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Aleardo G. Buzzi, President and Chief Executive Officer, Philip Morris International Inc. Marlboro continued its growth as the best-selling brand in West Germany (far left), Europe's largest and most profitable tobacco market. Superlights (above) is an important part of the Philip Morris brand family in Australia. Benson & Hedges (left) maintained its U.S. leadership in the i00mm segment, and Chesterfield (below) gained volume and share in Spain. began limited distribution of premium-priced Cartier Vendome; and in the dis- count segment introduced Bristol and successfully completed the national roll- out of Alpine. Overseas, we had several new product successes. Merit performed particularly well in Japan, selling nearly 2.1 billion units. In Korea, Virginia Slims became a leading import, while in Australia, Longbeach became the leader in its segment. Chesterfield was a success in the Netherlands, and in Venezuela, Fortuna became a leading brand in its first year on the market. Throughout the year, we increased the visibility and availability of our brands at retail. We placed added emphasis on incentive pro- grams for wholesalers and retailers, and stepped up our other promotional activities. A major initiative during the year was the expansion of our sales or- ganizations in the United States and a number of important foreign markets. We continue to modernize our plants to enhance efficiency and expand capacity to meet increased demand for our products. Over the next five years, we plan capital expenditures of over $2 billion to support our worldwide tobacco operations. The tobacco industry continues to face a number of social and political chal- lenges both in the United States and abroad. Some of these stem from the agendas of anti-smoking activists; others, from the view that tobacco taxes are a simple solution to government budget deficits. In the United States, we support legislation protect- ing those who choose to smoke from discrimination in employment. We have also launched programs stressing accommodation of both smokers and non- smokers in public areas. And we have joined with a number of coalitions - rang- ing from grass roots groups to organizations of leaders in the public and private sectors - to fight unfair and regressive consumer excise tax increases. In addition, we have developed an array of com- munications vehicles in the United States, including Philip Morris Magazine and the Smokers'Advocate national newsletter, to pro- vide information to con- World Cigarette Industry Unit Sales (Excluding U.S.A,)  World Cigarette Industry Unit Sales 0 Philip Morris Share of the World Market (%) Billion Units 5000 204816" J~> , 8 11

Philip Morris U.S. Cigarette Export Volume 85 86 87 88 89 sumers and to present our side of the issues. This helps us marshall support for our stances against unfair tax proposals, advertising bans, and similar constraints on our consumers' rights to enjoy our products and on our rights to market them. We are countering anti- smoking activity abroad with consumer information and politeness and accom- modation programs. These campaigns have gained public support and have successfully introduced the important elements of com- mon sense, courtesy, and civility into public policy debates on smoking. Our large and growing volume base and efficient production facilities have positioned us well for the opportunities and chal- lenges of the future. We have the brands, technologies, and marketing skills to strengthen our leadership and profitability in a highly competitive business. We also have the resources and the will to protect- and to build on-our achievements. Food In 1989, Kraft and General Foods operations merged to form the largest food com- pany in the United States and Canada, and the second largest in the world. In addition, most of our operating units more than met the financial and mar- keting targets set in the beginning of the year. On a pro forma basis, including a full year of Kraft results for 1988, Kraft General Foods, Inc. operating revenues grew by 1.9%, and operating companies income increased 26.2%, leading to operating margin improve- ments of 1.8 percentage points. At General Foods USA, improved product mix and operations led to revenue and income gains. Maxwell House volume increased, and share grew to reach more than 34%. Buoyed by the national expansion of Jell-O pudding snacks, our Jell-O and other desserts volume grew by nearly 3%. Kool-Aid and our other pow- dered beverages maintained our leadership position with a share of nearly 81%. We also continued to build our bakery operations, and pur- chased the Bouyea-Fassetts Baking Co., a regional baker in the Northeast. Post cere- als had an unsatisfactory year as share declined in spite of the success of our new oat-based cereals. Strong results at Kraft USA were led by continued vol- LL'",~ Ihe combination of Kraft and General Foods created more than the second-largest food company in the world. It created an organization determined to be the leader in its industry. To lead the industry we must rank first in quality, with products and services that con- sistently meet all our customers' and con- sumers' needs and ex- pectations, setting the standards for taste, nu- trition, convenience, variety, and value. We intend to lead in productivity as well as quality. In 1989, Kraft General Foods people achieved more than $425 million in savings by operating more effi- ciently. These are per- manent cost reductions, providing ongoing bene- fits for our company. The real opportunity now is synergy-work- ing together so that the Kraft General Foods of the future adds up to more than the sum of its parts in the past. With our family of brands, and the support of Philip Morris, we have immense strengths and even more potential. We are going to use them to grow still more, " Kraft General Foods introduced more new products in 1989 than any other U.S. food company. Among them: Kool-Aid Kool-Pops (above), and m crowave-reaay Cheez Whiz Zap-A-Pack (right). Michael A. Miles, Vice Chairman, Philip Morris Companies Inc.. and Chairman and Chief Executive Officer, Kraft General Foods, Inc. Operating Revenues (Percent ot Total Operabng Revenues) Food 51 % 12

The 'Great American Breakfast" promotion (left) now covers orange drink. bacon, bread, bagels, coffee- and more. Managing international product lines (right): John M. Keenan, Fresident. Kraft General Foods Inter- atronal; and Robert S. Morrison. r-res,dent, Kraft General Foods Canada. Research in oils, oilsubsti- tutes, and fat free technology (above) takes place at the new Kraft Foods Ingredients Center. Geoffrey C. Bible, President and Chief Administrative Officer, Kraft General Foods, Inc. 1W ume gains in the process cheese category. Among our grocery products, Miracle Whip increased its share of the spoonable salad dress- ing category to almost 89%, and Kraft increased its share of the mayonnaise market to over 21%. A sizable volume increase in our Kraft side dishes and dinners was largely driven by new Versa- tile Side Dish products such as noodles & sauce, sea- soned/sauced rice, and pasta salads. Kraft General Foods Inter- national is now the largest U.S.-based food multina- tional in both Europe and Asia. We also have a consid- erable presence in Latin America, as well as in a number of export markets. Philadelphia Brand cream cheese and Kraft mayon- naise and cheese slices showed strong global gains. Our European coffee busi- ness increased share in most markets, led by Gevalia in Sweden, Kenco in the United Kingdom, and Max- well in France and Germany, as well as by HAG in West Germany and HAG exports to other countries. Kraft General Foods Canada is now Canada's largest packaged food com- pany, with four of the coun- try's top ten food products, and seven of the top 25. In 1989, volume for Post cere- als gained 5%, lifting market share to a 20-year record of over 12%. Miracle Whip, Tang, and Maxwell House also increased their market shares. Total Oscar Mayer Foods volume rose by 6%, driven by gains in the core Louis Rich and Oscar Mayer fran- chises as well as by the suc- cessful introduction of new Lunchables lunch combina- tions, Louis Kemp surimi seafood products, and Zappetites microwaveable snacks. Oscar Mayer brand's number one market posi- tion, together with Louis Rich's leadership of the growing turkey segment, brought combined market shares to nearly 35% for luncheon meats and 19% for hot dogs. Oscar Mayer bacon also held its leader- ship, accounting for one- eighth of its category. Kraft General Foods Frozen Products is the larg- est frozen foods manufac- turer in the world. Breyers, the leading ice cream in the United States, increased its volume by 3%, and volumes for Light N' Lively, Knudsen, and Breakstone's products grew by the same amount. Jell-O novelties held vol- ume, while Cool Whip top- pings continued to lead the market with over a 60% share. Volume for Lender's, the clear leader in frozen Kraft General Foods, Inc. Volume Billions of Pounds 16 12 8 1111 4 0 85 2048163939 86 87 88 89 15

Total U.S. Cheese Consumption Md!ions of Pounos 24 bagels, grew by more than 5%. Birds Eye maintained share, and remains the mar- ket leader in frozen vegeta- bles. Our Budget Gourmet and Tombstone brands built both volume and market share during the year. Kraft General Foods Com- mercial Products is a major force in the expanding com- mercial food industry. Kraft Foodservice, which distrib- utes Kraft General Foods and other products to the foodservice industry, is the second-largest foodservice distributor in the country. With volume up 7.5%, oper- ating income improved still further, aided by increased efficiencies, tactical acquisi- tions, and a marketing and distribution alliance with Baxter Healthcare Corpora- tion. Kraft Food Ingredients is the country's largest pro- cessor of edible vegetable oils, and is expanding its product line of value-added specialty ingredients for food manufacturers, such as dehydrated cheese pow- ders, process and natural cheese, and confectionery products. Volume at Kraft 16 Food Ingredients was flat, but operating income rose, largely due to productivity and product mix improve- ments in the Oil Products Group. New product develop- ment is crucial to meet the demands of the consumer of the 1990's: food must be healthful; it must be conven- ient; it must deliver all the quality variety, and richness imaginable... and it must taste good. We are actively pursuing opportunities to satisfy these consumer needs with new products. One of the fastest-growing segments of the food indus- try is made up of products featuring reduced calories, and cholesterol and fat reduction. In 1989, we suc- cessfully introduced a large number of line extensions, such as Philadelphia Brand neufchatel cheese (a lighter style of cream cheese) in various markets; Cholesterol Free Miracle Whip, Kraft Cholesterol Free Mayon- naise, and Breyers Light ice milk in the United States; light Cracker Barrel cheese in Canada; and sugar-free Hollywood gum in France. We are also attracting health-conscious consumers with oat products, such as Post Honey Bunches of Oats, Lender's Oat Bran bagels, and Oroweat Oat Nut bread, as well as entire brands, such as Freihofer's Hearthstone bread, Louis Kemp surimi seafood, and Light N' Lively products. In light of growing interest in health and nutrition, we expect fat replacement tech- j 20481G:~:;40 James W McVey, President, Oscar Mayer Foods, and James M. Kilts, Presldent. Kraft USA, watch as meats from Oscar Mayer and cheeses from Kraft become Oscar Mayer Lunch- ables lunch combinations. Responding to consumer interest in health and variety: Entenmanns fat free and cholesterol free bakery line (above), Maxwell House Colombian Supreme coffee (also above), and Miracoli pasta dinners (right) in Germany. There `s always room for a key product in his test kitchens (left): Richard P Mayer, President, General Foods USA.

George F Goebeer. President. .~® Kraft Gerera!Foods Comrrercial ~~ Products ,~ooressrng healtn concerns vdhHe "ov=dfng full flavor Kraft Free fat .no'esterot free Ranch style ; oress~ng (far!eft). Finr iresh -- and oasias (aoovel reacto iooo stores throt ghout +ta!~ _ar Maver hot docs ta!so above ='e a stalJ!e Of the American C, ?;- - ~emas Herskov,ts_ Presdent- Kraft Ger,era! Foods Frozen Products nght~ nologies to present a major growth opportunity In 1989, we successfully adapted a variety of proprietary fat replacement technologies to a host of products, from Sealtest Free non fat ice cream in the freezer to Kraft pourable salad dressing and Entenmann's reduced calorie, fat free, and cho- lesterol free cakes on the grocery shelves. Convenient meal prepara- tion has become essential. In 1989, for the 720ro of the homes in the United States with microwave ovens, we began the introduction of our microwave Kraft entrees, Oscar Mayer Zap- petites snacks, Minute microwave meals, and Jell-O microwave pudding. Growing sales of ready-to- eat desserts led us to acquire the Catelli Magic Moments and Light Touch mini-dessert lines, giving us a 65% share of the market in Canada. In addition, Oscar Maver bolstered its U.S. convenience-store presence through contracts with Cir- cle K and Emro Marketing Co., and continued to expand Oscar Mayer Lunch- ables lunch combinations nationally. We now supply Boboli breads for on-site supermarket pizza prepara- tion. and increased capacit' v in our foodservice opera- tions is helping us grow with the expanding restaurant food market. Consumers also insist on taste, quality. and variety in their foods. In the growing hiaher-quaiit' v ground coffee segment. we introduced Maxwell House Rich French Roast coffee, Filter Packs, and Colombian Supreme in the United States, and Max- well House Sierra in Can- ada; we are also testing chilled, canned cappuccino. We acquired the DiGiorno brand fresh pasta business, broadening our position in a profitable, high-growth cate- gory Increased consumer interest in variety led us to introduce three flavors of Philadephia Brand cream cheese in Spain, and a new form - Mousse - to great success in Italy: Our 1989 capital invest- ments will help us keep up this pace. We are refocusing our coffee processing plants on specific products and processes, for instance, and expanding our capacity to meet rapidly increasing demand for Oscar Mayer Lunchables lunch combina- tions, Louis Rich turkey, and Louis Kemp surimi seafood. In our complex foodservice business, a substantial investment in error-free overnight service should give us a competitive advan- tage in a growing field. These investments fre- quently stretch across Kraft General Foods operating units. Our fat replacement technology wil I benefit many of our food compa- nies; California's new Kraft cheese facilitv will also ~ house Boboli bread opera ~ tions: and our purchase of Fini fresh foods in Italv V will take advantage of our Invernizzi distribution ~~ svstem there. - .:.. w }~a

I Merging Kraft and General Foods has led to thousands of specifically identifiable synergies offering concrete long-term benefits. Our syn- ergy projects range from the large-scale combination of our international operations and joint media purchases, to smaller but still signifi- cant savings from shared manufacturing facilities and other cooperative ventures. There are additional oppor- tunities in such constructive actions as bringing Oscar Mayer Zip-Pak packaging technology to Kraft cheese, and the joint marketing of Kraft General Foods prod- ucts through both "The Great American Breakfast" promotion and the sponsor- ship of Women's Interna- tional Professional Tennis. As 1992 approaches, the European Community is developing shared environ- U.S. Beer Industry Barrei Shipments (Federal Tax Paid Withdrawals)  U.S. Beer Industry Barrel Shipments  Miller Share of U.S. Industry ( % ) 85 86 87 88 89 20 30 25 20 15 10 5 0 mental and labeling rules to facilitate trade. We are ener- getically pressing for uni- form federal labeling statutes in the United States. Our solid 1989 results position us to satisfy chang- ing consumer needs more rapidly than ever before. Through close attention to detail, and by aggressively building and defending each brand, we will earn still greater acceptance in stores and homes around the world. Beer Miller Brewing Company posted a 1989 volume increase of 3.7%, perform- ing better than industry averages for the fourth consecutive year. The com- pany's share of the U.S. beer market rose to 23.1%, up by 0.6 share points over 1988. Despite increases in market- ing expenditures and prices for brewing materials, oper- ating margins improved as a result of continued cost containment efforts. Miller's share of the full- calorie premium segment increased for the second year in a row, bolstered by the continued rapid growth of Miller Genuine Draft- now counted among the nation's top ten beer brands. Miller Lite, the second- best-selling beer in the United States, increased volume in 1989, and repre- sents approximately 50% of the premium low-calorie segment. Milwaukee's Best, our leading below-premium entry, increased both vol- Leonard J. Goldstein, President and Chief Executive Officer, Miller Brewing Company. Operating Revenues tPe2ent ot Total OperaMg Revenues) Only the finest ingredients are used ir Miller's Milwaukee brew house (right). helping Miller Lite (above) to maintain its market leadership, We supported Miller High Life (left) with new pack- aging, graphics. and advertising.

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M Iler Genu,_ne Draft (far leff) is how amono the top ten beers in the United States New Sharo s nor-acoholrc- brew (left) helps consumers "keep=- their edae while enjoying a"f-uY6eet_ - flavor. Our rigorous quality control ' program includes taste testing _ (below) at the Miller Technlcafi Cenier t .'W-- PF d 9 - ~ C ' C r ~., t iO 0rns al7rfa +J S o _Orabon - r; orovrces tuaanc:no toostc~outors and . -_ , i , i ers o our t s a o ` =_ r ~~ u p o ooa acco, raDO2i. ano Cieer (reltl business s_ ume and share, and now ranks seventh in the industry We are responding to our changing customer and consumer base with major marketing initiatives. Local- ized marketing programs boosted our volume and share in key markets, such as Texas, while new product tests and introductions expanded our presence in growing segments. We launched two national brands: Lowenbrau Light, and Sharp's, a non-alcoholic beverage benefiting from an innovative, low-temperature brewing process. We also tested a light version of Gen- uine Draft, and increased Leinenkugel's strength in its traditional markets while expanding it geographically. To improve our focus on segments with greater profit potential, we discontinued Matilda Bay wine coolers. To provide a strong base for our gro«'th, we contin- ued our program of produc- tion improvements and capacity expansions, including a new hops pro- cessing facilitv in Wiscon- sin: expansion of packaged draft capability in lrwindale, California, and Fulton. New yi?rk: and the beginning of construction for packaged draft production in Fort Worth. Texas. Federal legislation now- requires warning labels on all beer sold in the United States. GVe redesigned and changed all our labels well ahead of the mandated deadline. 196y sawRliller'y larpest revenue. income. and vol- ume percentage gains in the past three years. We intend to build on this momentum. Financial Services and Real Estate Our consolidated operating companies income from financial services and real estate rose by 6.10b, despite a 16.2% decline in operating revenues as Mission Viejo Company continued its planned withdrawal from homebuilding. The financing activities of Philip Morris Capital Corpo- ration (previously named Philip Morris Credit Corpo- ration) led to operating reve- nues of $193 million, up 11.6%, and operating com- panies income of $82 mil- lion, up 32.3%. Increasing its ties to Philip Morris oper- ating companies, PMCC introduced several financing programs tailored to the needs of Philip Morris cus- tomers and suppliers. The company also continued its active role in leasing trans- actions, and is now one of the major equipment lessors in the United States. Mission Viejo operating revenues and operating companies income declined to S334 million and S91 mil- lion. respectivel}, as a result of the compan' v's focus on land planning. develop- ment. and sales..a.s wE,stel) up our selling activities. .,t}i in th<, continued strenp California market isyieldin<.; strong gains frunl ~3p1~rc~ci- ated real est<itU ValuCt. ~~() 4S I ():i~I-t !- ~_ni*

Managemen#'s Discussion and Analysis of Financial Condition and Resul#s of Operations V Operating Results 1988 Compared with 1987 Operating revenues for 1988 increased $3.6 billion (12.6%) and Effective September 15, 1989, outstanding shares of common operating profit increased $438 million (10.5%). All business * stock were split four-for-one. All references to per share amounts segments had increased operating revenues and all business have been restated to reflect the split. segments except food had increased operating profit. On December 7, 1988, Kraft, Inc. became a wholly-owned sub- The company's 1988 results included restructuring costs at sidiary of the company. The purchase of outstanding Kraft shares, General Foods. As a result of this restructuring, certain facilities retirement of employee stock options and other related payments were combined and overhead costs were reduced to achieve totaled $12.9 billion. The acquisition has been accounted for as a operating efficiencies. This restructuring reduced earnings before purchase and, accordingly, operating results of Kraft have been income taxes, net earnings and earnings per share by $348 mil- included in the consolidated operating results of the company lion, $212 milliort'and $.23, respectively. since acquisition. The purchase price exceeded the fair value of In 1987, the company recorded a pretax charge of $117 million ' the net assets acquired by $12.2 billion and such excess is being related to a restructuring of General Foods into three separate amortized over 40 years by the straight-line method. operating companies, partially offset by a pretax gain of $46 mil- lion from the sale of the Open Pit barbecue sauce retail business. I 1989 Compared with 1988 These items reduced 1987 earnings before income taxes, net eam- Operating revenues for 1989 increased $13.0 billion (41.0%) and ings and earnings per share by $71 million, $22 million and $.02, operating profit, as defined for segment reporting purposes (oper- respectively. ating income before unallocated corporate expenses), increased Interest and other debt expense net increased $24 million in , , $2.5 billion (53.4%). The inclusion of Kraft for the full year of 1989 1988 compared with 1987. The increase was due primarily to inter- resulted in $11.7 billion (90.0%) of the increase in operating reve- est (approximately $68 million) on debt associated with the pur- nues and $904 million (36.9%) of the increase in operating profit. chase of Kraft, partially offset by lower interest expense l f b The remainder of the increases resu ted primarily rom to acco =throughout the year prior to the Kraft acquisition, as well as higher I~ _operations. -= interest income Pamerl (R27 millinnl nn c-ach halannac intaract I~ In 1989, General Foods Corporation was combined with Kraft to expense prior to the acquisition of Kraft was lower by approxi- i` form Kraft General Foods, Inc. ("KGF'~, and the company charged mately $10 million in 1988 due primarily to lower average amounts $179 million against pretax income, primarily for costs associated of outstanding debt partially offset by higher interest rates , . I' with this merger. In addition, the company sold its equity invest As of January 1, 1988, the company adopted the method of " ~ " ment in Rothmans International p.l.c. ( Rothmans ) for 8610 mil accounting for income taxes prescribed by SFAS 96. Accordingly, ~ g lion 10 /a% notes maturing in 1994, generating a pretax gain of $455 the company changed its method of computing income taxes million. The notes were subsequently sold with recourse for from the-deferred method used in prior years to the method pre- approximately $850 million. The net impact of these items was an scribed by SFAS 96. SFAS 96 increased 1988 net earnings and earn- increase in eamings before income taxes, net eamings and eam- - ings per share by $213 million and $.23, respectively. Prior years' ings per share of $276 million, $152 million and $.16, respectively. data were not restated. (See Note 10 of the notes to the 1989 Amortization of goodwill increased to $385 million in 1989 due consolidated financial statements for further details.) primarily to goodwill arising from the acquisition of Kraft. Interest The company's effective tax rate in 1988 was 44.6%, compared and other debt expense, net, increased $ 1.1 billion in 1989 com _ With 44.9% in 1987. The rate did not decrease in line with the pared with 1988, due primarily to higher amounts of outstanding reduction in the U.S. corporate income tax rate, due to the rever- debt resulting from the acquisition of Kraft. sal during 1988 of excess deferred tax benefits recorded as of The company's ratio of earnings to fixed charges declined to 3.5 January 1, 1988 in accordance with SFAS 96 and higher provisions from 5.2 in 1988 and 5.0 in 1987, primarily as a result of higher for the repatriation of foreign earnings. - interest expense associated with the acquisition of Kraft. Earnings before cumulative effect of accounting change The company's effective tax rate in 1989 was 41.8%, compared increased in 1988 by $222 million (12.1%), due principally to with 44.6% in 1988. The decrease was due primarily to excess increased operating profit ($438 million), partially offset by higher deferred tax benefits related to Statement of Financial Accounting _- interest and other debt expense, net ($24 million) and a higher Standards No. ("SFAS") 96 and lower provisions for the repatria- income tax provision ($161 million). In addition to higher earn- tion of foreign earnings, partially offset by higher nondeductible ings, the 14.4% increase in earnings per share before cumulative goodwill amortization. effect of accounting change reflects a lower average number of Earnin s before cumulative effect of accountin chan e g g g outstanding shares of common stock in 1988._ increased in 1989 by$882 million (42.7%), due to increased operating profit ($2.5 billion), partially offset by higher interest -- expense ($1.1 billion) and a higher income tax provision ($449,- _- ,__ - - - - million). =----- I

uperaung Resurts dy Business Segment_ _ Philip Morris Intemational increased operating revenues by $290 million (3.696) due primarily to increased unit volume ($694 Operatmg revenues and operating profit increased 41.0% and 53.4%, respectively-over 1988. Operating revenues of tobacco operations were 40% and 52% of consolidated operating revenues in 1989 and 1988, respectively. Operating profit of tobacco opera- tions was 72% of total operating profit in 1989 compared with 84% in 1988, of which Philip Morris U.S.A. and Philip Morris Intema- tional contributed 51% and 21%, respectively, in 1989 and 67% and 17%, respectively, in 1988. Food operating revenues were 51% and 35% of consolidated operating revenues in 1989 and 1988, respec- tively. Operating profit of food operations was 22% of total operat- ing profit in 1989 compared with 9% in 1988. Percentages for tobacco and food operating profit reflect the 1989 gain on sale of investment in Rothmans, the inclusion of Kraft for the full year 1989, and food restructuring charges of $179 million and $348 million in 1989 and 1988,-respectively, Tobacco 1989 Compared with 1988 ' Operating revenues and operating profit in 1989 increased $1.3 billion (7.796) and $1.2 billion (31.6%), respectively, over 1988. The increase in operating revenues was due primarily to price increases ($1.5 billion) and volume growth ($696 million), partial- ly offset by currency translation ($480 million) and the deconsoli- dation of a subsidiary, the operations of which were merged into a joint venture. The increase in tobacco operating profit was due principally to higher gross profit ($1.1 billion), approximately 94% of which related to price increases, and to the $455 million gain on sale of investment in Rothmans. Partially offsetting these items were higher marketing, administration and research costs ($290 million), which were due primarily to higher marketing expenses. The following discussion of results by tobacco operating unit excludes the gain on sale of investment in Rothmans and amorti- zalion of goodwill. In 1989, Philip Morris U.S.A's operating revenues increased $988 million (11.6%), substantially all of which was due to price increases. Philip Morris U.S.A. increased its domestic unit volume to 219.5 billion units for a market share (based on shipments) of 41.9% in 1989 compared with 39.3% in 1988. Marlboro's share of the U.S. market was approximately 26% in 1989. The domestic cigarette industry's unit volume decreased approximately 6%. The industry decline in 1989 reflects lower consumer demand, as well as a decision by Philip Morris U.S.A's largest competitor to reduce trade inventories below year-end 1988 levels by limiting shipments. Philip Morris U.S.A.'s market share increase is attribut- able in part to this reduction of trade inventories and may be inflated by as much as one share point. In 1989, Philip Morris U.S.A.'s operating profit increased $519 million (16.8%). This- increase reflects higher gross profit ($753 million), substantially all of which was related to price increases, partially offset by higher marketing expenses. million) and price increases ($561 million), partially offset by currency translation ($480 million) and the deconsolidation of a subsidiary, the operations of which were merged into a joint ven- ture. Total unit volume of Philip Morris International for 1989 increased 7.7% over 1988. Philip Morris International's operating profit increased $233 million (30.2%), due primarily to higher gross profit ($318 million), partially offset by higher marketing, administration and research costs ($85 million). The increase in _ gross profit was due to price increases ($254 million) and volume increases ($199 million), partially offset by currency translation ($92 million) and the deconsolidation of a subsidiary, the opera- tions of which were merged into a joint venture. 1988 Compared with 1987 In 1988, operating revenues and operating profit from tobacco operations increased $1.9 billion (13.3%) and $556 million (16.9%) over 1987, respectively. The increase in operating reve- nues was due primarily to price increases ($962 million), volume growth ($639 million) and currency translation ($379 million). The increase in operating profit of tobacco operations was due principally to higher gross profit ($1.2 billion), approximately 70% of which related to price increases, with the remainder attribut- able to volume increases. Partially offsetting the increase in gross profit were higher marketing, administration and research costs ($674 million), which were due primarily to higher marketing expenses. In 1988, Philip Morris U.SA's operating revenues increased $861 million (11.3%), approximately 86% of which was due to price increases, with the remainder primarily attributable to a 1.7% increase in domestic unit volume. Philip Morris U.S.A's unit vol- ume outperformed the domestic cigarette industry, which declined by2.195 during 1988. In 1988, Philip Morris U.S.A's oper- ating profit increased $372 million (13.7%). The increase reflects higher gross profit ($736 million, approximately 92% of which related to price increases), partially offset by higher marketing, administration and research costs ($364 million, approximately 83% of which related to higher marketing expenses). Philip Morris International increased its operating revenues by $ 1.1 billion (15.4%) due primarily to increased unit volume ($522 million) and currency translation ($379 million). In 1988, Philip Morris International's operating profit increased $192 million (33.0%). The increase was due primarily to higher gross profit ($489 million), partially offset by higher marketing, administration and research costs ($297 million), primarily related to higher marketing expenses. The increase in gross profit was due primar- ily to volume ($193 million) and price ($169 million) increases, as well as currency translation. 20016"4a 25