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1974, energy units per c garette produced have creased by 12°0, Energy conservation is a rfect example of how social act v ties make s ness sense, tMiller Brewing's hewest facility at Fulton. New York, and the brewery under construction at Eden, North Carol na. include energy conserva- tion as an integral part of the production proc- ess. Coal is the primary fuel supply, and many energy-saving features of the latest technology have been incorporated into the design of the breweries. Miller is the only brewer w th a nationw de aluminum can recycling program M Iler's dis- tributors pay up to 17 cents_a pound for alumi- num cans brought to reclamat on centers. In 1977, 10 million pounds of aluminum were reclaimed. the equivalent of 240 m ll on cans, up from 7.8 million pounds in 1976. Recycling recovers 95°0 of the_energy that vvent into the production of the orig nal can The Milprint plant of Ph l p Morris Industrial at Downingtown. Pennsyvan a. is installing a pilot heat recuperator that w ll save 97.500 gallons of fuel oil a year and a polluUon-free incinerator that will convert the plant's own wastes into ergy. Wisconsin Tissue M Ils installed a heat s hanger system that recovers latent heat from charged water. sav ng 1,050.000 gallons of oil a year. Mission V ejo Company has helped fund the first phase of a comprehensive water reclama- tion program wh ch is designed to reuse all the waste water in the community. The initial 2-mil- lion-gallons-per-day pilot reclamation plant is scheduled to begin operation in early 1978. Mission Viejo has loined with the Energy Research and Development Administration of the federal government to research methods of reducing energy consumption in residential dwellings. It has built two experimental "Mini- mum Energy Dwellings" that employ solar energy and are designed to reduce energy con- sumption by as much as 50°%. Through a grant from the Housing and Urban Development Department, the company is building seven additional solar-assisted homes. The company again demonstrated its ability to blend public purpose with business endeavors when it complied with a state requirement to cease filling Lake Mission Viejo during the drought conditions that prevailed during 1977 in California. Mission Viejo proposed an innovative plan to substitute water from the San Juan Basin, which had been abandoned when new drinking water standards were adopted several years ago. The water is suitable for recreational purposes and will be used to help fill the lake. The company agreed to spend S4 million to build an 11-mde pipeline that will bring this water to Mission Viejo. Our plan was unanimously approved by the State Water Board, since the transfer of water represents a first step toward the state's goal to reclaim the San Juan Basin. According to one member of that board, "Mis- sion Viejo Company's plan is the one good thing to come out of the drought condition," In cigarette and beer production, air pollution is a minor factor. With electrostatic precipitators, and other control devices, we meet or better all emission standards. Miller Brewing Company aluminum Philip Morris supports higher educa- The Jasper Johns art exhibition sponsored can reclamat on centers recla med ten t on w th direct grants to independent by Philip Morris opened at the Whitney million pounds of aluminum in 19777 private colleges and college funds. Museum of American Art in New York City 9

10 In the mak ng of paper and beer, discharged water must be treated. Our Wisconsin Tissue Mills and Plainwell paper companies adhere to a pol cy of d scharg ng cleaner water than the water already present in the rivers. In 1977, Wis- consin Tissue received the Izaak Walton League of Amer ca's "Clean Water Award" for pollution control efforts "above and beyond the call of duty" At a cost of almost $30 million, Miller Brewing has installed the most sophisticated water treat- ment facilities in the nation at its breweries in Fulton, New York. and Eden. North Carolina. One of Philip Morr s's objectives is to promote women and minority group members into higher level positions. We are mak ng progress on this front. Minor t es now f ll 10 2°'0 of positions clas- sified as "officials and managers":. five years ago they held 5.7°-0. M norities now account for 15.6°o of our sales force. up from 9.0% five years ago. Women today account for 9.1 °io of our off cials and managers: five years ago they accounted for 6.6°/b. Women today hold 22.3°'0 of our professional jobs. compared with 13.3% five years ago. Ph Hp Morr s and Miller each maintain exten- sive minority bank deposit programs. At year- end, our program involved 44 minority-owned banks. Miller Brewing, as a part of its facilities expansion, has awarded minority vendors con- tracts totaling more than S25 million since January, 1975. During the year it received the National Award of Excellence from the U.S. Department of Commerce's Office of Minority Business Enterprise. A survey conducted by Philip Morris Interna- tional last year covering our affiliates in the developing countries indicated a close relation- ship between the development of our business and the economic and social objectives of host countries. The areas in which we confirmed a positive role included transfer of production technology and management know-how, train- ing and promotion of local nationals, local equity participation, and stimulation of local commerce and export trade. In addition to functioning as positive eco- nomic forces in the countries in which they operate, Philip Morris International's affiliate companies respond to plant community and host country needs through a variety of educa- tional, community, health, and cultural programs. Our affiliate in Switzerland has established an ecological foundation to protect rare Alpine ani- mals from extinction. A corporate grant is supporting a pilot pro- gram providing basic health services to resi- dents of our affiliate plant community in Guatemala. We and our affiliates have responded to the special needs created by devastating natural disasters which have occurred in Guatemala, Nigeria, Argentina, India, and elsewhere. People in plant communities also benefit from such projects as the opening of company- operated facilities for public recreation centers, and the donation of the use of land for a commu- nity~sports facility in Ontario, Canada. In addition. Philip Morris International provides direct assistance to international organizations specializing in grass roots educational and eco- nomic projects in the developing world. We continue to monitor the business conduct of our operations around the world, taking into account the voluntary business guidelines rec- ommended to multinational enterprises by the Organization of Economic Cooperation and Development. Our operating policies remain consistent with these guidelines. Our charitable contributions in the U.S. increased sharply in 1977. As the company con- tinues to grow, we have expanded our pro- grams. indicating the company's dedication to improving the quality of life, with particular emphasis in those communities where we operate. We have also increased our support of international organizations to reflect our stature as a multinational corporation. Again this year, our largest category of contributions was sup- port to higher education with direct grants to independent private colleges and through dol- lege scholarship awards to the children of our employees. Grants from the company also help support institutions active in the areas of health, welfare, culture and the humanities. Philip Morris marked its 15th year of sponsor- ship of the arts with the opening of a spectacular Jasper Johns retrospective at the Whitney Museum of American Art in New York. The col- lection of 201 paintings, drawings, and litho- graphs prompted Newsweek to call Johns "the pre-eminent American artist of this generation." The Jasper Johns exhibit will tour in Europe and Japan in 1978. [S ha ~ y

The Philip Morris Arts Grant program in Aus- lia continues to support innovative Australian sts, and an urban beautification program in nada made billboards available for large- ifale paintings. National artists. dance groups, orchestras, and cultural centers throughout the world receive continuing assistance from Philip Morris affiliates. As part of its support of the arts in the U.S., Philip Morris is extending its matching gift pro- gram to include contributions to cultural institu- tions. The company, within certain limitations, will match, dollar for dollar, any contribution made by an employee to a cultural organization, just as it does in the field of education. Board of Directors John E. Cookman, a member of our Board of Directors s nce 1963, retired in 1977 as a direc- tor. He will continue to provide his counsel to the Looking Ahead We have never been more optimistic about the future outlook for Philip Morris. We expect con- iued growth in both of our largest industrles. garettes and beer, and in our other fields. In e U.S. as well as internationally, our growing brands are well positioned, and we have moved quickly to provide products to meet the chang- ing consumer preferences around the world_ Our company is only beginning to realize the benefits of large investments in increased capacity and new technology in both cigarettes These are just some examples that illustrate our actions and our conviction that our business activities rrmake social sense and our social activ- ities make business sense. Public interest pro- grams undertaken by a corporation represent a positive step in the equity interest of stockhold- ers. This is no time for corporate isolation. Social, political, and economic problems are to be ignored only at our own peril. Our sensitivity to these problems may be one of the reasons that we have performed so well as a corporation. company in his role as Director Emeritus and as Chairman of the Finance Comm ttee of the Board of Directors. and beer. With experienced management in depth and with a strong sense of confidence, we look forward to our 25th consecutive year of increases in revenues and earnings in 1978. We are proud to acknowledge that our past record is a result of the continuing dedication, cooperation, and contribution of our 53,000 employees around the world. We thank them for their outstanding performance and thank our 28,000 stockholders for their continuing support. Joseph F. Culiman 3rd Cha rman of the Board and Chief Execut ve off cer George We ssman Vi ce Chairman of the Board Ross R. Milihiser President w.o~...._ 11

2 Philip Morris U.S.A. ~ ® ® .+Gl~~~ /'~ ~~~ sr: tV . . r~• ® ~~ .~..:.,. .. .~, :i cfr,+s-p ~ frTr~ x IR OWE ar FILTER CIGARETTES Oft-ice?s Clifford H Gofdsmith Pres dent John T. Landry Execut ve Vice President and Director of Marketing Beniamin A. Soyars Senior Vice President. Manufacturnng ~ Robert H Cremin Vice Pres,dent. Sales Edward A Grefe Vi ce Pres dent, Public Affairs J. Paul Jeb Lee Vice President. M,arket ng Servi ces Fred J. Laux Vice President, Personnel William G Longest Vice President, Leaf W. Wallace McOowell Vice President. Operations James J. Morgan Vice President and Assistant Director of Marketing Frank E. Resnik Vice President. Operations Administration Richard D. Robertson Vice President, Ecology and Director of Energy Resources Edward M. Schaaf, Jr. Vice President, Production Dr. Robert B. Seligman Vice President, Research and Development Richard L. Snyder Vice President. Finance and Administrat on Dr. Helmut R. R. Wakeham Vice President. Science and Technology R. Nelson Beane Controller Operating Revenues 1977 Operating Income $2,160,362,000 $474,400,000 1976 $1,963,144,000 $401,426,000 1975 $1,721,549,000 $337,31E 1974 $1,502,267,000 $286,225,000 1973 $1,303,629,000 $227,282,000 24480it}2i9

13 Philip Morris U.S.A. Operating Revenues _ Philip Morris U.S.A. Cigarette Unit Sales Philip Morris U.SA. Operating Income U.S. Cigarette Industry Unit Sa1es Sinoe 1968, Philip Morris U S.A s ooerating Total unit sales of Philip Morris U.S A have Phihp Morris U.S A's operating irtcome has Over the tast ten years, total U.S. cigarette revenues have increased at an average grown at an average annual compounded risen at an average annual compounded rate industry unit sales have grown at an average annual compounded rate of 12 7% rate of 9.2% since 1968. of 20.9% since 1968 annual rate of 1.6%, while our market share has increased from 13,6% to 26 2% = Total Filter Crgarettes t• Total Non-Filter Cgarefles - Philip Morri,s Share of U.S. Industry (%) Millions of Dollars Billion Units Millions of Dollars Billion Unlts % 2450 175 525 700 35 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 _ 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 2048010220

14 Philip Morris U.S.A. 'Enriched Flavor' Tobacco! MERIT technology making °good taste a reality for low tar smoking, ~ i1r rt•u4 ... EM.~.kJ ~... nlrim i, ~ ia,.e4mim Hn ..~ -~w,.~...,..m,. .nN m.Im1 ~ ~.mr.m.d •IuuuwNm,Y,wWlla MERIT Kings & 1001i 2 1 Straightforward, informative advertis- Ing has heralded the 'Enriched Flavor' breakthrough of Merit. and growing consumer acceptance since its introduction in January. 1976, has made Merit one of the top ten brands in the U S. 2 Marlboro's distinctive and continuous advertising theme helped widen its lead as the top cigarette brand in the U.S. a 3 Bold advertisements like this success- fully introduced Benson & Hedges t00's Lights as another Philip Morris entry in the low-tar cigarette market. 4 Virginia Slims continued to grow as the leading women's brand, sup- ported by smartly contemporary advertising. 6 w,t rv ~at~ sr.'r~: •a, wr .,r,,,wvvro. 1,~a u..',»!~t Iw v ~'sb+.+x rtr we+4 .•-,.at t~trc, eaa t ~n~te w rro w e~ao r* m n.xnna N.r ~ s,:ere, n~ fser teeeeK4' ip»uRnntlMUrv.f4fL'mne• tNt 5 To achieve and maintain full distribu- tion and visibility of our brands at the retail level, particularly new products like Merit 100's, has required an expanded, well-trained, and highly motivated sales force. 6 Parliament, introduced 45 years ago as the first national filter-tip brand and still a major brand has been aggres- sively repositioned as a low-tar brand, 7 7 Technicians in our quality control laboratories carefully test finished cig- arettes and their packaging to insure that our rigid quality standards are maintained. Production employees and sophisticated quality control devices on the cigarette-making lines assist in this effort, I.-

G 8 Efficiencies achieved at the Richmond Operations Center, one of the world's largest and most modern c garette manufacturing facilities. contributed importantly to the 1977 profit increase. 9 Frequent and close collaboration among manufacturing, marketing, research, and leaf execut ves keeps them abreast of internal and external developments and brings their com- bined talents to bear on new ' opportunities. 10 In 1977, our company began install- 1 1 Our Research Center in Richmond ng still another new generation of cig- keeps Philip Morris in the forefront arette making and packing machines with scientific knowledge of tobacco in Richmond. leaf, smoke, filtration, flavorings, and other factors involved in meeting changes in consumer tastes and pref- erences. Among its notable achieve- ments is the breakthrough in 'Enriched Flavor' that has made Merit a success. 4

1 s Philip Morris International w P 0 © le (Q X, P w Off cers Albert E, Bellot Eric M Janssen Vtce Pres dent Vi ce Pres dent Personnel Hugh Cullman . President Aieardo G Buzzi Hans G Storr Vice Pres dent Vice Pres dent Finance Ham sh Maxweli . Execut ve Vi ce Prestdent. Staffan Gunnarsson William H. Webb Europe Middle East Vrce Pres dent Vi ce Pres dent Africa ana Asia C;anada Hamilton Hurley George P H bbard R William Murray Vice President Treasurer Vice Pres dent Europe M ddle East Africa Mary W, Covington Thomas M Kearns Vi ce Pres dent. Financial and Systems Carlos E Sa guero - Corporate Affairs Controller Vi ce Pres den t. Latin America lbena Fel x R. Sanchez , Operations Controller William J O'Connor . Vi ce Pres dent Australia New Zeatand and Chief Administrative Off cer Gv ~,I~~\1,:. C1 © ® ® ;e Operating Revenues Operating Income 1977 S1.349,280.000 5153,791,0JC 1976 S1.083,970,000 5130,104,0u0 1975 S 887,077,000 1973 S 94,017,000 S 822,907,000 $ 92,150,000

17 Philip Morris Internatlonal Philip Morris International Philip Morris International Operating Revenues Cigarette Unit Sales Operating Income Operating revenues of the consolidated and unconsolidated affdiates of Phnip Morris international have increased at an average annual compounded rate ot 21.9%since 1968. III Consolidated ~ Unconsolidated Millions of Dollars 2450 350 1750 iii ,So 100 ..iii 120 so iiiii 90 700 iiiiiii 60 Total unit sales of Philip Morris International's affiliates, licensees and exports have risen at an average annual compounded rate of 15 5% since 1968. Since 1968. Phdip Morris InternatFonaPs operating income has grown at an average annual compounded rate of 19.5% World Cigarette Industry Unit Sales Excluding Us a. Since 1968. wortd cigarette industry unit 9ales have increased at an average annual rate of 3.6% Our share of ths market has grown from 2 0% to 52'1'e ta = - Total Filter C!garettes Total NornF lter Cigarettes Phahp Moms Share of World Market (%) B,Ilion Units Mdlions of Doflars Biltan Units % 2 10 ~ • 175 3850 14 30 125 -i 2750 10 too 2200 75 50 25 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 73 74 75 76 77 68 69 70 71 72 t65o 11~ SSO 0 68 69 70 71 72 73 74 75 76 77 204801 iJ2?4'

1a Philip Morris International 1 Our affd ate in Ecuador. Tabacalera Andina, S.A . produces several popular cigarette brands in its modern manufacturing facility in Outo. Marlboro is one of the leading brands in this market. 2 Our long-t me pol cy of decentral zed management has enabled us to build experienced teams of national and regional managers who are best qualified to ant cipate changing condit ons in their markets and adapt our bus ness strateg es accord ngly 3 In Sw tzerland. the success of Fl nt. a low-tar, low-n cot ne brand introduced in 1976. and Muratti 2000, a low- delivery line extens on launched in 1977. helped us achieve a h gher market share last year. 4 Benson & Hedges (Canada) Limited's leading low-tar brand, Viscount, continued to record higher sales last year. and an extra mild version of the company's best-selling Belvedere brand was successfully Introduced, 5 Marlboro continued to increase market share in Germany last year Philip Morris G m,b,H. modernized and expanded its factory in Munich to meet strong demand for our brands in the European Common Market 6 Lindeman (Holdings) Limited achieved record sales volume and increased its share of the Australian wine market. Ben Ean Moselle, the number-one•selting bottled wine in Austrai a, made a malor contribution to sales growth.