Description of the Company

Altria Group, Inc.'s wholly-owned subsidiaries include Philip Morris USA Inc. ("PM USA"), which is engaged in the manufacture and sale of cigarettes and other tobacco products in the United States, and John Middleton Co. ("Middleton"), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary, maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held a 28.5% economic and voting interest in SABMiller plc ("SABMiller") at June 30, 2008. Altria Group, Inc.'s access to the operating cash flows of its subsidiaries consists principally of cash received from the payment of dividends by its subsidiaries.

PMI Spin-Off

On March 28, 2008 (the "Distribution Date"), Altria Group, Inc. distributed all of its interest in Philip Morris International Inc. ("PMI") to Altria Group, Inc. stockholders of record as of the close of business on March 19, 2008 (the "Record Date") in a tax-free distribution. Altria Group, Inc. distributed one share of PMI common stock for every share of Altria Group, Inc. common stock outstanding as of the Record Date. Following the Distribution Date, Altria Group, Inc. does not own any shares of PMI stock.

Holders of Altria Group, Inc. stock options were treated similarly to public stockholders and, accordingly, had their stock awards split into two instruments. Holders of Altria Group, Inc. stock options received the following stock options, which, immediately after the spin-off, had an aggregate intrinsic value equal to the intrinsic value of the pre-spin Altria Group, Inc. options:

• a new PMI option to acquire the same number of shares of PMI common stock as the number of Altria Group, Inc. options held by such person on the Distribution Date; and

• an adjusted Altria Group, Inc. option for the same number of shares of Altria Group, Inc. common stock with a reduced exercise price.

As set forth in the Employee Matters Agreement, the exercise price of each option was developed to reflect the relative market values of PMI and Altria Group, Inc. shares, by allocating the share price of Altria Group, Inc. common stock before the spin-off ($73.83) to PMI shares ($51.44) and Altria Group, Inc. shares ($22.39) and then multiplying each of these allocated values by the Option Conversion Ratio. The Option Conversion Ratio was equal to the exercise price of the Altria Group, Inc. option, prior to any adjustment for the spin-off, divided by the share price of Altria Group, Inc. common stock before the spin-off ($73.83). As a result, the new PMI option and the adjusted Altria Group, Inc. option had an aggregate intrinsic value equal to the intrinsic value of the pre-spin Altria Group, Inc. option.

Holders of Altria Group, Inc. restricted stock or deferred stock awarded prior to January 30, 2008, retained their existing awards and received the same number of shares of restricted or deferred stock of PMI. The restricted stock and deferred stock will not vest until the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by Altria Group, Inc. after the Distribution Date, received additional shares of deferred stock of Altria Group, Inc. to preserve the intrinsic value of the award. Recipients of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by PMI after the Distribution Date, received substitute shares of deferred stock of PMI to preserve the intrinsic value of the award.

In connection with the spin-off, PMI paid to Altria Group, Inc. $4.0 billion in special dividends in addition to its normal dividends to Altria Group, Inc. PMI paid $3.1 billion of these special dividends in 2007 and paid the additional $900 million in the first quarter of 2008.

Prior to the PMI spin-off, PMI was included in the Altria Group, Inc. consolidated federal income tax return, and PMI's federal income tax contingencies were recorded as liabilities on the balance sheet of Altria Group, Inc. Altria Group, Inc. reimbursed PMI in cash for these liabilities, which were $97 million.

Prior to the PMI spin-off, certain employees of PMI participated in the U.S. benefit plans offered by Altria Group, Inc. The benefits previously provided by Altria Group, Inc. are now provided by PMI. As a result, new plans were established by PMI, and the related plan assets (to the extent that the benefit plans were previously funded) and liabilities were transferred to the PMI plans. The transfer of these benefits resulted in Altria Group, Inc. reducing its benefit plan liabilities by $129 million and increasing its prepaid pension assets by $33 million in its condensed consolidated balance sheet, partially offset by the related deferred tax assets ($23 million) and the corresponding Statement of Financial Accounting Standards ("SFAS") No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" adjustment to stockholders' equity ($27 million). Altria Group, Inc. paid PMI a corresponding amount of $112 million in cash, which is net of the related tax benefit.

A subsidiary of Altria Group, Inc. previously provided PMI with certain corporate services at cost plus a management fee. After the Distribution Date, PMI independently undertook most of these activities. Any remaining limited services provided to PMI by the Altria Group, Inc. service subsidiary under the Transition Services Agreement are expected to cease in 2008. The settlement of the intercompany accounts (including the amounts discussed above related to stock awards, tax contingencies and benefit plans) resulted in a net payment from Altria Group, Inc. to PMI of $332 million. In March 2008, Altria Group, Inc. made an estimated payment of $427 million to PMI, thereby resulting in PMI reimbursing $95 million to Altria Group, Inc. in the second quarter of 2008.

The distribution resulted in a net decrease to Altria Group, Inc.'s stockholders' equity of $14.4 billion on the Distribution Date.

Altria Group, Inc. has reflected the results of PMI prior to the Distribution Date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to PMI were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2007.

Dividends and Share Repurchases

During the second quarter of 2008, Altria Group, Inc.'s Board of Directors adjusted Altria Group, Inc.'s current quarterly dividend rate to $0.29 per common share. This adjustment was intended to allow Altria

In April 2008, Altria Group, Inc. began repurchasing its shares under the share repurchase program previously approved by the Board of Directors. As of June 30, 2008, Altria Group, Inc. had repurchased 53.5 million shares of its common stock at an aggregate cost of approximately $1.2 billion, or an average price of $21.81 per share, under this program.

Other

On March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft Foods, Inc. ("Kraft") on a pro-rata basis to Altria Group, Inc.'s stockholders in a tax-free distribution. Altria Group, Inc. has reflected the results of Kraft prior to the Kraft distribution date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows.

Beginning with the first quarter of 2008, Altria Group, Inc. revised its reportable segments to reflect the change in the way in which Altria Group, Inc.'s management reviews the business as a result of the acquisition of Middleton and the PMI spin-off. Altria Group, Inc.'s revised segments are Cigarettes and other tobacco products; Cigars; and Financial services. Accordingly, prior period segment results have been revised.

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

Consolidated Operating Results for the Six Months Ended June 30, 2008 - The changes in Altria Group, Inc.'s earnings from continuing operations and diluted earnings per share ("EPS") from continuing operations for the six months ended June 30, 2008, from the six months ended June 30, 2007, were due primarily to the following (in millions, except per share data):

                                                                               Diluted EPS
                                                       Earnings from              from
                                                        Continuing             Continuing
                                                        Operations             Operations
For the six months ended June 30, 2007                $         1,411         $        0.67

2007 Asset impairment and exit costs                              241                  0.11
2007 Recoveries from airline industry exposure                   (133 )               (0.06 )
2007 Interest on tax reserve transfers to
Kraft                                                              50                  0.02

Subtotal 2007 items                                               158                  0.07


2008 Asset impairment, exit, integration and
implementation costs                                             (196 )               (0.09 )
2008 Gain on sale of corporate headquarters
building                                                          263                  0.12
2008 Loss on early extinguishment of debt                        (256 )               (0.12 )

Subtotal 2008 items                                              (189 )               (0.09 )


Operations                                                        164                  0.08


For the six months ended June 30, 2008                $         1,544         $        0.73

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

Asset Impairment, Exit, Integration and Implementation Costs - In June 2007, PMI established plans to move the U.S.-based production of cigarettes from PM USA to PMI facilities. Due to declining U.S. cigarette volume, as well as PMI's decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. From 2007 through 2011, PM USA expects to incur total pre-tax asset impairment, exit and implementation charges of approximately $670 million for the program, including $61 million ($38 million after taxes) and $318 million ($205 million after taxes) incurred during the six months ended June 30, 2008 and 2007, respectively. In addition, during the six months ended June 30, 2008 and 2007, pre-tax asset impairment and exit costs of $248 million ($156 million after taxes) and $61 million ($36 million after taxes), respectively, were recorded in general corporate expense. The general corporate costs in 2008 primarily reflect the restructuring of Altria Group, Inc.'s corporate headquarters, including the move to Richmond, Virginia, as a result of the PMI spin-off. Middleton recorded pre-tax integration costs of $3 million ($2 million after taxes) during the six months ended June 30, 2008. For further details on asset impairment, exit and implementation costs, see Note 2. Asset Impairment and Exit Costs, to the Condensed Consolidated Financial Statements.

Gain on Sale of Corporate Headquarters Building - On March 25, 2008, Altria Group, Inc. sold its corporate headquarters building in New York City for $525 million and recorded a pre-tax gain on sale of $404 million ($263 million after taxes).

Recoveries from Airline Industry Exposure - During the six months ended June 30, 2007, PMCC recorded a pre-tax gain of $207 million ($133 million after taxes) on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down.

Interest on Tax Reserve Transfers to Kraft - The interest on tax reserves transferred to Kraft is related to the Kraft spin-off and the adoption of Financial Accounting Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" ("FIN 48") in 2007.

Operations - The increase in earnings from operations was due primarily to the following:

• Cigars income, reflecting the acquisition of Middleton in December 2007;

• Lower interest and other debt expense, net;

• Lower general corporate expense, due primarily to the restructuring and streamlining of Altria Group, Inc.'s corporate headquarters; and

• Higher equity earnings in SABMiller.

Consolidated Operating Results for the Three Months Ended June 30, 2008 - The changes in Altria Group, Inc.'s earnings from continuing operations and diluted EPS from continuing operations for the three months ended June 30, 2008, from the three months ended June 30, 2007, were due primarily to the following (in millions, except per share data):

                                                                                Diluted EPS
                                                       Earnings from               from
                                                        Continuing              Continuing
                                                        Operations              Operations
For the three months ended June 30, 2007              $           715          $        0.34

2007 Asset impairment and exit costs                              205                   0.09
2007 Recoveries from airline industry exposure                    (50 )                (0.02 )

Subtotal 2007 items                                               155                   0.07


2008 Asset impairment, exit, integration and
implementation costs                                              (24 )                (0.01 )

Change in tax rate                                                 (6 )
Lower shares outstanding                                                                0.01
Operations                                                         90                   0.04


For the three months ended June 30, 2008              $           930          $        0.45

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

Recoveries from Airline Industry Exposure - During the second quarter of 2007, PMCC recorded a pre-tax gain of $78 million ($50 million after taxes) on the sale of bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down.

Shares Outstanding- Lower shares outstanding during the three months ended June 30, 2008 were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase program.

Operations - The increase in earnings from operations was due primarily to the following:

• Cigars income, reflecting the acquisition of Middleton in December 2007;

• Higher cigarettes and other tobacco products income, reflecting lower wholesale promotional allowance rates and lower general and administrative expenses, partially offset by lower volume, higher ongoing resolution costs, and costs related to the reduction of contract volume manufactured for PMI;

• Lower general corporate expense, due primarily to the restructuring and streamlining of Altria Group, Inc.'s corporate headquarters; and

• Lower interest and other debt expense, net;

partially offset by:

• Lower financial services income (after excluding the impact of the recoveries from airline industry exposure in 2007), due primarily to lower asset management gains and lower lease revenues.

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

2008 Forecasted Results - On July 31, 2008, Altria Group, Inc. reaffirmed its 2008 earnings per share guidance. Altria Group, Inc. forecasts that 2008 adjusted full-year diluted earnings per share from continuing operations will be in the range of $1.63 to $1.67. This range represents a 9% to 11% growth rate in earnings per share from an adjusted base of $1.50 per share in 2007. Altria Group, Inc. continues to expect full-year operating companies income growth from continuing operations in the mid-single digits on both a reported and adjusted basis. The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast.

   Reconciliation of 2007 Reported Diluted EPS from Continuing Operations to

              2007 Adjusted Diluted EPS from Continuing Operations



2007 Reported diluted EPS from continuing operations   $  1.48
Tax items                                                (0.09 )
PMCC recoveries from airline industry exposure           (0.06 )
Interest on tax reserve transfers to Kraft                0.02
Asset impairment, exit and implementation costs           0.15

2007 Adjusted diluted EPS from continuing operations   $  1.50

Discussion and Analysis

Consolidated Operating Results

See pages 75-77 for a discussion of Cautionary Factors That May Affect Future
Results.



                                          For the Six Months Ended               For the Three Months Ended
                                                  June 30,                                June 30,
                                          2008                2007               2008                 2007
                                                                    (in millions)
Net revenues:
Cigarettes and other tobacco
products                              $      9,149        $      9,054       $       4,916        $       4,809
Cigars                                         192                                     101
Financial services                             123                  95                  37                   52

Net revenues                          $      9,464        $      9,149       $       5,054        $       4,861

Excise taxes on products:
Cigarettes and other tobacco
products                              $      1,650        $      1,699       $         859        $         899
Cigars                                          31                                      16

Excise taxes on products              $      1,681        $      1,699       $         875        $         899

Operating income:
Operating companies income:
Cigarettes and other tobacco
products                              $      2,377        $      2,134       $       1,337        $       1,004
Cigars                                          91                                      50
Financial services                             104                 299                  30                  139
Amortization of intangibles                     (3 )                                    (1 )
Gain on sale of corporate
headquarters building                          404
General corporate expense                     (170 )              (226 )               (73 )               (116 )
Corporate asset impairment and
exit costs                                    (248 )               (61 )                (1 )

Operating income                      $      2,555        $      2,146       $       1,342        $       1,027

As discussed in Note 9. Segment Reporting, management reviews operating companies income, which is defined as operating income before general corporate expense and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.

• Asset Impairment and Exit Costs - For the six and three months ended June 30, 2008 and 2007, pre-tax asset impairment and exit costs consisted of the following:

                                                      For the Six Months Ended               For the Three Months Ended
                                                              June 30,                                June 30,
                                                       2008               2007               2008                2007
                                                                                (in millions)
Separation program       Cigarettes and other
                         tobacco products          $         29       $        283       $         18       $           283
Separation program       General corporate                  193                 17                  1
Asset impairment         Cigarettes and other
                         tobacco products                                       35                                       35
Kraft spin-off fees      General corporate                                      44
PMI spin-off fees        General corporate                   55

Asset impairment
and exit costs                                     $        277       $        379       $         19       $           318

Manufacturing Optimization Program

In June 2007, PMI established plans to move the U.S.-based production of cigarettes from PM USA to PMI facilities. Due to declining U.S. cigarette volume, as well as PMI's decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. PM USA anticipates that its cigarette production for PMI, which approximated 57 billion cigarettes in 2007, will end during the fourth quarter of 2008. PM USA expects to close its Cabarrus manufacturing facility by the end of 2010.

As a result of this program, from 2007 through 2011, PM USA expects to incur total pre-tax charges of approximately $670 million, comprised of accelerated depreciation of $143 million, employee separation costs of $353 million and other charges of $174 million, primarily related to the relocation of employees and equipment, net of estimated gains on sales of land and buildings. Approximately $440 million, or 66% of the total pre-tax charges, will result in cash expenditures.

During the six months and three months ended June 30, 2008, PM USA incurred total pre-tax charges of $61 million and $35 million, respectively, related to this program. These charges consisted of pre-tax asset impairment and exit costs of $29 million and $18 million for the six months and three months ended June 30, 2008, respectively, as well as pre-tax implementation costs associated with the program of $32 million and $17 million for the six months and three months ended June 30, 2008, respectively. The pre-tax implementation costs primarily related to accelerated depreciation and were included in cost of sales in the condensed consolidated statements of earnings for the six months and three months ended June 30, 2008. PM USA recorded an initial pre-tax charge for the program of $318 million in the second quarter of 2007 related primarily to employee separation programs. Total pre-tax charges incurred since the inception of the program were $432 million. Pre-tax charges of approximately $79 million are expected during the remainder of 2008 for the program. Cash payments related . . .