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® Philip Morris U.S.A. 3 Financial Highlights ~ Philip Morris International 4 Review of the Year Miller Brewing Company 10 Philip Morris U.S.A. ~ Philip Morris Industrial 14 Philip Morris International ~ Mission Viejo Company 18 Miller Brewing Company 22 Philip Morris Industrial 24 Mission Viejo Company 26 Financial Review 44 Directors and Officers Financial Highlights Table of Contents [ 72 73 74 75 76 72 73 74 75 76 , 72 73 74 75 76 fl, Operating Revenues Operating Income Net Earnings by Operating Company by Operating Company it Miflions of - - 720 - Dollars 200 160 120 80 40 105 90 75 60 45 30 15 4250 4000 3750 3500 3250 3000 2750 2500 2250 2000 1750 1500 1250 1000 750 500 250 E 684 640 600 255 240 225

Philip Morris Incorporated and Consolidated Subsidiaries Fully Diluted Earnings Dividends Declared Capital Expenditures Per Share Per Share Dollars - Dollars Milhons of 450 . 1 26 270 72 73 74 75 76 72 73 74 75 76 Dollars 72 73 74 75 76 1

2 Philip Morris Incorporated 1976 Philip Morris Incorporated is a leading company in two large industries-cigarettes and beer-that provide simple pleasures to tens of rnifffons of people every day. In each of those industries, Philip Morris is the fastest-growing U.S. company. Founded more than a century ago and incorporated'in Virginia in 1919, the company has long been a major cigarette manufacturer. Today, it is the second-largest cigarette corripany in the U.S. market and the largest U.S.-based international cigarette company, selling its 175 brands in more than 160 countries • and territories. The corporation acquired the Miller Brewing Company in 1970. At that time, Miller was the seventh-largest brewer in the U.S. Today, it is the third-largest. The company has also diversified into the manufacture of specialty papers, flexible packaging materials, and specialty chemicals as well as into community development and homebuilding. These businesses are conducted by five operating companies: Philip Morris U.S.A., Philip Morris International, Miller Brewing Company, Philip Morris Industrial, and Mission Viejo Company. 0 I i i Philip Morris Incorporated 100 Park Avenue New York, NY 10017 The company's annual report on The "Review of the Year" contained Paper stocks used in this report are' Form 10-K, which will be filed with in this annual report has been made by Plainwell Paper Company, the Securities and Exchange translated into French, Spanish, a division of Philip Morris Industrial. Commission, will be available to German, Italian, and Dutch. These Cover: Kashmir Dull 80# stockholders in early April without translations are included in a Text: Kashmir Dull 100# charge by writing to: separate foreign language booklet which is available upon request. Design: Chermayeff & Geismar Associates I Eugene J. T. Flanagan, Secretary Philip Morris Incorporated Transfer Agents: Morgan Guaranty Printed in U.S.A. 100 Park Avenue Trust Company of New York New York, New York 10017 30 West Broadway New York, New York 10015. for common and preferred shares: ~ United Virginia Bank Box 6E Richmond, Virginia 23214. for common shares. C Annual Meeting: April 28, 1977 A 3601 Commerce Road D Richmond, Virginia tfx a t•2

Financial Highlights 4) Consolidated operating revenues include 3) operating revenues of the company and all wholly-owned subsidiaries (Mission Viejo Company nce September 30, 1972). Operating revenues of iss on Vielo Company for the entire year 1972 ere $60,824.000. Consolidated operating income includes the operating income of the company and all wholly-owned subsidiaries (Mission Viejo Company since September 30, 1972),•and the company's equity in the net earnings of unconsolidated subsidiaries. Operating income of Mission Viejo Company for the entire year 1972 was $5,714,000. _ Corporate expenses, interest, and items which are not directly attributable to the operating companies are not allocated to them. In the opinion of management, any allocation thereof would be arbitrary and would diminish the accuracy of measurement of their performances (dollar amounts except per-snare amounts expressed in thousands) Operating Revenues Net Earnings Earnings Per Common Share: Primary ully Diluted ividends D fit Percent Increase Over Prior Year Operating Revenues Net Earnings Earnings Per Common Share: Primary Fully Diluted Operating Companies Revenues Philip Morris U.S.A. Philip Morris International Miller Brewing Company Philip Morris Industrial ) Mission Viejo Company ~) Consolidated Operating Revenues Operating Companies Income eclared Per Common Share hilip Morris U.S.A. hilip Morris International iller Brewing Company Philip Morris Industrial >) Mission Viejo Company ) Consolidated Operating Income 3 Total Philip Morris tobacco product sales, both within and without the United States, accounted for 70% of consolidated operating revenues in 1976, __ 74% in 1975, 77% in 1974, 79% in 1973, and 80% in 1972, and 83% of consolidated operating incofne in 1976,91 % in 1975, 94% in 1974, and 97% in 1973 and 1972. Sales of beer by Miller Brewing Company accounted for 23% of consolidated operating revenues in 1976, 18% in 1975, 13% in 1974, 11 % in 1973, and 10% in 1972, and 12% of consolidated operating income in 1976, 6% in 1975, 2% in 1974, (1 %) in 1973, and 0% in 1972. No other class of similar products accounted for as much as 10% of consolidated operating revenues or operating income in any year. 1976 1975 1974 1973 1972 $4,293,782 $3,642,414 $3,010,961 $2,602,498 $2,131,224 265,675 211,638 175,516 148,632 124,466 4.47 3.62 3.15 2.71 2.34 4.47 3.62 3.07 2.61 2.18 1.15 .925 .775 .674 .631 17.9% 21.0% 15.7% 22.1 % 15.0% 25.5% 20.6% 18.1 % 19.4% 22.6% 23.5% 14.9% 16.2% 15.8% 16.4% 23.5% 17.9% 17.6% 19.7% 19.8% $1,963,144 $1,721,549 $1,502,267 $1,303,629 $1,164,550 1,083,970 1,040,002 887,077 822,907 623,699 982,810 658,268 403,551 275,860 211,262 169,096 151,960 155,390 132,126 113,136 94,762 70,635 62,676 67,976 18,577 $4,293,782 $3,642,414 $3,010,961 $2,602,498 $2,131,224 $ 401,426 $ 337,314 $ 286,225 $ 227,282 $ 194,072 h.x 130,104 112,975 94,017 92,150 84,095 4* 76,056 28,628 6,291 (2,371) 228 m 0 0 10,620 8,052 12,280 8,300 7,735 0o a- 16,333 5,875 4,772 4,122 1,331 rA w $ 634,539 $ 492,844 $ 403,585 $ 329,483 $ 287,461

4 Review of the Year In 1976, Philip Morris Incorporated extended its record of revenues and earnings growth to 23 consecutive years. New records were set for operating revenues which increased 17.9%, net earnings which rose 25.5%, and earnings per share which were up 23.5%. Both the cigarette and beer industries, our principal areas of operation, continued to demonstrate their fundamental strength by achieving increases in sales in 1976. Philip Morris substantially outpaced the gains in both industries. Our company's outstanding performance in both of its primary large and growing industries is reflected by our compounded average annual growth rates over the past ten years, up-18.7°lo in operating revenues and up 19.2% in fully diluted earnings per share. Cigarette sales in the U.S. industry increased 1.0% in 1976 to an estimated 606 billion units, marking the 20th year out of the last 22 years in which the industry has registered a gain. Philip Morris U.S.A.'s unit volume rose 7.5% to a total of 152 billion units. Marlboro, the world's leading cigarette brand since 1972, was clearly established last year as the leading brand in the U.S. as well. Merit, our low-tar brand introduced nationally in January, 1976, proved to be an immediate success. The international cigarette market is over five times the size of the U.S. market and growing twice as fast. Cigarette sales outside the U.S. last year were an estimated 3.3 trillion units, an increase of 3.3% over 1975. Philip Morris International's unit sales were up 10.6% to 171 billion units. The U.S. brewing industry increased its sales in 1976 for the 19th consecutive year with estirnated shipments of 150.5 million barrels, a gain of 1.3% over 1975. For the fourth straight year, Miller Brewing considerably outperformed its industry, with a gain of 43.1 % to 18.4 million barrels. With 25% of the U.S. cigarette market, 5% of the international cigarette market, and 12% of the U.S. beer market, Philip Morris has ample opportunity for growth in its two primary industries. The company is now increasingly realizing the benefits of its major capital expenditure program for the modernization and expansion of its facilities begun in 1971. Capital expenditures were $220 million in 1976, and they are projected to exceed $1.25 billion for the 1977-1981 period - about one-half of which will be for our U.S. beer operations and the rest for our U.S. and international cigarette operations. By the end of this decade, we expect 90% of our greatly enlarged fixed asset base to be less than ten years old. Philip Morris paid dividends on its common stock last year for the 49th consecutive year. In August, 1976, the Board of Directors authorized a 30% increase in the annual dividend rate, marking the ninth straight year the dividend has been raised. The Public Interest Philip Morris recognizes that the responsible role a corporation plays in the lives of its employees, its stockholders, the people in its plant communities, and the citizens of the countries where it operates is increasingly a matter of corporate concern. As a responsible corporation, we are acutely aware of our overriding obligation to abide by the law and refrain from questionable practices, including so-called improper payments. An explicit policy statement reaffirming the corporation's commitment to these principles was issued to our worldwide organization early in 1976. Further, all key management has been asked to sign a letter of understanding and compliance With corporate policy. At the same time, we have strengthened our audit and control procedures. In a related move, the company with the concurrence and involvement of the Audit Committee of the Board of Directors, composed of non-management directors, conducted a special audit of its worldwide activities and those of its subsidiaries for the period from January 1, 1971, to March 31, 1976. The results of this investigation were reported to the Philip Morris Board of Directors and in a Form 8-K to the Securities and Exchange Commission.

No evidence was found of unlawful political contributions in the United States or any other country. Certain questionable ayments were reported. With regard to our responsibility to employees, we have continued to make progress in the employment and upgrading of minorities and women. At year-end, about 25% of our U.S. employees were members of minority groups, and 28% were women. Members of minority groups occupied 11 % of our managerial, professional, and technician-level positions, and women held 16% of such positions. Our international affiliates continued their successful programs to train nationals and promote them into management positions, while further developing the skills of hourly workers. About one-half of our corporate contributions in the U.S. involved support of education. Included were major grants to private, independent colleges and an increasing number of college and vocational scholarships for children of our employees. We also continued our support of a ram for men and women ro scholarshi p p g 1 who want to upgrade their positions or reenter the work force. Overseas, contributions are granted to meet specific needs and opportunities. Philip Morris International's commitments, for example, include basic health care, community development, education, and cultural programs. Philip Morris is recognized around the world as a leading corporate patron of the arts. We supported the widely heralded visit of Italy's famous La Scala opera company to the U.S. in connection with the Bicentennial. A major art exhibition entitled "Frontier America: The Far West" has been presented in European museums, following its tour of the U.S. Two other major exhibitions, "Remember the Ladies," which included arts and crafts related to American women of the Revolutionary era, and "Two Centuries of Black American Art" opened to critical acclaim. Both continue to tour the U.S. this year. E Philip Morris U.S.A. Operating revenues and operating income for Philip Morris U.S.A. reached record levels with increases of 14.0% and 19.0%, respectively. Philip Morris U.S.A. recorded the industry's largest gain in unit sales, as it has every year since 1966. Our share of the U.S. market rose to 25.1 % from 23.6% in 1975. Marlboro extended its lead as the number one selling brand in the U.S. Continued growth was recorded by Benson & Hedges 100's as the top 100mm brand and by Virginia Slims as the leading brand designed for women. In 1976, significant changes in the industry occurred in the low-tar segment, now the fastest growing portion of the market. We have been well represented in this segment with Marlboro Lights and Parliament, but market research indicated that an increasing number of smokers would be interested in an even lower tar cigarette, if the taste were satisfying. Twelve years of scientific research enabled Philip Morris to score a timely breakthrough, which we call 'Enriched Flavor.' It is the result of a process for introducing more natural flavor into a cigarette while reducing its tar and nicotine delivery. This technology was applied in a new cigarette, Merit, which was introduced nationally in January, 1976. Merit quickly proved to be one of the most successful new cigarette brands in the history of the industry, selling 8.5 billion units and capturing 1.4% of the market in its first year. Early in 1977, Merit 100's were introduced to further establish our position in the low-tar segment. The capacity and efficiency of our Operations Center in Richmond, Virginia, have been essential to the simultaneous introduction of new brands and the growth of our established brands. The facility is now producing cigarettes at an annual rate of 100 billion units, approximately two-thirds of its planned production capacity. 5

6 Philip Morris International New records in operating revenues, up 4.2%, and operating income, up 15.2°l0, were achieved by Philip Morris International. Operating revenues were affected by adverse currency movements and the deconsolidation of a foreign subsidiary. Our share of the world cigarette market outside of the U.S. increased to 5.1 % from 4.8%in1975. Philip Morris International sells more than 175 brands in more than 160 countries and territories, through 25 manufacturing and marketing affiliates, 18 licensees, and regional export sales organizations. In more than 20 countries, Philip Morris holds a market share.of at least 15%, and the share is substantially higher in more than one-half of these countries. Marlboro is the preeminent brand fulfilling the growing worldwide demand for American-type blended cigarettes and accounting for more than one-third of our international volume. However, about 60% of our sales are accounted for by regional and national brands. _ Philip Morris Europe/Middle East/Africa, our largest international region, again increased its unit volume and market share with particularly strong progress being made in West Germany, where Marlboro is one of the fastest growing brands. In Switzerland, where Marlboro, Brunette, and Muratti Ambassador are our leading brands, the success of Flint, a new low-tar and low- nicotine brand, helped us achieve a higher market share than in 1975. We maintained our traditionally strong sales position in Italy and showed encouraging sales growth in the large United Kingdom market, though our market share is quite small. - The Australia/New Zealand region also increased its unit sales and market share, and Philip Morris (Australia) Limited further strengthened its market leadership. Lindeman (Holdings) Limited increased sales volume and maintained its position as the leading wine company in Australia. In the Asia/Canada region, Benson & Hedges (Canada) Limited increased its unit sales, although government profit controls reduced income. In Canada, sales of Viscount, a high-filtration, low-tar and low- nicotine cigarette, doubled, and Viscount became one of our leading brands along with Benson & Hedges 100's, Belvedere, and Mark Ten. In Asia, sales gains were achieved by our affiliates in Pakistan, India, and Indonesia. Sales of our licensee in the Philippines were depressed, following discriminatory taxing of international brands. The Latin America/Iberia region again achieved record unit volume and market share. Our Venezuelan affiliate maintained a substantial market share with the addition of Astor Super Suave to the Astor line. As we have previously stated, we continue to incur significant losses in Brazil, while building our business. We maintain our confidence in the long-term profit potential of our Brazilian operations. The Fortuna brand, produced under contract for the Spanish monopoly by our Canary Islands affiliate, registered strong growth. Our international operations illustrate the importance of maintaining the present policy on U.S. taxation on foreign-source income. According to the latest figures of the U.S. Department of Commerce, the net cash inflow from the international operations of U.S. multinational corporations is estimated to be over $12 billion in 1976. This income, which makes a major contribution to the U.S. balance of payments, would be jeopardized if credit against U.S. taxes for _ taxes paid to foreign governments were reduced or eliminated or if U.S. taxes were made payable when the overseas income is earned, rather than when it is brought back to the U.S. Proposals regarding both tax credits and tax deferrals have received serious consideration in the past year. We believe these proposals would in some cases eliminate and in other instances materially reduce the overseas competitiveness of American companies, and they would therefore endanger export-related jobs in the U.S. \ !

During the past 20 years, our international operations have generated a fivefold increase in export-related jobs for Philip orris employees in the U.S., a more than ivefold increase in exports of cigarettes from the U.S., and a more than 25-fold increase in exports of U.S.-grown tobacco. It has been our policy to conduct our international operations in conformity with the economic and social objectives of the countries in which we do business. We have a long record of positive contributions to economic and social progress in countries where we are active. We therefore concur with the initiative of the Organization for Economic Cooperation and Development in the adoption last year of a Declaration of International Investment and Multinational Enterprises. This Declaration, which recognizes the positive contributions of multinational companies, recommends responsible standards of behavior both for host governments and multinational enterprises, including voluntary business guidelines. We believe that Philip Morris's international operating policies are generally consistent ith these guidelines. Miller Brewing Company In 1976, Miller Brewing Company continued the resurgence begun in 1973. Operating revenues increased 49.3%, and operating income of $76.1 million almost tripled. Miller's gain of 5.5 million barrels over 1975 volume was not only the largest one-year barrelage increase ever in the U.S. brewing industry but also larger than Miller's total barrel volume in 1971, our first year of 100% ownership. Miller moved into third place in the U.S. industry, and its market share rose to about 12.2% from 8.6% in 1975. Miller High Life, our major premium brand, continued its rapid growth. Increased sales of Lite, our low-calorie brand, made it an emerging leader in the industry, despite heavily promoted introductions of competitive products. During the year, demand for Miller's products exceeded the company's production capacity, requiring allocation. Miller's capital expansion program was accelerated during the year to meet current demand and to anticipate future needs. In April, before our new Fulton, New York, brewery began initial production, Miller started construction there to expand its capacity from 4 million to 8 million barrels a year. Shipments from Fulton began in June. Also in June, Miller broke ground for a new mid-Atlantic brewery in Eden, North Carolina, which is scheduled to come on-stream in 1978 with an initial capacity of 3 million barrels a year. Our Milwaukee brewery with its annual capacity of over 9 million barrels is the largest in Wisconsin, and our Fort Worth brewery with its yearly capacity of over 6 million barrels is now the largest in Texas. By the end of 1977, Miller will have approximately 25 million barrels of annual production capacity or about 16.5% of U.S. industry volume. The vast majority of this capacity will use the most technologically advanced equipment available. During 1976, aluminum can manufacturing plants at Fulton and Fort Worth began production. Our Milwaukee can plant began operations in 1975. Miller's three can making facilities, which produce a portion of the company's container requirements, will result in substantial savings. ' Capital has been appropriated for Miller's first glass bottle making plant. Since 1973, we have invested about $385 million on brewery expansion and modernization, and we plan to spend substantially more over the next five years. 7

8 Philip Morris Industrial For Philip Morris Industrial, this past year was one of recovery from the recession in the U.S. economy of 1975. Operating revenues increased 11.3%, and operating income rose 31.9%. The Paper, Packaging, and Chemical Groups of I_ndustrial each operated profitably and registered increased revenues over 1975. The Paper Group, which produces specialty and technical papers, reported record levels of revenues and outperformed the paper industry in general. The Packaging Group, primarily in sophisticated flexible packaging materials, also reported a record sales level although profitabilitywas affected by the packaging industry's slower recovery from the recession. Income more than doubled over 1975 for the Chemical Group, which makes specialty chemicals for the textile and packaging industries. However, its results were hindered by the continuing soft market conditions in the textile industry, especially in the printed fabric segment of the market. Early in 1977, our company acquired Wisconsin Tissue Mills, a small but profitable company in the premium segment of the disposable paper napkin industry. This company fits well into the framework of Philip Morris Industrial's specialty paper operations and could provide an important boost to Industrial's profits. Mission Viejo Company In 1976, Mission Viejo Company achieved by far the best year.in its history. Operating revenues were up 34.2% over 1975, and operating income nearly tripled and amounted to 17.2% of revenues for one of the highest levels of profitability in the industry. The record levels reached in revenues and income marked the emergence of Mission Viejo as a leader in the U.S. homebuilding industry. The strong performance of Mission Viejo is directly related to the company's excellent location in Orange County, Southern California. In this area of the country, housing sales have rebounded to pre-1974 levels, although the nation as a whole failed to experience the hoped-for housing recovery. A long-awaited facility - the Mission Viejo regional shopping center - moved closer to reality with the start of construction planned for early in 1977. Looking toward increasing participation in the growing Orange County housing market, Mission Viejo Company acquired the 6,700-acre Moulton Ranch, located two miles west of Mission Viejo. A three-year period of careful planning in cooperation with citizen groups and various jurisdictional authorities has now begun to set the stage for future housing sales at the Moulton Ranch site. Development is continuing in Denver. The company is no longer actively involved in Fresno. Cigarette Taxes In 1976, total U.S. cigarette excise tax •revenues increased 5.8% to $6.0 billion, of which $2.4 billion was federal; $3.5 billion, state; and $0.1 billion, municipal. These excise taxes accounted for about 41 % of the average retail price of a pack of cigarettes on a national basis. Despite the excessive tax burden placed on the consumers of cigarettes, pressure to increase these excise taxes has continued. Although cigarette tax increase proposals were defeated in 24 states in 1976, there is still little acknowledgement of the regressive nature of excise taxes which places a disproportionate burden on lower income consumers. !

In states with the higher rates, however, there is increasing recognition of the need r a reduction in cigarette taxes. nootlegging activities, which are couraged by the tax disparities among the states, tend to make the taxes counterproductive and place the legitimate distributor of tobacco products in competition with organized crime. Smoking and Health It has been 13 years since the Surgeon General issued the report alleging a statistical relationship between smoking and health. Since then, intensive research has failed to establish clinical evidence that cigarettes cause the diseases for which they have been blamed. Moreover, leading epidemiologists continue to question the integrity of the statistics and the conclusions drawn from them. In the meantime, research has been considerably broadened into such areas as viruses, immunological response, genetic disposition; and environmental factors. Anti-cigarette groups have largely redirected their efforts and now concentrate n attempts to ban smoking in public places. mong the independent researchers into redirected question of the effect of cigarette smoke on non-smokers, none has found it to be hazardous to health. This led the New England Journal of Medicine to conclude, in an editorial, that the issue arises from psychological factors among those who object to smoking in public. We believe that legislation concerning smoking in public places infringes on the rights of smokers and has resulted in unfair discrimination toward the hundreds of millions around the world who enjoy smoking. Philip Morris and the tobacco industry continue their substantial support of independent medical research. The industry's commitment to the funding of fundamental research programs through the Council for Tobacco Research-U.S.A. and other institutions has totaled more than $60 million since 1954. I T. Newman Lawler retired as an elected Director last year after 17 years of service on our Board of Directors. We are deeply indebted to him for his many contributions. The company is fortunate to have the continuing benefit of his counsel as a Director Emeritus and as an active participant in Board meetings. During 1976, two new members were elected to the Philip Morris Board of Directors - Robert E. R. Huntley, president of Washington and Lee University, and Thomas F. Ahrensfeld, senior vice president and general counsel of Philip Morris Incorporated. To our 51,000 employees around the world, we extend our gratitude for their dedication and contributions to our success. We also thank our 28,000 stockholders for their support during the year. Respectfully submitted on behalf of the Board of Directors, Joseph F. Cullman 3rd Chairman of the Board and Chief Executive Officer George Weissman Vice Chairman of the Board Ross R. Millhiser President 9