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Financial Highlights Operating Revenues Billions of Dollars  Domestic tobacco 0 1 1992 International tobacco 1991  North American food  International food ' 1990  Beer  Financial services & real estate 1989 1988 Operating Companies Income Billions of Dollars 1992  Domestic tobacco 1991 International tobacco  North American food 1990  International food  Beer 1989  Financial services & real estate 1988 5 1 20% 1 1 0 1 1 5 20 47%. 2% Earnings Per Share 0 1 1.00 I 2.00 t 3.00 1 4.00 1 5.00 I 6.00 1 Before Cumulative 1992 Effect of Accounting Change Dollars 1991 1990 1989 1988 Contents Financial Highlights 1 Letter to Stockholders 2 Mission and Strategies 5 Business Review 16 Corporate Citizenship 24 Board of Directors 26 Officers 28 Financial Review 29 General Corporate Information 57 Registered trademarks and servicemarks of Philip Morris Companies Inc. and its subsidiaries are italicized in this report.

(in millions of dollars, except per share data) 1992 1991 1990 1989 1988 Operating revenues $59,131 $56,458 $51,169 $44,080 $31,273 Earnings before cumulative effect of accounting change 4,939 3,927 3,540 2,946 2,064 Net earnings 4,939 3,006 3,540 2,946 2,337 Earnings per share before cumulative effect of accounting change 5.45 4.24 3.83 3.18 2.22 Net earnings per share 5.45 3.25 3.83 3.18 2.51 Dividends declared per share 2.35 1.91 1.55 1.25 1.01 Percent Increase Over Prior Year Operating revenues 4.7% 10.3% 16.1% 41.0% 13.1% Earnings before cumulative effect of accounting change 25.8% 10.9% 20.2% 42.7% 12.1 % Net earnings 64.3% (15.1)% 20.2% 26.1% 26.9% Earnings per share before cumulative effect of accounting change 28.5% 10.7% 20.4% 43.2% 14.4% Net earnings per share 67.7% (15.1)% 20.4% 26.7% 29.4% Dividends declared per share 23.0% 23.2% 24.0% 23.8% -28.6°l-0 Operating Revenues Domestic tobacco $12,010 $11,589 $10,370 $ 9,474 $ 8,491 International tobacco 13,667 12,251 10,720 8,375 8,085 North American food 20,325 20,244 20,071 18,750 8,799 International food 8,723 7,934 6,014 3,623 2,099 Beer 3,976 4,056 3,534 3,342 3,177 Financial services and real estate 430 384 460 516 622 Total operating revenues $59,131 $56,458 $51,169 - $44,080 $31,273 Operating Companies Income Domestic tobacco $ 5,185 $ 4,774 $ 4,206 $ 3,606 $ 3,087 International tobacco 2,018 1,694 1,394 1,007 - 774 North American food 2,194 2,071 1,984 1,769 684 International food _ 1,083 891 664 369 165 Beer 260 301 285 226 190 Financial services and real estate 220 179 197 173 163_ Operating companies income 10,960 9,910 8,730 7,150 5,063 Gain on sale of Rothmans International p.l.c. - _ -- - 455 - Restructurings of food operations (455) - - - - (179) (348) Amortization of goodwill (521) (499) (448) (385) (125) Unallocated corporate expenses (380) (334) (336) (252) (193) Interest and other debt expense, net (1,451) (1,651) (1,635) (1,731) (670) Earnings before income taxes and cumulative - effect of accounting change $ 8,608 $ 6,971 $ 6,311 $ 5,058 $ 3,727 Compounded Average Annual Growth Rate 1992-1987 - 1992-1982 1992-1977 Operating revenues 16.4% 17.6% 17.6% Net earnings 21.8% 20.2% 19.6% Net earnings per share 22.9% 21.5% 20.1% Total return to stockholders 33.7% 30.5% 25.5% See notes to the consolidated financial statements regarding the 1991 adoption of SFAS No, 106, the 1991 restructuring of food operations, and the 1990 acquisition of Jacobs Suchard AG. In 1989, the Company charged $179 million, primarily for the cost of combining Kraft and General Foods. In addition, the Company sold its equity investment in Rothmans International p.l.c. for a pretax gain of $455 million. The net impact of these items was an increase to net earnings of $152 million, or $.16 per share. In 1988, the Company acquired Kraft, Inc. Consolidated results_of the Company include the operating results of-Kr-aEt, Inc. since its acquisition. In 1988, the Company adopted the method of accounting for income taxes prescribed by SFAS No. 96, resulting in a cumulative effect of accounting change that increased net earnings by $273 million, or $.29 per share, Total return to stockholders includes stock appreciation and dividends. N 1

Dear Stockholder: During 1992, your company continued to deliver strong earnings growth, and to make clear progress in achiev ing our mission: to be the most successful consumer packaged goods company in the world. Our efforts to achieve this ambitious mission have historically driven our growth, and we believe that nothing less than a determination to be the best will help us maximize shareholder value in the future. Our financial performance provides the most direct gauge of our progress. Consolidated operating revenues of $59.1 billion were 4.7% higher than in 1991. Operating companies income rose 10.6%, to $11.0 billion. Net earn- ings and net earnings per share increased 64.3% and 67.7%, respectively. Excluding last year's one-time charges for restructuring and postretirement health care costs, ongoing net earnings and net earnings per share were up 17.5% and 20.0%, respectively. We posted this 20% growth in earnings per share in a business environment characterized by a stubborn recession and low consumer confidence in the United States, and economic downturns in many of our key European and Asian markets. Our 1992 performance demonstrates the underlying strength of our business, as well as our momentum for continued growth. Our 1992 results enabled us to increase our dividend 23.8%, marking our 25th consecutive year of dividend increases. The current annualized dividend is $2.60 per share, which is more than eight times our annualized dividend just ten years ago. During 1992, we also used our cash flow to purchase 32.1 million shares of our common stock. At the end of 1992, $2.3 billion remained available for stock repurchase under our existing authority. Operating Company Results • Tobacco. Operating revenues and income from our worldwide tobacco operations continued to set new records, grow- ing 7.7% and 11.4%, respectively. Worldwide volume was down 0.5%, largely due to lower volume in the United States and lower exports to Russia. In the U.S. market, we continued to compete success- fully in both the full priced and discount segments. In spite of a volume decline, our full priced cigarettes reached a record 49% share of the full priced segment, while our discount brands grew more than 10%. Despite intense price competition, we widened our position as the profit leader in the U.S. cigarette industry, account- ing for more than half the industry's profits, and nearly all its profit growth. Outside the United States, we continued to record double-digit income growth, benefiting from volume gains in several major markets and acquisitions in Central Europe. We expect still better volume growth this year. • Food. In our worldwide food operations, continued volume growth generated good overall_ results, with operating revenues and income up 3.1% and 10.6%, respectively. In North America, a strong upturn in cheese and pro- cessed red meats in the second half of the year, coupled with good full-year results in breakfast cereals, coffee, bakery, desserts, and foodservice, point the way to fur- ther volume and income growth. Our international food business posted strong income gains, driven by growth in existing markets and by acquisitions. We expect this momentum to continue in the year ahead. • Beer. Partly due to an unusually cool summer in the United States, Miller Brewing Company's retail sales declined less than 1%, and operating revenues and income fell 2.0% and 13.6%, respectively. Our plans call for Miller to resume its pattern of volume and share gains, led by accelerated growth of our premium brands. In addition, investments in Molson Breweries, located in Canada, and FEMSA in Mexico should further strengthen our North American beer business. Strategies to Be the Best Six strategies have historically generated our steady, sus- tainable growth. Through these strategies, we strive to maximize shareholder wealth by achieving our mission to be the most successful consumer packaged goods company in the world. These strategies, and some indications of their 1992 impact, are described below. • To maintain the highest quality of people. We recognize that the quality of our people is the key to success. As a result, we have taken a number of steps to enhance the quality of our workforce; such as expand- ing our marketing and management training programs; improving our performance appraisal systems across our operations, in order to link incentives to the accom- plishment of business objectives at individual units; and establishing a more comprehensive management devel- opment and succession planning process, which helped us fill more than 85% of all key management opportuni- ties by promotions from within Philip Morris in 1992. We launched a formal diversity program to help us understand and serve our diverse worldwide markets better, and to ensure that we can attract and retain the best quality of people-all people. We also continued to attract top management talent, including John D. MacDonough, President and Chief Operating Officer of Miller Brewing Company, and Craig L. Fuller, Senior Vice President, Corporate Affairs of Philip Morris Companies Inc. 2

William Murray Michael A. Miles • To protect and build our brand franchises. After our people, our brands are our most important assets. To ensure that every one of our brands is a leader in its category, we invested approximately $11 billion in worldwide marketing activities. Many of our products faced intensified price com- petition in 1992. When necessary, we maintained our market position by adjusting our prices and expand- ing our discount alternatives. But we established stronger platforms for long-term profit growth by increasing the value of our brands through quality improvements and sharper product positioning. For example, we tapped new opportunities by marketing Velveeta cheese for cooking, and we increased our dis- tinctiveness-and volume-by emphasizing the whole family appeal of Post Honey Bunches of Oats cereal and the variety offered by Oscar Mayer Lunchables lunch combinations. We also developed more focused and integrated marketing efforts, such as the Marlboro Adventure Team promotion, providing new visibility and better imagery for our brands. In addition, we worked to increase the acceptance and distribution of all our brands by wholesalers and retailers through such programs as Retail Masters in our U.S. tobacco business, simplified trade deals and shared market information at Kraft General Foods North Amer- ica, and increased face-to-face sales coverage at Miller Brewing Company. • To grow profitable new business through line extensions, new products, geographic expansion, acquisitions, and joint ventures and strategic alliances. Because we recognize that the long-term vitality of our business depends on volume growth, we continued to invest in new products and line extensions in all our business lines. During 1992, we introduced almost 200 new products, and more than 4001ine extensions in our tobacco, food, and beer businesses. Much of our 1992 growth came through geographic expansion of existing Philip Morris brands, from Miller beers in Puerto Rico and Carte Noire coffees in Holland and Japan to Tombstone pizzas and Great Grains cereals in the United States. We also completed or initiated acquisitions or investments in more than 20 companies that provide a strategic complement to our existing busi- nesses. We expect these companies to add more than $2.5 billion to our revenues in 1993. The Freia Marabou acquisition, now pending approval by the Norwegian government, will be the fourth largest in our history, and will considerably strengthen our port- folio of confectionery brands in Northern Europe. Our tobacco and food expansions in Central Europe and the Asia/Pacific region, together with our planned strategic investments in beer in North America, similarly position us for continued growth in some of the world's most economically and demographically favorable markets. Redefining our market base for beer as North America, for instance, increases our market size, and potential for growth, by 50 million barrels. Around the world, our tobacco and food businesses are now profitable and growing in markets that-only five years ago-seemed closed to us forever. We are well positioned to take advantage of still other market open- ings and improvements. - - • To maximize productivity and synergy in all busi- nesses at all times. - - Even as we recognize the importance of growth, we are dedicated to being the low-cost producer in all our busi- ness lines. Accordingly, we have continued to fine-tune our operations for speed and efficiency in 1992, generat- ing over $650 million in productivity gains and nearly $100 million in benefits from synergies. We are planning for even greater gains in 1993. Because bureaucracy is always a risk in a large organ- ization, costing money and slowing decision-making, we have also continued to eliminate layers of management. Combined, our productivity and synergy initiatives have had considerable impact, even on a company as large as Philip Morris. Our operating companies income per employee has increased at an average annual rate of 20% since 1988. Our determination to keep creating value for our shareholders in 1992 meant closing or reconfiguring some of our plants, and selling marginal or non-strategic businesses. We are a growth company, and we pride our- selves on providing opportunities for our ambitious, dedicated workforce. We were therefore especially sensitive to the needs of employees laid off as a result of decisions necessary to ensure our continued competitiveness. • To make total quality management a reality in every -aspect of our everyday operations. In 1992, we continued to pursue total quality manage- ment programs in our facilities around the world. 3

Seventeen of our major food processing facilities in Europe have earned ISO 9002 certification, confirming that they meet the highest international standards for product quality and plant efficiency. We are seeing clear benefits from all our improvements in the form of reduced cycle times, faster changeovers, less waste, and better products, packaging, and customer service. At Kraft Food Ingredients, for instance, we significantly improved our percentage of complete and on-time deliv- eries, even as total shipments rose more than 5%. We have trained thousands of line and staff employees in total quality management practices, and we plan further expansions of these programs. • To manage with a global perspective. To take advantage of our unique opportunities to develop truly global brands, we continued to assure maximum efficiency through global sourcing and mar- keting in 1992. We improved communication among our managers by developing cross-border category manage- ment for our core products, such as cheese, and by creating worldwide ~,trategy councils for our tobacco, coffee, and spoonable dressings businesses. We are also sharing the best business practices in our company on a worldwide basis, both to create global brands and to strengthen a number of recently acquired trademarks. Through our 1992 acquisitions in Europe, the Asia/ Pacific region, and the western hemisphere, we have gained new opportunities to grow geographically. To increase the proportions of sales and profits generated outside the United States, we continued to rely on talented international managers who understand local cultures. Of our nearly 70,000 employees outside the United States last year, for instance, fewer than 300 were U.S. citizens. Social, Legislative, and Legal Issues We judge our success not only by our financial results and execution of our strategies, but also by the honesty, integrity, and concern for others that we demonstrate in our business. We therefore manage all our businesses in strict com- pliance with all laws, regulations, and other official guidelines established by the governments in the areas of the world in which we now do business. Beyond that, we recognize that virtually every aspect of our opera- tions has an impact on the rest of society. Accordingly, in every country in which we do business, we not only live up to, but also frequently go beyond, the regulations bearing on our business. The United States Supreme Court's long-awaited decision in the case of Cipollone v. Liggett, et al. was . one of the highlights of 1992. As we stated at the time, we believe that the decision is a significant victory for the tobacco industry because it precludes many of the prod- uct liability claims that have commonly been brought against us. We believe that we will continue to prevail in cases brought within the new, narrow guidelines the Court has established. We believe that the U.S. Environmental Protection Agency's January 1993 report, claiming that second- hand tobacco smoke causes cancer, is not supported by scientific data and ignores recent research that is incon- sistent with its conclusions. In 1992, we announced our commitment to print voluntarily the U.S. Surgeon General's warning on all of our cigarette packs in markets where labels are not already required. In other activities, we fought tax and marketing regulations that in many cases discriminated against our brands in favor of the products of local government monopolies. In the United States, we worked with other companies-and the federal government-in developing a legislative mandate for food labeling guidelines that will both inform consumers and spur innovation. We also continued to work in accordance with the Philip Morris Environmental Principles to reduce the impact of our production processes and our packaging on the environment. The Outlook: Fulfilling Our Mission Viewed independently, our tobacco, food, and beer busi- nesses have excellent volume growth and :acome potential for the future. Taken together, our focused operations benefit from shared talent, knowledge, and funds, and support the steady earnings growth that best increases shareholder value. All of our employees dem- onstrate our dedication to this growth, and to the additional shareholder value it creates, every day, as we work to become the low-cost producer in each of our categories, to strengthen our relationships with whole- salers and retailers, and to build our brands. We expect 1993 to mark another year of strong growth in earnings per share. Beyond the short term, however, and well into the next century, we are planning for a Philip Morris that will continue to raise the standard for business excellence. This is an exciting time for your company. We have brought together a unique set of talented people, estab- lished brands, and strong businesses. Through our efforts to become the most successful consumer pack- aged goods company in the world, we are determined to increase the value of your investment. Michael A. Miles Chairman and Chief Executive Officer William Murray President and Chief Operating Officer 91079025 4

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I Maintaining the highest quality of people. Our most important assets are the Philip Morris employees who add value to our products and processes every day. We are creating and maintain- ing a talented, productive, and diverse workforce focused on meeting-and exceeding-our business objectives. We have implemented, and are constantly improv- ing, systems to help our people develop, so that all our employees can learn, work, and be rewarded up to their full potential. Above: Catherine Ko uses her experience from assign- ments in Honolulu, Hong Kong, and White Plains, New York, in her new position as Director, Business Develop- ment, at Kraft General Foods International. Right: Many of our Philip Morris International managers have received training at our Richmond, Virginia, tobacco facility. Below left: A model of the Diversity Award, part of a pro- gram to encourage the best diversity management practices in our company overall. Some of the noteworthy 1992 initiatives at several of our operating companies included formal diversity and harassment awareness training sessions; strategies to eliminate glass ceilings; and work/ life programs such as dependent care leave, referrals for child and elder care, and flexible work arrangements. 91079027 6

Above: Management development and business per- formance are linked. Through Project G.O.L.D. (Gaining Organizational Leadership through Development), first developed at Kraft General Foods Europe, senior man- agers at Philip Morris International develop skills and behaviors that help their employees advance. Worldwide Employees Above: As our company has grown interna- tionally, so has our workforce. By the end of 1992, 43% of our employees worked outside the United States. Left: Miller Brewing Company relies on talented executives like Virgis W. Colbert, Vice President, Plant Operations, who joined Miller in 1979. 7

2 Protecting and building our brand franchises. Above: Focusing our product line, and returning to television advertising to deliver the message that The Budget Gourmet frozen entrees provide both quality and value, our core entrees gained 2.7 share points in the fourth quarter of 1992 over the same period in 1991. Left: Miller Genuine Draft, Lowenbrau Special, and Ldwenbrdu Dark Special beers each won medals at the 1992 Great American Beer Festival Xl, the largest beer festival in the United States. Right: We are increasing our marketing efforts for established brands in newly accessible markets, such as Milka chocolates in Poland. 91079029 ~

i Above: OurMarlboroAduenture Team program is keep- ing the image of the Marlboro brand sharp and contem- porary. Top: In 1992, we continued to fine-tune our campaign for Miller Lite beer. Far right: Why fry? Quality improvements, an appealing new flavor, well- placed store displays, and a campaign communicating clear product benefits have boosted sales of Shake 'n Bake coatings by 47% since 1990. Bottom right: In Japan, the Parliament family gained more volume than any other international cigarette brand. Other than our people, our brands are our most important assets. The power of our brands grows out of a precious relationship, built on trust among managers, retailers, and consumers, that has been handed down to us through the generations. We best defend this legacy by keeping it cur- rent: by building more value into our products and packaging, and by communicating their quality through superior advertising and focused promotion. 9