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1g74. energy units per cigarette produced have decreased by 12%. Energy conservation is a cer.'ect example of how social activities make nus ness sense. MiIler Brewing's newest facility at Fulton, New yorkk and the brewery under construction at Eden, North Carolina, include energy conserva- ton as an integral part of supply, and pany ess Coal is the primary fue er.ergy-saving features of the latest technology have been incorporated into the design of the orewenes. tiliiler is the only brewer with a nationwide aium num can recycling program. Miller's dis- ;r:butors pay up to 17 cents a pound for alumi- num cans brought to reclamation centers. In 1977, 10 million pounds of aluminum were recla med, the equivalent of 240 million cans, up from 7.8 million pounds in 1976. Recycling recovers 95% of the energy that went into the production of the original can. The Milprint plant of Philip Morris Industrial at Downingtown, Pennsylvania, is installing a pilot r.eat recuperator that will save 97,500 gallons of fuel oil a year and a pollution-free incinerator that w ll convert the plant's own wastes into energy. Wisconsin Tissue Mills installed a heat exchanger system that recovers latent heat from d scharged water, saving 1,050,000 gallons of oil a year. Mission Viejo Company has helped fund the f rst phase of a comprehensive water reclama- t on program which is designed to reuse all the waste water in the community. The initial 2-mil- i on-gallons-per-day pilot reclamation plant is scheduled to begin operation in early 1978. Mission Viejo has joined 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 $4 million to build an 11-mile 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. M uer Brewing Company aluminum Philip Morris supports higher educa- The Jasper Johns art exhibition sponsored can reclamation centers reclaimed ten tion with direct grants to independent by Philip Morris opened at the Whitney m llion pounds of aluminum in 1977. .. private colleges and college funds. Museum of American Art in New York City.

10 In the making of paper and beer, discharged water must be treated. Our Wisconsin Tissue Mills and Plainwell paper companies adhere to a policy of discharging cleaner water than the water already present in the rivers. In 1977, Wis- consin Tissue received the Izaak Walton League of America'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 Morris's objectives is to promote women and minority group members into higher level positions. We are making progress on this front. Minorities now fill 10.2°l0 of positions clas- sified as "officials and managers"; five years ago they held 5.7%. Minorities now account for 15.6% of our sales force, up from 9.007o five years ago. Women today account for 9.1 % of our officials and managers; five years ago they accounted for 6.6%. Women today hold 22.3% of our professional jobs, compared with 13.3% five years ago. Philip Morris and Miller each maintain exten- sive minorlty bank deposit programs. At year- end, our program involved 44 minority=owhed banks. Miller Brewing, as a part of its facilities expansion, has awarded minority vendors con- tracts totaling more than $25 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 includad 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 e:cological 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 col- 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. sW

The Philip Morris Arts Grant program in Aus- trat a continues to support innovative Australian ar, sts, and an urban beautification program in Canada made billboards available for large- scale paintings. National artists, dance groups, orchestras, and cultural centers throughout the ,,vorid receive continuing assistance from Philip ~v±orns affiliates. As part of its support of the arts in the U.S., Ph lip Morris is extending its matching gift pro- gram to include contributions to cultural institu- ;,ons. The company, within certain limitations, ,v ll match, dollar for dollar, any contribution made by an employee to a cultural organization, ;ust as it does in the field of education, Board of Directors john E. Cookman, a member of our Board of D rectors since 1963, retired in 1977 as a direc- tor. Ne 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- t nued growth in both of our largest industries, vgarettes and beer, and in our other fields. In the 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 make 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 Committee 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. Cullman 3rd Chairman of the Board and Chief Executive Officer George Weissman Vice Chairman of the Board Ross R. Millhiser President

Officers Fred J. Laux Vice President, Personnel Or. Robert B. Seligman Vice President, Operating Revenues Operating Income Clifford H. Goldsmith President William G. Longest Research and Development John T. Landry Vice President, Leaf Richard L. Snyder Vice President, 1977 Executive Vice President and Director of Marketing W. Wallace McDowell Vice President, Operations Finance and Administration $2,160,362,000 $474,400,0 Benjamin A. Soyars James J. Morgan Dr. Helmut R. R. Wakeham Vice President. 1976 Senior Vice President, Vice President and Assistant i d T l S h Manufacturing Director of Marketing ence an no ogy c ec $1,963 144 000 $401 426 0 R. Nelson Beane , , - , , Robert H. Cremin Frank E. Resnik Controller tn Vice President, Sales Vice President, O 1975 Edward A. Grefe Operations Administration O G ~ $1,721,549,000 $337,314,0 Vice President, Public Affairs Richard D. Robertson Vice President, Ecology and O Cn 1974 J. Paul Jeb Lee Director of Energy Resources r-~ _ - Vice President, Marketing Service"s - 1 $1,502,267,000 $286 225 0 Edward M. Schaaf, Jr. , , Vice President. Production 1973 S1,303,629, 000 $227,282,0

13 YV TAR--- E-'•1RfCHEJ FLAVOR' Philip Morris U.S.A. Philip Morris U.S.A. Operating Revenues Cigarette Unit Sales Smce 1968, Philip Morris U.S.A: s operating--"' Total unit sales of Philip Morris U.S.A. have revenues have increased at an average grown at an average annual compounded annual compounded rate of 12.7%, rate of 9.2% since 1968. . = Total Filter Cigarettes = Total Non-Flter Cigarettes - Philip Morris Share of U.S. Industry (%) Yilllons of Dollars Billion Units Mlllions of Dollars Billion Units % 2450 175 525 700 35 1750 1400 1050 700 350 375 300 /Mi 400 225 500 t•_-isMMs~ 25 20 5 Philip Morris U.S.A. Operating Income U.S. Cigarette Industry Unit Sales Philfp Morris U.S.A: s operating income has Over the last ten years, total U.S, cigarette risen at an average annual compounded rate industry unit sales have grown at an average of 20.9% since 1968. annual rate of 1.6%, while our market share has increased from 136% to 26.2%. 150 100 10 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

14 Philip Morris U.S.A. `Enriched Flavor' Tobacco! MERIT technology making good taste a reality for low tar smoking SCwrmWai~m, vhclw.raWN.vx 'Wmu,Am ww, 44ewbanv owe,~ddlnnn' ~t~mrcwJ~kwu!Ih~ MERIT wrtgs& ioos i 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. 4 3 Bold advertisements like this success- fully introduced Benson & Hedges 100'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. Low•tar P'dtilalriellt Choose more than just a numben 14itthT~ia. ,F,~dulhat!ntMUNwskecWe ~ ~ , .i~HUVnfke.,ubvil'sipmUe ~'mhi tip.(,vu-, (r:,er. Tu,2 ~Aer f?ed':xk' Ihdrwr f.,W. VGetl fiYen.~.,t tlut rar b,uld~A:~x.~~,~ Nu~ I~% Md tluti wtM:e 4n,tx Par:amm.t ha t1e zG x~~ye PeA:vnmtsfine[nrtmudtokeeptarGnEiy fnm v.u'i, 8 r~ I'i~ 4„he.e's te'fSa feedbxX 6 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 Technicians in our quality control laboratories carefully test finished c arettes and their packaging to insui that our rigid quality standards are maintained. Production employees and sophisticated quality controf devices on the cfgarette-making linf assist in this effort.

8 Efficiencies achieved at the Richmond 10 Operations Center, one of the world's - argest and most modern cigarette manufacturing facilities, contributed importantly to the 1977 profit increase. 9 Frequent and close collaboration among manufacturing, marketing, research, and leaf executives keeps them abreast of internal and external developments and brings their com- b ned talents to bear on new opportunities. In 1977, our company began install- 11 Our Research Center in Richmond ing 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. 15

Officers Albert E. Bellot Eric M. Janssen Vice President Vice President Personnel Hugh Cullman , President Aleardo G. Buzzi Hans G. Storr Vice President Vice President Finance Hamish Maxwell , Executive Vice President, Staffan Gunnarsson William H. Webb Europe/Middle East; Vice President Vice President Africa and Asia i Canada Hamilton Hurley George P. Hibbard R. William Murray Vice President Treasurer Vice President, Europe/Middle East/Africa Mary W. Covington Thomas M. Kearns Vice President, Financial and Systems N) Carlos E. Salguero Corporate Affairs Controller Ut Vice President, O O Latin America/Iberia Felix R. Sanchez O Operations Controller N William J. O'Connor O Vice President, cJl Australia, New Zealand and ,.-.`0 Chief Admin strative Officer Operating Revenues 1977 1976 1975 1974 $ 887,077,000 1973 S 822,907,000

Philip Morris International Operating Revenues Operating revenues of the consolidated and unconsolidated affiliates of Philip uorns international have increased at an nerage annual compounded rate of %1 91ti since 1968. 1111111 Consoldated M unconsolldated 0 Philip Morris International - _ Cigarette Unit Sales Total unit sales of Philip Morris International's affifiates, licensees and exports have risen at an average annual compounded rate of 15.5'/o since 1968. Philip Morris International Operating Income Since 1968, Philip Morris International's operatfng income has grown at an average annual compounded rate of 19.5%. World Cigarette Industry Unit Sales Excluding us.A. Since 1968, world cigarette industry unit sales have increased at an average annual rate of 3.6%. Our share'of this market has grown from 2.0% to 5.2%. ~ Total Filter Cigarettes ~ Total Non-Filter Cigarettes = Philip Morris Share of World Market (%)

Philip Morris International 1 Our affiliate in Ecuador, Tabacalera Andina, SA., produces several- popular cigarette brands in its modern inanufacturing facility in Quito. Marlboro is one of the leading brands in this market, 2 Our long-time policy of decentralized management has enabled us to build experienced teams of national and regional managers who are best qualified to anticipate changing conditions in their markets and adapt our business strategies accordingly. 3 In Switzerland, the success of Flint, a low-tar, low-nicotine brand introduced in 1976, and Muratti 2000, a low- delivery line extension launched in 1977, helped us achieve a higher 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-selling bottled wine in Australia, made a major contribution to sales growth.