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Contents I Financial Highlights 2 Message from the President and Chairman of the Board 4 Tobacco Products 16 Food Products 20 Distilled Beverages 22 Financial Review 25 Financial Statements 31 Auditors' Certificate 32 Ten Year Financial Review 33 Directors and Officers Annual Meeting The Annual Meeting of Stockholders will take place on Wednesday, May" 7, 1969, at 10:00 a.m. inthe Grand Ballroom of The Waldorf-Astoria in New York City. A formal Notice of Meeting, Proxy Statement and Proxy accompany this report. T!54210750

The American Tobacco Company 1968 Annual Report Financial Highlights (In thousands of dollars except per share amounts) 1968 1967 Per Common Share Net income Primary (based on average number of shares outstanding during each year) Pro forma (adjusted to give effect to possible conversion of convertible securities and exercise o~ options) . Dividends ........... $3.38 $3.15 $3.32 -- $1.875 $1.80 Income, before taxes on income and minority interest ........ Net income ........... Dividends ........... Current assets, December 31 ..... Current liabilities, December 31 .... Working capital, December 31 ..... $~,897,852 $1,493,535 205,612 173,769 92,911 89,227 50,931 50,996 1,131,059 808,289 342,523 231,337 788,536 576,952 Number of Common stockholders, December 31 ......... Average number of shares outstanding during the year ......... 145,392 144,967 27,513,986 28,320,398 Operating Results By Product Line NET SALES 1968 1967 Amount % Amount % Tobacco Products Domestic $1,115.7 58.8 International 358.8 18.9 Distilled Beverages 126.5 6.7 Food Products 289.1 15.2 Other 22.9 1.2 Deduct Intracompany Sales (15.1) (.8) Total $1,897.9 100.0 OPERATING I~COM~E(1) 1968 1967 Amount % Amount % $1,123.8 75.3 $167.1 74.6 $151.6 82.8 32,9 '2.2 27.7 12.4 8.4 4.6 113.8 7.6 16.6 7,4 13.2 7.2 219.9 14.7 9.8 4.4 7.4 4,0 14.4 1.0 2.9 1.2 2.5 1.4 (i 1.3) (.8) .... $1,493.5 lOO.O $224.1 1oo.o $183.1 lOO.O Earnings before interest, other income and expense items, taxes and minority interest. T154210751

To Our Stockholders: Roberl B. Walker On behalf of the Board of Directors of The American Tobacco Company, I am pleased to submit this Annual Report for 1968-to the Company's stockholders. In doing so, it is my privilege to report that 1968 represented a year of vigorous growth as sales increased to a record high of $1,897,852,000. Net income for the year, despite a much larger tax burden, attained a new high of $92,911,000. Innovation in the filter cigarette field and sound diversification into nontobacco areas are two major accomplishments of the past five years-each has substantially aided American Tobacco's progress. Specifically, in the last five years, sales have increased by 36 %, income before taxes and minority interest has increased by 28 %, and net income, despite the 1968 Federal surtax, has increased by 21%. Net income per Common share during this period has risen from $2.49 in 1963 to $3.38 in 1968. Managcmcnt's constant objective is to improve sales and profits and thereby enhance the value of your investment. As an expression of confidence in the growth of the Company, the Board of Directors increased the annual dividend by ten cents per Common share in April 1968. In view of record results for 1968, the annual dividend rate was again increased by ten cents at the January 28, 1969, Board of Directors meeting. This action raised the annual dividend rate to $2.00 per Common share. Since 1963 the dividend to Common stockholders has been increased five times, or by 33 %. The year 1969 has opened on a strong note and in the months ahead we anticipate continued growth of our subsidiary operations, a larger share of the filter cigarette market, and increased international tobacco sales. In 1962 the Company acquired a 13 % interest in Gallaher Limited, the second largest tobacco manufacturer in the United Kingdom. Faced with a challenge to our investment whert a competitor bid for control of Gallaher last summer, we made a successful counter offer which was endorsed by the Gallaher Board and resulted in American Tobacco's present ownership of 67% of Gallaher's Ordinary Stock. The inclusion of Gallaher in our financial results, beginning September 1, 1968, contributed to the Company's record income for the year. Last July we acquired a controlling interest in Duffy-Mott Company, Inc., which adds depth and variety to our line of food products. American now has a 78% interest in the company and financial results are included from July 1, 1968. The company is well known for its quality fruits, vegetables, juices. controlled-calorie meals and seafoods. Donald M. Klock, President of this subsidiary, and well known in the food industry, was elected to American Tobacco's Board of Directors in July. The Company's largest domestic subsidiary, Sunshine Biscuits, Inc., increased its volume in 1968 and has entered 1969 with several promising new biscuit and snack products. Two of these, Mint Hydrox and Cheez- Pleez, are already in national distribution. In 1968 Bourbon was again the largest-selling distilled beverage in the United States. American's subsidiary, the James B. Beam Distilling Co., registered substantial gains with its Jim Beam Kentucky Straight Bourbon, the largest-selling of all strai,,ht Bourbons, according to industry analysts. 28% of the Company's domestic business. This is an important component of our business and accounted for $429,800,000 in sales. We have made good progress in developing our filter cigarette business which at year end represented more~than 35% ot Our totalcigarette business. The Company now has twelve filter products nationally distributed compared with two five years ago. Our present combination of filter products in the popular 85 millimeter length and in the newer 100 millimeter length gives the Company a broad filter cigarette line-one that is designed to appeal to every consumer preference. The market for 100 millimeter cigarettes, first introduced by PALL MALL Gold in late 1964, grew from 10% in 1967 to 13% in 1968 according to industry analysts. American Tobacco has a large share of this market segment, with six 100 millimeter cigarette products distributed nationally. It appears that this segment of the market will continue to gain in 1969. PALL MALL, LUCKY STRIKE and TAREYTON are among the top ten cigarette brands sold in the United States. In 1968 PALLMALL maintained its position of second place among all cigarettes sold in the country even though demand for nonfilter cigarettes is not increasing. TAREYTON increased in unit sales and is the largest-selling activated charcoal filter brand; according to T154210752

industry analysts it accounts for 64% of that particular market segment. _ The industry's success story in 1968 was SILVA THINS 100's and the favorable sales trend for this brand is continuing. Additionally, SILVA THINS Menthol 100's were introduced nationally in September. Our new thin cigarette was quick to spark competitive imitations. Last October the Federal Tra_d~ Commission Laboratory released a report rating I22 cigarette products by "tar" and nicotine content. CARLTONs were lowest in"tar" of all cigarettes tested and SILVA THINS were the lowest in "tar" of all 100 millimeter cigarettes tested and lower than most kings. The Company's Cigar Division, one of the nation's largest cigar manufacturers, had record sales in 1968. ROI-TAN, which again contributed to the Division's sales increase, continues to be the largest-selling cigar in the I0¢ price category. In the higher price classifications, combined sales of ANTONIO y CLEOPATRA, LA CORONA, CABA~AS and BOCK again reached a new record. Since 1953 the tobacco industry has appropriated more than $35,000,000 for a wide range of research studies related to smoking and health. Those receiving research grants are given complete freedom to pursue their work and publish the results objectively and independently. It is regrettable that so many anti-tobacco proponents choose to invest their dollars in propaganda largely based on statistics rather than in constructive scientific research. The pressures of inflation continue unabated in the form ol~higher taxes, higher interest rates, increased cost of tobacco leaf, and increased wages. Increasing taxes at the state and local level continue to penalize our cigarette products. Federal and state excise taxes on the industry's cigarette products alone amount to more than four billion dollars a year. Products of The American Tobacco Company and subsidiaries are manufactured in twenty-two states and the Company employs more than 25,000 Americans. For many years The American Tobacco Company has provided equal employment opportunity and merit a dv a nc.e~jlt3~thoxtt_regardao_race,- color, creed or national origin. Recently the National Alliance of Businessmen, an organization to foster iob opportunities in the business sector for the hard-core unemployed, commended The American Tobacco Company "for advancing the cause_with v~igor and determination and providing an exemplary service to the nation." Again this year you will note that the FinancialHighlights, on page 1, present a report of sales and operating income by product line. Detailed accounts of our business and financial operations appear in the pages that follow, which I believe present a clear picture of our progress in broadening the scope of our operations. To reflect the enlarged character of our business, your Board of Directors has recommended that the Company's name be changed to American Brands, Inc. In recommending favorable action to our stockholders, we are mindful of our important domestic tobacco business with sales of over a billion dollars annually and of The American Tobacco Company name associated with that business. Your Board of Directors intends to conduct the cigarette and smoking tobacco business as a Division to be known as "The American Tobacco Company, a Division of American Brands, Inc." The cigar business will continue under the name "American Cigar, a Division of American Brands, Inc." These operating Divisions of your Company will function with srparateManagements in effect like separate subsidiaries, but without formal incorporation. Though the Board of Directors has approved steps to restructure the organization and Management of the Company, your present Board will remain but under the new American Brands, Inc., name. Your Directors will continue to devote their_gff~ts_ to increasing the growth of the highly profitable tobacco divisions as well as of our more recently added product lines. Our record results for 1968 reflect the combined contributions of many people. We commend our employees _for their good work and are grateful to our stockholders for their continued support of Management. We also thank our suppliers and distributors who help us make and market quality American Brands. ROBERT B. WALKER President and Chairman ol the Board February 27, 1969 T!54210753

Tobacco Products: Domestic Virgil D. Hager Executive Vice President Robert K, Heimann Executive Vice President Sales Cigarettes: American Tobacco's filter cigarette business continues to increase and in 1968 accounted for a gain of $21,400,000 over 1967. Corresponding to the industry trend, there was a decrease in the Company's volume of non filter cigarette business. Since 1963 the Company has led the industry in bringing to market new and improved cigarette products: CARLTON was the first brand to identify "tar" and nicotine data on the package; PALL MALL Gold was the first brand to be offered in the now-popular 100 millimeter length; SILVA THINS 100's was the first new thin cigarette. As a result of the Comp~.ny's intensive new product development program, at year end filters accounted for 35 % of our cigarette business as compared with about 16% five years ago. TAR.EYTON, with the activated charcoal filter, according to industry reports commands 64% of that market category and has moved upward from tenth to ninth place among all brands sold in the United States. TAREYTON continues to enlarge its share of market. PALL MALL retained its position of second place among all cigarettes sold in this country. PALL MALL Kings, PALL MALL Gold 100's and PALL MALL Menthol 100's are all sold under the PALL MALL label. The results of United States Government tests showed PALL MALL Gold 100's to be lower in "tar" than the largest-selling filter king. SILVA THINS 100's gained national distribution in the second quarter of 1968 and, during the latter part o1~ the year, SILVA THINS Menthol was introduced nationally. One industry analyst in ranking 41 cigarette brands reported SILVA THINS as being twenty-third, which is indicative of the strong consumer response to this new brand. In the Federal Trade Commission's October I6, 1968, report listing "tar" and nicotine content of 122 cigarette products, SILVA THINS was reported lowest in "tar" of all 100 millimeter cigarettes tested and lower than most kings. The same report listed CARLTON Cigarettes as lowest in "tar" of all brands; ~SFOS~ffl~ mcreased during 1968. Other filter brands marketed by the Company are LUCKY FILTERS, with a filter that combines charcoal with rolled tobacco; MONTCLAIR, a menthol cigarette with a charcoal filter; BULL DURHAM Extra Size, a-cigarette that smokes slower because of its extra thickness, and HALF and HALF Cigarettes, the first to feature pipe tobacco in a filter cigarette. These cigarette products are representative of the Company's efforts to cover the entire range of filter preferences in a changing market. Other promising cigarette innovations are continually being developed and tested. The Company's program for shipping tax-free cigarettes and cigars to the Armed Forces overseas continues to receive favorable response. Recognition of this program has been most gratifying and many cartons of our fine brands were shipped in 1968 with "thank you" cards for the serviceman to return to the sender. TI54210754

Pall Mall Gold lO0's now lower in"tar" filterl ng! Who says so ? The latest U.S. Government figures. tastier~ .~. milder You mdke out better at both ends! T154210755

Alfred F. Bowden Vice President, President, Cigar Division Cyril F. Helsko Vice Presiden! and General Counsel Cigars: American's Cigar Division posted record sales in 1968 even . :... though-the industry's totalSales were lower than in the previous year. Our Cigar Division again increased its share of market. ROI-TAN again contributed to the Division's sales increase and remains the largest-selling cigar in the 10~ price category. In the higher price classifications, combined sales of A~O~/_O_y_CLEOPATRA, LA CORONA, CABA~IAS and BOCK again reached a new record. During the year, the Division designed and introduced a series of packaging innovations for its large cigars. Also, recognizing the increas- ing popularity of little cigars, the Divisionbrough~to market ANTONIO y CLEOPATRA Filter Tipped Little Cigars in an attractive package. It is anticipated that this new product will enhance the already strong position the Company has in this field with ROI-TAN Little Cigars. ~'~':': American Tobacco's Cigar Division is the country's third largest cigar manufacturer. Smoking Tobaccos: HALF AND HALF, the Company's leading smoking tobacco, remains one of the largest-selling brands in the country and 1968 sales exceeded the 1967 level. In lanuary 1968 PALADIN BLACKCHERR¥, a distinctive and highly aromatic blend of quality tobacco, was given national distribution and contributed to the increase in our total pipe tobacco business. The development and testing of new smoking tobacco blends and flavors continue to be an active part of our new product program. The Company's cigarette, cigar and smoking tobacco products are the finest that money can buy. In recommending these brands to your friends, you can be confident of their high quality. For many years our stockholders have shown great interest in promoting the Company's products and this has resulted in added sales. dulien B. McCarthy Vice President--Manufacture and Leaf T154210756

Ta Ifyou could put,. reyton~s charcoal f, lter on your cigarette, you~! have a heifer cigarette. "That~ wl~ us Tareyton smokers would rather Fight than switch !" But not as good as a Tareyton. 100~ or kings/ze. TI54210757

Henry G. French Director of Manufactu ring John B. Sparrow Director of Leaf Purchases Manufacturing and Leaf On January 1, 1968, we encountered a strike at all our cigarette factories which was settled on $anuary 9.5. New contracts with the Tobacco Workers International Uniotl were successfully negotiated for a three- year period. As part of a continuing program to -i.ncreasee.fficiency-th ro u ghout~all-- areas of manufacturing operations, the Manufacturing and Leaf Departments have instituted a concept often referred to as "task force planning." As a direct result of this effort, the Company has reduced its costs for leaf processing and handling; the Company is also _ becoming more self-sufficient and is fabricating materials that were previously purchased from outside sources. Consolidation of all divisions of the Department of Research and Development at Bermuda Hundred, near Richmond, Virginia, was completed in early 1968 and has resulted in a substantial reduction in overhead. The Company is engaged in both fundamental and applied research, since it is clear that innovation is dependent upon advances in scientific knowledge. The pace of technology accelerates and, to keep abreast of technical advances, research has increased its use of computerized data processing and is developing an information selection, storage and retrieval system. During the year the Company initiated a $6,575,000 expansion program at the Bermuda Hundred complex. The project includes additional processing and storage facilities and a new office building scheduled for completion in early 1969. The Company's program for tighter manufacturing controls represents a continuing effort to compensate for the steady rise in the cost of leaf tobacco and other manufacturing costs. In the ten years ending in December 1968, the average market price per pound for flue-cured tobacco increased from 58.3 cents to 66.5 cents or 14% ; over the same period, the average price per pound for Burley leaf increased from 60.6 cents to 74. I cents or 22%. Last-yea rLs-fl ue-cu r~d-tobaccaero p was about 989 million pounds versus 1,263 million pounds in 1967. The government support price increased from 59.9 cents per pound to 6 | .6 cents per pound. The Burley crop was estimated at year end to be about 557 million poundscompared with-541 million pounds in 1967. The government support price increased from 61.8 cents per pound in 1967 to 63.5 cents in 1968. Average prices reflect all grades of tobacco placed on the market. This situation tends to underestimate our leaf costs, since our requirements are for tobacco of a quality which usually sells at prices higher than average. Among the Company's operating results by product line on page 1 is a heading, "Other," which includes among other smaller subsidiaries the operations of the Golden Belt Manufacturing Company located in Durham and Reidsville, North Carolina. Golden Belt Manufacturing Company is American Tobacco's oldest subsidiary and its production includes laminating foils, printing, textiles and plastics. While 76% of its sales are intracompany, Golden Belt experienced outside growth in 1968. As announced in 1967, its manufacturing capabilities for plastic injection moldings were increased by more than 50% to meet greater demand for a variety of plastic products. T154210758