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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

10 Philip Morris U.S.A. The Philip Morris Operations Center, in Richmond. Virginia, costing in excess of $200 million, is the most sophisticated cigarette manufacturing facility in the world. Dedicated in 1974 and now operating at about two-thirds of its planned capacity, the facility is a showcase of advanced manufacturing technology and unique employee work environment. The Center represents the largest single capital investment in Philip Morris's history and in the history of the U.S. cigarette industry.

12 'Ihere's more to choosing alow-tar ' ~ l~picdng~tunber: .4rci.,vayw..rx,tlwaayuairv,u,Ja. ~ ifxn+an_xduu.fia•ihauwJ.ulda.ma\rl\i •••Ilr'aaaIIIMMM~~~~ p,M>.,u,ssnm~i.c Rol.Yi.r kx.IbnY'l>t,ivm &N,µnxdfianpx W urluit µr@aNN.,,efqn Md Itn0.xlxn•Sna vll,kwxM hntlxad xnu~.l'wbnnaiarnm.~.adx,k.aPU1W4y, Mmuuh.upvyn `:,ihn+m'fiNarka.bxk' \fa,u Eup} Moreduniusalwrvrreurlbec 1"aWQ1TlCllt. Philip Morris U.S.A. The "Marlboro Country" advertising theme is recognized as one of the most memorable in the history of advertising. The continuity of its humorous, offbeat advertising helped to strengthen Benson & Hedges' leadership in the 100mm category. Operating Revenues F.~.~'M,!~.'m,n~_kve6,n.mo4,rcnJ+t . 'Fauiched Flawubreaktbtou~hands struggk to bring tasie to bw tar smoktng ~r-orQraf,he4.ea,ar ,ww•.~w,u,Q tiw+a~'mk<,he s...~~.~ ~lan+x MERIT Information-packed advertisements told the news of the 'Enriched Flavor' breakthrough for Merit. 1976 1975 $1,963,144,000 $1,721,549,000 In early 1977, advertisements like this introduced the reformulated Parliament as a low-tar brand. Fashionable, feminine advertising helped to maintain Virginia Slims as the preeminent woman's cigarette. 1974 1973 11 The Virginia Slims Tennis Circuit has achieved full stature as a major sports competition. 1972 $1,502,267,000 $1,303,629,000 $1,164,550,000 Operating Income $ 401,426,000 $ 337,314,000 $ 286,225,000 $ 227,282,000 $ 194,072,000 Clifford H. Goldsmith, President John T. Landry, Executive Vice President and Director of Marketing James J. Morgan, Vice President and Assistant Director of Marketing Max L. Berkowitz, Senior Vice President Frank E. Resnik, Vice President, Operations Administration Benjamin A. Soyars, Senior Vice President, Manufacturing Richard D. Robertson, Vice President, Ecology and Director of Energy Resources F+i Robert H. Cremin, Vice President, Sales _ Edward M. Schaaf, Jr., Vice President, Production ' 4" J. Paul Jeb Lee, Vice President, Marketing Services Dr. Robert B. Seligman, Vice President, Research and Development Ya Q C Fred J. Laux, Vice President, Personnel . Richard L. Snyder. Vice President, Finance and Administration (Jo CA William G. Longest, Vice President, Leaf Dr. Helmut R. R. Wakeham, Vice President, Science and Technology l`J W. Wallace McDowell, Vice President. Operations R. Nelson Beane, Controller

13 Quality is monitored by elaborate control devices, but quality responsibility still rests with highly trained and skilled workers. Quality cigarettes begin with expert buying of the finest tobacco. Philip Morris U.S.A. Operating Revenues The manufacturing area of the Operations Center, where each of the most technologically advanced cigarette making-packing modules available produces more than 4,000 units a minute. Philip Morris U.S.A. Operating Income The research and development personnel who achieved the scientific breakthrough for Merit are working on new developments that will meet changing consumer preferences. U.S. Cigarette industry Unit Sales Marlboro Share of Total U.S. Industry Miltions of -_-Millions of eillion % % Dollars dollars Units 2100 420 700 35 21 1800 Operating revenues of Philip Morris U.S.A. have increased atan average annual compounded rate of 13.5% since 1967. in$ ce 1967, operating income of Philip Morris U.S.A. has increased at an average annual compounded rate of 21..9%. 1 72 73 74 7576 ~ Total Filter Cigarettes ~ Total Non-Filter Cigarettes - Philip Morris Share of U.S. Industry (%) Total U.S. cigarette industry unit sales have grown at an average annual compounded rate of 1.6% over the last 10 years, while the filter segment increased at an annual rate of 4.2%. 676 6 7 71 727 747576 W ~ Marlboro 80-85mm Full Flavor ~ Marlboro Line Extensions All categories of Marlboro represented 15.5% of the U.S. industry In 1976 versus 6.6% In 1967. The Marlboro line extensions accounted for 23.3% of all Mariboros sold in 1976.

14 Philip Morris International Philip Morris International unit sales have continued to grow at a significantly higher rate than the world cigarette industry. We are now actively involved in almost every major market worldwide. One of our important newer markets is West Germany, where the company's affiliate, Philip Morris GmbH, is growing rapidly and Marlboro now ranks as the s xth-largest selling brand in that country. ZIGAR

16 Philip Morris International Brunette, produced by our affiliate Fabriques de Tabac Reunies, is one of the leading brands in the Maryland tobacco blend segment of the Swiss market. Marlboro is the number one selling international brand in Italy. Mark Ten is the major cigarette brand of Benson & Hedges (Canada) Limited. Premier Tobacco Industries Limited, in Pakistan, increased its -share of the rapidly growing filter market where the company's leading brands are Red & White . and K-2 Filter. 1976 1975 1974 1973 1972 Operating Revenues $1,083,970,000 $1,040,002,000 $887,077,000 $822,907,000 $623,699,000 Operating Income $ 130,104,000 $ 112,975,000 $ 94,017,000 $ 92,150,000 $ 84,095,000 Hugh Cultman. President Hamish Maxwell, Executive Vice President. Europe/Middle East/Africa and Asia/Canada Eric M. Janssen, Vice President, Personnel R. William Murray, Vice President, Europe/Middle East/Africa Charles F. Lombard. Vice President Carlos E. Saiguero, Vice President, Latin America/iberia Hans G. Storr, Vice President, Finance ~ William J.O'Connor,Vice President, Australla/ William H. Webb, Vice President ... j 0 New Zealand and Chief Administrative Officer ~ .,.~ Albert E. Bellot, Vice President C3 C] Aleardo G. Buzzf, Vice President _ U0 - ~ Staffan Gunnarsson, Vice President tf` Hamilton Hurley, Vice President

Benson & Hedges 100's continues as one of the company's leading brands in Argentina. In Brazil, Shelton Extra Suave, successfully introduced in 1976, continues to post unit safes increases. Phiiip Morris internationai Operating Revenues Philip Morris's U.S. export shipments showed a significant increase in 1976. Lindeman (Hoidings) Limited, our affiliate wine company in Australia, is the leading wine producer in that country. Philip Morris International Cigarette Unit Sales Export. Affiliates. Licensees Billion 175 Units Philip Morris Brasileira S.A. de Cigarros' new factory in Curitiba represents the company's effort to produce quality products in modern, efficient environments throughout the world. Philip Morris (Australia) Limited has become the largest cigarette company in that country with Marlboro its leading brand. Philip Morris internationai Operating income Millions of 140 Dollars 67 68 69 76 71 72'73 74 75 76 Total Filter Cigarettes Total Non-Filter Cigarettes 17 % 14 Philip Morris Share of World Market (%) Philip Morris International's operating Since 1967, total unit sales of Philip Since 1967, operating income of Philip World cigarette industry unit sales revenues of consolidated and unconsolidated Morris International's affiliates, Morris International has increased at an (excluding the U.S.) were about affiliates have grown at an average annual licensees, and exports have increased average annual compounded rate of 20.3%. 3.3 trillion in 1976, and over the last Compounded rate of 23.8% since 1967. at an average annual compounded 10 years have grown at an average rate of 17.6%. _ rate of 3.9%. Total World Cigarette Unit Sales Excluding U.S.A. Billion Units 3500

W 20 Miller Brewing Company The Fort Worth, Texas, brewery like Miller's other facilities uses highly automated equipment to insure consistency and quality in the brewing process. An architect's rendering of Miller's new corporate headquarters building now under construction in Milwaukee. .,•,~. . • If Milier ' ` • • lr• !... • • i /~ Miners~ • •'II ~-• • ijl~~Mdlertiaiei r • i Millertimer - . ., ~~Miilerti~ • ,I/ Milkr •_ L ~ : 11 ---~: • II-'~9!" ` • 0 • 11 ~ • V, •II " A • • II .,. r _ • • tt Continued use of the highly successful "Miller Time" theme helped Miller High Life sustain its rapid growth rate in 1976. 0 511 ,;,2'J,1C_.!!.~ 1976 1975 1974 1973 1972 Operating Revenues $982,810,000 $658,268,000 $403,551,000 $275,860,000 $211,262,000 Operating Income $ 76,056,000 $ 28,628,000 $ 6,291,000 $ (2,371,000) $ 228,000 John A. Murphy. President and Chief Executive Officer William K. Howell, Executive Vice President Lauren S. Williams, Vice President, Marketing and Treasurer Warren H. Dunn, Vice President, Travis G. Adler, Controller General Counsel and Secretary Edward W. Frantel, Vice President, Sales Thomas A. Fulrath, Vice President, Personnel Q -~s CA Larry K. Neuman, Vice President, _ ~ Plant Operations ,0 Allen A. Schumer, Vice President, ne.rertsi Gi..,.. M V 0 Thomas B. Shropshire, Vice President, Market Planning +p . I Georgy Tarala, Vice President, Engineering

The new brewery now under Miller now has three aluminum construction in tTden, North Carolina, can manufacturing plants. Miller's fifth facility, is scheduled to begin production in 1978. Miller High Life in six-packs of 12-oz. bottles on a high-speed packaging line at the new brewery in Fulton, New York. Miller Brewing Company Operating Revenues Miller Brewing Company Barrel Shipments Millions of _ Millions of Dollars Barrels 21 ! 67 68 69 70 71 72 73 74 75 76 Miller Unit Sales Miller Share of U.S. Industry (%) Miller's multi-brand marketing approach concentrates on the premium segment of the market. Analysis conducted at quality control laboratories at each of our breweries helps to maintain Miller's high quality standards. Miller Brewing Company Operating Income Over the last 10 years. Miller's operating Since 1967. Miller's barrel volume has Since 1967, operating income of Miller revenues have grown at an average risen at an average rate of 16.1 % per year. has increased at an average annual annual rate of 20.6%. Since 1970, after Miller's growth in 1976 moved the company compounded rate of 16.4%. Miller was acquired, revenues have into third place among U.S. brewers with a increased.at an average rate of 26.1 %. share of about 12.2%. ! ! 21 Domestic Beer Industry Unit Sales 67 68 69 70 71 72 73 74 75 76 Regional and Non-Premium Beer (est.) Nationally Distributed Premium Beer (est.) Since 1967, total U.S. beer industry barrel sales have grown at an average yearly rate of 3.7%, and the premium beer segment, where Miller is positioned, has increased at an average rate of 10.6%.

22 Philip Morris Industrial Modern computer controls help employees in Philip Morris Industrial's paper companies control the quality of their products. Sophisticated machinery is used by our packaging companies to produce food packaging materials. 0 Packaging materials for the food industry and for non-food applications are produced at six U.S. facilities by Philip Morris Industrial. William D. McCoy, Philip Morris Industrial's president and chief executive officer. 1976 1975 1974 1973 1972 Operating Revenues $169,096,000 $151,960,000 $155,390,000 $132,126,000 $113,136,000 Operating Income $ 10,620,000 $ 8,052,000 $ 12;280,000 $ 8,300,000 $ 7,735,000 William D. McCoy, President and Chief Executive Officer Fred M. Stefan, Chairman of the Executive Committee James B. Kurtzweil, Executive Vice President, Operations Edward B. Kime, Jr., President, Packaging Group Richard L. Radt, President, Paper Group t`r f C? ' Ralph J. Becker, Vice President, Purchasing Co Robert G. Etter, Vice President, Business Development C CIO V - George R. Lewis, Vice President, Finance and Planning a t~T Alan G. Wernick, Vice President, Personnel 11

23 Ii, Wisconsin Tissue Mitls produces 35,000 tons of paper annually for use in making products such as disposable paper napkins. Reinforcing bars, used in bridge and highway construction, are coated with a powder coating material made by Armstrong Products Company, a Philip Morris Industrial company. Construction is underway in Colonial Heights, Va., on a new packaging materials plant. Polymer Industries, another Philip Morris Industrial company, makes highly technical chemicals for the textile industry. Philip Morris Industrial Operating Revenues Philip Morris Industrial Operating Income 175 Millions of - . Dollars 14 Millions of Dollars 12 '10 8 6 4 2 0 ~ .{b 67 68 69 70 71 72`73 74 75 76 67 68 69 70 71 72 73 74 75 76 CC! Operating revenues of Philip Morris - Since 1967, operating income of Industrial have increased at an Philip Morris Industrial has increased - average annual compounded rate of at an average annual compounded - 8.5%since1967. rateot6.1%.

24 Mission Viejo Company In 1976, Mission Viejo Company purchased the 6,700-acre Moulton Ranch, located two miles west of its planned community in Orange County, California. Two experimental homes, designed to use less than half of the energy used in similar conventional homes, and called Minimum Energy Dwellings, were unveiled in Mission Viejo during 1976. Construction of the 900,000- sq.-ft. Mission Viejo Mall will begin in 1977. When completed in 1979, it will contain three major department stores. The Mission Viejo float in the 88th annual Tournament of Roses Parade, January 1, 1977. 1976 1975 1974 1973 1972 Operating Revenues $94,762,000 $70,635,000 $62,676,000 $67,976,000 $60,824,000 Operating Income $16,333,000 $ 5,875,000 $ 4,772,000 $ 4,122,000 $ 5,714,000 John E. Cookman, Chairman of the Board James G. Gilleran, Executive Vice President and Treasurer William K. Smith, Secretary Philip J. Reilly, President and Chief Executive Officer James G. Toepfer, Executive Vice President Roy N. Miller, Assistant Secretary Geurt Henri Lodder, Senior Vice President Carol A. Pifer, Assistant Secretary Marvin E. Lawrence, Vice President Timothy Ledbetter, Assistant Controller 4 ~ Robert M. Rodman, Vice President and Controller CA C Donald B. Schulz, Vice President ~ r.l Harvey Stearn, Vice President 42- Paul Van Stevens, Vice President . `

25 Olympic gold medalist Brian La Mancha townhomes, one of Philip J. Reilly, Mission Viejo Goodell (r) attributes much of two new home series introduced Company's president and chief his success to Mark Schubert by Mission Viejo Company in executive officer. (I), coach of the Mission Viejo 1976. Nadadores swim team. Mission Viejo Company has "The Challenge of the Sexes," expanded its commercial aired on CBS-TV in 1977, again recreation operation with two chose Mission Viejo as its site. roller skating rinks, one in Mission Viejo and the other in Cypress, Calif. Mission Viejo Company Mission Viejo Company Mission Viejo Company Mission Viejo Company Operating Revenues Operating income Operating income Orange County Share as a Percent of of Market Operating Revenues 67'68'69•70 71 72 73 74 75 76 °Fiscal years ended September 30 In 1976, sales of Mission Vie,o Operating revenues of Mission Viejo Since 1967, operating income of In 1976, operating income of Mission Company accounted for 8.2% of the Company have increased at an Mission Viejo has increased at an Viejo Company was 17.2% of operating new homes sold in Orange Country, average annual compounded rate of average annual compounded rate ' revenues, tor one of the highest levels California. 37.7% since 1967, of 49.9%. of profitability In the industry.

A 26 Financial Review Earnings of many American corporations rebounded sharply in 1976 from the recession lows of 1975. Philip Morris, whose earnings growth continued steadily throughout the economy's recent difficulties, once again is reporting that our upward trend has been maintained and even somewhat improved. The fourth quarter of 1976, which for many companies was the worst of the year, was our best. Philip Morris net earnings increased 25.5% in 1976. This compared with an average annual growth of 22.3% in the preceding five years. Last year's performance, which marked the 23rd consecutive year of improvement in revenues and earnings, resulted from continued volume growth in both cigarettes and beer, price increases which offset higher costs, and improved production efficiencies. Each of our five operating companies showed improvement over 1975 in revenues and operating income. Our domestic and international cigarette operations benefited from price increases, although the $0.75 per 1,000 units increase announced in the U.S. in October, 1976, had minimal effect on earnings. Miller's revenue gains resulted predominantly from volume increases. Factory margins improved because of increased volume and greater production at our modern facilities. Production volume levels increased significantly at our Richmond Operations Center and our new brewery in Fulton, New York. Start-up costs remained at a high level but were offset by our investment tax credit of $19 million. Operating Revenues Pre-Tax Margins Chart 1 - 67 68 69 70 71 72 73 74 75 76 Operating Revenues Pre-Tax Margins (%) Material costs were generally higher in 1976. Of primary importance was the increase in prices paid for tobacco. Marketing expenses increased as a percent of sales because of inflation and the costs related to the highly successful U.S. introduction of Merit. Philip Morris's pre-tax profit margin reached 11.0% in 1976, the highest level in the last 25 years (Chart 1). Our annual common stock dividend rate was increased to $1.30 in 1976, up 30%. This marked the ninth consecutive year of increase. As indicated in Chart 2, dividends declared rose to $1.15 per share in 1976 from $0.925 in 1975. Our increased inventory needs and continuing high level of capital expenditures have necessitated maintenance of conservative dividend payments approximating 25% of net earnings. Capital expenditures in 1976 amounted to $220 million, about 10% less than in 1975. A variety of delays, none major, prevented us from reaching our original spending estimate, which was roughly equal to the 1975 level. As a result of this shortfall in spending, funds from operations after deducting dividends exceeded capital expenditures for the first time since 1971 (Chart3). We expect that funds from operations, after deducting dividend payments, will exceed capital spending in the aggregate for the period 1977-1981, although not necessarily for each of the years. Our planned capital expenditures are estimated at $275 million for 1977 and in excess of $1.25 billion for the 1977-1981 period. Primary Earnings per Share Dividends Declared per Share -Chart 2 67 68 69 70 71 72 73 74 75 76 ~ Primary Earnings per Share Dividends Declared per Share Funds from Operations after Dividends Capital Expenditures Chart 3 67 68 69 70 71 72 73 74 75 76 M Funds from Operations after Dividends - Capital Expenditures

This compares with expenditures of $975 million in the five-year period 1972-1976. Our major capital expansion program has underwa jeen ssets have tri ccompanyin y for about six years. Net fixed pled since 1971. Despite the g high levels of unproductive assets under construction, start-up costs, and interest expense, our net return on total assets remained between 7% and 8% (Chart 4). Similarly, stockholders' equity more than doubled from $579 million in 1971 to $1.4 billion in 1976, while our net return on equity consistently approximated 20% (Chart 5). Over the last three years, Miller Brewing Company has accounted for 58% of Philip Morris's total capital expenditures. However, Miller's after-tax return on Philip Morris's investment has been increasing rapidly, reaching over 10% in 1976. We are highly satisfied with Miller's progress to date and are even more optimistic about the future. During this period of rapid growth, Philip Morris has maintained prime ratings in the credit markets. A growing equity base, a continuous record of strong earnings gains, and the special nature of our assets provide strong foundation for this credit rating. We must age tobacco leaf for at least two years and have, therefore, bought tobacco in 1976 to fill our larger requirements in 1978 and 1979. Our inventories are regarded as highly liquid assets and have continually exceeded total debt (Chart 6). Even with rapid growth of our fixed investment, inventories have accounted for a relatively constant percentage of total assets. Average Total Assets Net Return on Average Total Assets Chart 4 On March 31, 1976, Philip Morris negotiated a $250 million revolving credit and term loan agreement with a consortium of 16 banks. The agreement, which extends through March 31, 1984, provides us with considerable flexibility in meeting our financial requi rements underattractive terms. On January 1, 1976, Statement No. 8 of the Financial Accounting Standards Board regarding accounting for foreign currency transactions and financial statements became mandatory. This new procedure requires exchange gains and losses, realized and unrealized, to flow through the earnings statement on a current basis. It also mandates that inventories be valued at historical rather than current exchange rates. This is a reversal of our former inventory accounting method and means that our former balancing of non-U.S. inventories against non-dollar debt to minimize the effects of currency fluctuations can no longer be applied. In response, we broadened our hedging operations to minimize the fluctuations in earnings caused by this new accounting procedure. Our non-operating exchange losses last year totaled $15.5 million, reflecting strengthening European hard currencies, where we have borrowings, and unfavorable currency devaluations elsewhere. Last year, Philip Morris continued its consistent record of profitable growth. We anticipate further strong growth and remain highly confident that Philip Morris's financial resources will support and foster the potential for each of our operating companies. Average Stockholders' Equity Net Return on Average Stockholders' Equity Chart 5 Billions -% - --- Billions of of Dollars Dollars 14 1.75 67 68 69 70 71 72 73 74 75 76 ~ Average Total Assets ~= Net Return on Average Total Assets (%) % ~ Average Stockholders' Equity - Net Return on Average Stockholders' Equiry (%) Total Debt Total Inventory Chart 6 Billions of Dollars M Total Debt - Total Inventory 27

28 Management's Discussion and Analysis of the Summary of Operations The five-year summary of operations required by the Securities and Exchange Commission appears in bold face type on page 30 of the company's fifteen-year financial review. The following analysis pertains to the latest two years of the summary. Revenues Consolidated operating revenues increased $651 million (17.9%) in 1976. Revenues of Philip Morris U.S.A. were $242 million (14.0%) higher than in 1975, including $115 million due to cigarette price increases and $127 million due to increased cigarette unit sales (7.5% above 1975). Revenues of Philip Morris International were $44 million (4.2%) above 1975 due to price increases and a 10.6% increase in unit cigarette sales. Operating revenues were adversely affected by currency movements and the deconsolidation of a foreign subsidiary. Revenues of Miller Brewing Company were $325 million (49.3%) higher than in 1975, including $282 million due to higher barrel sales (43.1 % above 1975), $33 million due to price increases, and $10 million due to changes in product mix. Revenues of Philip Morris Industrial were $17 million (11.3%) higher than in 1975. Revenues of Mission Viejo Company were $24 million (34.2%) higher than in 1975. Consolidated operating revenues increased $631 million (21.0%) in 1975 over 1974. Revenues of Philip Morris U.S.A. were $219 million (14.6%) higher than in 1974, including $127 million due to cigarette price increases and $90 million due to increased cigarette unit sales (6.1 % above 1974). Revenues of Philip Morris International were $153 million (17.2%) above 1974 due to price increases and a 9.7% increase in unit cigarette sales partly offset by changes in foreign currency translation rates. Revenues of Miller Brewing Company were $255 million (63.1%) higher than in 1974, including $172 million due to higher barrel sales (41.9% above 1974), $64 million due to price increases, and $19 million due to changes in product mix. Revenues of Philip Morris Industrial were $3 million (2.2%) lower than in 1974. Revenues of Mission Viejo Company were $8 million (12.7%) higherthan in 1974. 4 ! 5-10-15-Year Growth Record (thousands except per share amounts ) 1976 1971 1966 1961 Operating Revenues $4,293,782 $1,852,495 $771,975 $529,127 Pre-Tax Income 471,928 189,800 65,144 45,985 Net Earnings 265,675 101,498 34,183 21,1511 Earnings Per Share: Primary 4.47 2.01 .77 .47 Fully Diluted 4.47 1.82 .77 .47 Compounded Average Annual Growth Rate 5 Years 10 Years 15 Years Operating Revenues 18.3% 18.7% 15.0% Pre-Tax Income 20.0% 21.9% 16.8%1 ~ Net Earnings 21.2% 22.8% 4z. 18.2% ca ~ Earnings Per Share: v Primary 17.3% 19.2% -,~ 16.2% ~ 00 .; Fully Diluted 19.7% 19.2% 16.2% 11

29 Costs and Expenses Cost of sales as a percentage of revenues has remained fairly constant over the last three years, at approximately 75% with higher production and raw material costs eing offset by operating efficiencies. The cost of products sold was $310 million (18.7%) higher in 1976 than in 1975 and $367 million higher (28.4%) in 1975 than in 1974. As a percentage of operating revenues, the cost of products sold increased to 45.8% in 1976 from 45.5% In 1975 and 42.9% in 1974. Interest expense increases of $4 million (3.8%) in 1976 and $16 million (19.7%) in 1075 were d,ue to higher levels of debt. Currency translation and hedging costs of $16 million were stated in the consolidated statement of earnings for the first time in 1976 in accordance with the pronouncement of the Financial Accounting Standards Board. Currency translation and hedging costs for periods prior to January 1, 1976 1' ~.. ~ JQuarterly Results Had the Company reported 1975 data reflecting the impact of FASB Statement No. 8 (see notes to financial statements), the reported net earnings and earnings per share for the year 1975 would have increased by $4.3 million and $.07, respectively. The effect on net earnings and _ .. w._ _ _ _ . .. are notshown separately in the Consolidated Statements of Earnings. (See the notes to consolidated financial statements for a more complete description.) Equity in Unconsolidated Subsidiaries and Affiliates Equity in net earnings of partly-owned unconsolidated subsidiaries and affiliates decreased $8.7 million (37.9%) in 1976 mainly due to the devaluation of the Australian dollar and the Mexican peso. The 1975 equity decreased $1.7 million (7.1 %) in 1975 due to start-up expenses in a new foreign market. Income Taxes The $57.1 million increase in income taxes in 1976 and $27.2 million increase in 1975 reflect the applicable tax on the increased income for the years. earnings per share for the fourth, third, second and first quarters would have been a decrease of $4.2 million and $.07, an increase of $9.1 million and $16, an increase of $4.5 million and $.08, and a decrease of $5.0 million and $.09, respectively. (millions except per share amounts) Per Share of Common Stock Quarters Operating Revenues Gross Profit Net Earnings Earnings Dividends Paid Market Price" (High-Low) 1976 Year $4,293.8 $1,167.6 $265.7 $4.47 $1.075 $631/4 -493/a IV 1,158.5 319.4 67.0 1.13 .325 631/a-56'/a III 1,122.6 302.6 74.6 1.25 .25 623/4-515/a II 1,069.9 291.9 67.2 1.13 .25 581/s-493/a 1 942.8 253.7 56.9 .96 .25 59'/s -50 1/4 1975 Year $3,642.4 $ 907.2 $211.6 $3.62 $ .875 $59'/4 -40~/s ,..t ~ 1 §. I V 971.9 247.1 52.6 .90 .225 561/4 -45 .~ , 111 953.3 232.2 60.8 1.04 .225 co 54'/s -42 0 II 917.2 225.4 53.6 .92 .225 oa 591/4-46'/2 ~ _ 1 800.0 202.5 44.6 .78 .20 505/s-40'/s ~ *New York Stock Exchange

ffi Fifteen-Year Financial Review Philip Morris Incorporated and Consolidated Subsidiaries 30 (dollar amounts except per-share amounts expressed in thousands) 1976 1975 1974 1973 1972 Summary of Operations: Operating Revenues $ 4,293,782 3,642,414 3,010,961 2,602,498 2,131,224 Cost of Sales: Cost of Products Sold 1,966,871 1,656,839 1,290,319 1,060,777 832,890 Federal Excise Taxes 778,161 686,276 619,504 558,947 494,778 Foreign Excise Taxes 381,125 392,127 349,363 334,512 228,151 Operating Income 634,539 492,844 403,585 329,483 287,461 Interest Expense 102,834 99,045 82,741 50,993 37,870 Earnings Before Income Taxes 471,928 360,810 297,502 255,609 229,634 Pre-Tax Profit Margins 11.0% 9.9% 9.9% 9.8% 10.8% Provision for Income Taxes $ 206,253 149,172 121,986 106,977 105,168 Net Earnings 265,675 211,638 175,516 148,632 124,466 Primary Earnings Per Common Share 4.47 3.62 3.15 2.71 2.34 Fully Diluted Earnings Per Common Share 4.47 3.62 3.07 2.61 2.18 ~ Dividends Declared Per Common Share ~ 1.150 .925 .775 .674 .6311 Weighted Average Shares-Primary 59,408,484 58,442,362 55,649,417 54,804,174 52,999,338 Weighted Average Shares-Fully Diluted 59,408,484 58,442,362 57,339,255 57,315,784 57,265,432 Capital Expenditures $ 220,173 244,477 215,770 174,665 120,034 Annual Depreciation 64,856 49,853 38,006 30,245 26,576 Property, P(ant & Equipment (Gross) 1,323,923 1,129,838 899,810 728,726 571,148 Property, Plant & Equipment (Net) 993,879 851,103 659,520 510,286 373,372 Inventories 1,657,504 1,448,428 1,269,212 1,009,414 801,145 Current Assets 2,005,745 1,788,085 1,557,908 1,245,934 989,708 Working Capital 1,202,224 890,797 725,000 515,347 524,791 Total Assets 3,582,209 3,134,326 2,653,263 2,108,403 1,701,494 Total Debt 1,525,638 1,443,270 1,239,312 947,364 681,000 Stockholders' Equity 1,429,982 1,227,781 974,673 815,028 695,549 Net Earnings Reinvested 197,195 157,102 131,890 111,376 89,894 Common Dividends Declared as% of Net Earnings 25 7% 25 7% 24 8% 25 0% 27 2% . . . . . Nt Book Value Per Common Share $ 23.99 20.63 16.97 14.66 12.5 0 ~ Market Price of Common Share High-Low 631/4-493/4 59'/4 -40'/a 613/s-34'/s 683/s-483/4 59'/s-33'/e a 0 0 Closing Price Year-End 613/4 53 48 573/a 591/8 ~ a Price/Earnings Ratio 13 14 15 21 25 N.. a No. of Common Shares-Actual Year-End 59,487,393 59,357,236 57,264,586 55,378,434 54,444,090

31 f 1971 1970 1969 1968 1967 1966 1965 1964 1963 1962 1,852,495 1,509,540 1,142,373 1,019,846 904,841 771,975 704,544 641,439 585,059 550,624 700,021 577,106 454,718 409,912 363,115 311,784 292,588 277,522 244,540 228,030 441,143 372,092 319,086 295,903 271,073 234,975 214,128 194,312 193,768 187,133 201,386 147,124 54,247 41,841 39,658 30,057 27,780 22,462 8,276 3,785 241,137 203,180 - 153,237 126,159 101,838 81,867 65,128 55,568 56,634 56,402 35,472 35,425 28,640 15,949 10,205 8,094 6,098 5,919 4,814 3,985 189,800 150,008 115,613 100,107 81,317 65,144 52,423 44,466 46,729 47,464 10.2% 9.9% 10.1 % 9.8% 9.0% 8.4% 7.4% 6.9% 8.0% 8.6% 88,302 72,510 57,273 51,241 37,716 30,961 25,914 21,852 24,677 25,518 101,498 77,498 58,340 48,866 43,601 34,183 26,509 22,614 22,052 21,946 2.01 1.68 1.29 1.09 .98 .77 .59 .50 .49 .49 I 1.82 1.43 1.20 1.07 .97 .77 .59 .50 .49 .49 .605 .525 .488 .425 .35 .35 .30 .30 .30 .30 50,126,614 45,613,196 44,538,922 43,857,780 43,349,768 56,556,948 56,596,566 49,558,612 45,069,770 43,982,508 68,001 39,595 23,636 26,373 25,688 17,089 12,078 19,366 26,243 11,843 21,500 17,658 13,512 12,139 10,903 9,532 8,857 8,316 6,765 6,293 447,075 394,088 236,962 159,759 153,224, 139,595 110,204 219,346 193,656 172,593 274,070 236,697 147,354 138,704 123,555 110,157 104,044 102,417 93,150 68,664 670,244 568,428 447,319 451,922 386,576 297,761 826,453 728,837 574,988 561,685 417,591 347,682 271,823 257,256 235,375 228,088 485,908 372,895 339,082 318,978 297,295 - 279,068 315,871 312,406 306,172 253,257 213,826 202,810 190,982 179,222 1,392,035 1,239,424 976,489 786,578 648,994 512,549 466,277 553,900 557,700 443,438 412,543 365,024 490,400 354,800 256,400 161,000 158,100 159,000 145,200 120,800 579,114 452,849 355,808 314,496 280,186 249,821 230,677 217,783 208,711 201,720 69,666 52,176 35,659 29,189 27,453 18,159 12,670 8,794 8,244 7,947 30.6% 31.6% 37.4% 38.4% 34.9% 44.2% 48.6% 56.9% 58.3% 59.4% 10.72 8.93 7.39 6.56 5.88 5.24 4.81 4.51 4.31 4.13 v ~ 35'/2 -23 3/9 25'/s -1 4 18'/s -12 1/2 1 71/s -1 1 14 3/8-7'/s 9-6'/s 8'/s -6 1/s 7'/6 -5 5/s 71/2 -5 5/s 9 3/s-5 1/8 r° C+ 351/8 243/4 17~/s 16 11 1/s 81/2 73/s 61/8 61/8 61/s ~ ..~ 17 14 13 14 11 11 12 12 12 12 F. ~ 52,338,908 48,317,680 45,130,668 44,400,616 43,661,748 43,226,688 43,043,460 42,916,956 42,858,888 43,052,856

32 Consolidated Balance Sheets Philip Morris Incorporated and Consolidated Subsidiaries December 31. 1976 and 1975 4 1976 1975 Assets Cash and cash equivalents - $ 64,353,000 $ 79,251,000 Receivables 267,943,000 252,501,000 Inventories: Leaf tobacco 1,089,301,000 1,091,984,000 Other raw materials 125,620,000 115,873,000 Work in process and finished goods 379,446,000 208,111,000 Housing programs under construction 63,137,000 32,460,000 1,657,504,000 1,448,428,000 Prepaid expenses 15,945,000 7,905,000. Total current assets 2,005,745,000 1,788,085,000 Investments in and advances to unconsolidated foreign subsidiaries and affiliates 220,147,000 189,523,000 Land and offtract improvements 58,766,000 46,223,000 Property, plant and equipment, at cost: Land and land improvements 53,230,000 46,326,000 Buildings and building equipment 391,341,000 330,460,000 Machinery and equipment 755,310,000 611,451,000 Construction in progress 124,042,000 141,601,000 1,323,923,000 1,129,838,000 Less, Accumulated depreciation 330,044,000 278,735,000 993,879,000 851,103,000 :4 tti Brands, trademarks, patents and goodwill 211,570,000 206,093,00~ ~ Long-term receivables 66,463,000 31,247,00G =° Other assets 25 639 000 . 22 052 000 cc, , , , , ~-t $3,582,209,000 $3,134,326,000 ~ See notes to financial statements.

33 1976 1975 Liabilities Notes payable $ 260,131, 000 $ 510, 341, 000 Current portion of long-term debt 17,729,000 15,059,000 Accounts payable and accrued liabilities 402,775,000 300,443,000 Federal and other income taxes 103,527,000 56,577,000 Dividends payable 19,359,000 14,868,000 Total current liabilities 803,521,000 897,288,000 Long-term debt: Senior 1,192,338,000 856,670,000 Subord i nated 55,440,000 61,200,000 Deferred income taxes 77,714,000 70,972,000 Other liabilities 23,214,000 20,415,000 Total liabilities 2,152,227,000 1,906,545,000 - Stockholders' Equity Cumulative preferred stock, par value $100 per share 8,812,000 9,187,000 Common stock, par value $1 per share 59,490,000 59,360,000 Additional paid-in capital 294,225,000 289,106,000 Earnings reinvested in the business 1,071,488,000 874,293,000 1,434,015,000 1,231,946,000 0 Less, Cost of treasury stock 4,033,000 4,165,000 ~ ° 1,429,982,000 1,227,781,000 10~ _ $3,582,209,000 $3,134,326, 000 "4 µ w

34 Consolidated Statements of Earnings Philip Morris Incorporated and Consolidated Subsidiaries for the years ended December 31, 1976 and 1975 1976 1975 Operating revenues $4,293,782,000 $3,642,414,000 Cost of sales: Cost of products sold 1,966,871,000 1,656,839,000 Federal and foreign excise taxes on products sold 1,159,286,000 1,078,403,000 Gross profit __ 1,167,625,000 907,172,000 Marketing, administration and research costs 547,287,000 437,196,000 620,338,000 469,976,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates 14,201,000 22,868,000 Operating income of operating companies 634,539,000 492,844,000 Corporate expense 35,229,000 30,270,000 Interest expense (excluding interest capitalized of s $6,424,000 in 1976 and $8,024,000 in 1975) 102,834,000 99,045,000 Currency translation and hedging costs, net 15,520,000 Other deductions, net 9,028,000 2,719,000 Earnings before income taxes 471,928,000 360,810,000 Provision for federal and other income taxes: Current 185,947,000 136,302,000 rs Deferred 20,306,000 12,870,000( ~ ,n 206,253,000 149,172,000 Q ~ Net earnings $ 265,675,000 $ 211,638,000 ~ v Earnings per common share $ 4.47 $ 3.62 t See notes to financial statements.

Consolidated Statements of Stockholders' Equity Philip Morris Incorporated and Consolidated Subsidiaries 35 for the years ended December 31, 1976 and 1975 Preferred Stock, $100 Par Value Common Stock, $1 Par Value Additional Paid-In Capital Earnings Reinvested in the Business Cost of Treasury Stock Total Stockholders' Equity Balance, Jan. 1, 1975 $9,679,000 $57,267,000 $195,022,000 $ 717,191,000 ($4,486,000) $ 974,673,000 Net earnings for the year1975 211,638,000 211,638,000 Proceeds from public issuance of two million shares of common stock 2,000,000 91,375,000 93,375,000 Proceeds from common stock issued upon exercise of stock options 93,000 2,569,000 2,662,000 Preferred stock purchased for treasury (31,000) (31,000) Preferred stock retired (492,000) 140,000 352,000 Cash dividends declared: Preferred stock - (117,000) (117,000) Common stock, $.925 per share (54,419,000) (54,419,000) Increase (decrease) 1975 (492,000) 2,093,000 94,084,000 157,102,000 321,000 253,108,000 Balance, Dec. 31, 1975 9,187,000 59,360,000 289,106,000 874,293,000 (4,165,000) 1,227,781,000 Net earnings for the year 1976 265,675,000 265,675,000 Proceeds from common stock issued upon exercise of stock options 130,000 4,997,000 5,127,000 Preferred stock purchased for treasury (121,000) (121,000) Preferred stock retired (375,000) 122,000 253,000 Cash dividends declared: Preferred stock (114,000) (114,000), ra Common stock, ~ $1.15 per share (68,366,000) (68,366,000; CO 0 Increase (decrease) 1976 (375,000) 130,000 5,119,000 197,195,000 132,000 202,201,000 rso ~ Balance, Dec.31, 1976 $8,812,000 $59,490,000 $294,225,000 $1,071,488,000 ($4,033,000) $1,429,982,000 }. ( ) Denotes deduction. See notes to financial statements.

36 Consolidated Statements of Changes in Financial Position Philip Morris Incorporated and Consolidated Subsidiaries for the years ended December 31. 1976 and 1975 Sources of Working Capital 1976 1975 Net earnings $265,675,000 $211,638,00(jg- Add (deduct) items not requiring current use of working capital: Depreciation and amortization 67,663,000 52,474,000 Deferred income taxes 20,306,000 12,870,000 Equity in net earnings of unconsolidated foreign subsidiaries and affiliates (14,201,000) (22,868,000) Dividends from unconsolidated foreign subsidiaries and affiliates 8,636,000 7,270,000 From operations 348,079,000 261,384,000 Long-term debt issued 340,000,000 177,923,000 Sale of common stock 93,375,000 Common stock issued under stock options _ 5,127,000 2,662,000 Land and offtract improvements transferred to housing programs under construction 9,226,000 2,934,000 Disposal of property, plant and equipment 4,266,000 3,041,000 Additions to working capital 706,698,000 541,319,000 Uses of Working Capital Dividends 68,480,000 54,536,000 Expansion and modernization of property, plant and equipment 220,173,000 244,477,000 Land and offtract improvements 21,769,000 7,944,000 Long-term receivables 34,045,000 3,827,000 Investments in and advances to: Unconsolidated foreign subsidiaries and affiliates 25,059,000 27,486,000 Consolidated subsidiaries 6,415,000 2,322,000 Decrease in long-term debt 18,267,000 22,640,000 Net unrealized exchange losses, resulting from translation of working capital 13,205,000 Other, net 1,063,000 (915,000) Working capital used 395,271,000 375,522,000 Increase in working capital $311,427,000 $165,797,000 Changes in Components of Working Capital Cash and receivables . $ 544,000 $ 53,565,000 Inventories 209,076,000 179,216,000 ~y Notes payable and long-term debt currently payable 247,540,000 (54,391,00 ~ t~s Accrued liabilities and other payables (149,282,000) (6,603,000) ° Other, net 3,549,000 (5,990,000) -j fw $311,427,000 $165,797,000 ~ See notes to financial statements.

Notes to Consolidated Financial Statements 37 Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of the Company and all wholly owned subsidiaries. Investments in and advances to unconsolidated subsidiaries and affiliates are stated at cost adjusted for equity in undistributed earnings or losses since the dates of acquisition. ! Foreign operations Foreign currency accounts are translated into U.S. dollars as follows: 1) current assets (except inventories), current liabilities, long-term receivables and long-term debt at year-end rates; 2) inventories, other assets and liabilities generally at historical rates; and 3) revenues, costs and expenses at average rates during the year except for the cost of inventories sold and depreciation and amortization which are based upon the historical dollar cost. The Company enters into forward exchange contracts and other hedging activities to minimize the effect of currency fluctuations on its operations. Gains and losses on such transactions and other currency gains and losses are included in income in the period in which they occur. The Company's present translation policy was adopted in accordance with the Financial Accounting Standards Board statement on translation of foreign currency transactions and foreign currency financial statements which became effective January 1, 1976. The Company's previous policy was similar to the present policy except that inventories were translated at current exchange rates and net currency gains and losses were added or charged to a reserve. To the extent such losses exceeded accumulated gains and provisions the net losses would have been charged to income. Receivables Current earnings are charged and an allowance is credited with a provision for doubtful accounts based on experience and on any unusual circumstances which may affect the ability of customers to meet their obligations. Accounts deemed uncollectible are charged against this allowance. ; Receivables are reported in the balance sheet net of such accumulated allowances. Inventories Inventories are valued at the lower of cost or market. The cost of leaf tobacco is determined on an average cost basis and the cost of other inventories is determined generally on a first-in, first-out basis. It is a generally recognized industry practice to classify the total amount of leaf tobacco inventory as a current asset although part of such inventory, because of the duration of the aging process, ordinarily would not be utilized within one year. The cost of housing programs under construction represents the cost of land, including offtract improvements, interest and property taxes and housing construction costs on sites currently under development. Real estate operations The cost of land, including offtract improvements, interest and property taxes, is reported as a noncurrent asset until a designated area is placed into development. Interest is capitalized in accordance with the general industry practice. The amount of interest capitalized is determined by the average short and long-term borrowing rates applicable to loans incurred for use in these operations. Offtract improvements are access roads, utilities, etc., which are essential to the development of a community, but which are not directly attributable to the development of a particular tract or area. The cost of these improvements is allocated to the saleable acreage remaining in each project and is charged to cost of sales when such acreage is sold. Revenue and profit from real estate sales are recognized only as cash is received. Brands, trademarks, patents and goodwill Cost in excess of net assets of companies acquired after November 1, 1970 is being amortized over a period of no more than 40 years. Other goodwill is not amortized unless there has been a diminution in its value. Income taxes The provisions for federal and foreign income taxes are calculated on reported pre-tax earnings. Certain items of income and expense included in the financial statements, such as depreciation, are

38 Notes, Continued reported in different years in the tax returns in accordance with applicable income tax laws. The resulting difference between the financial statement income tax provision and income taxes currently payable is reported in the financial statements as deferred income taxes. Investment tax credits on assets placed in service during the year are accounted for as a reduction in the provision for income taxes. Provision is also made for federal income taxes on the portion of undistributed earnings of foreign subsidiaries and affiliates that is expected to be remitted to the United States. Property, plant and equipment Maintenance and repairs are charged to income and expenditures for renewals and improvements are capitalized. In order to present more realistically the economic cost of a constructed facility, whenever the construction period of a facility exceeds one year, the capitalized cost of the facility includes interest and real estate taxes incurred during the construction period. The interest capitalized on construction of facilities is determined by applying the Company's average short-term borrowing rates to the outstanding construction balance. Provision for depreciation of assets is recorded by a charge against income at rates considered adequate to amortize the cost of such assets over their useful lives computed on the straight-line method. Pension plans The Company and certain of its subsidiaries have pension plans covering substantially all their employees. Prior service costs, which are being amortized over periods of up to thirty years, and accrued pension costs are funded with independent trustees. Translation of Foreign Currency Effective January 1, 1976, in accordance with the Financial Accounting Standards Board statement on translation of foreign currency transactions and foreign currency financial statements (FASB No. 8), the Company changed its method of translating inventories denominated in foreign currencies to use historical rather than current exchange rates and also began to include exchange gains and losses in income in the period in which they occur. As a result of the Company's policy of minimizing the impact of foreign currency fluctuations on its operations by entering various hedging activities, it has been concluded that it is not practicable to restate the financial statements for 1975 and earlier years because no reasonable estimates can be made of the hedging costs and exchange gains and losses that the Company would have incurred in such years under its established hedging policy. Accordingly, the cumulative effect as of January 1, 1976 of restatement of the inventory and other accounts pursuant to FASB No. 8, which is not significant, has been reflected in 1976 earnings. Had the Company reported 1975 data reflecting the impact of FASB No. 8 on its inventory and other accounts without giving effect to the hedging program that would have been followed had the new accounting rules been known at the time, reported net earnings and earnings per share for the year ended December 31, 1975 would have increased by $4,315,000 and $.07, respectively. Short-Term Borrowing Arrangements In addition to the domestic and foreign bank loans and commercial paper obligations included in current liabilities, the information presented below also includes short-term notes payable classified as long-term debt in accordance with the Financial Accounting Standards Board Statement No. 6. At December 31, 1976, $430,000,000 of short-term notes were included in long-term debt. Average bank loans and commercial paper obligations outstanding during 1976 were $115,000,000 and $440,000,000, respectively, on which the weighted average interest rates were 7.2% and 5.8%, respectively. At December 31, 1976, short- term notes payable consisted of bank loans of $177,402,000 and commercial paper obligations of $512,729,000 on which the average rates of interest were 7.2% and 5.4%, respectively. At that date, lines of credit amounted to approximately $1,100,000,000 of which $400,000,000 remained unused. During 1976, the Company and its consolidated subsidiaries maintained average demand deposit book balances of approximately $50,000,000 with a number of banks, principally in the United States, to compensate the banks for account handling and other important services and to support lines of credit. r I

Restrictions Certain of the agreements covering long-term debt contain restrictions with respect to the payment of cash dividends on ' ommon stock and to the purchase, edemption or retirement of capital shares. At December 31, 1976, approximately $480,000,000 of consolidated earnings reinvested in the business was free of such restrictions. - Other debt agreements specify minimum amounts of working capital and limit the amount of senior debt which may be issued. At December 31, 1976, the Company was in compliance with these agreements. Foreign Subsidiaries Principal financial data of foreign subsidiaries and affiliates are as follows: 1976 Assets Liabilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity 1975 I.AAssets Liabilities Net assets Company's equity and advances Operating revenues Net earnings Company's equity At December 31, 1976, investments in unconsolidated foreign subsidiaries and affiliates exceeded equity in net assets by approximately $17,000,000, including $13,000,000 which arose subsequent to November 1, 1970 and is being amortized. Capitalized Interest The effect of the policy to capitalize interest relating to major facilities was an increase in pre-tax income of $643,000 in 1976 and $2,928,000 in 1975; the effect relating to real state operations was an increase in re-tax income of $1,959,000 in 1976 and 1,577,000 in 1975. The combined effect on net income was an increase of $1,257,000 in 1976 and $2,176,000 in 1975. Expansion of Facilities Commitments for plant, equipment and machinery at all locations approximated $120,000,000 at December 31, 1976. Brands, Trademarks, Patents and Goodwill At December 31, 1976, this account included approximately $24,000,000 of goodwill which is being amortized. Cost in excess of net assets of companies acquired prior to November 1, 1970 is not being amortized because, in the opinion of management, the related investments have not experienced any diminution in value. Consol idated (Wholly Owned) Unconsolidated (Partially Owned) $ 635,715,000 $ 561,327,000 359,102,000 295,244,000 276,613,000 266,083,000 276,613,000 202, 946, 000 860,011,000 1,027,622,000 33,095,000 13,566,000 33,095,000 14,201,000 618,462,000 512,914,000 362,576,000 254,997,000 255,886,000 257,917,000 255,886,000 174,852,000 865,154,000 903, 384, 000 29,874,000 35,752,000 29,874,000 22,868,000 Federal income tax has not been provided on approximately $300,000,000 of undistributed earnings of foreign subsidiaries and affiliates, accumulated since inception of such investments, which are expected to be permanently invested abroad.

14 40 Notes, Continued Long-Term Debt 1976 1975 Outstanding at December 31, exclusive of amounts due within one year: Notes payable (see below) $ 430,000,000 $ 90,000,000 8'/2 % Notes, payable in 1985 150,000,000 150, 000, 000 8'/s% Sinking Fund Debentures, payable $6,250,000 annually from 1984 to 2003 and $25,000,000 in 2004 150, 000, 000 150, 000, 000 8.85% Notes, payable in 1982 50,000,000 50,000,000 6'/2 % Loan, 80,000,000 Swiss francs, payable 1988 32,653,000 30,189,000 63/4 % Loan, 100,000,000 German marks, payable from 1978 to 1987 41,667,000 37,736,000 Bank Term Loan Agreement, payable in 1980. Interest is at Y2 % above the bank prime rate, but not more than an average effective rate of 7.9% per annum if outstanding to maturity 50,000,000 50,000,000 65/a°io Sinking Fund Debentures, payable $3,500,000 annually from 1978 to 1992 and $15,500,000 in 1993 68, 000, 000 68, 000, 000 4.90% Notes, payable $2,600,000 annually to 1988 and $16,000,000 in 1989 44,600,000 47,200,000 Purchase money obligations 32,847,000 33,989,000 Other notes and debentures 42,571,000 49,556,000 Senior debt $1,192,338,000 $856,670,000 10% Subordinated Notes, payable $5,760,000 annually to 1981 and $32,400,000 in 1982 $ 55,440,000 $ 61,200,000 The Company has entered into a $250,000,000 revolving credit and term loan agreement, maturing in 1984, and a $180,000,000 Eurodollar revolving credit agreement maturing in 1979, both of which can be used to refinance short-term notes payable. Management intends to exercise its rights under these agreements in the event that it becomes advisable. Accordingly, $430,000,000 of short-term notes payable have been classified as long-term debt in accordance with the Financial Accounting Standards Board Statement No. 6. Generally, the long-term debt is callable, at annually decreasing premiums. Expenses incurred in securing long-term loans are included in other assets and are being amortized on the straight-line method over the respective lives of the issues giving rise thereto. Aggregate maturities of long-term debt in each of the following years are: 1977, $17,729,000; 1978, $40,401,000; 1979, $204,274,000; 1980, $169,884,000; 1981, $18,109,000. Capital Shares Preferred: At December 31, 1975 Authorized 91,863 Issued 91,863 Treasury (62,286) Outstanding 29,577 Purchased (1,617) (1,617) Retired (3,744) (3,744) 3,744 At December 31, 1976 88,119 88,119 (60,159) 27,960 Common, $1 par %3alue: At December 31, 1975 100,000,000 59,359,460 (2,224) 59,357,236 Exercise of stock options 130,157 130,157 At December 31, 1976 100,000,000 59,489,617 (2,224) 59,487,393 As of December 31, 1976, -825,376 shares are reserved for the exercise of stock options.

41 Earnings Per Share Earnings per common share for 1976 and 1975 are calculated on the weighted average number of shares of common stock utstanding for each year, which was 9,408,484 and 58,442,362, respectively. Stock Options Shares under option, beginning of year Options granted Options exercised - Options canceled Shares under option, end of year Shares available for option, end of year `At prices ranging from $44.44 to $61.94 Pursuant to stock option plans approved by stockholders, common stock of the Company has been made available for option to I officers and other key employees at market prices on the dates granted. Provision for Federal and Other Income Taxes The 1976 provision includes: Currently payable Deferred The 1975 provision includes: Currently payable Deferred Deferred tax expense results from timing differences in the recognition of certain items of revenue and expense for tax and financial statement purposes. The source of such differences and the tax effect of each are as follows: Excess of tax over book depreciation Provisions charged to expense on books, deductible in future years for tax purposes, net dditional taxes provided on unremitted earnings ~ Wof foreign subsidiaries and affiliates Carrying costs of real estate operations deferred on books, deductible currently for tax purposes Other Incentive Compensation Plan In accordance with the stockholder- approved Incentive Compensation Plan, a provision of $3,940,000 was made against 1976 earnings for awards that may be made to officers and other key employees. A provision of $3,100,000 was made against 1975 earnings. These amounts were less than the maximum amounts that could be provided under the plan. 1976 1975 811,291 732,306 171,800 203,000 (130,157) (92,650) (27,558) (31,365) 825,376'` 811,291 101,023 245,279 Federal $143,383,000 Foreign $18,196,000 State and Local $24,368,000 Total $185,947,000 18,060,000 2,246,000 20,306,000 $161,443,000 $20,442,000 $24,368,000 $206,253,000 $100,889,000 $17,483,000 $17,930,000 $136,302,000 13,325,000 (455,000) 12,870,000 $114,214,000 $17,028,000 $17,930,000 $149,172,000 1976 1975 $22,444,000 $13,200,000 ~ (4,352,000) (3 260 000) 0 , , a ~ 2 133 000 2 142 000 0 , , , , 0 w ~ 884,000 813,000 ~ (803,000) (25,000) ~ $20,306,000 $12,870,000

li 42 - Notes, Continued Reconciliation of the provision for income taxes computed at the federal statutory rate to the reported provision for federal and other income taxes is: Provision computed at 48% of reported pre-tax earnings Increases (decreases) in the provision resulting from: Inclusion of equity in net earnings of unconsolidated subsidiaries and affiliates in pre-tax earnings Investment tax credit Foreign income taxed at less than 48% and not expected to be subject to U.S. tax in the foreseeable future State and local income taxes, net of federal tax benefit Other Provision as reported Litigation Three purported class actions by tobacco growers are pending against the six major United States cigarette manufacturers, including the Company, and others alleging violations of the United States antitrust laws. In two of the actions, the plaintiffs originally sought damages for the years 1970-1974 of approximately $2,500,000,000 in the aggregate. In April 1976, plaintiffs in one of these cases filed a proposed amended complaint which would reduce the size of the purported class, so that the aggregate damages claimed in both actions would be approximately $400,000,000. No specific amount of damages is claimed in the third action. The Company has denied any violation of law, is vigorously contesting the actions and has been advised by counsel that in their opinion the actions are not proper class actions. Furthermore, based on the investigation made to date, counsel is of the opinion that the Company has substantial factual and legal defenses to each of the alleged charges. The District Court in one of the three actions determined that the action could not be maintained as a class action. On appeal, a three-judge panel of the Court of Appeals, by a two-to-one vote, concluded that the District Court should have permitted the case to proceed as a class action on the issue of whether or 1976 1975 Per Cent to Per Cent to Amount Pre-tax Amount Pre-tax 4 $226,525,000 48.0% $173,189,000 48.0% (6,816,000) (1.5) (10,976,000) (3.0) (18,756,000) (4.0) (17,136,000) (4.8) (3,423,000) (7) (4,560,000) (1.3) 12,671,000 2.7 9,324,000 2.6 (3,948,000) (8) (669,000) (.2) $206,253,000 43.7% $149,172,000 41.3% not the defendants had violated the antitrust laws. The Court of Appeals did not, however, disturb the District Court's determination that the action could not be maintained as a class action on the issues of injury and amount of damage, if any, to each of the purported class members. The Company and other corporate defendants filed a Petition for Rehearing in the Court of Appeals, challenging the correctness of the panel's decision, and requesting reconsideration by the entire Court. That Petition was granted by order dated December 13, 1976. The District Courts in the other two cases have not as yet determined whether those cases may be maintained as class actions. No adjustments or provisions have been made on account of the litigation. I

Replacement Cost (Unaudited) The current replacement costs of the Company's property, plant and equipment jRnd inventories (and the consequent cost of ales including depreciation expense) are higher than the comparable historical cost values for those assets. Replacement of property, plant and equipment would permit manufacturing efficiencies. Higher replacement cost values for inventories reflect economic trends of higher prices for Additional Information Working capital at year-end Depreciation expense Rental expense Pension expense Report of Independent Certified Public Accountants ~ To the Board of Directors and Stockholders of Philip Morris Incorporated We have examined the consolidated balance sheet of PHILIP MORRIS INCORPORATED and Consolidated Subsidiaries as of December 31, 1976, and the related consolidated statements of earnings, stockholders' equity and changes in financial position for the year then ended. Our examination was made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. We previously examined and reported upon the consolidated financial statements for the year ended December 31, 1975. In our opinion, the financial statements mentioned above present fairly the financial position of Philip Morris Incorporated and consolidated subsidiaries at December 31, 1976 and 1975 and the results of their operations and the changes in financial position for the years then ended, in conformity with enerally accepted accounting principles pplied on a consistent basis. Coopers & Lybrand New York, January 25, 1977 materials which the Company has traditionally offset through increased selling prices. Further information regarding the effects of current replacement cost will be presented in the Company's Form 10-K for the year 1976 which will be filed with the Securities and Exchange Commission. Unaudited Quarterly Financial Results The 1976 unaudited quarterly financial results are presented on page 29 of this annual report. 1976 $1,202,224,000 $ 64,856,000 $ 20,639,000 $ 29,739,000 43 1975 $890,797,000 $ 49,853,000 $ 17,982,000 $ 24,812,000 ~ .a ~ 0 cx w ~ ra .W

44 Joseph F. Cullman 3rd Richard W. Dammann Directors Thomas F. Ahrensfeld* Senior Vice President and General Counsel George Weissman Edward Lasker James C. Bowling Senior Vice President and Director ot Corporate Affairs Alfred Brittain III Chairman of the Board of Bankers Trust Company, New York, N.Y: George V. Comfort President of George Comfort & Sons, Inc., New York, N.Y., real estate management John E. Cookman Chairman of the Finance Committee Dr. Jose Antonio Cordido-Freytes Member of Betancourt, Cordido and Associates, Caracas, Venezuela, Attorneys, and President of C. A. Tabacalera Nacional Hugh Cullman Executive Vice President and President of Philip Morris International Joseph F. Cullman 3rd Chairman of the Board and Chief Executive Officer Ross R. Millhiser John E. Cookman Clifford H. Goldsmith Executive Vice President and President of Philip Morris U.S.A. Robert E. R. Huntley* President of Washington and Lee University John T. Landry Senior Vice President and Executive Vice President of Philip Morris U.S.A. Edward Lasker Counsel, McKenna & Fitting, Los Angeles, Calif., Attorneys Jacques G. Maisonrouge Chairman of IBM World Trade Europe/Middle East/Africa Corporation, White Plains, N.Y. H. Robert Marschalk Vice Chairman of the Board of Richardson-Merreff Incorporated Wilton, Conn., pharmaceuticals manufacturer Hamish Maxwell Senior Vice President and Executive Vice President of Philip Morris International Ross R. Millhiser President Hugh Cullman Alfred Brittain III H. Robert Marschalk Clifford H. Goldsmith John A. Murphy Executive Vice President and President of Miller Brewing Company John S. Reed Executive Vice President of Citibank, N.A., New York, N.Y. George Weissman Vice Chairman of the Board Margaret B. Young Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, N.Y., and Consultant to the`Company T. Newman Lawler Director Emeritus J. Harvie Wilkinson, Jr. Director Emeritus Andrew C. Britton Member, Advisory Board Chandler H. Kibbee Member, Advisory Board *Newly elected directors Officers Joseph F. Cullman 3rd Chairman of the Board and Chief Executive Officer George Weissman Vice Chairman of the Board Ross R. Millhiser, President Hugh Cullman, Executive Vice President and President, Philip Morris International Clifford H. Goldsmith Executive Vice Presfdent and President, Philip Morris U.S.A. John A. Murphy, Executive Vice President and President, Miller Brewing Company Thomas F. Ahrensfeld Senior Vice President and General Counsel James C. Bowling Senior Vice President, Assistan to the Chairman of the Board, and Director of Corporate Affarr John T. Landry Senior Vice President and Executive Vice President, Philip Morris U.S.A. Hamish Maxwell Senior Vice President and Executive Vice President, Philip Morris International Richard W. Dammann T. Justin Moore, Jr. Albert E. Bellot, Vice President Member of Dammann & Heming, President of Virginia Electric and and Vice President, New York, N.Y., Attorneys Power Company, Richmond, Va. Philip Morris International Russell N. Freund Vice President, Personnel

I ~ r. Joso Antonio Cordido-Freytes James C. Bowling John A. Murphy Margaret B. Young George V. Comfort John T. Landry William K. Howell, Vice President and Executive Vice President, Miller Brewing Company Jetson E. Lincoln Vice President, Planning Charles F. Lombard Vice President and Vice President, Philip Morris International William D. McCoy Vice President and President, Philip Morris Industrial W. Wallace McDowell Vice President and Vice President, Operations, Philip Morris U.S.A. James J. Morgan, Vice President and Vice President, Philip Morris U.S.A. R. William Murray, Vice President and Vice President, 3n Philip Morris International William J. O'Connor Vice President and Vice Preslcfent, Philip Morris International Shepard P. Pollack Vice President, Finance hilip J. Reilly, Vice President and esident, Mission Viejo Company ,arlos E. Salguero, Vice President nd Vice President, Philip Morris International nt Edward M. Schaaf, Jr. Vice President and Vice President, Production, Philip Morris U.S.A. T. Justin Moore, Jr. Hamish Maxwell Jacques G. Maisonrouge Thomas F. Ahrensfeld John S. Reed Robert E. R. Huntley Benjamin A. Soyars Executive Committee Management Committee Vice President and Senior J. F. Cullman 3rd, Chairman J. F. Cullman 3rd, Chairman Vice President, Manufacturing, A. Brittain III T. F. Ahrensfeld Philip Morris U.S.A. G. V. Comfort J. C. Bowling Walter F. Sperber J. E. Cookman H. Cullman Vice President and Controller H. Cullman C. H. Goldsmith Wakeham Dr Helmut R R R. W. Dammann W. D. McCoy . . . Vice President and Vice President C. H. Goldsmith R. R. Millhiser , Lasker E J. A. Murphy Science and Technology, . ll P P k S Philip Morris U S A T. N. Lawler ac . o . . . . H. R. Marschalk P. J. Reilly Lauren S. Williams, Vice President R. R. Millhiser G. Weissman and Vice President, Marketing, G. Weissman Miller Brewing Company Office of the Chairman Eugene J. T. Flanagan, Associate Finance Committee J. F. Cullman 3rd, Chairman General Counsel, Secretary J. E. Cookman, Chairman J. E. Cookman Alexander Holtzman A. Brittain III H. Cullman Associate General Counsel H. Cullman C. H. Goldsmith F. Harrison Poole, Treasurer C. H. Goldsmith R. R. Millhiser Hibbard George P E.Lasker J. A. Murphy . Assistant Treasurer and Treasurer, H. R. Marschalk G. Weissman Philip Morris International R. R. Millhiser Jr. T. J. Moore Norman J. Treisman , J. A. Murphy Assistant Treasurer G. Weissman John C. Lino, Assistant Controller Horace W. Pierpoint Audit Committee t+J Assistant Controller H. R. Marschalk, Chairman ~ Robert H. Souther R. W. Dammann W Assistant Controller E.Lasker Assistant Controller Robert A. White J. G. Maisonrouge Q Ca , T. J. Moore, Jr. 1 Mary E. Russell, Assistant Secretary J. S. Reed 4 h3 Anthony W. Giraldi G+! Assistant Secretary

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