and withholding taxes have not been provided on approximately
jurisdictions include Germany onward), Indonesia (2000 onward),
$11 billion of accumulated of foreign subsidiaries tha:
(2005 onward), and Switzerland onward). Altria Group, Inc.
to be reinvested.
currently under examination in various U.S. state and jurisdictions.
Service ("IRS") concluded examination of
previously in Note 2. Summary of Significant Accouniing
Altria Group, lnc:s consolidated tax the 1996 through 1999,
on January Altria Group, Inc. adopted provisions of FIN
and a final Report ("RAR") on March
48. As result of the January 1, adoption of FIN Altria Group, Inc.
with the RAR, with the exception of
lowered its liability for tax million. This
below. Consequently, in March 2006, Altria Group, Inc.
resulted in an to stockholders'
recorded non-cash of $1.0 billion, which principally re~ire1;ented
net of minority interest), a reduction of
the of following the of and agreement w.th
reduction tax benefits of million.
the RAR. Altria Group, Inc. reimbursed $337 million in cash to Kraft for its
A reconciliation of the beginning and ending amount of unrecog11iz1"d
of the $1.0 billion in tax benefits, as well as pre-tax interest of
tax is as follows:
million. The amounts to Kraft to
from discontinued operations. The reversal in an
earnings from continuing operations of $631 million for the year 2007 $1.053
lJe<:em1ber 31, 2006. Additions
Altria Group, Inc. agreed with all conclusions of the RAR, with the Additions for positions of 22
exception the disallowance of benefits pertaining to several PMCC Reductions for tax positions prior
lease transactions 1996 through 1999. PMCC will con- Reductions for b'\x positions due to of statutes of limitations (116)
Settlements (21)
tinue to position lease and
Reduction unrecog11iz1id tax due
contest approximately $150 million of and and
to Kraft
paid with regard to them. IRS may in the future challenge and disallow
more of PMCC's leveraged leases on Rulings, an IRS Notice

8009533546

8009533546
 lnc:s consolidated liability """'"'""""'Y of SignificantAccountiog
for "''AH'C'r>nc of FAS 13·2

December 31,
2007
$ 345 $ U.S. ted,eral statutc>ry
270 619
December
615 1,053
267 292
(102) (104)
$ 780 $1,241

I he amount of tax that, it would

impact the tax at December 31, 2007 was million, along 1.3 1.5 1.2
with $66 million affecting taxes and the remainder of $270 million
affecting the receivable from Kraft below. The amount unrecog- (3.0)
nized tax benefit; that, if would impact the effective tax rate at
wns $848 million, with the remnining
ing taxes. (50)
Altria Group, lnc:s tax to $615 million
of December 31, 2007, principally due to the spin-off of Kraft, well as
the expiration of statutes of limitations and audit in U.S. state and
foreign jurisdictions. year ended December 31, Altria Group,
Inc. consolidated statement of earnings $13 million of
interest and
Under the Tax Sharing between Altria Group, Inc. and Kraft,
Kraft responsible for own pre-spin-off obligations. However, to $111 million
regulations U.S. federal consolidated tax return, Altria Group, resulting from
Inc. remains severally liable Kraft's pre-spin-off federal taxes. result, the expiration of million in the third quarter and
Altria Group, Inc. continues to include $270 million Kraft's un1·ecog11izi,d $56 million in fourth quarter) and million related lo the reduction
tax benefits in its liability for uncertain tax positions, and corresponding of tax liabilities resulting from future lower tax enacted in
receivable from Kraft of $270 million included in other Germany in the third quarter. The tax provision in 2007 also includes the
Altna Group, Inc. recognizes accrued interest and penalties associated of tax accruals of $98 million no longer required fourth quar-
with uncertain tax positions as part of the tax provision. of January 1, ter. The bx provision 2006 includes $631 million of non-cash benefits
Altria Group, Inc. had $292 million of accrued interest and of principally the reversal of tax after the U.S. IHS con-
which approximately $125 million related to Kraft. The accrued interest and cluded examination of Altria Group, lnc:s consolidated tax for the
penallies decreased lo $267 million al December 31, principally a 1996 through 1999 in the first quarter of 2006. The 2006
result of the Kraft spin-off, and the expiration of of limitations and the tax no longer
audit closures in U.S. and foreign jurisdictions. This amount includes $105 million in the fourth quarter. The tax provision in 2005 includes a
$88 million of Kraft federal interest for which Kraft responsible under the $344 million benefit related to dividend repatriation under the Jobs Act
Sharing receivable frorn Kraft, which included in other in 2005, well other including Ure irnpm:t of tt1e dome;;tic
includes related accrued penalties. manufacturers' deduction under the Jobs Act and lower repatriation
It reasonably possible that within the next 12 months U.S.
state and foreign examinations will resolved, which could
and interest and
million, respectively.

8009533547

8009533547
 to consumer follows;
the following
2007

$18,485 $18,134
26,682

8,609
3,936
45,288
319

$
Financial liabilities primarily
able to temporary differences relating to net investments in finance

products of ALG's subsidiaries include and other tobacco

products sold in the United States PM USA and John Middleton, lne,, and
outside of the United States by PMI. operations and
by region. Another subsidiary of ALG, PMCC, maintains
a portfolio of and finance leases.
in Note 1. of beginning
with the second quarter ot 200/, Altna Group, Inc. revised reportable seg-
ments. Altria Group, lnc:s U.S. tobacco;
Union; Middle Latin America; and
Financial
Altria Group, lnc:s management reviews operating companies income
to evaluate performance and allocate Ope,ating compa-
corporate and
debt expense, (consumer 111 Loss on U.S. Tobacco Poof-As further discussed in Note 19. Contingen-
centrally managed at the ALG in October 2004, the Fair and Equitable Tobacco Reform Act of 2004
not presented by segment they ("FETRA") into law. Under the provisions of FETRA, PM USA was
excluded from the of profitaoility reviewed by Altria obligated to cover of potential losses that the government may
Group, lnc:s management. Information about total assets by not incur on the dispositicn of pool tobacco stock accumulated under the
disclosed such information not reported to or by Altria previous tobacco support program. In 2005, PM USA a
Group, lnc:s chief operating decision maker. goodwill and other $138 million for the
intangible assets, net, disclosed in Note 2. Summary of Significant 111 U.S. Tobacco Quota Buy-Out- The provisions of FETRA require PM USA,
accounting policies of the the same along with other manufacturers and importers of tobacco products, to make
in Note 2. quarterly that will to compensate tobacco growers and
quota holders affected by the legislation. Payments made by PM USA under
FETRA offset amounts due under the provisions of the Natienal Tobacco
Grower Settlement Irust ("N rGSf"), a formerly established to compen-
tobacco and quota holders. to the applicabil-
ity ot H:.I RA to N IGSI payments. During the third quarter ot 200b,
a North Carolina Supreme Court ruling determined that FETRA enactment
had not provisions during 2004 and that tobacco

8009533548

8009533548
 to full to the NTGST the full
ruling, along with FETRA bilhngs from the United States 2007
De1)artmi9nt of Agriculture ("USDA"), established that FETRA was effective
beginning in 2005. Accordingly, during the third quarter of 2005, PM USA $ 352 $ 361 $ 228
accrual tor H:TRA payments in the amount of $115 million. 575 501 351
1111 Italian Antitrust Charge- During the of PMI and l\frica 202 231
a $Gl million to an Italian antitrust action. This 236 181 123
Latin America 59 39 31

cu:;torner·s located
$8.0 bil-
cnded December 2007,

1111 Asset Impairment and Exit Costs-See Note 3. Asset Impairment and
for breakdown by

1111

of 31. 2007 2005

$18,690
3,459 3,502
1111 23,721 23,831
during 200/,
ownership interests and bankruptcy 8.381
claims in certain investments in aircraft, which rnn'n";e>nh>rl /\sia
a partial recovery, 1n cash, of amounts that had previously written Latin America
down. During 2006, PMCC increased its allowance for losses by $103 mil-
lion, due to within the airline industry. During 2005, PMCC increased
its allowance for by $200 million, reflecting exposure to the airline
2005
industry, particularly Delta and Northwest, botn of which filed for bankruptcy
protection during 2005.
$18.728
See Notes and 5, and acquisitions.

31. 2007 2006 200::, 1,596 1.416 1.319

1,521 1,215
$210 $208 499
270 217 211 $21,367

and Africa 209 162

194 100
Latin America 47
930
22 53 Benefit Plans:
$952 $890 In September 2006, the FASB
for Defined Pension and Other Po~>trEitinament
158"). SFAS No. 158 n9quires that employers of
their defined '.)ension and other postretirement plans on the consoli-
and record a cornponenl of other comprehensive
inrcomt>, or And prior nr c:rerlits that
have not as components of net periodic Altria
Group, Inc. adopted the recognition and related of
SFAS No. 158, prospectively, on December 2006.

8009533549

8009533549
 and in other comprehensive earnings/
financial at December 31, 2006 consisted of the following;
2008. Altria Group, lnc:s non- U.S. and Non-U.S.
U.S. pension plans September 30 of each (in millions) Pensions retirement wnployrnenl
of PMI will adopt the measurement date provision in 2008 $(505) $(197) $(2,486)
impact of the measurement date which is not 91
significant, as an adjustment to retained
incremental of applying SFAS No. 158 on individual line items 623 159 75 857
in the com;olidated balance sheet at December 31, 2006 was as follows; Amounts to be amortized-
After
Application Application
of of minimum pens1cn liab111ty,
(in millions) SFAS No. Adjustments of

$ $ (122) (1,580)
(124)
26,275
?,054 36
51,092

mclve1rnents in
ended December 31, 2007 were as follows:
Current liabilities of

25,411 16 25,427
1,617 1,391 transrerried to
147 541 ea1•rn112s1 as com:ionents
of net periodic
1,595 2,009 benefit
uao111ne~; or discontinued op1erat1or1s 20,117 19,629
Other liabilities 2,059 2,239
Total consumer products liabilities
Total liabilities 290

8009533550

8009533550
 Altria Group, Inc. obligation, which rep•re,;ents
plans covering sut)stan1:1allV U.S. pension plans was $4.6 billion and billion
employees of ALG's provided, to the extent deemed Decernb1er 31, and 2006, accumulated benefit
appropriate, through plans, many of which governed by local obligation for non-U.S. pension plans was $3.0 billion and $2.8 billion
statutory requirements. In addition, ALG and provide December 31, 200/ and 2006, respectively.
health and other benefits to substantially all Health For U.S. plans wi:h accumulated benefit obligations in excess of plan
benefits for outside the United States covered the projected benefit obligation, accumulated benefit obligation and
through local government plans. fair value of plan assets $211 million, million and $2 million,
The plan assets and benefit obligations Altria Group, lnc:s U.S. pen- respectively, as of December 31, 2007, and $219 million, $183 million and
sion plans December 31 of each and all other non-U.S. $4 million, of December 31. majority of
pension plans are 30 of each to plans for employees that cannot funded under l.R.S.
obligations of Altria Group, lnc:s postretirement plans are "1c1a::.'"' ;:;u regulations. For non-U.S. plans with accumulated benefit obligations in
December 31 of each of plan the projected benefit obligation, accumulated benefit
and fair value of plan assets were million, $200 million
Pension Pfans
ano million, of December 31, 2007, and $185 million.
Obligations and Funded Status $165 million and million, as of December 31, 2006. The
benefit obligations, plan assets and funded statw; of Altria Group, lnc:s majority of these plans cannot be funded under local tax re€;ul<1tions.
pension plans at and follows: following assumptions to determine
Altria Group, lnc:s benefit obligations under the plans at December 31:
Non-U.S. Plans

discount for Altria Group, lnc:s U.S. developed

from a model portfol o of high-quality, fixed-income debt instruments with
durations that match the future cash flows of the benefit obliga-
tions. The discount rates for Altria Group, lnc:s non-U.S. p1ans devel-
oped from local bond indices that match local benefit obligations as closely
possible.

Components of Net Periodic Benefit Cost

Net periodic pension of the following for the ended
December 31, 2006 and 2005:

(281) 2005
1errrnr1at1on, settlement
and curtailment
$ 126
Interest cost 113
(9) (9) return

5,841
82 154 106 25

10 12 14 5 5
$ 698 $ (257) Term1nat1on.
settlement and
The combined U.S. and non-U.S. pension plans in a net prepaid 31 15 9 42 2 2
pension asset of $0.9 billion December 31, 2007 and $0.2 billion at
December 31, 2006. These amounts were in Altria Group, lnc:s $112 $ 194 $ 150 $ 120 $ 105 108
consolidated balance at 2007 and 2006, as follows:
During 2007, PM USA's announced North Car-
olina manufacturing facility, and workforce reduction programs resulted in
curtailment and termination benefits of $37 million. This curtailment
prompted a revaluation of the U.S. plans at a discount rate of resulting

8009533551

8009533551
 in Plan Assets
a net of income stockholders' equity. Dur- pe1'cenliige of fair value of pension plan at December 31.
ing and 2005, employees left Altria Group, Inc. under voluntary and 2006, was follows:
retirement and workforce reduction events in set-
tlement curtailment and termination benefits tor the U.S. plans
in 2006 and 2005 of $15 million and $9 million, Non-U.S. early
retirement benefits resulted in additional termination of $42 million,
$2 million and $2 million during 2006 and 2005. res.pe1:tiv·ely.
amounts included in termination, settlement and curtailment in the
Other
above for the year ended 31. were comprised of the
following

lnc:s investment an that

Non-U.S. Plans Total equity will outperform debt over the long term. Accord-
$22 ingly, the composition Altria Group, lnc:s U.S. plan assets
15 ',, ..,,.,",..,.,allocation equity and
Beginning in Altria Group, Inc. decided to change the allocation
between equity and debt securities reflecting the impact of
5
the changing demographic mix of plan participants on obligations.
25
indexed U.S. equity actively managed
and actively managed debt
constitute 80% or more of debt securities) with
combined U.S. and non-U.S.
allocations lo higt·-yield and international debt ~c,,u,,1uc~.
loss and pnor cost that are expected to
plans outside the U.S., the investment subject to local
other comprehensive income into net pericdic benefit
rteg;uicmur1sand the asset/liability profiles the in individual
2008 $73 million and $14 million, respei:tively.
country. These circumstances result in a level o1 equity
following assumptions used to determine
that than the U.S. plans. In the actual
Altria Group, lnc:s net pension cost for the yec<r» ,emieu December 31:
tions non-U.S. plans virtually identical to their respective
U.S. r'lnns Non-U.S Plans policy
Altria Group, Inc. attempts to mitigate investment by rebalancing
2007
between equity and debt asset Altria Group, lnc:s contributions
6.10% and benefit payments made.
of
Altria Inc. presently makes, and plans to make, contributions, to
return on plan
8.00 the extent that they deductible and an tax lia-
of bility, in order to maintain plan in of the accumulated benefit
compensation obligation of its funded U.S. and non-U.S. plans. Currently, Altria Group, Inc.
4.50 anticipates making contributions of $16 million in to U.S. plans and
approximately $97 million in 2008 to its non-U.S. plans, based on current
Altria lnc:s rate return on plan determined tax law. However, subject to change as a result of
by plan historical long-term investment performance, current in tax and other laws, as well as asset performance signifi-
asset allocation and of future long-term returns by asset cantly above or below the assumed long-term rate of return on pension
subsidiaries sponsor profit-sharing or changes in
salaried, non-union and union employees. Contribu- estimated future benefit payments from the Altria Group, Inc.
tions and determined generally as of pension plans at December 31, 2007, were as follows:
as defined by the plans. Certain other subsidiaries of ALG also maintain (in millions) U.S. Plans Non-U.S.
defined contribution plans. Amounts to for 2008 $124
$
bution plans totaled million, $163 million and $162 million in 289 131
2006 and 2005, respectively. 2010 299 137
2011 312 141
2012 147
2013 2017

8009533552

8009533552
 Postretirement Benefit Plans
Net postretirement health of following for the
ended December 31, 2007, 2006 and 2005:
consolidated balance
I he following assumptions were used to determine Altria Group, lnc:s
postretirement benefit obligations December 31:

(4) (4)
3 3
$208 $179

During 2007, Altria Group, Inc. had curtailment related to PM

USA's announced of its Cabarrus, North Carolina manufacturing
included in other (income) expense, above. During 2006
amounts reported for the health
Group, Inc. instituted early retirement µ1 c1g"" .. ~. in assumed health care cost trend
termination benefits and curtailment losses in
Decemher 31,
included in other (income) above.
amounts included in other (income) in the table above for
year ended December 31, 2007 were comprised of the following

Altria Group, lnc:s esl:imatE:d 1'ut1Jre

retirement health care plans at December 31.

$117
prior 2009 125
2010 134
to amortized from accumulated other 143
2011
comprehensive income into postretirement health 2012 147
2008 $24 million and $(9) million, respectively.
The following assumptions
Altria Group, lnc:s net postretirement cost for the
Postemployment Benefit Plans
ALG and certain of its subsidiaries sponsor postemployment benefit plans
covering substantially all and certain hourly cost of
these plans charged to over the working life of the
employees. Net postemployment consisted of the
Altria Group, health plans are not fLnded. ended December 31, 2007, 2006 and 2005:
changes in the accumulated benefit obligation and net amount accrued
December 31, 200/ and were as follows:

2007 2006

$2,113 $2,132
41 49
120 121
in Note certain
ees left Altria Group, Inc. under separation programs. These programs
resulted in incremental postcmploymcnt which arc included in other
above.
(96) (21)
For the postemployment benefit plans, the that
to trom accumulated other comprehensive income
$2,033 $2,113
into net postemployment costs during 2008 approximately $20 million.

8009533553

8009533553
 Altria Group, lnc:s posternployrnent plans net funded. The
in benefit obligations the plans at Decernber 31, 2007 and 2006,
were as follows:
Financial Instruments:
(in millions)
1111 Derivative Financial Instruments: ALG's operate globally,
facilities in various locations around the world,
January 1 $ 505 $ certain financial instrurnents to for-
cost 23 19 eign are
Interest cost 12 12 and its subsidiaries, principally to reduce exposures to rnarket risks
(123)
ing frorn fluctuations in foreign hy offsetting exrn-
155
163 sures. Altria Grnup, Inc. not a pa1·ty to derivatives and, by policy,
does not derivative financial instruments for speculative
$ 505 Financial instrurnents qualifying for accounting must maintain a
specified of between the instrument and the
discount item inception and throughout tre hedged period.
of 8.1%and Altria Group, Inc. formally documents nature and relationships
annual turnover the instruments and hedged as well as its risk-management
cornpensation for undertaking and
benefits defined in the respective plans, Postcrnployrncnt effectiveness. Additionally, for
trorn actions that otter ernployees benefits in excess of those transactions, the characteristics and expected terms of
in the plans charged to when incurred, forec1ishid transaction must be specifically identified, and it must
probable that each transaction will occur. If it
probable that transaction will not occur, the gain or
would be in earnings currently.
Altria Group, Inc. forward foreign
Additional Information: currency swaps and foreign currency options to mitigate to
arnnunts shown helnw for continuing nreratinns. from third-party and intercompany, actual and
(in millions) primary to which Altria Group, Inc.
2007 2006 2005 exposed include the Japanese Swiss franc, euro, Turkish lira, Russian
ruole and Indonesian rupiah. 31, 2007 and 2006, Altria Group,
$ 631 $
Inc. had with notional amounts $6.9 billion and
$ 434 $ $3.2 billion, respe:tively, of which $6.9 billion and $3.1 billion, respectively,
were at PM!. The portion of unrealized and associated
653 $ 799 $ 905 with qualifying contracts component of accumulated other
comprehensive (losses) until the underlying hedged transacticns
are reported on Altria Group, lnc:s consolidated statement cf earnings,
A pcrtion of Altria Group, lnc:s foreign currency swaps, while effective as
$ 54 $ 81 $ 107 economic do not qualify for accounting and the
$ 304 $ 305 312 unrealized (loss) relating to these contracts are reported in Altria
Group, lnc:s consolidated statements of For the
Minirnurn rental cornrnitrnonts under non-cancclable 31, 2007, 2006 and 2005, the unrealized gain (loss) with
at Decernber 31, 2007, were follows: to the contracts that do not qualify for accounting insignificant
In addition, A trra Group, Inc. foreign currency swaps to its
in rates related to
2008 $133 'heo;eo;w;8ns typically convert fixed-rate
2009 108 to fixed-rate debt denominated in
2010
and
2011
the notional amounts of foreign currency
2012
billion and $1.4 billicn, respectively.
de~>igr1ab's certain currency denominated
debt and forwards as investment of foreign operations, During
the ended December 31, 2007 and 2006, these net invest-
ments resulted in net income taxes, of mil-
lion, respectively, and during the ended December 31, 2005 resulted in
a gain, net of incorne taxes, of $369 million. These and'"'"'"''' we1e

8009533554

8009533554
 accumulated other comprehensive estab1l1sr1es a framework for" 1ea~'" 111g
about fair measurements. Altria
adoption of this statement will not have
hPci<'e1<> "m" not material. financial statements.
forecz1ste1d transactions tor not See Notes 9 and 10 tor additional disclosures of fair value tor short-
Decernb12r 31, Altria Group, Inc. expects term borrowings and long-term
an insignificant amount of reported in accumulated other comprehen-
sive to to the consolidated statement of
earnings within the next twelve months.
Derivative or reported in accumulated other comprehen-
(losses) a result of qualifying of
gains or losses from accumulated other comprehensive earnings (losses) to are pending or
by the corresponding gains on the underlying threatened in various United and jurisdictions ALG.
activity affected accumulated other comprehensive subsidiaries and including PM USA and PM!, well as their
earnings (losses), net of income during the years ended December 31, rcspci:tiv'e indcmnitees. Various types of claims raised n procced-
2007, 2006 and 2005, as follows: 1ncluding product liability, consumer protection, antitrust, tax, contra-
band patent infringement, employment claims for
contribution and claims of competitors and distributors.

Overview of Tobacco-Related Litigation

1111 Types and Number of Cases: Claims related to tobacco products gen-
erally fall within the following (i) smoking and health alleg-
personal injury brought on behalf of individual plaintiffs, (ii) smoking and
health cases primarily alleging personal injury court-supervised
111 Credit exposure and credit risk: Altria Group, Inc. to credit for ongoing medical monitoring and purporting to brought on
in the event by Altria Group, Inc. behalf of a class of individual plaintiffs, including in which the aggre-
not anticipate nonperformance within its consumer products claims of a number of individual plaintiffs to tried in a
However, see Note 8. leases. proceeding, (iii) heallh cosl recovery broughl governrnenlal
(both domestic and and non-governmental plaintiffs
111 Fair value: based on market quotes, of Altri<J b..;rsement for health expenditures by
Group, lnc:s total debt at December 31, 2001, was billion, as compared and/or disgorgement profits, (iv)
with carrying value of $1LO billion, The fair value, based on of the terms and "Ultra constitute deceptive and unfair
market of Altria Group, lnc:s total debt at December 31, 2006, was trade practices, common law fraud, or violations of the Racketeer Influenced
$8.8 billion, as compared with carrying value of $8.5 billion. and Corrupt Act ("RICO"), and (v) other tobacco-related litiga-
fair value, based on market quotes, of Altria Group, lnc:s equity tion described below. Damages claimed in some of the tobacco-related liti-
investment in SABMiller at December 31, was $12.l billion, as com- gation significant, and in certain range into billions of dollars.
with value of $4.0 billion. value, based on market variabilily in pleadings in rnulliple jurisdictions, logether wilh the aclual
quotes, of Altria Group, lnc:s equity investment in SABMiller at December 31, experience of management in litigating claims, demonstrate that the mone-
2006, was $9.9 billion, as compared with carrying value of $3.7 billion. tary that may in a lawsuit little the ulti-
In September 2006, the FASB SI-AS No. "I-air Value Measure- mate outcome. Plaintiffs' theories of recovery and the
smoking and health, health
value, below.

8009533555

8009533555
 mt}acco-rPlritf>n actions pending out- Ill and Upcoming Trials: On November 16, jury in a
the United affiliates and subsidiaries, includ- flight lit gation found in of the defendants. In additicn, of
an estimated 133 individual smoking and health as of December December 31, 11 individual and health PM USA
2007 (Argentina Australia (2), Brazil (51), Chile (12), Rica (1), scheduled for trial through the end of c.vvo . '-'"'~",
Greece (1), Italy (4), the Philippines (1), Poland (3) and Scotland (1)), com- tobacco companies are also scheduled for trial through
with approximately 133 such cases on December 31, 2006, and Trial are subject to change.
approx.matoly 132 such on December 31, 2005. In addition, in Italy,
Ill Recent Trial Results: Since January 1999, have been returned
cases pending in the Italian equivalent of small court
in 45 smoking and health, Lighls/Ultra and health care cost recovery
where damages are limited to per and
cases 1n which PIV USA was a defendant. Verdicts in favor of PIVI USA and
pending in Finland against an indemnitee of a subsidiary of PMI.
other in 28 the cases. These 28 cases were
In addition, of December 31, there three smoking and
tried in California (4), Flcrida (9), Mississippi (1), Missouri (2), New Hamp-
heallh pulative class actions pending outside lhe United PMI
shire (1), Now (1), New York (3), Ohio (2), Pennsylvania (1), Rhode
or affiliates in Brazil (2) and Israel (1) compared with two such cases on
Island (1), (2), and West Virginia (1). Plaintitfs' appeals or
31, 2006, and two such cases on December 2005. The case
motions challenghg the verdicts pending in California, the District of
in Israel was dismissed in January health recovery
Columbia and Florida. A motion for a new trial has been in one of
actions are pending in Nigeria (5), Israel (1), Canada (1) and Spain (1),
the cases in Florida. In addition, in December 2002, a court an
PIVll or affiliates, and two Lights/Ultra actions
individual smoking and r1ealth case in California at the end of trial.
pending in Israel. PM USA also a named defendant in the smoking and
In July 2005, a jury in returned a verdict in favor of PIVI USA
health putative action in Israel, a ''Lights" class action in Israel and
in in which plairil1ffs had PM USA's retail prornotior1al and
health cost recovery actions in Israel and Canada.
merchandising under the Robinson-Patman Act.
Also, as of 31. there were nine "public civil actions"
. Of the in which verdicts were returned in favor of plaintiffs,
pending outside the llnited ;igainst PMI or its ;iffiliates in Argentina
eight have reached final resolution. A verdict against defendants in a health
(1), Brazil (3), Colombia (4), and Turkey (1) compared with such actions
recovery case has been and all claims were dismissed
on December 31, 2006, and one such action on December 31, 2005. Public
with prejudice. In addition, a verdict defendants in purported
civil actions claims filed either by an individual, or a public private
actior in Illinois has and case has been dis-
entity, to protect a variety of collective individual Plaintiffs
exhausting all appeals, PM JSA has paid six
in various forms of including injunctive such as
and totaling $33,806,665.
banning descriptors, smoKing in certain and advertising,
well as implementing communication campaigns and reimbursement of
medical incurred by public or private institutions.

8009533556

8009533556
 chart below that have to trial since January in which ve1cmcrs w1ore
returned in favor of plaintiffs.
Location of
Court/Name
Date of Plaintiff Verdict
May Approximately $2.5 million in

August District of Columbia/

United States
of America

March 2005 New York/Rose Individual

and Health

May 2004

Action

Court were denied in ""''u'" v<:vvo.

this denial, PM USA
:t><'.b rn1111on in connection with
Class Action below

8009533557

8009533557
 Location of
Court/Narno
Dale of Plaintiff Ve1dicl
2002 Individual Smoking $850,000 in conipensa:torv
and Health $28 billion in punitive ua1' ""'!S"" d,t;e1111"'
PM USA

new
amount of punitive damages. See d1scuss1onn) below.
June Individual Smoking $375 million in co111pensatory the
Health against all defendants, award to $24.86 million. PM USA's of the
'5 app1·oxim21tely $6 million, The

March 2002 Individual Smoking $168.500 in con1pensa:torv

and Health million in punitive
rMUSA

8009533558

8009533558
 Location of
Court/Narne
Dalo of Plaintiff Verdicl
July 2000 $145 billion in punitive
defendants, including $74
PM USA.

March 1999 Oregon/Williams lndividunl

and Health

8009533559

8009533559
 In addition to the information the health or thP>1rs11ir11r-t111P
appellate in Brazil nature with the intention that smokers would rely on the information to their
vidual smoking and health detriment; (vii) that all defendants sold or supplied that were
plaintiff approximately $433,000 and other unspecified defective; and (viii) that all defendants were negligent. The court also rein-
l::lrazilian at!iliate In December 2004, the three-Judge panel's stated compensatory awards totaling approximately $6.9 million
sion was vacated by an bane panel of the appellate court, which upheld to two individual and found that a third plaintiff's claim barred
the trial court's dismissal oi the currently on appeal to by the statute of limitations.
Superior Court. In 2006, PM USA sought rehearing from the Florida Supreme
With respect to certain adverse verdicts currently on as of Court on parts of July 2006 opinion, including the (described
Decemher 31, PM l JSA has posted various forms security totaling above) that certain jury findings have judicata in subsequent indi-
approximately $193 million, the majority of wh,ch been co11at1oralizE;d vidual tnals timely brought by class members. The rehearing motion
with deposits, to obtain stays judgments pending appeals, The cash also asked, other things, that legal that were but not
included in on the consolidatec balance ruled upon in the Third District Court of Appeal or in the
Supreme Court now Plaintiffs also filed motion for
1111 Engle Class Action: In July 2000, in the second phase of the
in August 2006 clarification of the applicability of the statute of lim-
smoking and health class action in Florida, a jury returned a verdict assess-
itations to non-members of the decertified class. In 2006, The
punilive damages totaling approximately $145 billion various
to its July ruling, except that it
rlPi Pn1-i;ir1t~ including
1
billion PM USA. Following of 1udg-
I findings entitled to res judlcata by excluding
ment, PM USA posted bond in the amount $100 million ard appealed.
finding (v) listed above (relating to agreement to misrepresent information),
In May 2001. the trial court approved a stipulation providing that
and added the finding that defendants sold or supplied that, at
tion of tho punitive damages component of the judgmert will remain
the time of sale or supply, did not conform to the of fact
PM USA and the other participating through the
made by defendants. On January 11, 2007. the Florida Supreme Court
completion of all judicial As a result of the stipulation, PM USA placed
the mandate from its revised opinion. Defendants then filed a motion with
$500 million into escrow account that,
the Florida District Court of Appeal that the court
of the outcome of the judicial review, will paid to the court and the
errors that were previously by defendants but have not been
court will delerrrnne how lo allocate or distribute it consistent wilh Florida
ad<jressE>d either by the Third District or by the Supreme Court. In
Rules of Civil Procedure. In July 2001, PM USA also placed $1.2 billion into an
February the Third District Court of Appeal denied motion.
inleresl-beari11g escrow account, which was relumed lo PM USA i11 Decern-
In May defendants' motion for a partial stay of mandate pending
ln addition, the $100 million bond related to case has been
the completion of appellate review was denied the D strict Court of
discharged. The billion escrow account and the deposit of $100 million
Appeal. In May defendants filed a petition writ of certiorari with the
related to the bonding requirement were included in December
United States Supreme Court. On October 1, 2007. United States
2006 consolidated balance as other assets. Interest income on the
Supreme Court denied defendants' petition. In November 2007. the United
$1.2 billion escrow account, prior to return to PM USA, was paid to PM
States Supreme denied defendants' petition for from the
USA quarterly and was recorded as earned in and other debt
denial their petition for writ ot certiorari.
net, in the consolidated statements of earnings. In connection with
By the January 11, 2008 deadline required by the Florida
the stipuliltion, PM USA recorded $500 million pre-tax in con-
Court's decision, approximately 1,282 cases had been upon PM USA
solidated statement of for the quarter March 31, 2001. In
or ALG individual claims on or on behalf of approximately 7,266
May 2003, the Florida Third District Court of Appeal reversed the judgment
plaintiffs. It possible that additional have been filed but not
by the trial court and instructed the trial court to order the decerti-
on the dockets. Some of
fication of the class. Plaintiffs petitioned the Florida Supreme Court for
from various Florida state to the
further review.
while filed in court. In July
In July 2006, the Florida Supreme Court ordered that the punitive dam-
defendants requested that multi-district litigation panel order the trans-
award that the class approved by the trial co~rt decerti-
of all such cases pending in the federal courts, as well other
and that members of class could file individual actions
progeny that may be filed, to the Middle District of Florida for
against defendants within one year of issuance of the mandate. The court
coordination. The panel denied this in December 2007. In October
further declared the following Phase I findings entitled to judicata"
attorneys for plaintiffs filed a motion to consolidate all and
in such individual actions brought within one of the of
future filed in the trial court in Hillsborough County. The court
the mandate: (i) that smoking causes various (ii) that nicotine in
denied this motion in November
addictive; (iii) that defendants' were defective and
unreasonably (iv) that defendants concealed or omitted material 111 Scott Class Action: In July 2003, following the first of the trial
information not otherwise known or available knowing that material in the Scott class action, in which plaintiffs creation of a fund to pay
or misleading or failed to disclose a material for medical monibring and smoking programs, a Louisiana jury
or addictive nature of smoking; (v) that all rlP.1'P.nrlant~ returned in favor of including PM USA, in connection
to information the health or addictive nature with plaintiffs' medical monitoring claims, but also found that plaintiffs
of with the intention of causing the public to rely on this infor- could benefit frcrn smoking cessation jury also found that
mation to their detriment; (vi) that defendants to conceal or omit not but that the defendants failed to

8009533560

8009533560
 their in In pur-
products minors. In port to be brought on behalf r>ti·p~1rlP•nt~
awarded plaintiffs rir110rr1xicnri·rplv (althcugh a few cases purport to nationwide in scope) and
and severally, to fund a 10-year smoking program. claims of physical injury as well.
In June 2004, the court judgment, which awarded plaintiffs the certification been denied or by courts in smoking
approximately $590 million jury award plus prejudgment interest accruing and health class acticns involving PM USA in Arkansas (1), the District of
from date the suit commenced. of amount of Columbia (2), (2), Illinois Iowa (1), Kansas (1), Louisiana (1), Mary-
prejudgment was approximately million. PM USA's of land (1), Michigan (1), Minnesota (1), Nevada (29), New (6). New York
the jury award and prejudgment interest (2), Ohio (1), Oklahoma (1), Pennsylvania (1), Rico (1), South Carolina
dants, including PM USA, Pursuant to a stipulation of (1) and Wisconsin (1). A class remains certified in the Scott
the trial court entered an the amount the bond at action Ul,\..Ul>,t:U CllJU'Vt:.
lion for all defendants in accordance with an article of Louisiana Code In addition to the cases brought in the United States. smoking
of Civil Procedure, and (the "bond cap law") the and healtn acticns have been brought tobacco industry partici-
amount of security in civil cases involving a signatory to the MSA defined pants, including PMI in (2) and Israel (l). In one
below). Under the terms stipulation, plaintiffs the to class action in Brazil, a consumer organization seeking damages for
contest, at a later the sufficiency or amount of the bond on any smokers and former smokers, and injunctive relief. The trial court found in
including the applicability or constitutionality of the bond cap law. favor of the plaintiff in court awarded R$1,000 (cur-
In September 2004, collectively bond in the amount rently approximately U.S. $500) per smoker per full year of smoking for
of $50 millicn. moral damages plus interest at the of 13 month, as of the date of
In 2007, the Louisiana Court of Appeal rulirg on the ruling. Actual damages are to assessed in a second phase of the
that, among other things: affirmed certification but size of the currently unknown. Defendants deci-
of the struck certain of the of Paulo Court of and the the judgment,
cornp1nsE:d the judgment, reducing the amount of award by approxi- In addition, the defendants filed a consti-
mately million; vacated the award of pre1udgment interest, which Supreme Court on the basis that the con-
totaled approximately million of February 2007; and ruled that sumer association not have standing to bring the lawsuit. Both
the only class members who eligible to participate in the smoking are pending.
who began smoking before, and whose claims currently pending two purported actions PM
a result, the Louisiana Court of Appeal USA brought in New (Caronia, filed in January 2006 in the United States
remanded for consistent with opinion, including L;rther District Court for the District of New York) and Massachusetts
reduction of the amount of the award based on the size of the new class. (Donovan, filed in March in the United States District Court for the Dis-
In March Louisiana Court of trict of on behalf of each state's who:
for rehearing and clarification. In January age 50 or older; smoked the Marlboro brand for 2J or
Court denied plaintiffs' and petitions for writ of certiorari. more; and have neither been diagnosed with lung cancer nor are under
Following the Louisiana Supreme Court's denial of defendants' petition tor examination by a physician lung cancer. Plaintitts in
writ of certiorari, PM USA recorded provision of $26 million in connection cases to liability under various product-based of action
with the case. and the creation of a court-supervised program providing members of the
purported Low Dose in order to identify and diagnose
Smoking and Health Litigation lung cancer. Neither claim seeks punitive Plaintiffs' motion for
1111 Overview: Plaintiffs' in smoking and health cases class certification is pending in Caronia.
based on various negli-
Health Care Cost Recovery Litigation
gence, liability, fraud, misrepresentation, foilurc to warn,
nuisance, of and implied warranties, breach of duty, 111 Overview: In health care cost recovery litigation, domestic and foreign
conspiracy, concert of action, violations deceptive trade laws governmental and non-governmental plaintiffs reimbursement
and ccnsumer protection and claims under the and state of health expenditures by tobacco products and,
anti-racketeering in of future expenditures as well. by
various forms of relief, including compensatory and punitive tre- some but not all plaintiffa includes punitive multiple damages and
ble/multiple damages and other statutory damages and penalties, creation other statutory damages and penalties, injunctions prohibiting mar-
of medical monitoring and smoking funds, d1sgorgE~m1en11 ot and to minors, of of profits,
profits, and injunctive and equitable Defenses raised in these funding of anti-smoking programs, additional disclosure of nicotine yields,
include lack of proximate of the risk, comparative fault and payment of attorney and C>Yi,<OV! w;tn.0 ~~
and/or contributory statutes of limitations and preemption by l he claims include claim that manufacturers
the Labeling and Advertising Act were "unjustly enriched" by plaintiffs' payment of health costs
attributable to smoki1g, as well claims of indemnity, strict lia-
1111 Smoking and Health Class Actions: dismissal in May 1996 of
b.lity, breach of and implied warranty, violaticn of a voluntary under-
purported nationwide class action brought on behalf of allegedly addicted
taking or special duty, fraud, misrepresentation, conspiracy, public
plaintiffs have filed numerous putative smoking and health class

8009533561

8009533561
 0''"'"·~0"'v'v, "' '"' consurner
fraud, antitrust, and clairns
under federal and state anti-racketeering
Defenses include lack of proxirnate of
1111 Settlements of Health Care Cost Recovery Litigation: In November
in1ury, failure valid clairn, lack of benefit, adequate rernedy
1998, PM USA and certain other United States tobacco product rnanufactur-
"unclean hands" (narnely, that plaintiffs cannot obtain equitable
1nto the Master Settlement Agreement (the "MSA") with 46
they participated in, and benefited frorn, of ric•Rri0 th0 " '
states, the District of Columbia, Puerto Rico, Guam, the United States Virgin
lack of antitrust standing and injury, federal preernption, lack of statutory
Islands, American Samoa and the Northern Marianas to and
authority to 5uit, and of limitations. In addition. defendants
unasserted health recovery and other claims. PM USA and certain
that they should he entitled to any to
other United tobacco product manufacturers had previously
extent the plaintiffs benefit economically from the
similar claims brought by Mississippi, and Minnesota
the receipt of or otherwise. Defendants also
(together with the MSA, the "State Settlement Agreements"). State Set-
improper plaintiffs must proceed under principles of
that the original participating manufacturers
subrogation and assignment Under traditional theories of recovery, a payor
make substantial annual payments of $9.4 billion eac:h \1ear (E;xcluding
medical (such an insurer) can seel' recovery of health
future annual payments, if any, under the National Tobacco Settle-
from third party solely by "standing in the shoes" of the in1ured party.
ment Trust below), subject to adjustrnenls for factors,
that plaintiffs should be to bring ary actions
including inflation. market and industry volume. In addition, the origi-
sut}rogeE?S of individual health and should subject to all
nal participating rianufacturers are to pay plaintiffs' attor-
defenses available against the injured party.
fees, subject to an annual cap of million.
Although t11ere have been decisions to the contrary, most judicial
The Settlement Agreements include provisions relating to
have all or most health recovery claims
advertising and marketing public disclosure of certain industry
manufacturers. Nine federal circuit courts of appeals and
documents, limitations on to certain control and under-
six appellate relying primarily on grounds that plaintiffs' claims
laws, restrictions on lobbying activities and provisions.
were too remote, have ordered or affirmed dismissals of health cost
recovery actions. The United States Supreme Court has to consider 1111 Possible Adjustments in MSA Payments for 2003, 2004 and 2005:
plaintiffs' from the decided by circuit courts of Pursuant to the provisions of the MSA, domestic tobacco product manufac-
In March 1999, in the first health recovery to trial, turers, including PM USA, who original MSA ("OPMs"),
Ohio jury returned a verdict in favor on all counts. In addi- participating i1 that may result in downward adjustments
defendants (including $6.8 million to the amounts paid by the OPMs and the other MSA participating manufac-
cost recovery case in New York, and all the and territories that are to the MSA for the
claims in February 2005 (Blue Cr(Jss,t8/1~e 2003, 2004 and proceedings based on the collective loss of
Shield). The trial in the health recovery case brought by the City of rnarket for 2003, 2004 and respectively, by all manufacturers
St. Louis, Missouri and approximately 50 Missouri hospitals, in which PM USA who are subject to the payment obligations and marketing restrictions of
and ALG defendants, scheduled to begin in January 2009. the MSA to non-participating manufacturers ("NPMs") who not subject
Individuals and also in purported actions to such obligations and restrictions.
""'I'> ''"''""'" under the Medicare Secondary Payer In proceedings, an independent economic consulting firm 1ointly
n>r·rn1Ar ·frnm defendants Medicare expenditures allegedly by the MSA required determine whether the disadvan-
incurred the treatment of srnoking-relaced disease5. Cases brought in of the MSA were a "significant contributing to the collective
New York (Mason), Florida (Glover) and Massachusetts (United Seniors of market for the year in question. If the firm determines that the
Association) have by and plaintiffs' appealed disadvantages of the MSA were such a "significant factor," each state may
"'"""'" ,,., "11 the United States of avoid a downward adjustment to its of the participating manufactur-
Circuit affirmed the district court's dismissal in United annual payments for that establishing that ii diligently enforced
Se1~io1·s /.ISS(JCi<11ion. In November 2007, plaintiffs filed petition for writ a qualifying escrow during entirety of that Any potential
of certiorari with the United States Supreme Court, which denied on downward adjustment would then be reallocated to that do not
January 22, 2008. such diligent enforcement PM USA believes that the MSA's arbitra-
In aodition to the cases brought in the United cost tion requires a state to submit claim to have diligently enforced
recovery actions have also been industry partici- a qualifying to binding arbitration a panel of
pants, including PM USA, PMI and certain PMI subsidiaries in Israel (1), the in the manner provided for in the MSA. A number
Marshall Islands (1 dismissed), (1), (1 dismissec), Spain (1) position that this claim should decided in
and Nigeria anb other that considering fil- court on a state-by-state basis.
ing such actions. In September 2005, in the case in Canadian In March of 2006, an independent economic consulting firm deter-
Supreme Court ruled that legislation passed in British Columbia permitting mined that the disadvantages of the MSA were a significant factor contribut-
the lawsuit is constitutional, and, result, the which had previously to the manufacturers' collective of market for
dismissed by the trial court was permitted PM USA. PMI the this same firm that the disad-
and other befendants' to the Columbia court's of contributing to the participat-
jurisdiction was rejected of British Columbia and, in tor the 2004. of

83

8009533562

8009533562
 October PM USA in such proceE,d1r1g through benefit Maryland and Pennsylvania (such
the same economic consulting firm to determine whether the would slightly more than percent the
of MSA were significant factor contributing to the participat- originally payments that would have due to the NTGST for
manufacturers' collective of market share for the year the 2005 through 2010) notwithstanding the offsets from
economic consulting firm to render its final determination on the 1-l:rRA payments. I he North Carolina trial court held in tavor of
the significant factor for 2005 sometime in 2008, Following Maryland and Pennsylvania, and companies (including PM USA) have
the economic consulting firm's determination with 2003, thirty- appealed, In additicn to the approximately $9.5 billion of the buy-out,
eight states filed declaratory judgment actions in state courts a FETRA also obligated manufacturers and importers tobacco products to
laration that the state diligently enforced statute during 2003, cover any (up to $500 million) that the government incurred on the
OPMs and other MSA-rarticipating manufacturers have responded to d1sposiricn of tohacc:i pool stock accumulated under the previous tobacco
actions by filing motions to compel arbitration in accordance with the support program, PM USA has paid $138 million fol' of
terms of the MSA, including filing motions to compel arbitration in eleven the tobacco pool stock quota buy-out did not have
MSA and territories that have not filed declaratory judgment actions, adverse impact on ALG's consolidated results in 2007. ALG
Courts in over 45 have ruled that the question of whether a dili- rently anticipate that the quota buy-out will have a material
gently enforced its escrow during 2003 subject to arbitration and on its consolidated in 2008 and beyond.
only one court ruling to the contrary currently stands, and it remains
1111 Other l\llSA-Relatecl Litigation: In June putative class of Califor-
subject to appeal, Many rulings, including the ruling
rna smokers filed complaint PM USA and the MSA's other "Original
arbitration, remain subject to or further review, Additionally, Ohio filed
Pa1'ticipz1ting Manufacturers" ("OPMs") from the OPMs for
a declaratory judgment action in court with to the 2004 dili-
post-MSA price and an injunction tneir continued compli-
enforcement action stayed pending the decision
ance with the MSA's terms. The complaint alleges that the MSA and related
about the 2003 payments,
legislation protect the OPMs from competition in manner tnat violates
availability and the amount any NPM Adjustment for
and state antitrust and consumer protection laws. The complaint also
2003 and 2004 will not be finally determined until 2008rir1rhPr»;ittp1· "'"'
names the California Attorney General as defendant and to enjoin
availability and the amount of any NPM Adjustment for 2005 will
him from enforcing California's Escrow Statute. In March 2005, the United
not be finally determined until late 2008 is no certainty
Dislricl Court for ttie Northern Districl of California
that the OPMs and other MSA-participating manufacturers will ultimately
dants' motion to dismiss the On September 26,
any adjustment as a result of these If the OP\ils do
Courl of Appeals for lhe Ninth C1rcuil affirmed lhe dismissal.
such an adjustment through these proceedings, the adjustment
Without naming PM USA or any other private party as a defendant,
would be allocated among the OPMs pursuant to the MSA's provisions,
manufacturers that have elected not to the MSA ("Non-Participating
and PM share would likely be applied credit against a future
Manufacturers" or "NPMs") and/or their distributors or customers have filed
MSA payment
other to the MSA and related legislation. New York
1111 National Grower Settlement Trust: part of MSA, the state officials are defendants in a lawsuit pending in the United States Dis-
defendants committed work cooperatively with the tobacco-growing trict Court for the Southern District of New York in which
states to concerns about the potential economic impact that the MSA and/or related legislation violates federal antitrust laws
of the MSA on tobacco and quota holders. To that end, in 1999, four and the Commerce of the United Constitution. In a
of the major domestic tobacco product manufacturers, including PM USA, prc1ceed1ing pending n same coul't, plaintiffs
established the National Tobacco Grower Settlement Trust ("NTGST"), a against not only New York officials but also the Attcrneys for thirty
fund to provide aid to tobacco and quota holders, The to United Court of Appeals for the Second Circuit
funded by four manufacturers over 12 with payments, prior held that the allegations in both actions, if proven, establish a for
to application of various adjustments, scheduled to total billion. Provi- on antitrust and Commerce Clnusc nnd that the trial courts in New
sions of the NTGST allowed for offsets to the that industry-funded York have personal jurisdiction sufficient to enjoin other officials from
payments were made for the or quota holders as part of enforcing their MSA-related legislation. On remand in those two actions,
a end to the tobacco quota and pnce support program. trial preliminarily enjoined New York from enforcing its "allocable
the Fair and Equitable Tobacco Reform Act of 2004 share" amendment to the MSA's Model Escrow Statute against the plaintiffs,
("FETRA") into law, FETRA provides for the elimination of the fed- while another trial do so after concluding that the plaintiffs
eral tobacco quota and price support through an industry-funded unlikely to prove their allegations. Summary judgment motions
buy-out of tobacco growers and quota holders. The cost of the buy-out, in of
which estimated approximately $95 billion, is being paid over 10 years In another action, the United States Court of Appeals for the Fifth Cir-
by manufacturers and importers of each kind of tobacco product The cost cuit reversed trial court's dismissal of challenges MS/'1-related legislation
being allocated on relative market of manufacturers and in Louisiana under First and Fourteenth Amendments to the United
importers of each kind of product The quota buy-out payments States Constitution. The case will now to moticns for summary
already scheduled payments to the NTGST. However, two of the judgment and, 1f judgment in
states, Maryland and Pennsylvania, filed claims in the North another challenge to in the MSA and
state courts, asserting that the companies which established the NTGST related legislation may begin in rnid-2008. Yet another proceeding has been
(including PM USA) must continue making payments under the NTGST initiated before an international arbitraticn tribunal under the provisions of

8009533563

8009533563
 North PM USA, violated RICO and 8 to
holding that plaintiffs have failed to make allegations that the government had court found that:
a claim for or to submit evidence supporting those allegations
and minimized the significant
currently, 0( will soon be, pending the United States Court
co11sE1ouences of smoking;
for the l::ighth and le nth Circuits. fhe United Court of Appea1s tor the
Sixth Circuit has affirmed the dismissal of two similar challenges. ,. defendants hid from the public that smoking and nicotine
are addictive:
111 Federal Government's Lawsuit: In 1999, the United States government
filed lawsuit in the United States District Court for tne District of Columbia " defendants denied that they control the level of nicotine
against various manufacturers, including PM USA, and others, delivered to and addiction;
including ALG, claims under three federal the Medical
Care Recovery Act ("MCRA"), the Medicare Secondary Payer ("MSP") provi- " defendants falsely marketed and promoted "low tar/light"
sions of the Social Act and the civil provisions of RICO. Trial of the as harmful than full-flavor c12arE1ttes
lawsuit sought to an unspecified " defendants falsely that they intentionally marketed to youth;
amount of health for tobacco-related illnesses allegedly
by defendants' fraudulent and tortious conduct and paid for by the govern- " defendants publicly and falsely hazardous to
ment under various federal health programs, including Medicare, rnili- non-smokers; and
and health programs, and the Employees " defendants surmr·es~;ed scientific
Health Program. complaint that such total more
than $20 billion annually. It also sought what it to equitable and court did not impose on the defendants, but
declaratory relief, including of profits which arose from ordered the following (i) an against "committing any act of
allegedly tortious conduct, an iniunction prohibiting certain racketee1·im1" relating to the manufacturing, marketing, promotion, health
by the defendants, and a declaration that the liable consequences or of in the United States; (ii) an injunction
for the federal future of providing health resulting participating directly or indirectly in the management or control of
from defendants' alleged past tortious and wrongful conduct. In September the Council for Tobacco Research, the Tobacco Institute, or the Center for
2000, the trial court dismissed the government's MCRA and MSP claims, but Indoor /\ir Research, or any or affiliated entities of (iii) an
permitted discovery to on the government's claims for relief under iniunctron "making, or causing to be made in way, any material
the civil provisions of RICO. misleading, or or reb)re1ser1ta1:ion
government alleged that disgorgement by defendants of approxi- any pub1ic relations or marketing endeavor that
mately $280 billion is an appropriate remedy. In May 2004, the trial court States public and that or info,mation concerning
an order denying motion tor partial summary judgment , (iv) an injunction against conveying any
limiting the remedy. In 2005. panel cf the United message through use of descriptors on nrl<·:k:iiPir1P '"in
States Court of Appeals for the District of Columbia Circuit held that dis- advertising or promotional material, including "lights;' "ultra lights" and "1ow
not a available to the government under the civil pro- tar," which the court found could consumers to believe a
vision;; of RICO and entered summary judgment in favor of defendants with brand hazardous than another brand; (v) the issuance "corrective
to the claim. In April the Court of in various media health of smok-
r1'""'"'--1 H'" government's motion for In July 2005, ing, of smoking and nicotine, the lack of any significant
ment petitioned the United States Supreme Court for further review of the health benefit from smoKing "low tar" or "light" u!":drtmt1::. defend;int<;'
Court of ruling not an available remedy, and manipulation of to optimum nicotine delivery and the
in October 2005, the Supreme denied the petition. adverse health of exposure to environmental tobacco smoke; (vi) the
In June 2005, the government filed with the trial court its oroposed disclosure on defendants' public document websites and in the Minnesota
final judgment remedies of approximately $14 billion, nclud1ng document repository of all documents the government in the
$10 billion a to fund national smoking pro- lawsuit or produced in any future court or administrative action concerning
gram and $4 billion over a period to fund a public education and smoking and health until 2021, with certain additional to
counter-marketing campaign. the government's proposed remedy documents withheld from production under a claim of
would have required defendants to pay additional monies to tiality; (vii) the of disagi;;re1,abid
if targeted reductions in the smoking of those under in the form and on the
achieved according to a proposed closing such data the Commission, period of ten
remedies also included a of measures and restrictions applicable to (viii) certain restrictions on the sale or by defendants of any cigarette
operations including, but not limited to, restrictions on hrands, hrand names, formulas within United
advertising and marketing, potential measures with to certain price States; and (ix) payment of the government's in br nging the action.
promotional activities and development, disclosure require- In September 2006, defendants filed notices of appeal to the United
ments certain confidential data and implementation of a monitoring States Court for the District Columbia Circuit. In September
system with potential broad powers over operations. 2006, the trial court denied defendants' motion to the judgment pending
In 2006, the federal trial court entered judgment in favor of defendants' appeals, and defendants then filed an emergency motion with the
government. The court held that certain defendants, including ALG and Court of Appeals to stay enforcement of 1udgment pending their appeals.

8009533564

8009533564
 In October to the Court of January An and
'"~'~"'''' ·rhPdenial of remedies, including the Supreme Court in Washington have
orn·op1mP1nt of profits and the cessation it had sought In October tory review of the trial courts' to certify class. in the
a panel of the United States Court of Appeals granted failed to appeal by the deadline for doing so and the trial court
defendants' motion and the trial court's judgment pending review of subsequently enterec Judgment plaintitts on the ground of
the decision. defendants, including PM USA and ALG, filed a motion to prE1en1Pt1on under the Federal and Act In
clarify the trial court's 2006 Final Judgment and Remedial In November, plaintiffs in case (Pearson) filed a notice of appeal of the trial
March trial court denied in part and in part rlP11,mrl;oir1t<:c' court's decisions with the Court of Appeals. Plaintiffs in the case in
post-trial motion for clarification of portions of the court's remedia order. As Washington voluntari y dismissed the with prejudice. Plaintiffs in the
noted above, the trial court's judgment and n;medial order remain New Mexico their motion for certification. Plaintiffs in the
pending the to the Court In May 2007, the United States Florida case petitioned the Florida ~uorE:m1:: court tcr ·turther
Court of Appeals for the District of Columbia briefing of the and on January 14, 2008, the Florida
consolidated appeal to in 2007 and conclude in May 2008. Trial have certified PM USA in IVassachusetts
Minnesota (Curtis), Missouri (Craft) and New York (Schwab). PM
Lights/Ultra Lights Cases has appealed or otherwise challenged these certification orders,
1111 Overview: Plaintiffs in these class actions (some of which have not been and the appeal in Schwab is pending. In addition, United States Supreme
cernm;o 1is such), allege, among other things, that che of the terms Court has the trial and appellate rulings denying plaintiffs'
"I ights" and/or "Ultra I constitute and unfair trade motion to remand the case to trial court in a purported class
common law or RICO violations, and injunctive and equitable action brought in Arkansas (Watson). Developments in these cases include:
including restitution and, in certain cases, punitive a Watson: In June 2007, the United States Supreme Court the
been PM USA and, in certain instances, ALG and lower court rulings that denied plaintiffs' motion to have the
subsidiaries, on behalf of individuals who purchased and consumed heard in a as opposed to trial court The Supreme
various brands of including Marlboro Marlboro Court defendants' contention that the case must be tried in
and Superslims, and Carnb1·fd13,e federal court under the "federal officer" statute. The case has been
in these include lack of misrepresentation, lack of remanded lo lhe lrial court in Arkansas. In December the
and statute of limitations, preemption by court the proposed stipulation stay the case
Labeling and Advertising Act and implied preemption by pending Lile United Stales Supreme Court's decision on defendants'
the policies and directives of the Federal Commission, non-liability petition for writ of certiorari in which was granted on
under statutory provisions exempting conduct that complies with fed- January 2008.
and the First Amendment cases are
pending in Arkansas (2), Delaware (1), Florida (1), Illinois (1), Maine (1), Massa- • Aspinall: In August 2004, the Massachusetts Supreme Judicial Court
chusetts (1), Minnesota (1), Missouri (1), New Hampshire (1), New Jersey (1), affirmed the certification order. In April ?006, ::ilaintiffs filed
New Mexico (1), New York (1), Oregon (1), and West Virginia (2). a motion the to include all who
In addition, two pending in Israel. Other entities have November 1994 purchased packs or cartons of Mariboro
that are considering filing such actions against ALG, PM!, and USA. in Massachusetts that displayed the legend
ll courts in 12 have to certify class actions, Nicotine" (the original class definition did not include
prior certificalion decisions or have entered judgrnenl 1n to lower tar and nicotine). In the trial court denied
favor of PM USA Trial courts in Arizona, Kansas, New Mexico, Oregon, Wash- PM USA's motion for summary judgment based on the state con-
ington and New have to class, an appellate court in sumer protection statutory exemption and preempt.on. On
Florida has certification by a trial court, the Ohio Supreme motion of the parties, the trial court subsequently
Court has overturned certifications in two cases, the United States decision to deny summary judgment to the appeals court for review
Court of tor the Hfth Circuit dismissed a purported and the trial court pending completion of
action brought in Louisiana court (Sullivan) on the the appellate review. Motions for direct appellate review with the
that plaintiffs' claims were preempted the Federal 1Vlass11chusE:tts Supreme Judicial Court granted in April
and Advertising Act, a federal trial court Maine has dismissed a purported and oral arguments heard in January 2008.
action on preemption grounds (Good), plaintiffs voluntarily a Curtis: In April the Minnesota Supreme Court PM USA's
dismissed an action in federal trial court in Michigan after the court dis- pelilion for inlerloculory review of lhe trial court's c ass cerlificalion
claims under the Michigan and Consumer order. In PM USA removed Curtis to federal court
Protection Act and the Supreme Court of Illinois has cverturned a judgment based on the Circuit's decision in Walson, which upheld the
in favor of a plaintiff in the United of removal of a Lights case to federal court based on the officer
Appeals tor the First Circuit vacated district court's grant of PM USA's jurisdiction of the Commission. In 2006, the
motion for summary judgment in the Good on federal preemption federal court denied plaintiffs' motion to remand the case to state
grounds and remanded the to district court stayed court The pending the outcome of DDhl v. R. J.
pnice·ed1ng:s pending the ruling of the United States Supreme Court Co., which before the United States
on defendants' petition for a writ of certiorari, wnich was granted forthe

8009533565

8009533565
 United the PM
Circuit issued its ruling in and the court a case management
court's denial of pending the outcome of the United Supreme Court's
trial court. On October 2007, the district court remanded the Good. United States Supreme Court granted defendants' petition on Jan-
case to court. In December the Minnesota Court ot uary 18, 2008. In addition, plaintitts' motion tor class certification pending
Appeals the trial determination in Dahl that plaintiffs' in a in Terine'"""·
claims in that case were subject to preemption and defen-
dant in that case has petitioned Minnesota Court for Certain Other Tobacco-Related Litigation
review. In December 2007, defendants in moved to stay pro- 1111 Tobacco Price Cases: of December 31, 2007, two cases were pend-
pending any appellate review hy the Minnesota Supreme ing in Kansas and New Mexico in which plaintiffs that defendants,
Court in Dahl and the United States Supreme Court in Good, which including PM USA and PMI, conspired to fix in violation of
was on January 18, 2008. antitrust laws. ALG and PMI defendants in the in Kansas. Plaintiffs'
a Craft: In August 2005, a Missouri Court affir-ned the motions for ::ertification been 1n both cases. In February
certification order. In 2005, PM USA removed Craft to 2005, the New Mexico Court of Appeals affirmed the certification
eral court based on the Eighth Circuit's decision in Watson In March sion. In June 2006, motion for summary judgment
2006, lhe federal lrial courl granled plaintifis' motion aid remanded in the New Mexicc Plaintiffs 1n the New Mexicc case have
the to the Missouri trial court In May 2006, tie Missouri case in Kansas has been stayed pending the Kansas Supreme
Supreme Court declined to the trial court's certification decision on defendants' petition regarding certain rrocP-dural rulings by
decision. Trial been for January 2009. the trial

a Schwab: In 2005, the trial court granted in part defen- 1111 Cigarette Contraband Cases: In May 2000 and 2001. various
dants' motion for partial summary judgrnenl dismissing plainliffs' departments of Colombia and the Community and 10 Member
claims for equitable relief and denied number of plaintiffs' motions in the United States ALG and certain of
summary judgment. In November 2005, the trial court ruled that including PM USA and PMI, and other manufacturers ano
plaintiffs would be permitted to calculate on an their affiliates, that defendants sold tc distributors
basis and "fluid theories to allocate them among would be illegally imported into various 1urisdictions. In
class members. In September the trial court denied district court
summary judgment motions and granted plaintiffs' motion for In January 2004, the United
certification of nationwide of all United States that affirmed the dismissals of the based on the com non law Revenue
in the United States that labeled "light" or Rule, which bars a foreign government from bringing civil claims in U.S.
"lights" from the date defendants began selling such courts for the of It that f~ ture litigation
until the trial commences. The court also declined to certify the related may brought In this regard, ALG
order for interlocutory appeal, declined to the case and authorities contemplating a legal proceeding
jury selection to in January with trial scheduled to begin based on an invesligalion of ALG en lilies to allegations of contra-
immediately the jury impaneled. In October 2006, a band shipments of into Canada in the early to mid-1990s.
1udge of the United Court of Appeals for the Second Circuit 111 Cases Under the California Business and Professions Code: In June
PM USA's petition for a temporary of pre-trial and trial 1997 and July 1998, two (Brown and Daniels) were filed in California
proceedings disposition petitions for state court alleging that domestic manufacturers, including
locutory review by a panel of the Court of PM USA and others, have violaled California and Code
November 2006, the Second Circuit interlocutory review of Sections 17200 and 17500 regarding unfair, unlawful and fraudulent busi-
trial court's class certification order and stayed the ness practices. Class certification was granted in both cases as to plaintiffs'
trial court pending lhe appeal. Oral argurnenl was heard on claims that members entitled to reimbursement of the of
July 10, the
In addition to cases, in December 2005, in the Miner case which
pending at that time in United States District Court for the Western
District of Arkansas, plaintiffs mcved for certification of composed
individuals who purchased Marlboro or Cambridge brands in
Arkansas, California, Colorado, and Michigan. PM USA's motion for summary
judgment on preemption and the Arkansas exemption is California
pending. Following the of this motion, plaintiffs voluntarily acticn on preemption In December
dismiss Miner without prejudice, which PM USA opposed. The court then plaintiffs filed a petition for writ of certiorari with the United States
the case pending the United States Supreme decision on a Supreme Court.
petition for writ of certiorari in the case above. In July In September 2004, the trial court 1n the Brown case granted
2007, the remanded to a trial court in Arkansas. In dants' moticn for summary judgment as to plaintiffs' claims attacking
2007, plaintiffs renewed their motion for certification. In October 2007, defendants' and promotion and denied defendants'

8009533566

8009533566
 motion for summary on on However, should PMCC's position not upheld, PMCC
affirmative statements. Plaintiffs' motion denied. In may have to the payment
March 2005, the court granted defendants' motion decertify the income and s1gni'icantly lower
based on a change in California law, which, in two July 2006 opinions, the income from the affected which could have a material
the California Supreme Court ruled applicable to pending cases. Plaintitts' on the and cash flows of Altria Group, Inc. in a particular fis-
motion for reconsideration of the order that decertified the cal quarter or fiscal PMCC considered this matter in adoption of
denied, and plaintiffs have In September 2006, an intermediate FASB Interpretation No. 48 and FASB Srnff Position No. FAS 13-2.
court affirmed the trial court's order class in
Brown. In November 2006, California Supreme Court accepted review
of the appellilte court's decision. It possible that there could be adverse in pending cases. An
In May lawsuit (Gurevitch) was filed in California state court on unfavorable outcome or settlement of pending tobacco litigation
behalf of a purported class of all California who purchased the could encourage the commencement of additional litigation. Although PM
Merit brand July 2000 to the present that defen- USA has historically been able to obtain required bonds from bond-
dants, including PM USA, violated California's and Professions to prevent plaintiffs from seel,ing to collect
Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent have appealed, remains a risk that
including and misleading advertising. The com- such may not obtainable in all
tially reduced that
violations of California's Consumer Legal ""' neu'""" ,.,u.
injunctive relief, and ;citt.nrr1P11<e' t""" no bond at al.
In July 2005, defendants' motion to dismiss was granted; however, plaintiffs' ALG and ils subsidiaries record provisions in the consolidated financial
motion for leave to amend the complaint was granted, and plaintiffs statements for pending litigation when they determine an unfavorable
filed an amended complaint in 2005. In October 2005, the court outcome probable and the amount of the loss be reasonably
stayed this action pending the California Supreme Court's rulings on two mated. Except as elsewhere in this Note 19. Cor1tin.ger1cies:
not involving PM USA. In July 2006, the California Supreme Court (i) management not concluded that it probable that a
issued rulings in the two cases and held that recent change in California incurred in any of pending tobacco-related cases; (ii) 1s
law known as Proposition 64, which limits the ability to bring a lawsuit to unable to the or that could result from
only those plaintiffs who have injury in and "lost money or an unfavorable outcome of any of the pending tobacco-related cases;
property" result defendant's statutory violations, properly and (iii) accordingly, management not provided any amounts in the
to pending cases. In 2006. the was lifted and consblidated financial statements for unfavorable outCbrnes, if
defendants filed their demurrer to plaintiffs' amended complaint. In March It possible th;i- PM USA's or Altria Group, lnc:s results of
the court, without ruling on the demurrer, again the action operations, flows or financial position could materially affected in a
pending from the California Supreme Court in another involving particular fiscal quarter or fiscal year by an unfavorable outcome or
Proposition that relevant to PM USA's demurrer. ment certain pending litigation. Nevertheless, although I tigation sub-
ject to uncertainty, management believes the litigation environment has
Certain Other Actions substantially improved. ALG and each of its subsidiaries named as defen-
dant believe, and each has so advised by counsel handling the
1111 IRS Challenges to PMCC Leases: The IRS concluded examination of tive cases, that it has a number valid to the litigation pending
ALG's consolidated tax returns for the 1996 through 1999, and issued it, as well as valid bases for appeal of it All
final Report ("RAR") on March RAR disal- and will continue to be, vigorously ue1e,,ue<1.
lowed pertaining certain PMCC and subsidiaries may enter into discussions in particular
the 1996 through 1999. Altria Group, Inc. has with all conclu· cases if they believe in best interests of ALG's stockholders to do
sions of the RAR, with exception of the disallowance of
ing to several PMCC transactions for the Third-Party Guarantees
1999. PMCC will continue to assert position At December 31, 2007, Altria Group, lnc:s third-party guarantees, which are
transactions and approximately million of tax and related to and divestiture activities, were $72 million, of
interest assessed and paid with to them. The IRS may in the future which million have no specified expiration remainder
challenge and disallow more of based or through 2011, with none expiring during Group, Inc. required
Rulings, an IRS Notice and subsequent law addressing specific to perform in the event that a third party fails to
(lease-in/lease-out ("LILO") and sale-in/lease-out make conlraclual or achieve performance Allria Group,
transz1ct1on~s). PMCC position and supporting case law Inc. liability of million on its consolidated balance Decem-
in the RAR, Revenue Rulings and the IRS Notice incorrectly 31, 2007, to For remainder
applied to PMCC's transactions and that factually no liability on the consolidated balance at December 31,
and legally distinguishable in material from IRS's position. 2007 as the fair value of these guarantees insignificant, to the fact that
PMCC and ALG intend to vigorously defend any challenges probability of future payments under these gu;arantE~es
on that position through litigation. In this on October 16, 2006, ordinary course of certain sui}S1(j1ai'ies
PMCC filed complaint in the U.S. District Court for Southern District indemnify a limited number of third
of New York to claim refunds for a portion of tax payments and

8009533567

8009533567
 Financial Data (Unaudited):
2007 Quarters
1st 2nd 3rd 4th
$17,556 $18,809 $19,207 $18,229
$ 5,128 $ 5,532 $ 5,639 $ 5,205
$ $ 2,215 $ 2,633 $ 2,188

$ 2,750 $ 2,215 $ 2,633 $ 2,188

$ 1.01 $ 1.()5 $ 1.25 $ 1.04

0.30
$ 1.31 $ 1.05 $ 1.25 $ 1.04

$ Ull $ 1.05 $ 1.24 $ 1.03

0.29
$ 1.24
$ 0.75
$ 72.20
$ 63.13

Quarters
(in rnillions. except per share data) 1st 2nd 3rd 4th

$ 1.25 $ 1.01 $ 1.06 $ 1.15

0.29 0.32
1.30 1.38 1.41

$ 1.24 $ 1.00 $ 1.05 $ 1.14

8009533568

8009533568
 During and 2006, Altria Inc. following or (gains) in from continuing
2007 Quarters
4th
$
105
$105

2006
(in rni!lions) 3rd tlth
$ $ $ $
103

? ri3

Altria Group, Inc. reco2r1izE,d income benefits in the consolidated sta1terne1nts during 2007 and

Holders of Altria Group, Inc. stock or stock

awarded prior lo January 30, 2008, will retain lheir awards and will
receive the same nuriber of shares of restricted stock of PM!.
Events:
stock and until the completion
Spin-Off of PMI from the of the
original grant). Recip ents of Altria Inc. deferred stock awarded on
On January 30, 2008, the Board of Directors announced that Altria Group,
January 30, 2008, who will be employed by Altria Group, Inc. after the PM!
Inc. plans to spin off all of in PM! to Altria Group, Inc. stockhold·
Distribution Date, will receive additional shares of deferred stock of Altria
in a distribution. The distribution of all the PM! shares owned by
Group, Inc. to the intrinsic value of the award. Recipients of Altria
Altria Group, Inc. will made on March 28, 2008 (the "PM! Distribution
Group, Inc. stock awarded on January 30, 2008, who will
Date"), to Altria Group, Inc. stockholders of record as of the close of business
employed by PM! the PM! Distribution Date, will
on March 19, 2008 (the "PM! Record Date"). Altria Group, Inc. will distribute
of stock of PM! to the intrinsic va of the award.
one of PMI common stock for every of Altria Group, Inc. com-
the extent that of the remaining Altria Gr::iup, Inc. receive
mon outstanding as the PM! Record Date. Following the PM! Distrib-
PMI stock options, Altria Inc. will reimburse PM! in cash for the
ution Date, Altria Group, Inc. will not own any of PM! common
Scholes fair value of t1e options to the extent that PM!
Altria Group, Inc. intends to adjust its current dividend so that its stockhold-
employees hold Altria Group, Inc. stock options, PM! will reimburse Altria
ers who retain their Altria Group, Inc. and PM! will receive, in the
Group, Inc. in cash for the Blacl,·Scholes fair value the options. To the
aggreigate the same dividend dollars as before the PM! Distribution
extent that employees of remaining Altria Group, Inc. PM! deferred
Following the distribution, PM l's initial annualized dividend will be $1.84
stock, Altria Group, In:. will pay PM! the fair value of the P\111 deferred
per common share and Altria Group, lnc:s initial annualized dividend rate
the value of projected the extent that PM! hold
will $1.16 common share. All decisions future dividends will
Altria Group, Inc. stock or deferred PM! will reimburse Altria
be independently by the Altria Group, Inc. l:3oard cf and the
Group, Inc. in cash for lhe fair value of lhe restricled or stock lhe
PM! Board of Directors, for their companies.
value of projected forfeitures and any amounts previously charged to PM! for
Stock Compensation the restricted or stock. Based upon the number of Altria Group, Inc.
stock awards outstanding December 31, net amount of these
Holders of Allria Group, Inc. slock oplions will be lreated similarly to public
reimbursements would be a payment of approximately $427 million from
stockholders and will, accordingly, have their stock awards split in:o two
Altria Group, Inc. to PM!. However, this estimate subject change as
instruments. Holders of Altria Group, Inc. stock options will rPrPI""' +1'"
awards vest (in the of and deferred stock) or
following stock options, which. immediately the spin-off, will
(in the case of stock options) prior to PM! Record Date.
an intrinsic value equal to the intrinsic value of the
Altria Group, Inc. options: Other Matters
" a new PM! option to the same number of of PM! com- PMI currently included in the Altria Group, Inc. consolidated federal
mon stock as number of Altria Group, Inc. options held by such income return, are
person on the PM! Distribution Date; and liabilities on the balance of ALG (the parent company). Prior to the dis-
tribution of PM! ALG will PM! in liabilities,
11 an Altria Group, Inc. option for
which are approximately $97 million.
of Altria Group, Inc. common stock with

90

8009533569

8009533569
 A subsidiary of ALG currently provides PMI with certain Altria Group, Inc. Tender Offer for Debt
at plus a management the PMI Distribution Date, On January 30, 2008, the announced Altria Group,
PMI will undertake activities, and provided to PMI will cease Inc. will commence a tender offer to purchase for cash all of Altria Group,
in 2008. All intercompany accounts will be settled in lnc:s notes including $2.6 billion of domest c notes denomi-
Certain of PMI participate in the U.S. benefit plans ottered in U.S. dollars and billion in euro-denominate:J notes. Altria Group,
by Altria Group, Inc. After the PMI Distribution Date, previously Inc. record a in the of $340 million to $380 million
provided by Altria Group, Inc. will be provided by PMI. resLlt, new plans upon completion of the tender offer. In order to finance the tender offer, Altria
will by PMI, and the related plan assets (to the extent that the Group, Inc. has a $4.0 billion, credit Subsequent
benefit plans were previously funded) and liabilities will be transferred to to the spin-off, Altria Inc. intends to the public market to
the new of benefits will result in PMI recording an debt incurre:J in connection with the tender
additional liability of approximately $98 million in consolidated balance
partially by the related tax assets ($37 million) and the Share Repurchase Programs
corresponding SFAS 158 adjustment to stockholders' equity ($23 million). On January 30, 2008, the Altria Group, Inc. Board of approved
Altria Group, Inc. will pay PMI a corresponding amount in cash, net of the billion two·ye:ir sh:ire repurchase program which expected to begin
related tax benefit. in April, completion of the PMI spin-off. In addition, the Altria Group,
Altria Group, Inc. currently that, 1f distribution had Inc. Directors approved $13.0 billion two-year share repurchase
on December 2007, it woulo have resulted in a to program for PMI which expected to in May 2008.
Altria Group, lnc:s stockholders' equity of approximately $15 billion.

principal stock ex(;nang•e, on which Altria Group, lnc:s common stock (par value $0.33)1, per share) is listed, the New Yori' Stock i-xr1""""'"·
At January 31, 2008, there approximately 100,000 holders of of Altria Group, lnc:s common stock.

8009533570

8009533570
 the Board of Directors and in Notes and to the consolidated fi<ancial
Stockholrlers of Altria Group, Inc.: ments, Altria Group, Inc. changed the manner in which it accounts for
pension, pcstretirement and postemployment plans in fiscal 2006 and
In our opinion, the accompanying consolidated balance and the
the manner in which it accounts for uncertain tax positions in fiscal
related consolidated of stockholders' equity, and cash
2007, respectively.
flows, fairly, 1n all material financial position of Altria
A company's internal control over financial reporting a
Group, Inc. and subsidiaries December 31, 2007 and 2006, and the
designed to provide reasonable the reliability of finan-
results of their operntions and their flows of the in
cial reporting and the preparation of financial statements for external
the period ended December 31, in conformity with accounting princi-
in accordance with generally
ples generally accepterl in llniterl States of Amerirn. Alsn in npinion,
A 1:01npany's internal control over financial includes
Altria Group, Inc. maintained, in all material internal con-
and that (i) pertain to the maintenance of that in
sonable detail, accurately and fairly reflect the transactions and di~posilions
trol over financial reporting as of 2007, based on criteria
established in Internal Control . by the Com-
of the assets of the company; (1i) provide reasonable assurance that
mittee of Sponsoring Organizations of the Treadway Commission (COSO).
tions as to permit preparation financial state-
Altria Group, lnc:s management financial state-
ments in accordance with generally accounting principles, and
ments, for maintaining internal control over financial reporting and
that receipts and . . of the company are made only in
for its assessment of the of internal control over financial
with authorizations of management and directors of com-
reporting, included in the accompanying Report of Management on Internal
pany; and (iii) provide reasonable pre·1ention or timely
Control over Financial Our responsibility to opinions
detection of unautho,ized acquisition, disposition of company's
on financial and on Altria Group, lnc:s internal control over
that could have a material financial statements.
financial reporting based on our integrated audits. We conducted our audits
Because or limitations, internal control over financial
in accordance with the standards of the Public Company Accounting Over-
reporting may not prevent or misstatements. Also, projections of any
sight Board (United standards require that we plan and per-
evaluation of effectiveness lo future periods subject lo risk thal con-
form the audits to obtain reasonable about whether the financial
trols may become inadequate because of changes in conditions, or that the
statements of material misstatement and whether
of compliance with the policies or procedures m;3y •de1:erio~ate.
control over financial reporting maintained in all material Our
audit; of the financial statement; included examining, on a
dence supporting the amounts and in the financial staterne11ts,
PricewaterhouseCoopers LLP
accounting principles and significant made by
management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial the risk
that a material weakness exists, and testing and evaluating the and
operating of internal control on the assessed risk. Our
also included such other as we considered New York, New York
in the circumstances. We believe that our audits provide January 28, 2008, for Notes 19 and 21
re1iso1nable basis for our opinions. which are as of February 2008

8009533571

8009533571
 Management of Altria Group, Inc. responsible for establishing and main- effec1:ivEmE1ss of Altria Group, lnc:s internal
taining internal control over financial reporting as defined 1n Decemher 31, Management
13a-15(f) and 15d-15(f) unde1· the Securities Exchange Act 1934. Altria internal control over financial
Group, lnc:s internal control over financial reporting is a reporting by
provide reasonable the reliability of financial the Committee of Sponsoring Organizations of the Commission.
and the preparation of financial for external Management's included an evaluation of of Altria
dance with accounting principles generally accepted in Group, lnc:s interral control over financial testing
America. Internal control over financial reporting includes ational of irternal control over financial reporting. Manage-
policies and that: ment reviewed the its the Audit Committee of
our Board of Directors.
111 pertain to the maintenance of that, in detail, acc.J-
Based on this assessment, management determined that, as of
rately and fairly transactions and dispositions of the of
December 31, 2007, Altria Group, Inc. maintained effective internal control
Altria Group, Inc.;
over financial reporting.
111 provide reasonable that transactions recorded Price1Na1:erl1oc1seCoop'e's LLP, independent public
to permit preparation of financial statements in accordance with accounting firm, who audited and reported on the consolidated financial
accounting principles in the United of America; stn1tcrnents of Altria Group, Inc. included in this report, rns audited the
effiective1ne,;s of Altria Group, lnc:s internal control over financial reporting
111 provide reasonable and of Altria as of December 31, 2007, in their herein.
Group, Inc. made only in accordance with authorization of man-
agement and directors Altria Group, Inc.; and
1111 provide assurance prevention or timely detection
of unauthorized acquisition, or disposition of assets that could have a
material on the consolidated financial staterner1ts.
Internal control over financial reporting includes the controls them-
monitoring and internal auditing and actions taken to
correct deficiencies as identified.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, proienions of
any evaluation of future to risk that
controls inadequate in conditions, or that
the compliance with the policies or procedures may deteriorate. January 28, 2008

8009533572

8009533572
 The graph below compares the cumulative total return on common stock for the last five years with the cumulative total return for the same period
of the S&P 500 Index and the Altria peer group index. The graph assumes the investment of $100 in common stock and each of the indices as of
the market close on December 31, 2002 and reinvestment of all dividends on a quarterly basis.

$50""""""'""'''"""""'"'""""'"'""""'"'""""'""'"""""''""'""""""'"'"""""""""""""""""'"'""'""'"'"""'"'"'"""""""""""""""""""'"'""""""""'"'""'""'""""'"'"'"'

$0 """'"'""''"""''"''''""'''"'""''"""""'

1212002 12/2003 1212004 1212005 12/2006 12/2007

Date Altria Group S&P500 Altria Peer Group<1l

December $100.00 $100.00 $100.00

December 2003 $142.99 $128.63 $116.51
December $169.32 $142.59 $
December 2005 $216.32 $149.58 $132.91
December 2006 $259.43 $173.15 $158.06
December 2007 $316.90 $182.64 $192.92

OlThe Altria Peer Group consists of the following companies that are competitors the Company's operating subsidiaries or that have been
selected on the basis of size, global focus or industry leadership: Anheuser-Busch Companies, Inc .. Bntish American Tobacco p.l.c., Campbell Soup
Company, The Coca-Cola Company, ConAgra Foods, Inc., General Mills, Inc., H.J. Heinz Company, Hershey Foods Corporation, Kellogg Company,
Nestle SA PepsiCo, Inc .. The Procter & Gamble Company, Reynolds American Inc.. Lee Corporation, Unilever N.V.. and UST Inc.
The cumulative total return graph excludes The Gillette Company as result of its acqi,,isition by The Procter & Gamble Company in 2005.

94

8009533573

8009533573
 8009533574

8009533574
 8009533575

8009533575