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By-laws - ALTRIA GROUP, INC. - 3-19-2002

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By-laws - ALTRIA GROUP, INC. - 3-19-2002 Powered By Docstoc
					Exhibit 3.2 BY-LAWS of PHILIP MORRIS COMPANIES INC. ARTICLE I Meetings of Stockholders Section 1. Annual Meetings. - The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting, and any postponement or adjournment thereof, shall be held on such date and at such time as the Board of Directors may in its discretion determine. Section 2. Special Meetings. - Unless otherwise provided by law, special meetings of the stockholders may be called by the chairman of the Board of Directors, or in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, an executive vice president or by order of the Board of Directors, whenever deemed necessary. Section 3. Place of Meetings. - All meetings of the stockholders shall be held at such place in the Commonwealth of Virginia as from time to time may be fixed by the Board of Directors. Section 4. Notice of Meetings. - Notice, stating the place, day and hour and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting (except as a different time is specified herein or by law), to each stockholder of record having voting power in respect of the business to be transacted thereat. Notice of a stockholders' meeting to act on an amendment of the Articles of Incorporation, a plan of merger or share exchange, a proposed sale of all, or substantially all of the Corporation's assets, otherwise than in the usual and regular course of business, or the dissolution of the Corporation shall be given not less than twenty-five nor more than sixty days before the date of the meeting and shall be accompanied, as appropriate, by a copy of the proposed amendment, plan of merger or share exchange or sale agreement. August 29, 2001 -1-

Notwithstanding the foregoing, a written waiver of notice signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A stockholder who attends a meeting shall be deemed to have (i) waived objection to lack of notice or defective notice of the meeting, unless at the beginning of the meeting he or she objects to holding the meeting or transacting business at the meeting, and (ii) waived objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless he or she objects to considering the matter when it is presented. Section 5. Quorum. - At all meetings of the stockholders, unless a greater number or voting by classes is required by law, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, action on a matter is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation, and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Less than a quorum may adjourn. Section 6. Organization and Order of Business. - At all meetings of the stockholders, the chairman of the Board

Notwithstanding the foregoing, a written waiver of notice signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A stockholder who attends a meeting shall be deemed to have (i) waived objection to lack of notice or defective notice of the meeting, unless at the beginning of the meeting he or she objects to holding the meeting or transacting business at the meeting, and (ii) waived objection to consideration of a particular matter at the meeting that is not within the purpose or purposes described in the meeting notice, unless he or she objects to considering the matter when it is presented. Section 5. Quorum. - At all meetings of the stockholders, unless a greater number or voting by classes is required by law, a majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, action on a matter is approved if the votes cast favoring the action exceed the votes cast opposing the action, unless the vote of a greater number or voting by classes is required by law or the Articles of Incorporation, and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Less than a quorum may adjourn. Section 6. Organization and Order of Business. - At all meetings of the stockholders, the chairman of the Board of Directors or, in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the most senior executive vice president, shall act as chairman. In the absence of all of the foregoing officers or, if present, with their consent, a majority of the shares entitled to vote at such meeting, may appoint any person to act as chairman. The secretary of the Corporation or, in the secretary's absence, an assistant secretary, shall act as secretary at all meetings of the stockholders. In the event that neither the secretary nor any assistant secretary is present, the chairman may appoint any person to act as secretary of the meeting. The chairman shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the dismissal of business not properly presented, the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof and the opening and closing of the voting polls. At each annual meeting of stockholders, only such business shall be conducted as shall have been properly brought before the meeting (a) by or at the direction of the Board of Directors or (b) by any stockholder of the Corporation who shall be entitled to -2-

vote at such meeting and who complies with the notice procedures set forth in this Section 6. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice must be given, either by personal delivery or by United States certified mail, postage prepaid, and received at the principal executive offices of the Corporation (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of stockholders or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 60 days before the date of the applicable annual meeting. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder proposing such business, (c) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to bring the business before the meeting specified in the notice, (d) the class and number of shares of stock of the Corporation beneficially owned by the stockholder and (e) any material interest of the stockholder in such business. Notwithstanding anything in the ByLaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 6. The chairman of an annual meeting shall, if the facts warrant, determine that

vote at such meeting and who complies with the notice procedures set forth in this Section 6. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice must be given, either by personal delivery or by United States certified mail, postage prepaid, and received at the principal executive offices of the Corporation (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of stockholders or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 60 days before the date of the applicable annual meeting. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting, including the complete text of any resolutions to be presented at the annual meeting, and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder proposing such business, (c) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to bring the business before the meeting specified in the notice, (d) the class and number of shares of stock of the Corporation beneficially owned by the stockholder and (e) any material interest of the stockholder in such business. Notwithstanding anything in the ByLaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 6. The chairman of an annual meeting shall, if the facts warrant, determine that the business was not brought before the meeting in accordance with the procedures prescribed by this Section 6. If the chairman should so determine, he or she shall so declare to the meeting and the business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this Section 6, a stockholder seeking to have a proposal included in the Corporation's proxy statement shall comply with the requirements of Regulation 14A under the Securities Exchange Act of 1934, as amended (including, but not limited to, Rule 14a-8 or its successor provision). The secretary of the Corporation shall deliver each such stockholder's notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Section 7. Voting. - A stockholder may vote his or her shares in person or by proxy. Any proxy shall be delivered to the secretary of the meeting at or prior to the time designated by the chairman or in the order of business for so delivering such proxies. No proxy shall be valid after eleven months from its date, unless otherwise provided in the proxy. Each holder of record of stock of any class shall, as to all matters in respect of which stock of such class has voting power, be entitled to such vote as is provided in the Articles of Incorporation for each share of stock of such class standing -3-

in the holders's name on the books of the Corporation. Unless required by statute or determined by the chairman to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting or by such stockholder's proxy, if there be such proxy. Section 8. Written Authorization. - A stockholder or a stockholder's duly authorized attorney-in-fact may execute a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the stockholder or such stockholder's duly authorized attorney-in-fact or authorized officer, director, employee or agent signing such writing or causing such stockholder's signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. Section 9. Electronic Authorization. - The secretary or any vice president may approve procedures to enable a stockholder or a stockholder's duly authorized attorney-in-fact to authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram, internet transmission, telephone transmission or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such transmission must either set forth or be submitted with information from which the inspectors of election can determine that the transmission was authorized by the stockholder or the stockholder's duly authorized attorney-in-fact. If it is determined that such transmissions are valid, the inspectors shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created

in the holders's name on the books of the Corporation. Unless required by statute or determined by the chairman to be advisable, the vote on any question need not be by ballot. On a vote by ballot, each ballot shall be signed by the stockholder voting or by such stockholder's proxy, if there be such proxy. Section 8. Written Authorization. - A stockholder or a stockholder's duly authorized attorney-in-fact may execute a writing authorizing another person or persons to act for him or her as proxy. Execution may be accomplished by the stockholder or such stockholder's duly authorized attorney-in-fact or authorized officer, director, employee or agent signing such writing or causing such stockholder's signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. Section 9. Electronic Authorization. - The secretary or any vice president may approve procedures to enable a stockholder or a stockholder's duly authorized attorney-in-fact to authorize another person or persons to act for him or her as proxy by transmitting or authorizing the transmission of a telegram, cablegram, internet transmission, telephone transmission or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such transmission must either set forth or be submitted with information from which the inspectors of election can determine that the transmission was authorized by the stockholder or the stockholder's duly authorized attorney-in-fact. If it is determined that such transmissions are valid, the inspectors shall specify the information upon which they relied. Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to this Section 9 may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 10. Inspectors. - At every meeting of the stockholders for election of directors, the proxies shall be received and taken in charge, all ballots shall be received and counted and all questions concerning the qualifications of voters, the validity of proxies, and the acceptance or rejection of votes shall be decided, by two or more inspectors. Such inspectors shall be appointed by the chairman of the meeting. They shall be sworn faithfully to perform their duties and shall in writing certify to the returns. No candidate for election as director shall be appointed or act as inspector. -4-

ARTICLE II Board of Directors Section 1. General Powers. - The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. Section 2. Number. - The number of directors shall be fourteen (14). Section 3. Term of Office and Qualification. - Each director shall serve for the term for which he or she shall have been elected and until a successor shall have been duly elected. Section 4. Nomination and Election of Directors. - At each annual meeting of stockholders, the stockholders entitled to vote shall elect the directors. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. Nominations of persons for election to the Board of Directors may be made by the Board of Directors or any committee designated by the Board of Directors or by any stockholder entitled to vote for the election of directors at the applicable meeting of stockholders who complies with the notice procedures set forth in this Section 4. Such nominations, other than those made by the Board of Directors or any committee designated by the Board of Directors, may be made only if written notice of a stockholder's intent to nominate one or more persons for election as directors at the applicable meeting of stockholders has been given, either by personal delivery or by United States certified mail, postage prepaid, to the secretary of the Corporation and received (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of

ARTICLE II Board of Directors Section 1. General Powers. - The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. Section 2. Number. - The number of directors shall be fourteen (14). Section 3. Term of Office and Qualification. - Each director shall serve for the term for which he or she shall have been elected and until a successor shall have been duly elected. Section 4. Nomination and Election of Directors. - At each annual meeting of stockholders, the stockholders entitled to vote shall elect the directors. No person shall be eligible for election as a director unless nominated in accordance with the procedures set forth in this Section 4. Nominations of persons for election to the Board of Directors may be made by the Board of Directors or any committee designated by the Board of Directors or by any stockholder entitled to vote for the election of directors at the applicable meeting of stockholders who complies with the notice procedures set forth in this Section 4. Such nominations, other than those made by the Board of Directors or any committee designated by the Board of Directors, may be made only if written notice of a stockholder's intent to nominate one or more persons for election as directors at the applicable meeting of stockholders has been given, either by personal delivery or by United States certified mail, postage prepaid, to the secretary of the Corporation and received (i) not less than 120 days nor more than 150 days before the first anniversary of the date of the Corporation's proxy statement in connection with the last annual meeting of stockholders, or (ii) if no annual meeting was held in the previous year or the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 60 days before the date of the applicable annual meeting, or (iii) with respect to any special meeting of stockholders called for the election of directors, not later than the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such stockholder's notice shall set forth (a) as to the stockholder giving the notice, (i) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder, (ii) a representation that such stockholder is a stockholder of record and intends to appear in person or by proxy at such meeting to nominate the person or persons specified in the notice, (iii) the class and number of shares of stock of the Corporation beneficially owned by such stockholder, and (iv) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder; and (b) as to each person whom the stockholder proposes to nominate for -5-

election as a director, (i) the name, age, business address and, if known, residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, and (v) the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected. The secretary of the Corporation shall deliver each such stockholder's notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Any person nominated for election as director by the Board of Directors or any committee designated by the Board of Directors shall, upon the request of the Board of Directors or such committee, furnish to the secretary of the Corporation all such information pertaining to such person that is required to be set forth in a stockholder's notice of nomination. The chairman of the meeting of stockholders shall, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by this Section 4. If the chairman should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 5. Organization. - At all meetings of the Board of Directors, the chairman of the Board of Directors or, in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of

election as a director, (i) the name, age, business address and, if known, residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors or is otherwise required by the rules and regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended, and (v) the written consent of such person to be named in the proxy statement as a nominee and to serve as a director if elected. The secretary of the Corporation shall deliver each such stockholder's notice that has been timely received to the Board of Directors or a committee designated by the Board of Directors for review. Any person nominated for election as director by the Board of Directors or any committee designated by the Board of Directors shall, upon the request of the Board of Directors or such committee, furnish to the secretary of the Corporation all such information pertaining to such person that is required to be set forth in a stockholder's notice of nomination. The chairman of the meeting of stockholders shall, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed by this Section 4. If the chairman should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Section 5. Organization. - At all meetings of the Board of Directors, the chairman of the Board of Directors or, in the chairman's absence, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) or, in the absence of all of the foregoing, the senior most executive vice president, shall act as chairman of the meeting. The secretary of the Corporation or, in the secretary's absence, an assistant secretary, shall act as secretary of meetings of the Board of Directors. In the event that neither the secretary nor any assistant secretary shall be present at such meeting, the chairman of the meeting shall appoint any person to act as secretary of the meeting. Section 6. Vacancies. - Any vacancy occurring in the Board of Directors, including a vacancy resulting from amending these By-Laws to increase the number of directors by thirty percent or less, may be filled by the affirmative vote of a majority of the remaining directors though less than a quorum of the Board of Directors. Section 7. Place of Meeting. - Meetings of the Board of Directors, regular or special, may be held either within or without the Commonwealth of Virginia. Section 8. Organizational Meeting. - The annual organizational meeting of the Board of Directors shall be held immediately following adjournment of the annual meeting of stockholders and at the same place, without the requirement of any notice other than this provision of the By-Laws. -6-

Section 9. Regular Meetings: Notice. - Regular meetings of the Board of Directors shall be held at such times and places as it may from time to time determine. Notice of such meetings need not be given if the time and place have been fixed at a previous meeting. Section 10. Special Meetings. - Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if any) or two of the directors. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each director, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Section 11. Waiver of Notice. - Whenever any notice is required to be given to a director of any meeting for any purpose under the provisions of law, the Articles of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless at the beginning of the meeting or promptly upon the director's arrival, he or she objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting.

Section 9. Regular Meetings: Notice. - Regular meetings of the Board of Directors shall be held at such times and places as it may from time to time determine. Notice of such meetings need not be given if the time and place have been fixed at a previous meeting. Section 10. Special Meetings. - Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the vice chairman of the Board of Directors (if any), the president (if any) or two of the directors. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each director, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held, or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Section 11. Waiver of Notice. - Whenever any notice is required to be given to a director of any meeting for any purpose under the provisions of law, the Articles of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, either before or after the time stated therein, shall be equivalent to the giving of such notice. A director's attendance at or participation in a meeting waives any required notice to him or her of the meeting unless at the beginning of the meeting or promptly upon the director's arrival, he or she objects to holding the meeting or transacting business at the meeting and does not thereafter vote for or assent to action taken at the meeting. Section 12. Quorum and Manner of Acting. - Except where otherwise provided by law, a majority of the directors fixed by these By-Laws at the time of any regular or special meeting shall constitute a quorum for the transaction of business at such meeting, and the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the Board of Directors. In the absence of a quorum, a majority of those present may adjourn the meeting from time to time until a quorum be had. Notice of any such adjourned meeting need not be given. Section 13. Order of Business. - At all meetings of the Board of Directors business may be transacted in such order as from time to time the Board of Directors may determine. Section 14. Committees. - In addition to the executive committee authorized by Article III of these By-Laws, other committees, consisting of two or more directors, may be designated by the Board of Directors by a resolution adopted by the greater number of (i) a majority of all directors in office at the time the action is being taken or (ii) the number of directors required to take action under Article II, Section 12 hereof. -7-

Any such committee, to the extent provided in the resolution of the Board of Directors designating the committee, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except as limited by law. ARTICLE III Executive Committee Section 1. How Constituted and Powers. - The Board of Directors, by resolution adopted pursuant to Article II, Section 14 hereof, may designate, in addition to the chairman of the Board of Directors, one or more directors to constitute an executive committee, who shall serve during the pleasure of the Board of Directors. The executive committee, to the extent provided in such resolution and permitted by law, shall have and may exercise all of the authority of the Board of Directors. Section 2. Organization, Etc. - The executive committee may choose a chairman and secretary. The executive committee shall keep a record of its acts and proceedings and report the same from time to time to the Board of Directors. Section 3. Meetings. - Meetings of the executive committee may be called by any member of the committee. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to

Any such committee, to the extent provided in the resolution of the Board of Directors designating the committee, shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, except as limited by law. ARTICLE III Executive Committee Section 1. How Constituted and Powers. - The Board of Directors, by resolution adopted pursuant to Article II, Section 14 hereof, may designate, in addition to the chairman of the Board of Directors, one or more directors to constitute an executive committee, who shall serve during the pleasure of the Board of Directors. The executive committee, to the extent provided in such resolution and permitted by law, shall have and may exercise all of the authority of the Board of Directors. Section 2. Organization, Etc. - The executive committee may choose a chairman and secretary. The executive committee shall keep a record of its acts and proceedings and report the same from time to time to the Board of Directors. Section 3. Meetings. - Meetings of the executive committee may be called by any member of the committee. Notice of each such meeting, which need not specify the business to be transacted thereat, shall be mailed to each member of the committee, addressed to his or her residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such place by telegraph, telex or telecopy or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Section 4. Quorum and Manner of Acting. - A majority of the executive committee shall constitute a quorum for transaction of business, and the act of a majority of those present at a meeting at which a quorum is present shall be the act of the executive committee. The members of the executive committee shall act only as a committee, and the individual members shall have no powers as such. Section 5. Removal. - Any member of the executive committee may be removed, with or without cause, at any time, by the Board of Directors. Section 6. Vacancies. - Any vacancy in the executive committee shall be filled by the Board of Directors. -8-

ARTICLE IV Officers Section 1. Number. - The officers of the Corporation shall be a chairman of the Board of Directors, a deputy chairman of the Board of Directors (if elected by the Board of Directors), a president (if elected by the Board of Directors), one or more vice chairmen of the Board of Directors (if elected by the Board of Directors), a chief operating officer (if elected by the Board of Directors), one or more vice presidents (one or more of whom may be designated executive vice president or senior vice president), a treasurer, a controller, a secretary, one or more assistant treasurers, assistant controllers and assistant secretaries and such other officers as may from time to time be chosen by the Board of Directors. Any two or more offices may be held by the same person. Section 2. Election, Term of Office and Qualifications. - All officers of the Corporation shall be chosen annually by the Board of Directors, and each officer shall hold office until a successor shall have been duly chosen and qualified or until the officer resigns or is removed in the manner hereinafter provided. The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) and the vice chairmen of the Board of Directors (if any) shall be chosen from among the directors. Section 3. Vacancies. - If any vacancy shall occur among the officers of the Corporation, such vacancy shall be filled by the Board of Directors.

ARTICLE IV Officers Section 1. Number. - The officers of the Corporation shall be a chairman of the Board of Directors, a deputy chairman of the Board of Directors (if elected by the Board of Directors), a president (if elected by the Board of Directors), one or more vice chairmen of the Board of Directors (if elected by the Board of Directors), a chief operating officer (if elected by the Board of Directors), one or more vice presidents (one or more of whom may be designated executive vice president or senior vice president), a treasurer, a controller, a secretary, one or more assistant treasurers, assistant controllers and assistant secretaries and such other officers as may from time to time be chosen by the Board of Directors. Any two or more offices may be held by the same person. Section 2. Election, Term of Office and Qualifications. - All officers of the Corporation shall be chosen annually by the Board of Directors, and each officer shall hold office until a successor shall have been duly chosen and qualified or until the officer resigns or is removed in the manner hereinafter provided. The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) and the vice chairmen of the Board of Directors (if any) shall be chosen from among the directors. Section 3. Vacancies. - If any vacancy shall occur among the officers of the Corporation, such vacancy shall be filled by the Board of Directors. Section 4. Other Officers, Agents and Employees - Their Powers and Duties. - The Board of Directors may from time to time appoint such other officers as the Board of Directors may deem necessary, to hold office for such time as may be designated by it or during its pleasure, and the Board of Directors or the chairman of the Board of Directors may appoint, from time to time, such agents and employees of the Corporation as may be deemed proper, and may authorize any officers to appoint and remove agents and employees. The Board of Directors or the chairman of the Board of Directors may from time to time prescribe the powers and duties of such other officers, agents and employees of the Corporation. Section 5. Removal. - Any officer, agent or employee of the Corporation may be removed, either with or without cause, by a vote of a majority of the Board of Directors or, in the case of any agent or employee not appointed by the Board of Directors, by a superior officer upon whom such power of removal may be conferred by the Board of Directors or the chairman of the Board of Directors. -9-

Section 6. Chairman of the Board of Directors and Chief Executive Officer. - The chairman of the Board of Directors shall preside at meetings of the stockholders and of the Board of Directors and shall be a member of the executive committee. The chairman shall be the Chief Executive Officer of the Corporation and shall be responsible to the Board of Directors. He or she shall be responsible for the general management and control of the business and affairs of the Corporation and shall see to it that all orders and resolutions of the Board of Directors are implemented. The chairman shall from, time to time, report to the Board of Directors on matters within his or her knowledge which the interests of the Corporation may require be brought to its notice. The chairman shall do and perform such other duties as from time to time the Board of Directors may prescribe. Section 7. Deputy Chairman of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The deputy chairman shall be responsible to the chairman of the Board of Directors and shall perform such duties as shall be assigned to him or her by the chairman of the Board of Directors. The deputy chairman shall from time to time report to the chairman of the Board of Directors on matters within the deputy chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. Section 8. President. - In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The president shall be responsible to the chairman

Section 6. Chairman of the Board of Directors and Chief Executive Officer. - The chairman of the Board of Directors shall preside at meetings of the stockholders and of the Board of Directors and shall be a member of the executive committee. The chairman shall be the Chief Executive Officer of the Corporation and shall be responsible to the Board of Directors. He or she shall be responsible for the general management and control of the business and affairs of the Corporation and shall see to it that all orders and resolutions of the Board of Directors are implemented. The chairman shall from, time to time, report to the Board of Directors on matters within his or her knowledge which the interests of the Corporation may require be brought to its notice. The chairman shall do and perform such other duties as from time to time the Board of Directors may prescribe. Section 7. Deputy Chairman of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The deputy chairman shall be responsible to the chairman of the Board of Directors and shall perform such duties as shall be assigned to him or her by the chairman of the Board of Directors. The deputy chairman shall from time to time report to the chairman of the Board of Directors on matters within the deputy chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. Section 8. President. - In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if one shall have been elected by the Board of Directors) shall preside at meetings of the stockholders and of the Board of Directors. The president shall be responsible to the chairman of the Board of Directors. Subject to the authority of the chairman of the Board of Directors, the president shall be devoted to the Corporation's business and affairs under the basic policies set by the Board of Directors and the chairman of the Board of Directors. He or she shall from, time to time, report to the chairman of the Board of Directors on matters within the president's knowledge which the interests of the Corporation may require be brought to the chairman's notice. In the absence of the chairman of the Board of Directors and the deputy chairman of the Board of Directors (if any), the president (if any) shall, except as otherwise directed by the Board of Directors, have all of the powers and the duties of the chairman of the Board of Directors. The president (if any) shall do and perform such other duties as from time to time the Board of Directors or the chairman of the Board of Directors may prescribe. Section 9. Vice Chairmen of the Board of Directors. - In the absence of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), the vice chairman of the Board of Directors designated for such purpose by the chairman of the Board of Directors (if any) shall preside at meetings of the stockholders and of the Board of Directors. Each vice chairman of the -10-

Board of Directors shall be responsible to the chairman of the Board of Directors. Each vice chairman of the Board of Directors shall from time to time report to the chairman of the Board of Directors on matters within the vice chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. In the absence or inability to act of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), such vice chairman of the Board of Directors as the chairman of the Board of Directors may designate for the purpose shall have the powers and discharge the duties of the chairman of the Board of Directors. In the event of the failure or inability of the chairman of the Board of Directors to so designate a vice chairman of the Board of Directors, the Board of Directors may designate a vice chairman of the Board of Directors who shall have the powers and discharge the duties of the chairman of the Board of Directors. Section 10. Chief Operating Officer. - The chief operating officer (if any) shall be responsible to the Chairman of the Board of Directors for the principal operating businesses of the Corporation and shall perform those duties which may from time to time be assigned. Section 11. Vice Presidents. - The vice presidents of the Corporation shall assist the chairman of the Board of Directors, the deputy chairman of the Board of Directors, the president (if any) and the vice chairmen (if any) of the Board of Directors in carrying out their respective duties and shall perform those duties which may from time to time be assigned to them. The chief financial officer shall be a vice president of the Corporation (or more

Board of Directors shall be responsible to the chairman of the Board of Directors. Each vice chairman of the Board of Directors shall from time to time report to the chairman of the Board of Directors on matters within the vice chairman's knowledge which the interests of the Corporation may require be brought to the chairman's notice. In the absence or inability to act of the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any) and the president (if any), such vice chairman of the Board of Directors as the chairman of the Board of Directors may designate for the purpose shall have the powers and discharge the duties of the chairman of the Board of Directors. In the event of the failure or inability of the chairman of the Board of Directors to so designate a vice chairman of the Board of Directors, the Board of Directors may designate a vice chairman of the Board of Directors who shall have the powers and discharge the duties of the chairman of the Board of Directors. Section 10. Chief Operating Officer. - The chief operating officer (if any) shall be responsible to the Chairman of the Board of Directors for the principal operating businesses of the Corporation and shall perform those duties which may from time to time be assigned. Section 11. Vice Presidents. - The vice presidents of the Corporation shall assist the chairman of the Board of Directors, the deputy chairman of the Board of Directors, the president (if any) and the vice chairmen (if any) of the Board of Directors in carrying out their respective duties and shall perform those duties which may from time to time be assigned to them. The chief financial officer shall be a vice president of the Corporation (or more senior) and shall be responsible for the management and supervision of the financial affairs of the Corporation. Section 12. Treasurer. - The treasurer shall have charge of the funds, securities, receipts and disbursements of the Corporation. He or she shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as the Board of Directors may from time to time designate. The treasurer shall render to the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), the vice chairmen of the Board of Directors (if any), and the chief financial officer, whenever required by any of them, an account of all of his transactions as treasurer. If required, the treasurer shall give a bond in such sum as the Board of Directors may designate, conditioned upon the faithful performance of the duties of the treasurer's office and the restoration to the Corporation at the expiration of his or her term of office or in case of death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind in his or her possession or under his or her control belonging to the Corporation. The treasurer shall perform such other duties as from time to time may be assigned to him or her. -11-

Section 13. Assistant Treasurers. - In the absence or disability of the treasurer, one or more assistant treasurers shall perform all the duties of the treasurer and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the treasurer. Assistant treasurers shall also perform such other duties as from time to time may be assigned to them. Section 14. Secretary. - The secretary shall keep the minutes of all meetings of the stockholders and of the Board of Directors in a book or books kept for that purpose. He or she shall keep in safe custody the seal of the Corporation, and shall affix such seal to any instrument requiring it. The secretary shall have charge of such books and papers as the Board of Directors may direct. He or she shall attend to the giving and serving of all notices of the Corporation and shall also have such other powers and perform such other duties as pertain to the secretary's office, or as the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) or any vice chairman of the Board of Directors may from time to time prescribe. Section 15. Assistant Secretaries. - In the absence or disability of the secretary, one or more assistant secretaries shall perform all of the duties of the secretary and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the secretary. Assistant secretaries shall also perform such other duties as from time to time may be assigned to them. Section 16. Controller. - The controller shall be administrative head of the controller's department. He or she shall be in charge of all functions relating to accounting and the preparation and analysis of budgets and statistical

Section 13. Assistant Treasurers. - In the absence or disability of the treasurer, one or more assistant treasurers shall perform all the duties of the treasurer and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the treasurer. Assistant treasurers shall also perform such other duties as from time to time may be assigned to them. Section 14. Secretary. - The secretary shall keep the minutes of all meetings of the stockholders and of the Board of Directors in a book or books kept for that purpose. He or she shall keep in safe custody the seal of the Corporation, and shall affix such seal to any instrument requiring it. The secretary shall have charge of such books and papers as the Board of Directors may direct. He or she shall attend to the giving and serving of all notices of the Corporation and shall also have such other powers and perform such other duties as pertain to the secretary's office, or as the Board of Directors, the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any) or any vice chairman of the Board of Directors may from time to time prescribe. Section 15. Assistant Secretaries. - In the absence or disability of the secretary, one or more assistant secretaries shall perform all of the duties of the secretary and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the secretary. Assistant secretaries shall also perform such other duties as from time to time may be assigned to them. Section 16. Controller. - The controller shall be administrative head of the controller's department. He or she shall be in charge of all functions relating to accounting and the preparation and analysis of budgets and statistical reports and shall establish, through appropriate channels, recording and reporting procedures and standards pertaining to such matters. The controller shall report to the chief financial officer and shall aid in developing internal corporate policies whereby the business of the Corporation shall be conducted with the maximum safety, efficiency and economy. The controller shall be available to all departments of the Corporation for advice and guidance in the interpretation and application of policies which are within the scope of his or her authority. The controller shall perform such other duties as from time to time may be assigned to him or her. Section 17. Assistant Controllers. - In the absence or disability of the controller, one or more assistant controllers shall perform all of the duties of the controller and, when so acting, shall have all of the powers of, and be subject to all the restrictions upon, the controller. Assistant controllers shall also perform such other duties as from time to time may be assigned to them. -12-

ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc. Section 1. Contracts. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the chairman of the Board of Directors may authorize shall have the power to execute any contract or other instrument on behalf of the Corporation; no other officer, agent or employee shall, unless otherwise in these By-Laws provided, have any power or authority to bind the Corporation by any contract or acknowledgement, or pledge its credit or render it liable pecuniarily for any purpose or to any amount. Section 2. Loans. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the Board of Directors may authorize shall have the power to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any corporation, firm or individual, and for such loans and advances may make, execute and deliver promissory notes or other evidences of indebtedness of the Corporation, and, as security for the payment of any and all loans, advances, indebtedness and liability of the Corporation, may pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the Corporation, and to that end endorse, assign and deliver the same. Section 3. Voting of Stock Held. - The chairman of the Board of Directors, the deputy chairman of the Board of

ARTICLE V Contracts, Checks, Drafts, Bank Accounts, Etc. Section 1. Contracts. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the chairman of the Board of Directors may authorize shall have the power to execute any contract or other instrument on behalf of the Corporation; no other officer, agent or employee shall, unless otherwise in these By-Laws provided, have any power or authority to bind the Corporation by any contract or acknowledgement, or pledge its credit or render it liable pecuniarily for any purpose or to any amount. Section 2. Loans. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president, the treasurer and such other persons as the Board of Directors may authorize shall have the power to effect loans and advances at any time for the Corporation from any bank, trust company or other institution, or from any corporation, firm or individual, and for such loans and advances may make, execute and deliver promissory notes or other evidences of indebtedness of the Corporation, and, as security for the payment of any and all loans, advances, indebtedness and liability of the Corporation, may pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the Corporation, and to that end endorse, assign and deliver the same. Section 3. Voting of Stock Held. - The chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may from time to time appoint an attorney or attorneys or agent or agents of the Corporation to cast the votes that the Corporation may be entitled to cast as a stockholder or otherwise in any other corporation, any of whose stock or securities may be held by the Corporation, at meetings of the holders of the stock or other securities of such other corporation, or to consent in writing to any action by any other such corporation, and may instruct the person or persons so appointed as to the manner of casting such votes or giving such consent, and may execute or cause to be executed on behalf of the Corporation such written proxies, consents, waivers or other instruments as such officer may deem necessary or proper in the premises; or the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), the president (if any), any vice chairman of the Board of Directors (if any), any vice president or the secretary may attend in person any meeting of the holders of stock or other securities of such other corporation and thereat vote or exercise any and all powers of the Corporation as the holder of such stock or other securities of such other corporation. -13-

ARTICLE VI Certificates Representing Shares Certificates representing shares of the Corporation shall be signed by the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), or the vice chairman of the Board of Directors (if any), or the president of the Corporation (if any) and the secretary or an assistant secretary. Any and all signatures on such certificates, including signatures of officers, transfer agents and registrars, may be facsimile. ARTICLE VII Dividends The Board of Directors may declare dividends from funds of the Corporation legally available therefor. ARTICLE VIII Seal The Board of Directors shall provide a suitable seal or seals, which shall be in the form of a circle, and shall bear

ARTICLE VI Certificates Representing Shares Certificates representing shares of the Corporation shall be signed by the chairman of the Board of Directors, the deputy chairman of the Board of Directors (if any), or the vice chairman of the Board of Directors (if any), or the president of the Corporation (if any) and the secretary or an assistant secretary. Any and all signatures on such certificates, including signatures of officers, transfer agents and registrars, may be facsimile. ARTICLE VII Dividends The Board of Directors may declare dividends from funds of the Corporation legally available therefor. ARTICLE VIII Seal The Board of Directors shall provide a suitable seal or seals, which shall be in the form of a circle, and shall bear around the circumference the words "Philip Morris Companies Inc." and in the center the word and figures "Virginia, 1985." ARTICLE IX Fiscal Year The fiscal year of the Corporation shall be the calendar year. -14-

ARTICLE X Amendment The power to alter, amend or repeal the By-Laws of the Corporation or to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by the Board of Directors may be repealed or changed by the stockholders, or new By-Laws may be adopted by the stockholders, and the stockholders may prescribe that any By-Laws made by them shall not be altered, amended or repealed by the directors. ARTICLE XI Emergency By-Laws If a quorum of the Board of Directors cannot be readily assembled because of some catastrophic event, and only in such event, these By-Laws shall, without further action by the Board of Directors, be deemed to have been amended for the duration of such emergency, as follows: Section 1. Section 6 of Article II shall read as follows: Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the directors present at a meeting of the Board of Directors called in accordance with these By-Laws. Section 2. The first sentence of Section 10 of Article II shall read as follows: Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors or a deputy chairman (if any),or of the president (if any) or any vice chairman of the Board of

ARTICLE X Amendment The power to alter, amend or repeal the By-Laws of the Corporation or to adopt new By-Laws shall be vested in the Board of Directors, but By-Laws made by the Board of Directors may be repealed or changed by the stockholders, or new By-Laws may be adopted by the stockholders, and the stockholders may prescribe that any By-Laws made by them shall not be altered, amended or repealed by the directors. ARTICLE XI Emergency By-Laws If a quorum of the Board of Directors cannot be readily assembled because of some catastrophic event, and only in such event, these By-Laws shall, without further action by the Board of Directors, be deemed to have been amended for the duration of such emergency, as follows: Section 1. Section 6 of Article II shall read as follows: Any vacancy occurring in the Board of Directors may be filled by the affirmative vote of a majority of the directors present at a meeting of the Board of Directors called in accordance with these By-Laws. Section 2. The first sentence of Section 10 of Article II shall read as follows: Special meetings of the Board of Directors shall be held whenever called by order of the chairman of the Board of Directors or a deputy chairman (if any),or of the president (if any) or any vice chairman of the Board of Directors (if any) or any director or of any person having the powers and duties of the chairman of the Board of Directors, the deputy chairman, the president or any vice chairman of the Board of Directors. Section 3. Section 12 of Article II shall read as follows: The directors present at any regular or special meeting called in accordance with these By-Laws shall constitute a quorum for the transaction of business at such meeting, and the action of a majority of such directors shall be the act of the Board of Directors, provided, however, that in the event that only one director is present at any such meeting no action except the election of directors shall be taken until at least two additional directors have been elected and are in attendance. -15-

Exhibit 10.18 AGREEMENT AGREEMENT made this 31st day of January, 2002, between Philip Morris Companies Inc., a corporation organized and existing under the laws of the Commonwealth of Virginia, hereinafter called the "Company," and Geoffrey C. Bible, hereinafter called "Consultant." WHEREAS, Consultant has been employed by the Company or its affiliates continuously since 1976 and has served the Company as President and Chief Executive Officer since June 1994 and Chairman and Chief Executive Officer since February 1995 and has contributed significantly to the Company's success; and WHEREAS, the Company desires that Consultant continue to make himself available following his retirement to consult with the Company and his successor on various issues; NOW, THEREFORE, in consideration of Consultant's significant contributions to the success of the Company and the other agreements contained herein, the parties hereto agree as follows:

Exhibit 10.18 AGREEMENT AGREEMENT made this 31st day of January, 2002, between Philip Morris Companies Inc., a corporation organized and existing under the laws of the Commonwealth of Virginia, hereinafter called the "Company," and Geoffrey C. Bible, hereinafter called "Consultant." WHEREAS, Consultant has been employed by the Company or its affiliates continuously since 1976 and has served the Company as President and Chief Executive Officer since June 1994 and Chairman and Chief Executive Officer since February 1995 and has contributed significantly to the Company's success; and WHEREAS, the Company desires that Consultant continue to make himself available following his retirement to consult with the Company and his successor on various issues; NOW, THEREFORE, in consideration of Consultant's significant contributions to the success of the Company and the other agreements contained herein, the parties hereto agree as follows: 1. For the five-year period commencing with the date of Consultant's retirement from the Company (the "term hereof"), Consultant shall, at all reasonable times and insofar as his physical condition may permit, make himself available to the Company to consult with and advise its officers, directors and other representatives in connection with such matters as the then chief executive officer of the Company shall require. The Company will reimburse Consultant for his reasonable out-of-pocket expenses incurred in providing such services. 2. For so long as Consultant shall maintain a residence within reasonable commuting distance of Greenwich, Connecticut, the Company shall provide Consultant at Company expense with an office at the location specified in Exhibit A or another comparable office in the Greenwich, Connecticut area, together with secretarial service and office furniture, supplies and equipment, including two phone lines, telephones and a fax machine, comparable to that to which he is currently accustomed. If Consultant shall cease to maintain a residence within reasonable commuting distance of Greenwich, Connecticut, the Company shall no longer be required to maintain such office, but in lieu thereof shall provide Consultant, if Consultant so requests, with a comparable office and secretarial service, furniture, supplies and equipment at a Company facility within a reasonable commuting distance of Consultant's new residence, subject to available space and the approval of the Company's chief executive officer. If there is no Company facility within a reasonable commuting distance of Consultant's new residence or if Consultant has requested office space at such a facility and the Company has not provided such space, the Company shall provide Consultant with an allowance of up to $190,000 a year for office space, furniture, supplies and equipment and in addition with comparable

secretarial service. The Company's obligations under this paragraph shall continue for Consultant's life. 3. In addition to the Company's obligations to Consultant under paragraph 2, the Company shall provide Consultant at Company expense with the following for his life or until Consultant no longer requires them: (a) a telephone calling card; (b) two cellular telephones, of Consultant's choosing, two cellular telephone lines, and costs of maintenance; and two home fax machines, of Consultant's choosing, fax telephone lines, and costs of maintenance; (c) the security arrangements in existence or their equivalent at Consultant's current home and vacation home or at any other two residences that Consultant may subsequently occupy; (d) reasonable access to Company facilities, including dining rooms and fitness centers, and use of Company aircraft subject to availability of such aircraft and the approval of the Company's chief executive officer; (e) a Company car and driver; provided that if Consultant shall cease to maintain a residence within reasonable commuting distance of the Greenwich, Connecticut area, the Company shall no longer be required to provide a

secretarial service. The Company's obligations under this paragraph shall continue for Consultant's life. 3. In addition to the Company's obligations to Consultant under paragraph 2, the Company shall provide Consultant at Company expense with the following for his life or until Consultant no longer requires them: (a) a telephone calling card; (b) two cellular telephones, of Consultant's choosing, two cellular telephone lines, and costs of maintenance; and two home fax machines, of Consultant's choosing, fax telephone lines, and costs of maintenance; (c) the security arrangements in existence or their equivalent at Consultant's current home and vacation home or at any other two residences that Consultant may subsequently occupy; (d) reasonable access to Company facilities, including dining rooms and fitness centers, and use of Company aircraft subject to availability of such aircraft and the approval of the Company's chief executive officer; (e) a Company car and driver; provided that if Consultant shall cease to maintain a residence within reasonable commuting distance of the Greenwich, Connecticut area, the Company shall no longer be required to provide a car and driver, but in lieu thereof shall provide Consultant, if Consultant so requests, with an allowance of up to $100,000 per year for a car service; and (f) up to $15, 000 a year in financial counseling expenses. 4. If at any time in the future Consultant is made a party or witness, or is threatened to be made a party or witness, to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding") by reason of the fact that Consultant was a director, officer or employee of the Company (or any subsidiary or affiliate thereof) whether or not the basis for such proceedings is Consultant's alleged action in an official capacity while serving as a director, officer or employee, the Company agrees that Consultant shall be indemnified and held harmless by the Company to the fullest extent permitted or authorized by applicable law against all cost, expense, liability and loss (including, without limitation, attorney's fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by Consultant in connection therewith. Such indemnification will inure to the benefit of Consultant's heirs, executors and administrators. The Company shall also advance to Consultant all reasonable costs and expenses incurred by Consultant in connection with a Proceeding within 20 days after receipt by the Company of a written request for such advance as well as Consultant's written agreement to submit subsequent documentation of such costs. Such request shall include a written statement, executed personally, of Consultant's good faith belief that Consultant met any standard of conduct that is a prerequisite to Consultant's entitlement to indemnification under applicable law and a written undertaking by Consultant to repay

the amount of such advance if it shall ultimately be determined that Consultant did not meet such standard of conduct. This paragraph shall remain in full force and effect regardless of any other provision of this agreement, including paragraph 5 below. 5. The Company and Consultant shall each inform the other in writing at least six months prior to the expiration of the consulting period specified in paragraph 1 and each extension thereof whether the party wishes to renew such consulting agreement and, thereafter, by mutual written agreement, such agreement may be renewed for additional terms and under conditions, as the parties shall agree. It is intended that a mutual determination of the continuation of Consultant's services desired by Consultant and the Company will determine the specifics relative to the length and terms of any further agreement between Consultant and the Company. 6. In rendering services as a consultant as provided in paragraph 1, Consultant shall be an independent contractor. 7. This agreement shall be binding upon and inure to the benefit of the parties hereto and any successors to the business of the Company, and the obligations of the Company, and any successor, to Consultant shall continue notwithstanding any change in control of the Company as such term is defined in the agreement dated February 1,

the amount of such advance if it shall ultimately be determined that Consultant did not meet such standard of conduct. This paragraph shall remain in full force and effect regardless of any other provision of this agreement, including paragraph 5 below. 5. The Company and Consultant shall each inform the other in writing at least six months prior to the expiration of the consulting period specified in paragraph 1 and each extension thereof whether the party wishes to renew such consulting agreement and, thereafter, by mutual written agreement, such agreement may be renewed for additional terms and under conditions, as the parties shall agree. It is intended that a mutual determination of the continuation of Consultant's services desired by Consultant and the Company will determine the specifics relative to the length and terms of any further agreement between Consultant and the Company. 6. In rendering services as a consultant as provided in paragraph 1, Consultant shall be an independent contractor. 7. This agreement shall be binding upon and inure to the benefit of the parties hereto and any successors to the business of the Company, and the obligations of the Company, and any successor, to Consultant shall continue notwithstanding any change in control of the Company as such term is defined in the agreement dated February 1, 1995 between Company and Consultant. Neither this agreement nor any rights hereunder shall be assignable by Consultant. 8. This agreement contains the entire understanding and agreement between the parties hereto with respect to the subject matter hereof, provided that the parties expressly acknowledge that this agreement does not pertain to any pension, health care or other benefits to which Consultant may otherwise be entitled as a retiree of the Company under other policies or agreements, except that the Company expressly agrees that the health care benefits to which Consultant and his spouse shall be entitled upon his retirement from the Company (or to the extent such health care benefits may later be increased) shall continue in effect for his life and the life of Consultant's spouse without reduction in the level of benefits or increase in the cost of such benefits to Consultant or Consultant's spouse. No representations have been made, except as herein set forth, and no change may be made in the terms and provisions hereof, except by an instrument in writing signed by the parties hereto. If the foregoing conforms to your understanding, please sign and return the enclosed counterpart of this letter, which will thereupon become a binding agreement between us. PHILIP MORRIS COMPANIES INC.
/s/ TIMOTHY A. SOMPOLSKI ------------------------------------Timothy A. Sompolski

Accepted and agreed to:
/s/ GEOFFREY C. BIBLE ---------------------------------Geoffrey C. Bible March 18, 2002 --------------------------Date

EXHIBIT A Office space on the second level of the office building located at One East Putnam Avenue in Greenwich, Connecticut

Accepted and agreed to:
/s/ GEOFFREY C. BIBLE ---------------------------------Geoffrey C. Bible March 18, 2002 --------------------------Date

EXHIBIT A Office space on the second level of the office building located at One East Putnam Avenue in Greenwich, Connecticut

Financial Review Contents 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Selected Financial Data -- Five-Year Review 37 Consolidated Balance Sheets 38 Consolidated Statements of Earnings and Consolidated Statements of Cash Flows 40 Consolidated Statements of Stockholders' Equity 41 Notes to Consolidated Financial Statements 60 Report of Independent Accountants 60 Company Report on Financial Statements [Logo of L&M] [Logo of Milka] [Logo of Altoids] [Logo of Lunchables] [Logo of Marlboro] [Logo of Miller Lite] [Logo of Kraft] [Logo of Kool-Aid] [Logo of Carte Noire] 19

Management's Discussion and Analysis of Financial Condition and Results of Operations Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip Morris Incorporated ("PM Inc."), Philip Morris International Inc. ("PMI") and Miller Brewing Company ("Miller"), and its majority owned (83.9%) subsidiary, Kraft Foods Inc. ("Kraft"), is engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese, convenient meals and beer. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary, is primarily engaged in leasing activities. During November 2001, the Company announced that it would ask stockholders at its next Annual Meeting of Stockholders in April 2002 to approve changing the Company's name from Philip Morris Companies Inc. to Altria Group, Inc. All subsequent references to "the Company" include Philip Morris Companies Inc. and its subsidiaries. Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission

EXHIBIT A Office space on the second level of the office building located at One East Putnam Avenue in Greenwich, Connecticut

Financial Review Contents 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Selected Financial Data -- Five-Year Review 37 Consolidated Balance Sheets 38 Consolidated Statements of Earnings and Consolidated Statements of Cash Flows 40 Consolidated Statements of Stockholders' Equity 41 Notes to Consolidated Financial Statements 60 Report of Independent Accountants 60 Company Report on Financial Statements [Logo of L&M] [Logo of Milka] [Logo of Altoids] [Logo of Lunchables] [Logo of Marlboro] [Logo of Miller Lite] [Logo of Kraft] [Logo of Kool-Aid] [Logo of Carte Noire] 19

Management's Discussion and Analysis of Financial Condition and Results of Operations Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip Morris Incorporated ("PM Inc."), Philip Morris International Inc. ("PMI") and Miller Brewing Company ("Miller"), and its majority owned (83.9%) subsidiary, Kraft Foods Inc. ("Kraft"), is engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese, convenient meals and beer. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary, is primarily engaged in leasing activities. During November 2001, the Company announced that it would ask stockholders at its next Annual Meeting of Stockholders in April 2002 to approve changing the Company's name from Philip Morris Companies Inc. to Altria Group, Inc. All subsequent references to "the Company" include Philip Morris Companies Inc. and its subsidiaries. Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requires all registrants to discuss critical accounting policies or methods used in the preparation of financial statements. Note 2 to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. However, in the opinion of management, the Company does not have any individual accounting policy which is critical to the preparation of its consolidated financial statements. This is due principally to the definitive nature of accounting requirements for the Company's consumer products businesses. Also, in many instances, the Company must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America ("U.S. GAAP"). The following is a review of the more significant accounting policies and methods used by the Company:

Financial Review Contents 20 Management's Discussion and Analysis of Financial Condition and Results of Operations 36 Selected Financial Data -- Five-Year Review 37 Consolidated Balance Sheets 38 Consolidated Statements of Earnings and Consolidated Statements of Cash Flows 40 Consolidated Statements of Stockholders' Equity 41 Notes to Consolidated Financial Statements 60 Report of Independent Accountants 60 Company Report on Financial Statements [Logo of L&M] [Logo of Milka] [Logo of Altoids] [Logo of Lunchables] [Logo of Marlboro] [Logo of Miller Lite] [Logo of Kraft] [Logo of Kool-Aid] [Logo of Carte Noire] 19

Management's Discussion and Analysis of Financial Condition and Results of Operations Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip Morris Incorporated ("PM Inc."), Philip Morris International Inc. ("PMI") and Miller Brewing Company ("Miller"), and its majority owned (83.9%) subsidiary, Kraft Foods Inc. ("Kraft"), is engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese, convenient meals and beer. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary, is primarily engaged in leasing activities. During November 2001, the Company announced that it would ask stockholders at its next Annual Meeting of Stockholders in April 2002 to approve changing the Company's name from Philip Morris Companies Inc. to Altria Group, Inc. All subsequent references to "the Company" include Philip Morris Companies Inc. and its subsidiaries. Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requires all registrants to discuss critical accounting policies or methods used in the preparation of financial statements. Note 2 to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. However, in the opinion of management, the Company does not have any individual accounting policy which is critical to the preparation of its consolidated financial statements. This is due principally to the definitive nature of accounting requirements for the Company's consumer products businesses. Also, in many instances, the Company must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America ("U.S. GAAP"). The following is a review of the more significant accounting policies and methods used by the Company: - Revenue Recognition: As required by U.S. GAAP, the Company recognizes operating revenues for its consumer product businesses upon shipment of products to customers when title and risk of loss pass to its customers. Provisions and allowances for sales returns and bad debts are also recorded in the Company's consolidated financial statements. The amounts recorded for these provisions and related allowances are not significant to the Company's consolidated financial position or results of operations. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company will adopt new required accounting

Management's Discussion and Analysis of Financial Condition and Results of Operations Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip Morris Incorporated ("PM Inc."), Philip Morris International Inc. ("PMI") and Miller Brewing Company ("Miller"), and its majority owned (83.9%) subsidiary, Kraft Foods Inc. ("Kraft"), is engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese, convenient meals and beer. Philip Morris Capital Corporation ("PMCC"), another wholly-owned subsidiary, is primarily engaged in leasing activities. During November 2001, the Company announced that it would ask stockholders at its next Annual Meeting of Stockholders in April 2002 to approve changing the Company's name from Philip Morris Companies Inc. to Altria Group, Inc. All subsequent references to "the Company" include Philip Morris Companies Inc. and its subsidiaries. Financial Reporting Release No. 60, which was recently issued by the Securities and Exchange Commission ("SEC"), requires all registrants to discuss critical accounting policies or methods used in the preparation of financial statements. Note 2 to the consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of the Company's consolidated financial statements. However, in the opinion of management, the Company does not have any individual accounting policy which is critical to the preparation of its consolidated financial statements. This is due principally to the definitive nature of accounting requirements for the Company's consumer products businesses. Also, in many instances, the Company must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States of America ("U.S. GAAP"). The following is a review of the more significant accounting policies and methods used by the Company: - Revenue Recognition: As required by U.S. GAAP, the Company recognizes operating revenues for its consumer product businesses upon shipment of products to customers when title and risk of loss pass to its customers. Provisions and allowances for sales returns and bad debts are also recorded in the Company's consolidated financial statements. The amounts recorded for these provisions and related allowances are not significant to the Company's consolidated financial position or results of operations. As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company will adopt new required accounting standards mandating that certain costs currently reported as marketing expenses be shown as a reduction of operating revenues and as an increase in cost of sales and excise taxes on products. As a result, previously reported revenues will be reduced by approximately $9.1 billion, $6.9 billion and $5.9 billion for 2001, 2000 and 1999, respectively. The adoption of the new accounting standards will have no impact on net earnings or basic or diluted earnings per share. - Depreciation and Amortization: The Company depreciates its property, plant and equipment and amortizes its goodwill and other intangible assets using straight-line methods. Through December 31, 2001, the Company used forty years to amortize goodwill and other intangible assets, in recognition of the strength of its brands, which resulted in amortization expense of $1.0 billion for the year ended December 31, 2001. Beginning on January 1, 2002, with the adoption of a new required accounting standard, the Company will no longer be required to amortize a substantial portion of its goodwill and other intangible assets. As a result, the Company estimates that amortization expense will approximate $10 million for the year ending December 31, 2002. The Company will also continue to review annually its goodwill and other intangible assets for possible impairment or loss of value. However, the Company does not currently anticipate having to record an impairment loss when it adopts the new standard. - Marketing Costs: As required by U.S. GAAP, the Company records marketing costs as an expense in the period to which such costs relate. The Company does not defer the recognition of any amounts on its consolidated balance sheets with respect to marketing costs. The Company expenses advertising costs as incurred, which is the period in which the related advertisement initially appears. The Company records consumer incentive and trade promotion costs as an expense in the period in which these programs are offered, based on estimates of utilization and redemption rates that are developed from historical information. As discussed above under "Revenue Recognition," beginning January 1, 2002, the Company will adopt previously mentioned revenue recognition accounting standards mandating that certain costs currently reported as marketing expense be shown as a reduction of operating revenues and as an increase in cost of sales and excise taxes on products. As a result, previously reported amounts for marketing, administration and research costs will be reduced by approximately $9.9 billion, $7.6 billion and $6.4 billion for 2001, 2000 and 1999, respectively. The adoption of the new accounting standards will have no impact on net earnings or basic or diluted earnings per share.

- Hedging Instruments: As of January 1, 2001, the Company adopted the provisions of a new required accounting standard, which reduced net earnings by $6 million and increased other comprehensive earnings by $15 million. The new accounting standard requires that the fair value of all derivative financial instruments be recorded on the Company's consolidated balance sheet as assets or liabilities. Substantially all of the Company's derivative financial instruments are effective as hedges under the new standard; accordingly, the changes in their fair value are recognized in earnings when the related hedged items are recorded in earnings. During 2001, the Company recognized deferred gains of $84 million in income, which offset the impact of losses on the related hedged items. In Note 15 of the notes to consolidated financial statements, the Company has included a detailed discussion of the types of exposures that are periodically hedged, as well as a summary of the various instruments which the Company utilizes. The Company does not use derivative financial instruments for speculative purposes. - Contingencies: As discussed in Note 16. Contingencies, of the notes to the consolidated financial statements ("Note 16"), legal proceedings covering a wide range of matters are pending or threatened in various jurisdictions against the Company. In 1998, PM Inc. and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA") with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar 20

claims brought by four other states (together with the MSA, the "State Settlement Agreements"). As part of the MSA, PM Inc. and three other domestic tobacco product manufacturers agreed to establish and fund a trust to provide aid to tobacco growers and quota-holders. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments subject to adjustment for several factors, including inflation, market share and industry volume. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap. These payment obligations, which are subject to adjustment for the factors mentioned above, are the several and not joint obligations of each settling defendant. Industry payments under the settlement agreement are: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM Inc. records its portion of ongoing settlement payments as cost of sales as product is shipped. During the year ended December 31, 2001, PM Inc. recognized $5.9 billion as part of cost of sales for the payments under the State Settlement Agreements and to fund the trust for tobacco growers and quota-holders. It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and punitive damages against PM Inc. have been returned in the Engle smoking and health class action, several individual smoking and health cases and a health care cost recovery case and are being appealed. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation, and the Company has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. The present legislative and litigation environment is substantially uncertain, and it is possible that the Company's business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to all litigation pending against it, as well as valid bases for appeal for adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so.

claims brought by four other states (together with the MSA, the "State Settlement Agreements"). As part of the MSA, PM Inc. and three other domestic tobacco product manufacturers agreed to establish and fund a trust to provide aid to tobacco growers and quota-holders. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments subject to adjustment for several factors, including inflation, market share and industry volume. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap. These payment obligations, which are subject to adjustment for the factors mentioned above, are the several and not joint obligations of each settling defendant. Industry payments under the settlement agreement are: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. PM Inc. records its portion of ongoing settlement payments as cost of sales as product is shipped. During the year ended December 31, 2001, PM Inc. recognized $5.9 billion as part of cost of sales for the payments under the State Settlement Agreements and to fund the trust for tobacco growers and quota-holders. It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and punitive damages against PM Inc. have been returned in the Engle smoking and health class action, several individual smoking and health cases and a health care cost recovery case and are being appealed. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation, and the Company has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. The present legislative and litigation environment is substantially uncertain, and it is possible that the Company's business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to all litigation pending against it, as well as valid bases for appeal for adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so. - Employee Benefit Plans: The Company and its subsidiaries provide a range of benefits to their employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). The Company records annual amounts relating to these plans based on calculations specified by U.S. GAAP, which include various actuarial assumptions, such as discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. As required by U.S. GAAP, the effect of the modifications is generally recorded or amortized over future periods. The Company believes that the assumptions utilized in recording its obligations under its plans, which are presented in Note 13 to the consolidated financial statements, are reasonable based on advice from its actuaries and information as to assumptions used by other employers. PMCC is primarily engaged in leasing activities. PMCC's operating revenues and operating companies income approximated less than 2% of the Company's consolidated operating revenues and operating companies income for the year ended December 31, 2001. The accounting principle used by PMCC for revenue recognition, which is prescribed by U.S. GAAP, differs from that used by the Company's consumer products businesses. A summary of this policy is as follows: - Leasing: A substantial portion, or over 60%, of PMCC's operating revenues relate to leveraged leases. Income relating to leveraged leases is recorded initially as unearned income, which is included in finance assets, net, on

the Company's consolidated balance sheets, and is subsequently recorded as revenue over the life of the related leases at a constant after-tax rate of return. The remainder of PMCC's operating revenues consist primarily of amounts related to direct finance leases, with income initially recorded as unearned and recognized in operating revenues over the life of the leases at a constant pre-tax rate of return. The Company's investment in leases is included in finance assets, net, on the consolidated balance sheet as of December 31, 2001. As required by U.S. GAAP, the Company's investment in leases is presented on a net basis and consists of lease receivables and estimated residual values, reduced by non-recourse debt (which is collateralized by the assets under lease and lease receivables) and unearned income. Estimated residual values represent the Company's estimate at lease inception as to the fair value of assets under lease at the end of the lease term. The estimated residual values are reviewed annually by PMCC management based on a number of factors, including appraisals, activity in the relevant industry and other factors. If necessary, revisions to reduce the residual values are recorded. Such review has not resulted in adjustments to PMCC's operating revenues or results of operations for the periods presented. For a further discussion of the Company's investment in leveraged leases, see the section entitled "Leveraged Leases" within the Company's Financial Review of Debt and Liquidity.

The preparation of all financial statements includes the use of estimates and assumptions that affect a number of amounts included in the Company's financial statements, including among other things, employee benefit costs and related disclosures, inventories under the last-in, first-out ("LIFO") method, marketing costs (advertising, consumer incentives and trade promotions), income taxes and contingencies. The Company bases its estimates on historical experience and other assumptions which it believes are reasonable. If actual amounts are ultimately different from previous 21

estimates, the revisions are included in the Company's results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between the Company's estimates and actual amounts in any year, have not had a significant impact on its consolidated financial statements. Consolidated Operating Results
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Operating Revenues Domestic tobacco $ 24,784 $ 22,658 $ 19,596 International tobacco 26,586 26,374 27,506 North American food 25,106 18,461 17,897 International food 8,769 8,071 8,900 Beer 4,244 4,375 4,342 Financial services 435 417 355 -------------------------------------------------------------------------------Operating revenues $ 89,924 $ 80,356 $ 78,596 ================================================================================

(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Operating Income Domestic tobacco $ 5,264 $ 5,350 $ 4,865 International tobacco 5,406 5,211 4,968 North American food 4,796 3,547 3,190 International food 1,239 1,208 1,063 Beer 481 650 511 Financial services 296 262 228 -------------------------------------------------------------------------------Operating companies income 17,482 16,228 14,825 General corporate expenses (766) (831) (627) Amortization of goodwill and

estimates, the revisions are included in the Company's results of operations for the period in which the actual amounts become known. Historically, the aggregate differences, if any, between the Company's estimates and actual amounts in any year, have not had a significant impact on its consolidated financial statements. Consolidated Operating Results
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Operating Revenues Domestic tobacco $ 24,784 $ 22,658 $ 19,596 International tobacco 26,586 26,374 27,506 North American food 25,106 18,461 17,897 International food 8,769 8,071 8,900 Beer 4,244 4,375 4,342 Financial services 435 417 355 -------------------------------------------------------------------------------Operating revenues $ 89,924 $ 80,356 $ 78,596 ================================================================================

(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Operating Income Domestic tobacco $ 5,264 $ 5,350 $ 4,865 International tobacco 5,406 5,211 4,968 North American food 4,796 3,547 3,190 International food 1,239 1,208 1,063 Beer 481 650 511 Financial services 296 262 228 -------------------------------------------------------------------------------Operating companies income 17,482 16,228 14,825 General corporate expenses (766) (831) (627) Amortization of goodwill and other intangibles (1,014) (591) (582) -------------------------------------------------------------------------------Operating income $ 15,702 $ 14,806 $ 13,616 ================================================================================

Items Affecting Comparability Several events occurred in 2001, 2000 and 1999 that affected the comparability of income statement amounts. In order to isolate the impact of these events and disclose underlying business trends, comparisons will be disclosed both including and excluding these events, which are as follows: - Nabisco Acquisition: On December 11, 2000, the Company acquired all of the outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash, through its subsidiary Kraft. The purchase of the outstanding shares, retirement of employee stock options and other payments totaled approximately $15.2 billion. In addition, the acquisition included the assumption of approximately $4.0 billion of existing Nabisco debt. The acquisition was financed by the Company through the issuance of $12.2 billion of short-term obligations and $3.0 billion of available cash. The acquisition has been accounted for as a purchase. Nabisco's balance sheet was consolidated with the Company as of December 31, 2000; however, Nabisco's earnings subsequent to December 11, 2000 were not included in the consolidated operating results of the Company in 2000 since such amounts were insignificant. Beginning January 1, 2001, Nabisco's earnings have been included in the consolidated operating results of the Company. The Company's interest cost on borrowings associated with acquiring Nabisco has been included in interest and other debt expense, net, in the Company's consolidated statements of earnings for the years ended December 31, 2001 and 2000. - Kraft IPO: On June 13, 2001, Kraft completed an initial public offering ("IPO") of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. The Company used the IPO proceeds, net of

underwriting discount and expenses, of $8.4 billion to retire a portion of the debt incurred to finance the acquisition of Nabisco. After the completion of the IPO, the Company owns approximately 83.9% of the outstanding shares of Kraft's capital stock through the Company's ownership of 49.5% of Kraft's Class A common stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has one vote per share while Kraft's Class B common stock has ten votes per share. Therefore, the Company holds 97.7% of the combined voting power of Kraft's outstanding common stock. - Litigation Related Expense: As discussed in Note 16, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM Inc., certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, the Company has recorded a $500 million pre-tax charge in marketing, administration and research costs in the consolidated statement of earnings of the domestic tobacco segment for the year ended December 31, 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2001 consolidated balance sheet as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in the Company's consolidated statement of earnings. - Sale of Food Factory and Integration Costs: During 2001, the Company recorded pre-tax charges of $53 million for site reconfigurations and other consolidation programs in the United States. In addition, the Company recorded a pre-tax charge of $29 million to close a North American food factory. These pre-tax charges, which aggregate $82 million, were included in marketing, administration and research costs in the consolidated statement of earnings of the North American food segment. - Contract Brewing Charge: During 2001, the Company revised the terms of a contract brewing agreement with Pabst Brewing Co. ("Pabst"), which resulted in pre-tax charges of $19 million in marketing, administration and research costs in the consolidated statement of earnings of the beer segment. - Sale of Molson Rights in the U.S.: During 2000, the Company's beer business sold its rights to Molson trademarks in the United States ("Molson Sale") and recorded a pre-tax gain of $100 million in marketing, administration and research costs in the consolidated statement of earnings of the beer segment. - Sale of French Confectionery Business: During 2000, the Company sold a French confectionery business ("French Confectionery Sale") and recorded a pre-tax gain of $139 million in marketing, administration and research costs in the consolidated statement of earnings of the international food segment. - Century Date Change: During the fourth quarter of 1999, the Company's customers purchased additional product in anticipation of potential Century Date Change ("CDC") related disruptions. These incremental shipments would have normally been made during the first quarter of 2000. The increased shipments in 1999 resulted in incremental operating revenues and operating 22

companies income in 1999 of approximately $225 million and $100 million, respectively, and corresponding decreases in operating revenues and operating companies income in 2000. 2001 compared with 2000 Operating revenues for 2001 increased $9.6 billion (11.9%) over 2000, due primarily to the acquisition of Nabisco and an increase in revenues from the Company's domestic tobacco operations. Including the incremental CDC revenues in the first quarter of 2000, and excluding the revenues of businesses divested since the beginning of 2000, operating revenues for 2001 increased $9.6 billion (12.0%) over 2000. Operating revenues would have increased 2.3% over 2000 had the acquisition of Nabisco occurred on January 1, 2000. Operating income for 2001 increased $896 million (6.1%) over 2000. Including the incremental CDC income in

companies income in 1999 of approximately $225 million and $100 million, respectively, and corresponding decreases in operating revenues and operating companies income in 2000. 2001 compared with 2000 Operating revenues for 2001 increased $9.6 billion (11.9%) over 2000, due primarily to the acquisition of Nabisco and an increase in revenues from the Company's domestic tobacco operations. Including the incremental CDC revenues in the first quarter of 2000, and excluding the revenues of businesses divested since the beginning of 2000, operating revenues for 2001 increased $9.6 billion (12.0%) over 2000. Operating revenues would have increased 2.3% over 2000 had the acquisition of Nabisco occurred on January 1, 2000. Operating income for 2001 increased $896 million (6.1%) over 2000. Including the incremental CDC income in 2000 and excluding the previously discussed unusual items from each year, as well as the results from operations divested since the beginning of 2000, operating income for 2001 increased $1.7 billion (11.5%) over 2000, due primarily to higher operating income from the Company's food and tobacco operations, partially offset by higher goodwill amortization relating to the acquisition of Nabisco. Operating income would have increased 7.3% had the acquisition of Nabisco occurred on January 1, 2000. Operating companies income, which is defined as operating income before general corporate expenses and amortization of goodwill, increased $1.3 billion (7.7%) over 2000, due primarily to the Nabisco acquisition, partially offset by the 2001 litigation related expense. Including the incremental CDC income in 2000 and excluding the unusual items from each year, as well as the results from operations divested since the beginning of 2000, operating companies income increased $2.0 billion (12.7%). Operating companies income would have increased 6.1% had the acquisition of Nabisco occurred on January 1, 2000, due primarily to higher results from the Company's tobacco and food operations. Currency movements have decreased operating revenues by $1.9 billion ($1.1 billion, after excluding the impact of currency movements on excise taxes) and operating companies income by $449 million from 2000. Declines in operating revenues and operating companies income are due primarily to the strength of the U.S. dollar against the euro, the Turkish lira and Asian currencies. Although the Company cannot predict future movements in currency rates, the strength of the U.S. dollar, primarily against the euro and Asian currencies, if sustained during 2002, could continue to have an unfavorable impact on operating revenues and operating companies income comparisons with 2001. Interest and other debt expense, net, of $1.4 billion for 2001 increased $699 million over 2000. This increase was due primarily to higher average debt outstanding in 2001, as a result of the Nabisco acquisition. The Kraft IPO proceeds, net of underwriting discount and expenses, of $8.4 billion were used to retire a portion of the debt incurred as a result of the Nabisco acquisition. During 2001, the Company's effective tax rate decreased by 0.8 percentage points to 37.9%. This change primarily reflects the reversal in 2001 of previously accrued taxes for certain foreign jurisdictions where the Company has received favorable closings of audits by taxing authorities. Diluted and basic earnings per share ("EPS") after the cumulative effect of an accounting change, of $3.87 and $3.92, respectively, for 2001, increased by 3.2% and 4.0%, respectively, over 2000. Net earnings of $8.6 billion for 2001 increased $50 million (0.6%) over 2000. These results include the unusual items previously discussed. Excluding the after-tax impact of the unusual items, net earnings increased 5.9% to $8.9 billion, diluted EPS increased 8.9% to $4.04 and basic EPS increased 9.7% to $4.09. 2000 compared with 1999 Operating revenues for 2000 increased $1.8 billion (2.2%) over 1999, due primarily to an increase in revenues from the Company's domestic tobacco operations. The operating revenue comparison was adversely affected by approximately $225 million of incremental sales made during the fourth quarter of 1999, as the Company's customers planned for potential business failures related to the CDC. Including the incremental CDC revenues in the first quarter of 2000, and excluding the revenues of several small international food businesses divested since the beginning of 1999, operating revenues for 2000 increased 3.2% over 1999.

Operating income for 2000 increased $1.2 billion (8.7%) over 1999. Operating income for 2000 includes pretax gains related to the French Confectionery Sale and the Molson Sale. Operating income for 1999 includes pre-tax charges of $319 million related to domestic and international tobacco factory closures, $157 million related to a domestic food separation program and $29 million related to the write-down of three brewing facilities to their estimated fair values. In addition, the operating income comparison was adversely affected by approximately $100 million of operating income from the incremental CDC sales made in 1999. Including the incremental CDC income in 2000 and excluding the previously discussed pre-tax gains and pre-tax charges in each year, as well as the results from operations divested since the beginning of 1999, operating income for 2000 increased 4.9% over 1999, due primarily to higher operating results from all segments, partially offset by higher general corporate expenses of $204 million. The increase in general corporate expenses was due primarily to higher spending on the Company's corporate image campaign. Operating companies income increased $1.4 billion (9.5%) over 1999, due primarily to higher operating results from all segments, the impact of the 2000 pre-tax gains and 1999 pre-tax charges, partially offset by incremental CDC income. Including the incremental CDC income in 2000 and excluding the 2000 pre-tax gains and 1999 pre-tax charges, as well as the results from operations divested since the beginning of 1999, operating companies income for 2000 increased 5.9% over 1999. Currency movements decreased operating revenues by $2.9 billion ($1.6 billion, excluding excise taxes) and operating companies income by $495 million from 1999. Decreases in operating revenues and operating companies income were due primarily to the strength of the U.S. dollar against the euro. Interest and other debt expense, net, decreased $76 million (9.6%) in 2000 from 1999. This decrease was due primarily to lower levels of average debt outstanding and higher interest income on cash and cash equivalents. Diluted and basic EPS, which were $3.75 and $3.77, respectively, for 2000, increased by 17.6% and 17.4%, respectively, over 1999. Net earnings of $8.5 billion in 2000 increased 10.9% over 1999. These results include the pre-tax gains and charges, as well as the impact of the incremental CDC income. After adjusting for the effect of these unusual items, net earnings increased 6.3% to $8.4 billion, and diluted and basic EPS increased 12.4% and 12.7% to $3.71 and $3.73, respectively. - Century Date Change: The Company did not experience any material disruptions to its businesses as a result of the CDC. The Company's increases in 1999 year-end inventories and trade receivables caused by preemptive CDC contingency plans resulted in incremental cash outflows during 1999 of approximately 23

$300 million. The cash outflows reversed in the first quarter of 2000. In addition, certain operating subsidiaries of the Company had increased shipments in the fourth quarter of 1999, because customers purchased additional product in anticipation of potential CDC-related disruptions. The increased shipments in 1999 resulted in incremental operating revenues and operating companies income in 1999 of approximately $225 million and $100 million, respectively, and corresponding decreases in operating revenues and operating companies income in 2000. - Euro: Twelve of the fifteen member countries of the European Union have established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency--the euro. In January 2002, the new euro-denominated currency (bills and coins) was issued. The Company's operating subsidiaries affected by the euro conversion have addressed the systems and business issues raised by the euro currency conversion. These issues included, among others: (1) the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions; and (2) the competitive impact of cross-border price transparency, which makes it more difficult for businesses to charge different prices for the same products on a country-by-country basis. The euro conversion has not had, and the Company currently anticipates that it will not have, a material adverse impact on its financial condition or results of operations. Operating Results by Business Segment Tobacco

$300 million. The cash outflows reversed in the first quarter of 2000. In addition, certain operating subsidiaries of the Company had increased shipments in the fourth quarter of 1999, because customers purchased additional product in anticipation of potential CDC-related disruptions. The increased shipments in 1999 resulted in incremental operating revenues and operating companies income in 1999 of approximately $225 million and $100 million, respectively, and corresponding decreases in operating revenues and operating companies income in 2000. - Euro: Twelve of the fifteen member countries of the European Union have established fixed conversion rates between their existing currencies ("legacy currencies") and one common currency--the euro. In January 2002, the new euro-denominated currency (bills and coins) was issued. The Company's operating subsidiaries affected by the euro conversion have addressed the systems and business issues raised by the euro currency conversion. These issues included, among others: (1) the need to adapt computer and other business systems and equipment to accommodate euro-denominated transactions; and (2) the competitive impact of cross-border price transparency, which makes it more difficult for businesses to charge different prices for the same products on a country-by-country basis. The euro conversion has not had, and the Company currently anticipates that it will not have, a material adverse impact on its financial condition or results of operations. Operating Results by Business Segment Tobacco Business Environment The tobacco industry, both in the United States and abroad, has faced, and continues to face, a number of issues that may adversely affect the business, volume, results of operations, cash flows and financial position of PM Inc., PMI and the Company. These issues, some of which are more fully discussed below, include pending and threatened smoking and health litigation and certain jury verdicts against PM Inc., including a $74 billion punitive damages verdict in the Engle smoking and health class action case discussed in Note 16 and punitive damages awards in individual smoking and health cases discussed in Note 16; the civil lawsuit filed by the United States federal government against various cigarette manufacturers and others discussed in Note 16; legislation or other governmental action seeking to ascribe to the industry responsibility and liability for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke ("ETS"); price increases in the United States related to the settlement of certain tobacco litigation; actual and proposed excise tax increases in the United States and foreign markets; diversion into the United States market of products intended for sale outside the United States; governmental investigations; actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information; governmental and private bans and restrictions on smoking; actual and proposed price controls and restrictions on imports in certain jurisdictions outside the United States; actual and proposed restrictions affecting tobacco manufacturing, marketing, advertising and sales outside the United States; actual and proposed legislation in Congress, the state of New York and other jurisdictions inside and outside the United States to require the establishment of fire-safety standards for cigarettes; the diminishing social acceptance of smoking and increased pressure from tobacco control advocates and unfavorable press reports; and other tobacco legislation that may be considered by Congress, the states and other jurisdictions inside and outside the United States. - Excise Taxes: Cigarettes are subject to substantial federal, state and local excise taxes in the United States and to similar taxes in most foreign markets. In general, such taxes have been increasing. The United States federal excise tax on cigarettes is currently $0.39 per pack of 20 cigarettes. In the United States, state and local sales and excise taxes vary considerably and, when combined with sales taxes, local taxes and the current federal excise tax, may be as high as $2.00 per pack in a given locality in the United States. Congress has considered significant increases in the federal excise tax or other payments from tobacco manufacturers, and significant increases in excise and other cigarette-related taxes have been proposed or enacted at the state and local levels within the United States and in many jurisdictions outside the United States. In the European Union (the "EU"), taxes on cigarettes vary considerably and currently may be as high as the equivalent of $4.88 per pack on the most popular brands. In Germany, where total tax on cigarettes is currently equivalent to $1.96 per pack on the most popular brands, the excise tax is scheduled to increase by approximately $0.17 per pack by January 2003.

In the opinion of PM Inc. and PMI, increases in excise and similar taxes have had an adverse impact on sales of cigarettes. Any future increases, the extent of which cannot be predicted, could result in volume declines for the cigarette industry, including PM Inc. and PMI, and might cause sales to shift from the premium segment to the discount segment. - Tar and Nicotine Test Methods and Brand Descriptors: Jurisdictions around the world have questioned the utility of standardized test methods to measure tar and nicotine yields of cigarettes. In September 1997, the United States Federal Trade Commission ("FTC") issued a request for public comment on its proposed revision of its "tar" and nicotine test methodology and reporting procedures established by a 1970 voluntary agreement among domestic cigarette manufacturers. In February 1998, PM Inc. and three other domestic cigarette manufacturers filed comments on the proposed revisions. In November 1998, the FTC wrote to the Department of Health and Human Services ("HHS") requesting its assistance in developing specific recommendations on the future of the FTC's program for testing the "tar," nicotine and carbon monoxide content of cigarettes. In November 2001, the National Cancer Institute, issued a report as a part of HHS' response to the FTC's request. The report concluded, among other things, that because there was no meaningful difference in smoke exposure or risk to smokers between cigarettes with different machine-measured tar and nicotine yields, the marketing of low yield cigarettes was deceptive. Similarly, public health officials in other countries and the EU have questioned the relevance of the related International Standards Organization's test method for measuring tar, nicotine and carbon monoxide yields. The EU Commission has been directed to establish a committee to address, among other things, alternative methods for measuring tar, nicotine and carbon monoxide yields. In addition, public health authorities in the United States, the EU, Brazil and other countries have called for the prohibition of the use of brand descriptors such as "Lights" and "Ultra Lights." In the United States, as of December 31, 2001, there were 11 putative class actions pending against PM Inc. and the Company in which plaintiffs allege, among other things, that the use of the terms "Lights" and/or "Ultra Lights," constitutes deceptive and unfair trade practices. - Food and Drug Administration ("FDA") Regulations: In August 1996, the FDA promulgated regulations asserting 24

jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act ("FDCA"). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, recordkeeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in March 2000. The Company has stated that while it continues to oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the provisions of FDCA, it would support new legislation that would provide for reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there are several bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products. The bills take a variety of approaches to the issue of the FDA's proposed regulation of tobacco products ranging from codification of the original FDA regulations under the "drug" and "medical device" provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of the pending bills cannot be predicted. - Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose the ingredients used in the manufacture of cigarettes, and in certain cases, to provide toxicological information supporting the use of ingredients. In the United States, the Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report the flavorings and other ingredients used in each brand-style of cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the district court granted the plaintiffs' motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand-specific information on ingredients in their products, and defendants appealed. In October 2001, the United States Court of Appeals for the First Circuit reversed the district court's decision, holding that the Massachusetts disclosure statute does not constitute an impermissible taking of private property. In November 2001, the First Circuit granted the cigarette manufacturers' petition for rehearing en banc and withdrew the prior opinion. The First Circuit, sitting en banc, heard oral argument in January 2002. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states and

jurisdiction over cigarettes as "drugs" or "medical devices" under the provisions of the Food, Drug and Cosmetic Act ("FDCA"). The regulations, which included severe restrictions on the distribution, marketing and advertising of cigarettes, and would have required the industry to comply with a wide range of labeling, reporting, recordkeeping, manufacturing and other requirements, were declared invalid by the United States Supreme Court in March 2000. The Company has stated that while it continues to oppose FDA regulation over cigarettes as "drugs" or "medical devices" under the provisions of FDCA, it would support new legislation that would provide for reasonable regulation by the FDA of cigarettes as cigarettes. Currently, there are several bills pending in Congress that, if enacted, would give the FDA authority to regulate tobacco products. The bills take a variety of approaches to the issue of the FDA's proposed regulation of tobacco products ranging from codification of the original FDA regulations under the "drug" and "medical device" provisions of the FDCA to the creation of provisions that would apply uniquely to tobacco products. All of the pending legislation could result in substantial federal regulation of the design, performance, manufacture and marketing of cigarettes. The ultimate outcome of the pending bills cannot be predicted. - Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose the ingredients used in the manufacture of cigarettes, and in certain cases, to provide toxicological information supporting the use of ingredients. In the United States, the Commonwealth of Massachusetts has enacted legislation to require cigarette manufacturers to report the flavorings and other ingredients used in each brand-style of cigarettes sold in the Commonwealth. Cigarette manufacturers sued to have the statute declared unconstitutional, arguing that it could result in the public disclosure of valuable proprietary information. In September 2000, the district court granted the plaintiffs' motion for summary judgment and permanently enjoined the defendants from requiring cigarette manufacturers to disclose brand-specific information on ingredients in their products, and defendants appealed. In October 2001, the United States Court of Appeals for the First Circuit reversed the district court's decision, holding that the Massachusetts disclosure statute does not constitute an impermissible taking of private property. In November 2001, the First Circuit granted the cigarette manufacturers' petition for rehearing en banc and withdrew the prior opinion. The First Circuit, sitting en banc, heard oral argument in January 2002. The ultimate outcome of this lawsuit cannot be predicted. Similar legislation has been enacted or proposed in other states and in jurisdictions outside the United States, including the EU. Under the EU product directive described below, tobacco companies must disclose the use of, and provide toxicological information about, all ingredients by October 2002. PMI has voluntarily disclosed ingredients in its brands in a number of EU member states and in other countries. Other jurisdictions have enacted or proposed legislation that would require the submission of toxicological information about ingredients and would permit governments to prohibit their use. - Health Effects of Smoking and Exposure to ETS: Reports with respect to the health risks of cigarette smoking have been publicized for many years, and the sale, promotion and use of cigarettes continue to be subject to increasing governmental regulation. Since 1964, the Surgeon General of the United States and the Secretary of Health and Human Services have released a number of reports linking cigarette smoking with a broad range of health hazards, including various types of cancer, coronary heart disease and chronic lung disease, and recommending various governmental measures to reduce the incidence of smoking. The 1988, 1990, 1992 and 1994 reports focus upon the addictive nature of cigarettes, the effects of smoking cessation, the decrease in smoking in the United States, the economic and regulatory aspects of smoking in the Western Hemisphere, and cigarette smoking by adolescents, particularly the addictive nature of cigarette smoking during adolescence. Studies with respect to the health risks of ETS to nonsmokers (including lung cancer, respiratory and coronary illnesses, and other conditions) have also received significant publicity. In 1986, the Surgeon General of the United States and the National Academy of Sciences reported that nonsmokers were at increased risk of lung cancer and respiratory illness due to ETS. Since then, a number of government agencies around the world have concluded that ETS causes disease--including lung cancer and heart disease--in nonsmokers. It is the policy of each of PM Inc. and PMI to support a single, consistent public health message on the role played by cigarette smoking in the development of diseases in smokers, and on smoking and addiction. It is also their policy in relation to these issues and the health effects of exposure to ETS to defer to the judgment of public health authorities as to the text of health warning messages that will best serve the public interest. In 1999, PM Inc. and PMI established web sites that include, among other things, views of public health authorities on smoking, disease causation in smokers, addiction and ETS. In October 2000, the sites were updated to reflect PM Inc.'s and PMI's agreement with the overwhelming medical and scientific consensus that

cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. The web sites advise smokers, and those considering smoking, to rely on the messages of public health authorities in making all smoking-related decisions. The sites also state that government agencies have concluded that ETS causes diseases--including lung cancer and heart disease--in nonsmokers. PM Inc. and PMI recognize and accept that many people have health concerns regarding ETS. In addition, because of concerns relating to conditions such as asthma and respiratory infections, PM Inc. and PMI believe that particular care should be exercised where children are concerned, and that smokers who have children--particularly young ones--should seek to minimize their exposure to ETS. - The World Health Organization's Framework Convention for Tobacco Control: The World Health Organization has begun negotiations regarding a proposed Framework Convention for Tobacco Control. The proposed treaty would require signatory nations to enact legislation that would require, among other things, specific actions to prevent youth smoking; restrict tobacco product marketing; inform the public about the health consequences of smoking and the benefits of quitting; regulate the content of tobacco products; impose new package warning requirements including the use of pictorial or graphic images; eliminate cigarette smuggling and counterfeit cigarettes; restrict smoking in public places; increase and harmonize cigarette excise taxes; abolish duty-free tobacco sales; and permit and encourage litigation against tobacco product manufacturers. PM Inc. and PMI have stated that they would support a treaty that member states could consider for ratification, based on the following four principles: (1) smoking-related decisions should be made on the basis of a consistent public health message; (2) effective measures should be taken to prevent minors from smoking; (3) the right of adults to choose to smoke should be preserved; and (4) all manufacturers of tobacco products should compete on a level 25

playing field. The outcome of the treaty negotiations cannot be predicted. - Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the HHS or regulation under the Consumer Products Safety Act, establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities, further restrict the advertising of cigarettes, require additional warnings, including graphic warnings, on packages and in advertising, eliminate or reduce the tax deductibility of tobacco advertising, provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law, and allow state and local governments to restrict the sale and distribution of cigarettes. Legislative initiatives affecting the regulation of the tobacco industry have also been considered in a number of jurisdictions outside the United States. The EU has issued a directive on tobacco product regulation that, among other things, reduces maximum permitted levels of tar, nicotine and carbon monoxide yields to 10, 1 and 10 milligrams respectively, requires manufacturers to disclose ingredients and toxicological data on ingredients, requires health warnings on the front of a pack that cover at least 30% of the front panel and 14 rotational warnings that cover no less than 40% of the back panel, requires the health warnings to be surrounded by a black border, requires the printing of tar, nicotine and carbon monoxide numbers on the side panel of the pack at a minimum size of 10% of the side panel, and as described above, prohibits the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others. The EU's member states are in the process of drafting and adopting legislation that will implement the provisions of the directive. The European Commission is also considering a new directive that would further restrict tobacco marketing and advertising in the EU. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions. In August 2000, New York State enacted legislation that requires the State's Office of Fire Prevention and Control to promulgate by January 1, 2003 fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. It is not possible to predict the impact of this law on PM Inc. until the standards are published. Similar legislation is being considered in other states and localities and at the federal level, as well as in jurisdictions outside the United States.

playing field. The outcome of the treaty negotiations cannot be predicted. - Other Legislative Initiatives: In recent years, various members of the United States Congress have introduced legislation, some of which has been the subject of hearings or floor debate, that would subject cigarettes to various regulations under the HHS or regulation under the Consumer Products Safety Act, establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities, further restrict the advertising of cigarettes, require additional warnings, including graphic warnings, on packages and in advertising, eliminate or reduce the tax deductibility of tobacco advertising, provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under state statutory or common law, and allow state and local governments to restrict the sale and distribution of cigarettes. Legislative initiatives affecting the regulation of the tobacco industry have also been considered in a number of jurisdictions outside the United States. The EU has issued a directive on tobacco product regulation that, among other things, reduces maximum permitted levels of tar, nicotine and carbon monoxide yields to 10, 1 and 10 milligrams respectively, requires manufacturers to disclose ingredients and toxicological data on ingredients, requires health warnings on the front of a pack that cover at least 30% of the front panel and 14 rotational warnings that cover no less than 40% of the back panel, requires the health warnings to be surrounded by a black border, requires the printing of tar, nicotine and carbon monoxide numbers on the side panel of the pack at a minimum size of 10% of the side panel, and as described above, prohibits the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others. The EU's member states are in the process of drafting and adopting legislation that will implement the provisions of the directive. The European Commission is also considering a new directive that would further restrict tobacco marketing and advertising in the EU. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed in numerous other jurisdictions. In August 2000, New York State enacted legislation that requires the State's Office of Fire Prevention and Control to promulgate by January 1, 2003 fire-safety standards for cigarettes sold in New York. The legislation requires that cigarettes sold in New York stop burning within a time period to be specified by the standards or meet other performance standards set by the Office of Fire Prevention and Control. All cigarettes sold in New York will be required to meet the established standards within 180 days after the standards are promulgated. It is not possible to predict the impact of this law on PM Inc. until the standards are published. Similar legislation is being considered in other states and localities and at the federal level, as well as in jurisdictions outside the United States. It is not possible to predict what, if any, additional foreign or domestic governmental legislation or regulations will be adopted relating to the manufacturing, advertising, sale or use of cigarettes, or to the tobacco industry generally. However, if any or all of the foregoing were to be implemented, the business, volume, results of operations, cash flows and financial position of PM Inc., PMI and the Company could be materially adversely affected. - Governmental Investigations: In June 2001, the competition authorities in Italy and Turkey initiated separate investigations into business activities among participants in the cigarette markets of those countries. The order initiating the Italian investigation named the Company and certain of its affiliates as well as all other parties purportedly engaged in the sale of cigarettes in Italy, including the Italian state tobacco monopoly. The Turkish investigation is directed at one of the Company's Turkish affiliates and another cigarette manufacturer. In 2001, authorities in Australia initiated an investigation into use of descriptors, alleging that their use was false and misleading. The investigation is directed at one of the Company's Australian affiliates and other cigarette manufacturers. While it is not possible to predict the outcome of these investigations, the Company and its affiliates believe they have meritorious responses to the matters being investigated. They are cooperating with the investigations and are prepared to vigorously contest any findings of unlawful conduct that may result from the investigations. - Tobacco-Related Litigation: There is substantial litigation pending related to tobacco products in the United States and certain foreign jurisdictions, including the Engle class action case in Florida, in which PM Inc. is a defendant, and a civil health care cost recovery action filed by the United States Department of Justice in September 1999 against domestic tobacco manufacturers and others, including PM Inc. and the Company. (See Note 16 for a discussion of such litigation.)

- State Settlement Agreements: As discussed in Note 16, during 1997 and 1998, PM Inc. and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements provide for substantial annual payments. They also place numerous restrictions on the tobacco industry's conduct of its business operations, including restrictions on the advertising and marketing of cigarettes. Among these are restrictions or prohibitions on the following: targeting youth; use of cartoon characters; use of brand name sponsorships and brand name non-tobacco products; outdoor and transit brand advertising; payments for product placement; and free sampling. In addition, the settlement agreements require companies to affirm corporate principles to reduce underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry's ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations. Operating Results
(in millions) Operating Revenues Operating Companies Income -----------------------------------------------------------------------------------2001 2000 1999 2001 2000 1999 -----------------------------------------------------------------------------------Domestic tobacco $24,784 $22,658 $19,596 $ 5,264 $ 5,350 $4,865 International tobacco 26,586 26,374 27,506 5,406 5,211 4,968 -----------------------------------------------------------------------------------Total $51,370 $49,032 $47,102 $10,670 $10,561 $9,833 ====================================================================================

2001 compared with 2000 - Domestic tobacco: During 2001, PM Inc.'s operating revenues increased $2.1 billion (9.4%) over 2000, due primarily to higher pricing ($2.6 billion) and improved mix, partially offset by lower volume ($525 million). Operating companies income for 2001 decreased $86 million (1.6%) from 2000, due primarily to higher marketing, administration and research costs ($1.2 billion, primarily marketing), the 2001 Engle litigation related expense ($500 million) and lower 26

volume ($403 million), partially offset by price increases, net of cost increases ($2.0 billion) and improved mix. Excluding the 2001 Engle litigation related expense, operating companies income of $5.8 billion in 2001 increased 7.7% over $5.4 billion in 2000. As reported by Management Science Associates, shipment volume for the domestic tobacco industry during 2001 decreased to 406.3 billion units, a 3.2% decrease from 2000, primarily as a result of wholesalers' decisions to reduce inventory at the end of 2001 in advance of the January 1, 2002 increase in the federal excise tax rate. PM Inc.'s shipment volume for 2001 was 207.1 billion units, a decrease of 2.3% from 2000. After adjusting for changes in trade inventories, PM Inc. estimates that industry volume declined at an annual rate of 1.0% to 2.0%. For 2001, PM Inc.'s shipment market share was 51.0%, an increase of 0.5 share points over 2000 due to increased shipment share for Marlboro, Parliament and Virginia Slims. Marlboro shipment volume decreased 397 million units (0.3%) from 2000 to 157.8 billion units for a 38.8% share of the total industry, an increase of 1.1 share points over 2000. Based on shipments, the premium segment accounted for approximately 73.9% of the domestic cigarette industry volume in 2001, an increase of 0.4 share points over 2000. In the premium segment, PM Inc.'s volume decreased 1.1% during 2001, compared with a 2.7% decrease for the industry, resulting in a premium segment share of 61.6%, an increase of 1.0 share points over 2000. In the discount segment, PM Inc.'s shipments decreased 11.0% to 22.2 billion units in 2001, compared with an

volume ($403 million), partially offset by price increases, net of cost increases ($2.0 billion) and improved mix. Excluding the 2001 Engle litigation related expense, operating companies income of $5.8 billion in 2001 increased 7.7% over $5.4 billion in 2000. As reported by Management Science Associates, shipment volume for the domestic tobacco industry during 2001 decreased to 406.3 billion units, a 3.2% decrease from 2000, primarily as a result of wholesalers' decisions to reduce inventory at the end of 2001 in advance of the January 1, 2002 increase in the federal excise tax rate. PM Inc.'s shipment volume for 2001 was 207.1 billion units, a decrease of 2.3% from 2000. After adjusting for changes in trade inventories, PM Inc. estimates that industry volume declined at an annual rate of 1.0% to 2.0%. For 2001, PM Inc.'s shipment market share was 51.0%, an increase of 0.5 share points over 2000 due to increased shipment share for Marlboro, Parliament and Virginia Slims. Marlboro shipment volume decreased 397 million units (0.3%) from 2000 to 157.8 billion units for a 38.8% share of the total industry, an increase of 1.1 share points over 2000. Based on shipments, the premium segment accounted for approximately 73.9% of the domestic cigarette industry volume in 2001, an increase of 0.4 share points over 2000. In the premium segment, PM Inc.'s volume decreased 1.1% during 2001, compared with a 2.7% decrease for the industry, resulting in a premium segment share of 61.6%, an increase of 1.0 share points over 2000. In the discount segment, PM Inc.'s shipments decreased 11.0% to 22.2 billion units in 2001, compared with an industry decrease of 4.5%, resulting in a discount segment share of 20.9%, a decrease of 1.6 share points from 2000. Basic shipment volume for 2001 was down 5.5% to 20.4 billion units, for a 19.2% share of the discount segment, down 0.2 share points compared to 2000. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail grew 0.3 share points to 50.8% for 2001. The 2001 retail share for Marlboro increased 1.1 share points to 38.2%. In October 2001, PM Inc. announced a price increase of $2.50 per thousand cigarettes on its domestic premium and discount brands. This followed price increases of $7.00 per thousand in April 2001, $7.00 per thousand in December 2000, $3.00 per thousand in July 2000, $6.50 per thousand in January 2000 and $9.00 per thousand in August 1999. Each $1.00 per thousand increase by PM Inc. equates to a $0.02 increase in the price to wholesalers of each pack of twenty cigarettes. PM Inc. cannot predict future changes or rates of change in domestic tobacco industry volume, the relative sizes of the premium and discount segments or in PM Inc.'s shipments, shipment market share or retail market share; however, it believes that PM Inc.'s shipments may be materially adversely affected by price increases including those related to tobacco litigation settlements and, if enacted, by increased excise taxes or other tobacco legislation discussed under the caption "Tobacco--Business Environment." - International tobacco: During 2001, international tobacco operating revenues, including excise taxes, increased $212 million (0.8%) from 2000. Excluding excise taxes, operating revenues increased $154 million (1.1%), due primarily to price increases ($366 million), higher volume/mix ($156 million) and the shift in CDC revenues ($97 million), partially offset by unfavorable currency movements. Operating companies income for 2001 increased $195 million (3.7%) over 2000, due primarily to price increases and favorable costs ($430 million), higher volume/mix ($23 million), the shift of CDC income ($59 million) and the favorable impact of new distribution and contract manufacturing agreements in several markets, partially offset by unfavorable currency movements ($390 million). Adjusting for the shift in CDC income, operating companies income of $5,406 million in 2001 increased 2.6% over $5,270 million in 2000. PMI's volume for 2001 of 698.9 billion units increased 27.7 billion units (4.1%) over 2000. Adjusting for the shift in CDC volume (the basis of presentation for all following PMI volume disclosures), PMI's volume for 2001 increased 23.5 billion units (3.5%) over 2000, due primarily to volume increases in Western, Central and Eastern Europe, as well as Asia. Volume advanced in a number of important markets, including Italy, Belgium, France, Spain, Portugal, the Netherlands, Sweden, the United Kingdom, Israel, Poland, Romania, Saudi Arabia, Russia, the Ukraine, Japan, Korea, Indonesia, Taiwan, Malaysia, Thailand, Mexico and Brazil. PMI recorded market

share gains in most of its major markets. Volume and share in Germany were lower due to the continued growth of low-priced trade brands. Volume declined in Turkey as several price increases related to the Turkish lira devaluation have led to a market contraction and consumer downtrading. In Argentina, volume declined due to a recession-driven decline in the total cigarette industry, which more than offset higher market share. The Company expects continued erosion of the economic climate in Argentina to negatively affect income in 2002. International volume for Marlboro decreased 0.4%, as lower volumes in Germany, Turkey, Poland, Egypt, the Philippines, Argentina and worldwide duty-free were partially offset by higher volumes in France, Spain, Russia, the Ukraine, Indonesia, Japan, Korea and Mexico. Excluding Argentina, Turkey and worldwide duty-free, international volume for Marlboro increased 2.5%. 2000 compared with 1999 - Domestic tobacco: During 2000, PM Inc.'s operating revenues increased $3.1 billion (15.6%) over 1999, due primarily to higher pricing ($2.7 billion, including amounts related to the January 1, 2000 federal excise tax increase) and higher volume ($0.3 billion). Operating companies income for 2000 increased $485 million (10.0%) over 1999, due primarily to price increases, net of cost increases ($1.2 billion), higher volume ($237 million) and the absence of 1999 pre-tax charges for the closure of a Louisville, Kentucky manufacturing plant ("Louisville Closure," $183 million), partially offset by higher marketing, administration and research costs ($1.2 billion, primarily increased marketing related to consumer promotions). Excluding the impact of the 1999 pre-tax charges for the Louisville Closure, PM Inc.'s operating income of $5,350 million in 2000 increased by 6.0% over $5,048 million in 1999. As reported by Management Science Associates, shipment volume for the domestic tobacco industry during 2000 increased to 419.8 billion units, a 0.1% increase over 1999. PM Inc.'s shipment volume for 2000 was 211.9 billion units, an increase of 1.8% over 1999. Shipment growth for the industry and PM Inc. during 2000 was largely driven by wholesalers' decisions to rebuild their inventories after the January 1, 2000 federal excise tax increase. In contrast, wholesalers decreased their inventory levels during 1999, as inventory held at the end of 1999 was subject to a federal excise tax increase. PM Inc. estimates that after adjusting for this and other factors, industry shipment volume declined approximately 1.0% to 2.0% from 1999, while PM Inc.'s shipment volume was essentially flat. For 2000, PM Inc.'s shipment market share was 50.5%, an increase of 0.9 share points over 1999. Marlboro shipment volume 27

increased 5.4 billion units (3.5%) from 1999 to 158.2 billion units for a 37.7% share of the total industry, an increase of 1.3 share points over 1999. Contributing to this growth were introductory shipments of Marlboro Milds, which were launched nationally at retail in April 2000. Based on shipments, the premium segment accounted for approximately 73.5% of the domestic cigarette industry volume in 2000, an increase of 0.1 share points over 1999. In the premium segment, PM Inc.'s volume increased 2.0% during 2000, compared with a 0.2% increase for the industry, resulting in a premium segment share of 60.6%, an increase of 1.1 share points over 1999. In the discount segment, PM Inc.'s shipments increased 0.2% to 25.0 billion units in 2000, compared with an industry decrease of 0.1%, resulting in a discount segment share of 22.5%, an increase of 0.1 share points from 1999. Basic shipment volume for 2000 was up 6.1% to 21.6 billion units, for a 19.4% share of the discount segment, an increase of 1.1 share points from 1999. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail grew 0.6 share points to 50.5% for 2000. The 2000 retail share for Marlboro rose 1.1 share points to 37.1%. - International tobacco: During 2000, international tobacco operating revenues, including excise taxes, decreased $1.1 billion (4.1%) from 1999. Excluding excise taxes, operating revenues decreased $310 million (2.2%), due primarily to unfavorable currency movements ($759 million) and the previously discussed shift in CDC revenues

increased 5.4 billion units (3.5%) from 1999 to 158.2 billion units for a 37.7% share of the total industry, an increase of 1.3 share points over 1999. Contributing to this growth were introductory shipments of Marlboro Milds, which were launched nationally at retail in April 2000. Based on shipments, the premium segment accounted for approximately 73.5% of the domestic cigarette industry volume in 2000, an increase of 0.1 share points over 1999. In the premium segment, PM Inc.'s volume increased 2.0% during 2000, compared with a 0.2% increase for the industry, resulting in a premium segment share of 60.6%, an increase of 1.1 share points over 1999. In the discount segment, PM Inc.'s shipments increased 0.2% to 25.0 billion units in 2000, compared with an industry decrease of 0.1%, resulting in a discount segment share of 22.5%, an increase of 0.1 share points from 1999. Basic shipment volume for 2000 was up 6.1% to 21.6 billion units, for a 19.4% share of the discount segment, an increase of 1.1 share points from 1999. According to consumer purchase data from Information Resources Inc./Capstone, PM Inc.'s share of cigarettes sold at retail grew 0.6 share points to 50.5% for 2000. The 2000 retail share for Marlboro rose 1.1 share points to 37.1%. - International tobacco: During 2000, international tobacco operating revenues, including excise taxes, decreased $1.1 billion (4.1%) from 1999. Excluding excise taxes, operating revenues decreased $310 million (2.2%), due primarily to unfavorable currency movements ($759 million) and the previously discussed shift in CDC revenues ($194 million), partially offset by price increases ($363 million) and favorable volume/mix ($223 million). Operating companies income for 2000 increased $243 million (4.9%) over 1999, due primarily to price increases and favorable costs ($517 million), the 1999 pre-tax charge for a factory closure in Brazil ("Brazil Factory Closure," $136 million) and lower marketing, administration and research costs, partially offset by unfavorable currency movements ($404 million) and the shift of CDC income ($118 million) to the fourth quarter of 1999. Adjusting for the shift in CDC income and excluding the 1999 impact of the pre-tax charge for the Brazil Factory Closure, operating companies income of $5,270 million in 2000 increased 4.5% over $5,045 million in 1999. PMI's 2000 volume of 671.2 billion units decreased 0.9 billion units (0.1%) from 1999. Adjusting for the shift in CDC volume (the basis of presentation for all following PM International volume disclosures), PMI's volume of 675.4 billion units for 2000 increased 7.5 billion units (1.1%) over 1999, due primarily to volume increases in Western and Eastern Europe and Asia, partially offset by lower worldwide duty-free shipments, which were affected by the July 1999 cessation of duty-free sales within the European Union, and lower volume in Central Europe. Volume advanced in a number of important markets, including Italy, France, Spain, the Benelux countries, Portugal, Greece, Russia, the Ukraine, Kazakhstan, Saudi Arabia, Egypt, Japan, Indonesia, Thailand, Korea, Malaysia and Mexico. PMI recorded market share gains in many of its major markets. Volume and share in Germany were adversely affected by heightened competition and the growth of trade brands. Trade inventory distortions in Poland and market softness and the timing of shipments in the Czech Republic contributed to PMI's overall volume decline in Central Europe. In Turkey, lower volume and share were due to a significant tax-driven price increase in December 1999, which affected the premium segment in particular. PMI's volume was lower in Argentina due to tax-driven pricing in a recessionary environment. International volume for Marlboro increased 1.7%, as higher volumes in Japan, Italy, France, Greece, Spain, Saudi Arabia, Russia, Korea, Malaysia, Thailand, Indonesia, Brazil and Mexico were partially offset by lower volumes in Poland, the Czech Republic and certain Eastern European markets, and by lower worldwide duty-free shipments. Food Business Environment Kraft, the largest branded food and beverage company headquartered in the United States, conducts its global business through two units. A wide variety of snacks, beverages, cheese, grocery products and convenient meals are manufactured and marketed in the United States, Canada and Mexico by Kraft Foods North America, Inc. ("Kraft Foods North America"). Subsidiaries and affiliates of Kraft Foods International, Inc. ("Kraft Foods International") manufacture and market a wide variety of snacks, beverages, cheese, grocery products and convenient meals in Europe, the Middle East and Africa, as well as the Latin America and Asia Pacific regions. Kraft Foods North America and Kraft Foods International are subject to fluctuating commodity costs, currency

movements and competitive challenges in various product categories and markets, including a trend toward increasing consolidation in the retail trade and consequent inventory reductions, and changing consumer preferences. Certain competitors may have different profit objectives and some international competitors may be less susceptible to currency exchange rates. To confront these challenges, Kraft continues to take steps to build the value of its brands and improve its food business portfolio with new product and marketing initiatives. Fluctuations in commodity costs can cause retail price volatility, intensify price competition and influence consumer and trade buying patterns. The North American and international food businesses are subject to fluctuating commodity costs, including dairy, coffee bean and cocoa costs. Dairy commodity costs on average have been higher in 2001 than those seen in 2000. Cocoa bean prices have also been higher, while coffee bean prices have been lower than in 2000. During the latter part of 2000 and into 2001, energy costs rose in response to higher prices charged for oil and natural gas. However, this increase in energy costs did not have a material adverse effect on the operating results of the Company. Kraft's subsidiaries end their fiscal years on the last Saturday in December. Accordingly, most years contain 52 weeks of operating results while every fifth or sixth year includes 53 weeks. The Company's consolidated statement of earnings for the year ended December 31, 2000 included a 53rd week. The benefit to 2000 operating results from an extra week of shipments was essentially offset by reductions in retail trade inventories for certain of the Company's products. A similar level of reductions in trade inventories also occurred in 2001. The net result is that Kraft's 2001 volume and revenue comparisons to 2000 were affected by the extra week of shipments in 2000. Volume comparisons contained in Management's Discussion and Analysis for 2001 versus 2000 have been provided on a comparable 52-week basis to provide a more meaningful comparison. On December 11, 2000, the Company, through Kraft, acquired all of the outstanding shares of Nabisco. The integration of Nabisco into Kraft has continued throughout 2001. The closure of a number of Nabisco domestic and international facilities resulted in severance and other exit costs of $379 million, which are included in the adjustments for the allocation of purchase price. The closures will result in the elimination of approximately 7,500 employees and will require total cash payments of $373 million, of which approximately $74 million has been spent through 28

December 31, 2001. Substantially all of the closures will be completed by the end of 2002. The integration of Nabisco into the operations of the Company will also result in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the Company's consolidated statement of earnings to close or reconfigure its facilities and integrate Nabisco are estimated to be in the range of $200 million to $300 million. During 2001, the Company incurred pre-tax integration costs of $53 million for site reconfigurations and other consolidation programs in the United States. In October 2001, Kraft announced that it was offering a voluntary retirement program to certain salaried employees in the United States. The program is expected to terminate approximately 750 employees and will result in an estimated pre-tax charge of approximately $140 million upon final employee acceptance in the first quarter of 2002. During 2001, the Company purchased coffee businesses in Romania, Morocco and Bulgaria and also acquired confectionery businesses in Russia and Poland. The total cost of these and other smaller food acquisitions was $194 million. The operating results of these businesses were not material to the Company's consolidated financial position or results of operations in any of the periods presented. During 2000, the Company purchased the outstanding common stock of Balance Bar Co., a maker of energy and nutrition snack products. In a separate transaction, the Company also acquired Boca Burger, Inc., a manufacturer and marketer of soy-based meat alternatives. The total cost of these and other smaller food acquisitions was $365 million. The operating results of these businesses were not material to the Company's consolidated financial position or results of operations in any of the periods presented. During 2001, 2000 and 1999, the Company sold several small international and domestic food businesses, including a French confectionery business in 2000. The aggregate proceeds received in these transactions were $21 million in 2001, $300 million in 2000 and $175 million in 1999, on which pre-tax gains of $8 million in 2001, $172 million in 2000 and $62 million in 1999 were recorded. The operating results of businesses divested were

December 31, 2001. Substantially all of the closures will be completed by the end of 2002. The integration of Nabisco into the operations of the Company will also result in the closure or reconfiguration of several existing Kraft facilities. The aggregate charges to the Company's consolidated statement of earnings to close or reconfigure its facilities and integrate Nabisco are estimated to be in the range of $200 million to $300 million. During 2001, the Company incurred pre-tax integration costs of $53 million for site reconfigurations and other consolidation programs in the United States. In October 2001, Kraft announced that it was offering a voluntary retirement program to certain salaried employees in the United States. The program is expected to terminate approximately 750 employees and will result in an estimated pre-tax charge of approximately $140 million upon final employee acceptance in the first quarter of 2002. During 2001, the Company purchased coffee businesses in Romania, Morocco and Bulgaria and also acquired confectionery businesses in Russia and Poland. The total cost of these and other smaller food acquisitions was $194 million. The operating results of these businesses were not material to the Company's consolidated financial position or results of operations in any of the periods presented. During 2000, the Company purchased the outstanding common stock of Balance Bar Co., a maker of energy and nutrition snack products. In a separate transaction, the Company also acquired Boca Burger, Inc., a manufacturer and marketer of soy-based meat alternatives. The total cost of these and other smaller food acquisitions was $365 million. The operating results of these businesses were not material to the Company's consolidated financial position or results of operations in any of the periods presented. During 2001, 2000 and 1999, the Company sold several small international and domestic food businesses, including a French confectionery business in 2000. The aggregate proceeds received in these transactions were $21 million in 2001, $300 million in 2000 and $175 million in 1999, on which pre-tax gains of $8 million in 2001, $172 million in 2000 and $62 million in 1999 were recorded. The operating results of businesses divested were not material to the Company's consolidated financial position or results of operations in any of the periods presented. Operating Results
(in millions) Operating Revenues Operating Companies Income ---------------------------------------------------------------------------------2001 2000 1999 2001 2000 1999 ---------------------------------------------------------------------------------North American food $25,106 $18,461 $17,897 $4,796 $3,547 $3,190 International food 8,769 8,071 8,900 1,239 1,208 1,063 ---------------------------------------------------------------------------------Total $33,875 $26,532 $26,797 $6,035 $4,755 $4,253 ==================================================================================

2001 compared with 2000 - North American food: During 2001, operating revenues increased $6.6 billion (36.0%) over 2000, due primarily to the acquisition of Nabisco ($6.6 billion), the shift in CDC revenues ($71 million), partially offset by unfavorable currency movements ($62 million). Adjusting for the shift in CDC revenues and excluding businesses divested since the beginning of 2000, operating revenues increased 35.5%. Operating revenues would have increased 0.8% had the acquisition of Nabisco occurred on January 1, 2000. Operating companies income for 2001 increased $1.2 billion (35.2%) over 2000, primarily reflecting the acquisition of Nabisco ($1.2 billion), lower marketing, administration and research costs ($177 million, the majority of which related to lower marketing expenses) and the shift in CDC income ($27 million), partially offset by the pre-tax loss on the sale of a North American food factory and integration costs ($82 million) and lower margins ($39 million, driven by higher dairy commodity costs). Adjusting for the shift in CDC income and excluding the loss on the sale of a food factory and integration costs, as well as the impact of businesses divested since the beginning of 2000, operating companies income of $4,878 million in 2001 increased 36.6% over

$3,570 million in 2000. Operating companies income would have increased 9.0% had the acquisition of Nabisco occurred on January 1, 2000. Volume for 2001 increased 31.7% over 2000. Excluding the impact of divested businesses and adjusting for the shift in volume related to the CDC, volume increased 31.2%, due primarily to the acquisition of Nabisco. Had the acquisition of Nabisco occurred on January 1, 2000, volume would have increased 2.1%. Excluding the 53rd week of shipments in 2000 (the basis of presentation of all of the following Kraft Foods North America 2001 volume comparisons), volume increased 3.4%. In Cheese, Meals and Enhancers, volume increased slightly due primarily to increases in grated and natural cheese, spoonable and pourable dressings, and higher shipments of macaroni & cheese dinners. Partially offsetting these increases were lower U.S. food service volume, lower shipments of process cheese loaves and cream cheese, and the discontinuation of lower-margin, non-branded cheese products. In Canada, shipments increased as a result of higher consumption of branded products. Volume increased in Biscuits, Snacks and Confectionery, driven primarily by new biscuit product introductions, partially offset by lower shipments of snack nuts. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily by the strength of ready-to-drink beverages, partially offset by volume declines in desserts and cereals. In Oscar Mayer and Pizza, volume increased due primarily to hot dogs, bacon, luncheon meats, soy-based meat alternatives and frozen pizza. - International food: Operating revenues for 2001 increased $698 million (8.6%) over 2000. Adjusting for the shift in CDC revenues and excluding the operating revenues of businesses divested since the beginning of 2000, operating revenues increased $820 million (10.3%) due primarily to the acquisition of Nabisco ($1.2 billion), partially offset by unfavorable currency movements ($460 million). Operating revenues would have decreased 4.0% from 2000 had the acquisition of Nabisco occurred on January 1, 2000, due primarily to unfavorable currency movements and lower coffee pricing. Operating companies income for 2001 increased $31 million (2.6%) over 2000. Adjusting for the shift in CDC income and excluding the pre-tax gain on the French Confectionery Sale in 2000 and the operating companies income of businesses divested since the beginning of 2000, operating companies income increased $191 million (18.2%), due primarily to the acquisition of Nabisco ($128 million) and lower marketing, administration and research costs ($119 million), partially offset by unfavorable currency movements ($51 million). Operating companies income would have increased 8.5% had the acquisition of Nabisco occurred on January 1, 2000. Volume for 2001 increased 34.4% over 2000. Excluding the impact of divested businesses and adjusting for the shift in volume related to the CDC, volume increased 36.3%, due primarily to the acquisition of Nabisco. Volume would have increased 3.5% 29

had the acquisition of Nabisco occurred on January 1, 2000. Excluding the 53rd week of shipments in 2000 (the basis of presentation of all following Kraft Foods International 2001 volume comparisons), volume increased 4.7%. In Europe, Middle East and Africa, volume increased over 2000, due primarily to higher volume in the developing markets of Central and Eastern Europe and growth in many Western European markets, partially offset by lower volume in Germany and Italy. In beverages, volume increased in both coffee and refreshment beverages. Coffee volume grew in many markets, due primarily to recent acquisitions in Romania, Morocco and Bulgaria and new product introductions. Refreshment beverage volume increased, driven by higher sales to the Middle East. Snacks volume increased, driven by confectionery and salty snacks. Snacks growth was moderated by lower volume in Germany, due to increased price competition and trade inventory reductions. Cheese volume increased, due primarily to cream cheese growth across the region, partially offset by lower volume in Germany. In convenient meals and grocery, volume decreased, as lower canned meats volume in Italy and a decline in grocery volume in Germany were partially offset by higher shipments of lunch combinations and pourable dressings in the United Kingdom. Volume increased in the Latin American and Asia Pacific regions driven by gains across most categories. Beverages volume increased, due primarily to growth in refreshment beverages, in Latin America and Asia Pacific, and coffee in Asia Pacific. Cheese volume increased driven primarily by cream cheese and process cheese. Grocery volume was higher, due primarily to new product introductions. Snacks volume increased,

had the acquisition of Nabisco occurred on January 1, 2000. Excluding the 53rd week of shipments in 2000 (the basis of presentation of all following Kraft Foods International 2001 volume comparisons), volume increased 4.7%. In Europe, Middle East and Africa, volume increased over 2000, due primarily to higher volume in the developing markets of Central and Eastern Europe and growth in many Western European markets, partially offset by lower volume in Germany and Italy. In beverages, volume increased in both coffee and refreshment beverages. Coffee volume grew in many markets, due primarily to recent acquisitions in Romania, Morocco and Bulgaria and new product introductions. Refreshment beverage volume increased, driven by higher sales to the Middle East. Snacks volume increased, driven by confectionery and salty snacks. Snacks growth was moderated by lower volume in Germany, due to increased price competition and trade inventory reductions. Cheese volume increased, due primarily to cream cheese growth across the region, partially offset by lower volume in Germany. In convenient meals and grocery, volume decreased, as lower canned meats volume in Italy and a decline in grocery volume in Germany were partially offset by higher shipments of lunch combinations and pourable dressings in the United Kingdom. Volume increased in the Latin American and Asia Pacific regions driven by gains across most categories. Beverages volume increased, due primarily to growth in refreshment beverages, in Latin America and Asia Pacific, and coffee in Asia Pacific. Cheese volume increased driven primarily by cream cheese and process cheese. Grocery volume was higher, due primarily to new product introductions. Snacks volume increased, driven primarily by new biscuit product introductions and geographic expansion, partially offset by lower volume in Argentina due to economic weakness in that country. The Company expects continued erosion of the economic climate in Argentina to negatively affect volume and income in 2002. 2000 compared with 1999 - North American food: During 2000, operating revenues increased $564 million (3.2%) over 1999, due primarily to higher volume/mix ($465 million), the impact of acquisitions ($148 million) and higher pricing ($79 million), partially offset by the shift in CDC revenues ($142 million). Operating companies income for 2000 increased $357 million (11.2%) over 1999, primarily reflecting favorable margins ($318 million, driven by lower commodity-related costs), the absence of the 1999 pre-tax charge for a domestic food separation program ($157 million) and higher volume/mix ($240 million), partially offset by higher marketing, administration and research costs ($310 million, the majority of which related to higher marketing expenses) and the shift in CDC income ($54 million). Volume for 2000 increased 2.8% over 1999. Excluding the impact of divested businesses and the shift in volume related to the CDC, volume increased 3.8%, of which 0.3 percentage points related to the net impact of the 53rd week of shipments and trade inventory reductions in 2000. Volume gains were achieved in Beverages, Desserts and Cereals, driven primarily from the strength of ready-to-drink beverages, and coffee, resulting from the continued success of Starbucks grocery coffee. Volume also grew in shelf-stable puddings and frozen toppings and from the first-quarter acquisition of the Balance Bar brand. In Oscar Mayer and Pizza, volume increased due primarily to lunch combinations, hot dogs, luncheon meats, the first-quarter acquisition of the Boca Burger brand and from new product introductions in frozen pizza. Volume also increased in Biscuits, Snacks and Confectionery driven primarily by line extensions in mints and chocolate products. Volume declined in Cheese, Meals and Enhancers due primarily to a decrease in the food service business due to the expiration of an exclusive distribution agreement and the loss of a national supply agreement, declines in rice and ethnic foods, and decreases in barbecue sauces and seasoned coatings. These declines were partially offset by an increase in retail cheese volume, with gains in processed, natural and cream cheese products. - International food: Operating revenues for 2000 decreased $829 million (9.3%) from 1999, due primarily to unfavorable currency movements ($887 million), lower pricing ($30 million, due primarily to lower coffee prices), the shift in CDC revenues ($52 million) and the impact of divested businesses, partially offset by higher volume/mix ($291 million). Operating companies income for 2000 increased $145 million (13.6%) over 1999, due primarily to the pre-tax gain on the French Confectionery Sale ($139 million), higher volume/mix ($147 million) and favorable margins

($84 million, primarily related to lower commodity costs), partially offset by unfavorable currency ($96 million), higher marketing, administration and research costs ($78 million) and the shift in CDC income ($26 million). Volume for 2000 increased 1.4% over 1999. Excluding the impact of divested businesses and the shift in volume related to the CDC, volume increased 4.9%, of which 1.7 percentage points related to the impact of the 53rd week of shipments in 2000. In Europe, Middle East and Africa, volume increased over 1999, with growth in all categories. In beverages, coffee volume grew in the developing markets of Central and Eastern Europe and in the established markets of Sweden, Austria, Italy and the United Kingdom. Snacks volume increased, driven by new product launches and line extensions in confectionery. Cheese volume grew in Italy and Spain. Convenient meals volume increased, driven by new lunch combinations products in the United Kingdom and boxed dinner line extensions in Germany and Belgium. Higher grocery volume was driven by spoonable dressings in Italy and Spain. Volume increased in the Latin American and Asia Pacific regions driven by gains across all categories. Beverage volume increased due to higher coffee volume from increased shipments to the Caribbean and the relaunch of a coffee mix in China. Refreshment beverage volume grew due to new flavor introductions in Brazil, marketing programs in China and the Philippines and expansion in Thailand. Snacks volume increased, driven primarily by higher sugar confectionery sales in Indonesia and China, and the launch of new chocolate products in Brazil and Argentina. Cheese volume increased driven primarily by cream cheese in Australia and Japan and higher volume in the Philippines and Indonesia. Convenient meals volume was higher, driven by increased shipments of dinners to Asian markets. Grocery volume increased due to higher yeast spread sales in Australia and shipments of cereals and gelatin products to Asia. Beer Business Environment The domestic beer industry is intensely competitive, with the major methods of competition being product quality and price. The Company's beer business has lost market share in 2001 and 2000, and has instituted actions to increase the equity of its brands and focus on premium brands with the highest growth potential. These actions include an emphasis on advertising and promotion of its premium brands, streamlining its contract brewing operations, exiting certain licenses to brew brands for domestic distribution, reducing inventory on hand at distributors and 30

pursuing opportunities in the growing ready-to-drink flavored malt beverages category. In 2002, the Company entered into partnerships with Skyy Spirits LLC and Allied Domecq PLC to launch a range of new ready-to-drink malt beverages. The flavored-alcohol malt beverage category is the fastest growing segment in the wine, beer and spirits industry. The partnership with Skyy Spirits will introduce Skyy Blue(TM), a flavored malt beverage with a citrus flavor. The partnership with Allied Domecq will introduce flavored malt beverages based on Allied Domecq's popular Stolichnaya(TM) vodka and Sauza(TM) tequila brands. During 2001, the Company revised the terms of a contract brewing agreement with Pabst, which resulted in pretax charges of $19 million. In December 2000, the Company sold its rights to Molson trademarks in the United States for proceeds of $131 million, on which a pre-tax gain of $100 million was recorded. During 1999, the Company purchased four trademarks from Pabst and the Stroh Brewery Company. The Company also agreed to increase its contract manufacturing of Pabst products. The Company began brewing and shipping the acquired brands during the second quarter of 1999. In the third quarter of 1999, the Company assumed ownership of the former Pabst brewery in Tumwater, Washington, as part of these agreements. In addition, the Company recorded a pre-tax charge of $29 million in marketing, administration and research costs in the consolidated statements of earnings of the beer segment to write down the book value of three brewing facilities to their estimated fair values. During 2000, two of the facilities were sold, and the remaining facility was

pursuing opportunities in the growing ready-to-drink flavored malt beverages category. In 2002, the Company entered into partnerships with Skyy Spirits LLC and Allied Domecq PLC to launch a range of new ready-to-drink malt beverages. The flavored-alcohol malt beverage category is the fastest growing segment in the wine, beer and spirits industry. The partnership with Skyy Spirits will introduce Skyy Blue(TM), a flavored malt beverage with a citrus flavor. The partnership with Allied Domecq will introduce flavored malt beverages based on Allied Domecq's popular Stolichnaya(TM) vodka and Sauza(TM) tequila brands. During 2001, the Company revised the terms of a contract brewing agreement with Pabst, which resulted in pretax charges of $19 million. In December 2000, the Company sold its rights to Molson trademarks in the United States for proceeds of $131 million, on which a pre-tax gain of $100 million was recorded. During 1999, the Company purchased four trademarks from Pabst and the Stroh Brewery Company. The Company also agreed to increase its contract manufacturing of Pabst products. The Company began brewing and shipping the acquired brands during the second quarter of 1999. In the third quarter of 1999, the Company assumed ownership of the former Pabst brewery in Tumwater, Washington, as part of these agreements. In addition, the Company recorded a pre-tax charge of $29 million in marketing, administration and research costs in the consolidated statements of earnings of the beer segment to write down the book value of three brewing facilities to their estimated fair values. During 2000, two of the facilities were sold, and the remaining facility was closed. 2001 compared with 2000 Operating revenues for 2001 decreased $131 million (3.0%) from 2000. Excluding the operating revenues of businesses divested since the beginning of 2000, operating revenues decreased slightly, due primarily to lower volume ($98 million) and contract manufacturing fees, partially offset by higher pricing ($101 million). Operating companies income for 2001 decreased $169 million (26.0%) from 2000. Excluding the contract brewing charge, the Molson Sale and the operating companies income of businesses divested since the beginning of 2000, operating companies income decreased by $43 million (7.9%), due primarily to lower volume ($44 million) and higher marketing, administration and research costs ($61 million, primarily higher marketing spending for core brands), partially offset by higher pricing ($58 million). Domestic shipment volume of 39.6 million barrels for 2001 decreased 4.8% from 2000. Excluding the impact of businesses divested since the beginning of 2000, total domestic shipment volume was down 2.4%. The majority of the Company's decline in domestic shipments was due to below-premium products, which decreased 7.7%, while premium brands decreased 1.0%. The Company's estimated market share of the U.S. malt beverage industry (based on shipments, including exports) was 19.7%, a decrease of 1.0 share points from the prior year. Excluding the impact of businesses divested since the beginning of 2000, total wholesalers' sales to retailers decreased 2.5% from 2000, reflecting lower retail sales of Miller Lite, Miller Genuine Draft, Icehouse, Milwaukee's Best and Red Dog. 2000 compared with 1999 Operating revenues for 2000 increased $33 million (0.8%) over 1999, due primarily to higher pricing ($195 million) and the previously mentioned acquired brands and contract manufacturing fees (aggregating $101 million), partially offset by lower volume ($199 million) and the impact of divestitures ($64 million). Operating companies income for 2000 increased $139 million (27.2%) over 1999, due primarily to the pre-tax gain on the sale of Molson rights in the United States ($100 million), higher pricing ($138 million) and income from acquired brands and contract manufacturing, partially offset by lower volume ($109 million) and higher marketing, administration and research costs. The Company's domestic shipment volume of 41.6 million barrels for 2000 decreased 3.8% from 1999, reflecting higher pricing, the Company's continuing efforts to reduce distributor inventories, and discontinued brands. Excluding discontinued brands, total domestic shipment volume was down 2.6%. Domestic shipments of premium/near-premium brands decreased across most brands from 1999. Domestic shipments of belowpremium products also decreased on lower shipments across most brands. The Company's estimated market

share of the U.S. malt beverage industry (based on shipments, including exports) was 20.7%, a decrease of 0.9 share points from the prior year. Wholesalers' sales to retailers in 2000 decreased 3.3% from 1999. Excluding the acquired brands, wholesalers' sales to retailers in 2000 decreased 4.6% from 1999, reflecting lower retail sales of Miller Lite, Miller Genuine Draft, Miller Genuine Draft Light, Icehouse, Miller High Life, Milwaukee's Best, Red Dog, Magnum, Meister Brau and Southpaw Light as well as the discontinuance of Lowenbrau and the sale of Molson rights. Financial Services PMCC's operating revenues and operating companies income for 2001 increased $18 million (4.3%) and $34 million (13.0%), respectively, over 2000. These increases were due primarily to growth in leasing activities and continued gains derived from PMCC's finance asset portfolio. Additionally, operating companies income benefited from lower interest rates. PMCC's operating revenues and operating companies income for 2000 increased $62 million (17.5%) and $34 million (14.9%), respectively, over 1999. These increases were due primarily to new leasing and structured finance investments and gains realized on related portfolio management activities. Financial Review - Net Cash Provided by Operating Activities: During 2001, net cash provided by operating activities was $8.9 billion compared with $11.0 billion in 2000. The decrease was due primarily to cash payments of $1.7 billion for the establishment of litigation related escrow bonds (see Note 16) and higher inventory spending. During 2000, net cash provided by operating activities was slightly below 1999, due primarily to the timing of tobacco litigation settlement payments, partially offset by higher net earnings. - Net Cash Used in Investing Activities: During 2001, 2000 and 1999, net cash used in investing activities was $2.9 billion, $17.5 billion and $2.7 billion, respectively. The increase in 2000 primarily reflects the cash used for the acquisition of Nabisco. Capital expenditures for 2001, which were funded by operating activities, increased 14.3% to $1.9 billion. Approximately 30% related to tobacco operations and approximately 57% related to food operations, which were primarily for modernization and consolidation of manufacturing facilities and expansion of certain production capacity. The increase in 2001 over 2000 was due primarily to the acquisition and integration of Nabisco. Capital expenditures are expected to be approximately the same amount in 2002 and are expected to be funded from operations. 31

- Net Cash Used in Financing Activities: During 2001, net cash of $6.4 billion was used in financing activities, compared with $2.7 billion provided by financing activities during 2000. The Company used cash during 2001 to repurchase Philip Morris common stock and pay dividends on Philip Morris common stock. These uses of cash were partially offset by net debt issuances of $1.7 billion during 2001, excluding debt repayments made with the Kraft IPO proceeds. The proceeds from the Kraft IPO were used to repay debt and, as a result, had no net impact on financing cash flows. In 2000, the Company's financing activities provided cash, as additional borrowings to finance the acquisition of Nabisco exceeded the cash used to repurchase Philip Morris common stock and pay dividends to Philip Morris stockholders. - Debt and Liquidity: The SEC recently issued Financial Reporting Release No. 61, which sets forth the views of the SEC regarding enhanced disclosures relating to liquidity and capital resources. The information provided below about the Company's debt, credit facilities, guarantees and future commitments is included here to facilitate a review of the Company's liquidity. Debt: The Company's total debt (consumer products and financial services) was $22.1 billion and $29.1 billion at December 31, 2001 and 2000, respectively. Total consumer products debt was $20.1 billion and $27.2 billion at December 31, 2001 and 2000, respectively. As discussed in Notes 6 and 7 to the consolidated financial statements, the Company's total debt of $22.1 billion at December 31, 2001 is due to be repaid as follows: in 2002, $6.9 billion; in 2003-2004, $2.8 billion; in 2005-2006, $5.5 billion; and thereafter, $6.9 billion. Debt

- Net Cash Used in Financing Activities: During 2001, net cash of $6.4 billion was used in financing activities, compared with $2.7 billion provided by financing activities during 2000. The Company used cash during 2001 to repurchase Philip Morris common stock and pay dividends on Philip Morris common stock. These uses of cash were partially offset by net debt issuances of $1.7 billion during 2001, excluding debt repayments made with the Kraft IPO proceeds. The proceeds from the Kraft IPO were used to repay debt and, as a result, had no net impact on financing cash flows. In 2000, the Company's financing activities provided cash, as additional borrowings to finance the acquisition of Nabisco exceeded the cash used to repurchase Philip Morris common stock and pay dividends to Philip Morris stockholders. - Debt and Liquidity: The SEC recently issued Financial Reporting Release No. 61, which sets forth the views of the SEC regarding enhanced disclosures relating to liquidity and capital resources. The information provided below about the Company's debt, credit facilities, guarantees and future commitments is included here to facilitate a review of the Company's liquidity. Debt: The Company's total debt (consumer products and financial services) was $22.1 billion and $29.1 billion at December 31, 2001 and 2000, respectively. Total consumer products debt was $20.1 billion and $27.2 billion at December 31, 2001 and 2000, respectively. As discussed in Notes 6 and 7 to the consolidated financial statements, the Company's total debt of $22.1 billion at December 31, 2001 is due to be repaid as follows: in 2002, $6.9 billion; in 2003-2004, $2.8 billion; in 2005-2006, $5.5 billion; and thereafter, $6.9 billion. Debt obligations due to be repaid in 2002 will be satisfied with a combination of short-term borrowings, refinancing transactions in the debt markets and operating cash flows. During 2001, the proceeds from the Kraft IPO and a Kraft global bond offering were used to repay outstanding borrowings. At December 31, 2001 and 2000, the Company's ratio of consumer products debt to total equity was 1.02 and 1.81, respectively. The ratio of total debt to total equity was 1.13 and 1.94 at December 31, 2001 and 2000, respectively. Fixed-rate debt constituted approximately 75% and 50% of total consumer products debt at December 31, 2001 and 2000, respectively. The increase in the percentage of fixed-rate debt at December 31, 2001 was due primarily to the repayment of commercial paper borrowings in 2001 with the proceeds from the Kraft IPO and Kraft's completion of a $4.0 billion public global bond offering. The average interest rate on total consumer products debt, including the impact of currency and interest rate swap agreements discussed in Market Risk below, was approximately 5.8% and 6.9% at December 31, 2001 and 2000, respectively. Credit Ratings: The Company's credit ratings by Moody's at December 31, 2001 and 2000 were "P-1" in the commercial paper market and "A2" for long-term debt obligations. The Company's credit ratings by Standard & Poor's ("S&P") at December 31, 2001 and 2000 were "A-1" in the commercial paper market, and "A-" in 2001 and "A" in 2000 for long-term debt obligations. The Company's credit ratings by Fitch Rating Services at December 31, 2001 and 2000 were "F-1" in the commercial paper market and "A" for long-term debt obligations. The changed rating by S&P for long-term debt obligations was due to a change in S&P's policy regarding how it rates companies with holding company structures and does not reflect a change in S&P's view of the Company's credit quality. Changes in the Company's credit ratings, although none are currently anticipated, could result in corresponding changes in the Company's borrowing costs; however, none of the Company's debt agreements require accelerated repayment in the event of a decrease in credit ratings. Credit Facilities: The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $16.2 billion at December 31, 2001. Approximately $15.6 billion of these facilities were undrawn at December 31, 2001. Certain of these facilities, used to support commercial paper borrowings, are available for general corporate purposes. The Company's credit facilities include $7.0 billion (of which $2.0 billion is for the sole use of Kraft) of 5-year revolving credit facilities expiring in July 2006, and $7.0 billion (of which $4.0 billion is for the sole use of Kraft) of 364-day revolving credit facilities expiring in July 2002. The Philip Morris facilities require the maintenance of a fixed charges coverage ratio and the Kraft facilities require the maintenance of a minimum net worth. Philip Morris and Kraft exceeded these covenants at December 31, 2001 and do not currently anticipate any difficulty in continuing to exceed these covenant requirements. The foregoing revolving credit facilities do not include any other covenants that could require an acceleration of maturity or the posting of collateral. The majority of the Company's remaining facilities expire within one year. The 5-year revolving credit facilities enable the Company to reclassify short-term debt on a long-term basis. At December 31, 2001, approximately $3.5 billion of short-term borrowings that the Company intends to refinance were reclassified as long-term debt. The Company expects to continue to refinance long-term and short-term debt from time to time. The nature and amount of the Company's long-term and short-term debt and the proportionate

amount of each can be expected to vary as a result of future business requirements, market conditions and other factors. Guarantees: At December 31, 2001, the Company was contingently liable for guarantees and commitments of $1.1 billion, consisting of the following: - $0.8 billion of guarantees of excise tax and import duties related to international shipments of tobacco products. In these agreements, a bank provides a guarantee of tax payments to respective governments. PMI then issues a guarantee to the respective banks for the payment of the taxes. These are revolving facilities that are integral to the shipment of tobacco products in international markets, and the underlying taxes payable are recorded on the Company's consolidated balance sheet. - $0.2 billion, primarily surety bonds, related to government approval of production changes at an international tobacco facility. The surety bonds expire in 2002. - $0.1 billion of commitments to purchase leaf tobacco from the United States. PM Inc.'s current leaf commitment expires in 2003. Although these guarantees are typically short-term in nature, they will be replaced, upon expiration, with similar guarantees of similar amounts. Guarantees do not have, and are not expected to have, a significant impact on the Company's liquidity. Litigation Escrow Deposits: As discussed in Note 16, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among PM Inc., certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, the Company has recorded a $500 million pre-tax charge in marketing, administration and research costs in the consolidated statement of earnings 32

of the domestic tobacco segment for the year ended December 31, 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2001 consolidated balance sheet as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in the Company's consolidated statement of earnings. Tobacco Litigation Settlement Payments: As discussed in Note 16 of the notes to the consolidated financial statements, PM Inc., along with other domestic tobacco companies, has entered into tobacco litigation settlement agreements that require the domestic tobacco industry to make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as an additional $250 million each year from 2002 through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quotaholders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments,

of the domestic tobacco segment for the year ended December 31, 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2001 consolidated balance sheet as other assets. Interest income on the $1.2 billion escrow account is paid to PM Inc. quarterly and is being recorded as earned in the Company's consolidated statement of earnings. Tobacco Litigation Settlement Payments: As discussed in Note 16 of the notes to the consolidated financial statements, PM Inc., along with other domestic tobacco companies, has entered into tobacco litigation settlement agreements that require the domestic tobacco industry to make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as an additional $250 million each year from 2002 through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its relative share of the settling manufacturers' domestic cigarette shipments, including roll-your-own cigarettes, in the year preceding that in which the payment is due. Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quotaholders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (in 2002 through 2008, $500 million each year; and 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. During the year ended December 31, 2001, PM Inc. recognized $5.9 billion as part of cost of sales attributable to the foregoing settlement obligations. As discussed above under "Tobacco--Business Environment," the present legislative and litigation environment is substantially uncertain and could result in material adverse consequences for the business, financial condition, cash flows or results of operations of the Company, PM Inc. and PMI. Assuming there are no material adverse developments in the legislative and litigation environment, the Company expects its cash flow from operations and its access to global capital markets to provide sufficient liquidity to meet the ongoing needs of the business. Rent Payments: The Company's consolidated rent expense for 2001 was $534 million. Accordingly, the Company does not consider its operating lease commitments to be a significant determinant of the Company's liquidity. Leveraged Leases: As part of its lease portfolio, PMCC invests in leveraged leases. At December 31, 2001, PMCC's net investment of $7.0 billion in leveraged leases, which is included in finance assets, net, is comprised of total lease payments receivable ($26.2 billion) and the residual value of assets under lease ($2.6 billion), reduced by non-recourse third-party debt ($17.9 billion) and unearned income ($3.9 billion). PMCC has no obligation for the payment of the non-recourse third-party debt issued to purchase the assets under lease. The payment of the debt is collateralized only by lease payments receivable and the leased property, and is nonrecourse to all other assets of PMCC or the Company. As required by U.S. GAAP, the non-recourse debt has been offset against the related rentals receivable and the residual value of the property, and has been presented on a net basis within finance assets, net, in the Company's consolidated balance sheet at December 31, 2001. - Equity and Dividends: During 2001 and 2000, the Company repurchased 84.6 million and 137.6 million shares, respectively, of its common stock at a cost of $4.0 billion and $3.6 billion, respectively. During the first quarter of 2001, the Company completed its three-year, $8 billion share repurchase program and announced a new threeyear, $10 billion share repurchase program. At December 31, 2001, cumulative repurchases under the $10

billion authority totaled 69.6 million shares at an aggregate cost of $3.3 billion. Dividends paid in 2001 and 2000 were $4.8 billion and $4.5 billion, respectively, an increase of 6.0%, reflecting a higher dividend rate in 2001, partially offset by a lower number of shares outstanding as a result of ongoing share repurchases. During the third quarter of 2001, the Company's Board of Directors approved a 9.4% increase in the quarterly dividend rate to $0.58 per share. As a result, the annualized dividend rate increased to $2.32 from $2.12. Market Risk The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain financial instruments to manage its foreign currency and commodity exposures, which primarily relate to forecasted transactions and interest rate exposures. Derivative financial instruments are used by the Company, principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates, commodity prices and interest rates, by creating offsetting exposures. The Company is not a party to leveraged derivatives. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company does not use derivative financial instruments for speculative purposes. Substantially all of the Company's derivative financial instruments are effective as hedges under the new accounting standard. Accordingly, the Company recorded deferred gains of $33 million in accumulated other comprehensive losses relating to the fair value of the Company's derivative financial instruments. This 33

reflects a gain resulting from the initial adoption of the accounting pronouncement of $15 million and an increase in the fair value of derivatives during the year of $102 million, partially offset by deferred gains transferred to earnings of $84 million. The fair value of all derivative financial instruments has been calculated based on active market quotes. - Foreign exchange rates: The Company uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Japanese yen, Swiss franc and the euro. At December 31, 2001 and 2000, the Company had option and forward foreign exchange contracts with aggregate notional amounts of $3.7 billion and $5.8 billion, respectively, for the purchase or sale of foreign currencies. The Company uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. Foreign currency swap agreements are accounted for as cash flow hedges. At December 31, 2001 and 2000, the notional amounts of foreign currency swap agreements aggregated $2.3 billion. The Company also uses certain foreign currency denominated debt as net investment hedges of foreign operations. During the year ended December 31, 2001, losses of $18 million, net of income taxes of $10 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments. - Commodities: The Company is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by the Company's businesses. Accordingly, the Company uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk, cheese and wheat. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar and soybean. At December 31, 2001 and 2000, the Company had net long commodity positions of $589 million and $617 million, respectively.

reflects a gain resulting from the initial adoption of the accounting pronouncement of $15 million and an increase in the fair value of derivatives during the year of $102 million, partially offset by deferred gains transferred to earnings of $84 million. The fair value of all derivative financial instruments has been calculated based on active market quotes. - Foreign exchange rates: The Company uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Japanese yen, Swiss franc and the euro. At December 31, 2001 and 2000, the Company had option and forward foreign exchange contracts with aggregate notional amounts of $3.7 billion and $5.8 billion, respectively, for the purchase or sale of foreign currencies. The Company uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. Foreign currency swap agreements are accounted for as cash flow hedges. At December 31, 2001 and 2000, the notional amounts of foreign currency swap agreements aggregated $2.3 billion. The Company also uses certain foreign currency denominated debt as net investment hedges of foreign operations. During the year ended December 31, 2001, losses of $18 million, net of income taxes of $10 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments. - Commodities: The Company is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by the Company's businesses. Accordingly, the Company uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk, cheese and wheat. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar and soybean. At December 31, 2001 and 2000, the Company had net long commodity positions of $589 million and $617 million, respectively. - Interest rates: The Company uses interest rate swaps to hedge the fair value of an insignificant portion of its long-term debt. The differential to be paid or received is accrued and recognized as interest expense. If an interest rate swap agreement is terminated prior to maturity, the realized gain or loss is recognized over the remaining life of the agreement if the hedged amount remains outstanding, or immediately if the underlying hedged exposure does not remain outstanding. If the underlying exposure is terminated prior to the maturity of the interest rate swap, the unrealized gain or loss on the related interest rate swap is recognized in earnings currently. During the year ended December 31, 2001, there was no ineffectiveness relating to these fair value hedges. At December 31, 2001, the Company had interest rate swap agreements which converted $102 million of fixed-rate debt to variable-rate debt, of which $29 million will mature in 2003 and $73 million will mature in 2004. - Value at Risk: The Company uses a value at risk ("VAR") computation to estimate the potential one-day loss in the fair value of its interest rate-sensitive financial instruments and to estimate the potential one-day loss in pre-tax earnings of its foreign currency and commodity price-sensitive derivative financial instruments. The VAR computation includes the Company's debt; short-term investments; foreign currency forwards, swaps and options; and commodity futures, forwards and options. Anticipated transactions, foreign currency trade payables and receivables, and net investments in foreign subsidiaries, which the foregoing instruments are intended to hedge, were excluded from the computation. The VAR estimates were made assuming normal market conditions, using a 95% confidence interval. The Company used a "variance/co-variance" model to determine the observed interrelationships between movements in interest rates and various currencies. These interrelationships were determined by observing interest rate and forward currency rate movements over the preceding quarter for the calculation of VAR amounts at December 31, 2001 and 2000, and over each of the four preceding quarters for the calculation of average VAR amounts during each year. The values of foreign currency and commodity options do not change on a one-to-one basis with the underlying currency or commodity, and were valued accordingly in the VAR computation. The estimated potential one-day loss in fair value of the Company's interest rate-sensitive instruments, primarily debt, under normal market conditions and the estimated potential one-day loss in pre-tax earnings from foreign currency and commodity instruments under normal market conditions, as calculated in the VAR model, were as follows:

Pre-Tax Earnings Impact -----------------------------------------------At (in millions) 12/31/01 Average High Low ================================================================================ Instruments sensitive to: Foreign currency rates $ 40 $30 $ 49 $12 Commodity prices 5 7 11 5 ================================================================================

Fair Value Impact -----------------------------------------------At (in millions) 12/31/01 Average High Low ================================================================================ Instruments sensitive to: Interest rates $121 $68 $121 $45 ================================================================================

Pre-Tax Earnings Impact -----------------------------------------------At (in millions) 12/31/00 Average High Low ================================================================================ Instruments sensitive to: Foreign currency rates $ 21 $19 $ 31 $11 Commodity prices 9 8 9 7 ================================================================================

Fair Value Impact -----------------------------------------------At (in millions) 12/31/00 Average High Low ================================================================================ Instruments sensitive to: Interest rates $ 63 $38 $ 63 $23 ================================================================================

The VAR computation is a risk analysis tool designed to statistically estimate the maximum probable daily loss from adverse movements in interest rates, foreign currency rates and commodity prices under normal market conditions. The computation does not purport to represent actual losses in fair value or earnings to be incurred by the Company, nor does it consider the effect of favorable changes in market rates. The Company cannot predict actual future movements in such market rates and does not present these VAR results to be indicative of future movements in such market rates or to be representative of any actual impact that future changes in market rates may have on its future results of operations or financial position. 34

New Accounting Standards Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive losses, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses are included in earnings in the periods in which earnings are affected by the hedged item. As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of an

New Accounting Standards Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive losses, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses are included in earnings in the periods in which earnings are affected by the hedged item. As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of an accounting change that reduced net earnings by $6 million, net of income taxes of $3 million, and decreased accumulated other comprehensive losses by $15 million, net of income taxes of $8 million. The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." As a result, certain items previously included in marketing, administration and research costs on the consolidated statement of earnings will be recorded as a reduction of operating revenues, and an increase in cost of sales and excise taxes on products. These EITF Issues will be effective in the first quarter of 2002. The Company estimates that adoption of EITF Issues No. 00-14 and No. 00-25 will result in a reduction of operating revenues in 2001, 2000 and 1999 of approximately $9.1 billion, $6.9 billion and $5.9 billion, respectively. Marketing, administration and research costs will decline in 2001, 2000 and 1999 by approximately $9.9 billion, $7.6 billion and $6.4 billion, respectively. Cost of sales will increase in 2001, 2000 and 1999 by approximately $600 million, $500 million and $400 million, respectively, and excise taxes on products will increase by approximately $200 million, $200 million and $100 million, respectively. The adoption of these EITF Issues will have no impact on net earnings or basic and diluted EPS. During 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Effective January 1, 2002, the Company will no longer be required to amortize indefinite life goodwill and intangible assets as a charge to earnings. In addition, the Company will be required to conduct an annual review of goodwill and other intangible assets for potential impairment. The Company estimates that net earnings and diluted earnings per share would have been approximately $9,569 million and $4.33, respectively, for the year ended December 31, 2001; $9,096 million and $4.00, respectively, for the year ended December 31, 2000; and $8,252 million and $3.43, respectively, for the year ended December 31, 1999, had the provisions of the new standards been applied in those years. The Company does not currently anticipate having to record a charge to earnings for the potential impairment of goodwill or other intangible assets as a result of adoption of these new standards. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. SFAS No. 144 is effective for the Company on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on the Company's 2002 financial statements. Contingencies See Note 16 to the consolidated financial statements for a discussion of contingencies. Forward-Looking and Cautionary Statements The Company and its representatives may from time to time make written or oral forward-looking statements, including statements contained in the Company's filings with the Securities and Exchange Commission and in its reports to stockholders. One can identify these forward-looking statements by use of words such as "strategy," "expects," "plans," "believes," "will," "estimates," "intends," "projects," "goals," "targets" and other words of similar meaning. One can also identify them by the fact that they do not relate strictly to historical or current facts. In

connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results and outcomes to differ materially from those contained in any forward-looking statement made by or on behalf of the Company; any such statement is qualified by reference to the following cautionary statements. The tobacco industry continues to be subject to health concerns relating to the use of tobacco products and exposure to ETS, legislation, including actual and potential excise tax increases, increasing marketing and regulatory restrictions, governmental regulation, privately imposed smoking restrictions, governmental and grand jury investigations, litigation, including risks associated with adverse jury and judicial determinations, courts reaching conclusions at variance with the Company's understanding of applicable law, bonding requirements and the absence of adequate appellate remedies to get timely relief from any of the foregoing, and the effects of price increases related to concluded tobacco litigation settlements and excise tax increases on consumption rates. The food industry continues to be subject to the possibility that consumers could lose confidence in the safety and quality of certain food products. Each of the Company's consumer products subsidiaries is subject to intense competition, changes in consumer preferences, the effects of changing prices for its raw materials and local economic conditions. Their results are dependent upon their continued ability to promote brand equity successfully, to anticipate and respond to new consumer trends, to develop new products and markets and to broaden brand portfolios, in order to compete effectively with lower priced products in a consolidating environment at the retail and manufacturing levels, and to improve productivity. In addition, PMI, Kraft Foods International and Kraft Foods North America are subject to the effects of foreign economies and the related shifts in consumer preferences and currency movements. Developments in any of these areas, which are more fully described above and which descriptions are incorporated into this section by reference, could cause the Company's results to differ materially from results that have been or may be projected by or on behalf of the Company. The Company cautions that the foregoing list of important factors is not exclusive. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. 35

Selected Financial Data -- Five-Year Review (in millions of dollars, except per share data)
--------------------------------------------------------------------------------------------------------2001 2000 1999 --------------------------------------------------------------------------------------------------------Summary of Operations: Operating revenues $ 89,924 $ 80,356 $ 78,596 United States export sales 3,882 4,354 5,046 Cost of sales 33,267 29,148 29,561 Federal excise taxes on products 4,154 4,309 3,252 Foreign excise taxes on products 12,826 12,771 13,593 --------------------------------------------------------------------------------------------------------Operating income 15,702 14,806 13,616 Interest and other debt expense, net 1,418 719 795 Earnings before income taxes, minority interest and cumulative effect of accounting change 14,284 14,087 12,821 Pre-tax profit margin 15.9% 17.5% 16.3% Provision for income taxes 5,407 5,450 5,020 --------------------------------------------------------------------------------------------------------Earnings before minority interest and cumulative effect of accounting change 8,877 8,637 7,801 Minority interest in earnings 311 127 126 Earnings before cumulative effect of accounting change 8,566 8,510 7,675 Cumulative effect of accounting change (6) Net earnings 8,560 8,510 7,675 --------------------------------------------------------------------------------------------------------Basic EPS before cumulative effect of accounting change 3.93 3.77 3.21 Per share cumulative effect of accounting change (0.01) Basic EPS 3.92 3.77 3.21 Diluted EPS before cumulative effect of accounting change 3.88 3.75 3.19 Per share cumulative effect of accounting change (0.01) Diluted EPS 3.87 3.75 3.19 Dividends declared per share 2.22 2.02 1.84 Weighted average shares (millions)--Basic 2,181 2,260 2,393 Weighted average shares (millions)--Diluted 2,210 2,272 2,403 --------------------------------------------------------------------------------------------------------Capital expenditures 1,922 1,682 1,749 Depreciation 1,323 1,126 1,120

Selected Financial Data -- Five-Year Review (in millions of dollars, except per share data)
--------------------------------------------------------------------------------------------------------2001 2000 1999 --------------------------------------------------------------------------------------------------------Summary of Operations: Operating revenues $ 89,924 $ 80,356 $ 78,596 United States export sales 3,882 4,354 5,046 Cost of sales 33,267 29,148 29,561 Federal excise taxes on products 4,154 4,309 3,252 Foreign excise taxes on products 12,826 12,771 13,593 --------------------------------------------------------------------------------------------------------Operating income 15,702 14,806 13,616 Interest and other debt expense, net 1,418 719 795 Earnings before income taxes, minority interest and cumulative effect of accounting change 14,284 14,087 12,821 Pre-tax profit margin 15.9% 17.5% 16.3% Provision for income taxes 5,407 5,450 5,020 --------------------------------------------------------------------------------------------------------Earnings before minority interest and cumulative effect of accounting change 8,877 8,637 7,801 Minority interest in earnings 311 127 126 Earnings before cumulative effect of accounting change 8,566 8,510 7,675 Cumulative effect of accounting change (6) Net earnings 8,560 8,510 7,675 --------------------------------------------------------------------------------------------------------Basic EPS before cumulative effect of accounting change 3.93 3.77 3.21 Per share cumulative effect of accounting change (0.01) Basic EPS 3.92 3.77 3.21 Diluted EPS before cumulative effect of accounting change 3.88 3.75 3.19 Per share cumulative effect of accounting change (0.01) Diluted EPS 3.87 3.75 3.19 Dividends declared per share 2.22 2.02 1.84 Weighted average shares (millions)--Basic 2,181 2,260 2,393 Weighted average shares (millions)--Diluted 2,210 2,272 2,403 --------------------------------------------------------------------------------------------------------Capital expenditures 1,922 1,682 1,749 Depreciation 1,323 1,126 1,120 Property, plant and equipment, net (consumer products) 15,137 15,303 12,271 Inventories (consumer products) 8,923 8,765 9,028 Total assets 84,968 79,067 61,381 Total long-term debt 18,651 19,154 12,226 Total debt--consumer products 20,098 27,196 13,522 --financial services 2,004 1,926 946 --------------------------------------------------------------------------------------------------------Total deferred income taxes 8,622 4,750 3,751 Stockholders' equity 19,620 15,005 15,305 Common dividends declared as a % of Basic EPS 56.6% 53.6% 57.3% Common dividends declared as a % of Diluted EPS 57.4% 53.9% 57.7% Book value per common share outstanding 9.11 6.79 6.54 Market price per common share--high/low 53.88-38.75 45.94-18.69 55.56-21.25 --------------------------------------------------------------------------------------------------------Closing price of common share at year end 45.85 44.00 23.00 Price/earnings ratio at year end--Basic 12 12 7 Price/earnings ratio at year end--Diluted 12 12 7 Number of common shares outstanding at year end (millions) 2,153 2,209 2,339 Number of employees 175,000 178,000 137,000 =========================================================================================================

36

Consolidated Balance Sheets (in millions of dollars, except per share data)
--------------------------------------------------------------------------------------------------------at December 31, 2 --------------------------------------------------------------------------------------------------------Assets Consumer products

Consolidated Balance Sheets (in millions of dollars, except per share data)
--------------------------------------------------------------------------------------------------------at December 31, 2 --------------------------------------------------------------------------------------------------------Assets Consumer products Cash and cash equivalents $ Receivables (less allowances of $193 and $199) 5, Inventories: Leaf tobacco 3, Other raw materials 1, Finished product 3, --------------------------------------------------------------------------------------------------------8, Other current assets 2, --------------------------------------------------------------------------------------------------------Total current assets 17, Property, plant and equipment, at cost: Land and land improvements Buildings and building equipment 6, Machinery and equipment 17, Construction in progress 1, --------------------------------------------------------------------------------------------------------25, Less accumulated depreciation 10, --------------------------------------------------------------------------------------------------------15, Goodwill and other intangible assets (less accumulated amortization of $7,363 and $6,319) 37, Other assets 6, --------------------------------------------------------------------------------------------------------Total consumer products assets 76, Financial services Finance assets, net 8, Other assets --------------------------------------------------------------------------------------------------------Total financial services assets 8, --------------------------------------------------------------------------------------------------------Total Assets $ 84, ========================================================================================================= Liabilities Consumer products Short-term borrowings $ Current portion of long-term debt 1, Accounts payable 3, Accrued liabilities: Marketing 2, Taxes, except income taxes 1, Employment costs 1, Settlement charges 3, Other 2, Income taxes 1, Dividends payable 1, --------------------------------------------------------------------------------------------------------Total current liabilities 20, Long-term debt 17, Deferred income taxes 5, Accrued postretirement health care costs 3, Minority interest 4, Other liabilities 7, --------------------------------------------------------------------------------------------------------Total consumer products liabilities 57, Financial services Short-term borrowings Long-term debt 1, Deferred income taxes 5, Other liabilities --------------------------------------------------------------------------------------------------------Total financial services liabilities 7, ---------------------------------------------------------------------------------------------------------

Total liabilities Contingencies (Note 16)

65,

Stockholders' Equity Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued) Additional paid-in capital 4, Earnings reinvested in the business 37, Accumulated other comprehensive losses (including currency translation of $3,238 and $2,864) (3, Cost of repurchased stock (653,458,100 and 597,064,937 shares) (19, --------------------------------------------------------------------------------------------------------Total stockholders' equity 19, --------------------------------------------------------------------------------------------------------Total Liabilities and Stockholders' Equity $ 84, =========================================================================================================

See notes to consolidated financial statements. 37

Consolidated Statements of Earnings (in millions of dollars, except per share data)
--------------------------------------------------------------------------------------------------------for the years ended December 31, 2001 --------------------------------------------------------------------------------------------------------Operating revenues $89,924 Cost of sales 33,267 Excise taxes on products 16,980 --------------------------------------------------------------------------------------------------------Gross profit 39,677 Marketing, administration and research costs 22,961 Amortization of goodwill and other intangible assets 1,014 --------------------------------------------------------------------------------------------------------Operating income 15,702 Interest and other debt expense, net 1,418 --------------------------------------------------------------------------------------------------------Earnings before income taxes, minority interest and cumulative effect of accounting change 14,284 Provision for income taxes 5,407 --------------------------------------------------------------------------------------------------------Earnings before minority interest and cumulative effect of accounting change 8,877 Minority interest in earnings 311 --------------------------------------------------------------------------------------------------------Earnings before cumulative effect of accounting change 8,566 Cumulative effect of accounting change (6 --------------------------------------------------------------------------------------------------------Net earnings $ 8,560 ========================================================================================================= Per share data: Basic earnings per share before cumulative effect of accounting change $ 3.93 Cumulative effect of accounting change (0.01 --------------------------------------------------------------------------------------------------------Basic earnings per share $ 3.92 ========================================================================================================= Diluted earnings per share before cumulative effect of accounting change $ 3.88 Cumulative effect of accounting change (0.01 --------------------------------------------------------------------------------------------------------Diluted earnings per share $ 3.87 =========================================================================================================

Consolidated Statements of Cash Flows (in millions of dollars)
--------------------------------------------------------------------------------------------------------for the years ended December 31, 2001 --------------------------------------------------------------------------------------------------------Cash Provided by (Used in) Operating Activities Net earnings--Consumer products $ 8,382 --Financial services 178 --------------------------------------------------------------------------------------------------------Net earnings 8,560

Consolidated Statements of Earnings (in millions of dollars, except per share data)
--------------------------------------------------------------------------------------------------------for the years ended December 31, 2001 --------------------------------------------------------------------------------------------------------Operating revenues $89,924 Cost of sales 33,267 Excise taxes on products 16,980 --------------------------------------------------------------------------------------------------------Gross profit 39,677 Marketing, administration and research costs 22,961 Amortization of goodwill and other intangible assets 1,014 --------------------------------------------------------------------------------------------------------Operating income 15,702 Interest and other debt expense, net 1,418 --------------------------------------------------------------------------------------------------------Earnings before income taxes, minority interest and cumulative effect of accounting change 14,284 Provision for income taxes 5,407 --------------------------------------------------------------------------------------------------------Earnings before minority interest and cumulative effect of accounting change 8,877 Minority interest in earnings 311 --------------------------------------------------------------------------------------------------------Earnings before cumulative effect of accounting change 8,566 Cumulative effect of accounting change (6 --------------------------------------------------------------------------------------------------------Net earnings $ 8,560 ========================================================================================================= Per share data: Basic earnings per share before cumulative effect of accounting change $ 3.93 Cumulative effect of accounting change (0.01 --------------------------------------------------------------------------------------------------------Basic earnings per share $ 3.92 ========================================================================================================= Diluted earnings per share before cumulative effect of accounting change $ 3.88 Cumulative effect of accounting change (0.01 --------------------------------------------------------------------------------------------------------Diluted earnings per share $ 3.87 =========================================================================================================

Consolidated Statements of Cash Flows (in millions of dollars)
--------------------------------------------------------------------------------------------------------for the years ended December 31, 2001 --------------------------------------------------------------------------------------------------------Cash Provided by (Used in) Operating Activities Net earnings--Consumer products $ 8,382 --Financial services 178 --------------------------------------------------------------------------------------------------------Net earnings 8,560 Adjustments to reconcile net earnings to operating cash flows: Consumer products Cumulative effect of accounting change Depreciation and amortization Deferred income tax provision (benefit) Loss on sale of a North American food factory and integration costs Escrow bond for domestic tobacco litigation Gains on sales of businesses Cash effects of changes, net of the effects from acquired and divested companies: Receivables, net Inventories Accounts payable Income taxes Accrued liabilities and other current assets Other

6 2,337 277 82 (1,200 (8 (437 (293 (192 782 (917 (520

Financial services Deferred income tax provision 408 Other 8 --------------------------------------------------------------------------------------------------------Net cash provided by operating activities 8,893 ---------------------------------------------------------------------------------------------------------

See notes to consolidated financial statements. 38

Consolidated Statements of Cash Flows (continued)
--------------------------------------------------------------------------------------------------------for the years ended December 31, 2001 2000 --------------------------------------------------------------------------------------------------------Cash Provided by (Used in) Investing Activities Consumer products Capital expenditures Purchase of Nabisco, net of acquired cash Purchase of other businesses, net of acquired cash Proceeds from sales of businesses Other

$ (1,922) (451) 21 139

$ (1,682) (15,159) (417) 433 28

$(1

Financial services Investments in finance assets (960) (865) Proceeds from finance assets 257 156 --------------------------------------------------------------------------------------------------------Net cash used in investing activities (2,916) (17,506) (2 --------------------------------------------------------------------------------------------------------Cash Provided by (Used in) Financing Activities Consumer products Net (repayment) issuance of short-term borrowings Long-term debt proceeds Long-term debt repaid

(5,678) 4,079 (5,215)

8,501 3,110 (1,702)

1 (1

Financial services Net (repayment) issuance of short-term borrowings (515) 1,027 Long-term debt proceeds 557 Long-term debt repaid Repurchase of Philip Morris common stock (3,960) (3,597) (3 Dividends paid on Philip Morris common stock (4,769) (4,500) (4 Issuance of Philip Morris common stock 779 112 Issuance of Kraft Foods Inc. common stock 8,425 Other (143) (293) --------------------------------------------------------------------------------------------------------Net cash (used in) provided by financing activities (6,440) 2,658 (7 --------------------------------------------------------------------------------------------------------Effect of exchange rate changes on cash and cash equivalents (21) (359) --------------------------------------------------------------------------------------------------------Cash and cash equivalents: (Decrease) increase (484) (4,163) 1 Balance at beginning of year 937 5,100 4 --------------------------------------------------------------------------------------------------------Balance at end of year $ 453 $ 937 $ 5 ========================================================================================================= Cash paid: Interest--Consumer products $ 1,689 $ 1,005 $ 1 ========================================================================================================= --Financial services $ 76 $ 102 $ ========================================================================================================= Income taxes $ 3,775 $ 4,358 $ 4 =========================================================================================================

See notes to consolidated financial statements. 39

Consolidated Statements of Stockholders' Equity (in millions of dollars, except per share data)
Accumulated Other

Consolidated Statements of Cash Flows (continued)
--------------------------------------------------------------------------------------------------------for the years ended December 31, 2001 2000 --------------------------------------------------------------------------------------------------------Cash Provided by (Used in) Investing Activities Consumer products Capital expenditures Purchase of Nabisco, net of acquired cash Purchase of other businesses, net of acquired cash Proceeds from sales of businesses Other

$ (1,922) (451) 21 139

$ (1,682) (15,159) (417) 433 28

$(1

Financial services Investments in finance assets (960) (865) Proceeds from finance assets 257 156 --------------------------------------------------------------------------------------------------------Net cash used in investing activities (2,916) (17,506) (2 --------------------------------------------------------------------------------------------------------Cash Provided by (Used in) Financing Activities Consumer products Net (repayment) issuance of short-term borrowings Long-term debt proceeds Long-term debt repaid

(5,678) 4,079 (5,215)

8,501 3,110 (1,702)

1 (1

Financial services Net (repayment) issuance of short-term borrowings (515) 1,027 Long-term debt proceeds 557 Long-term debt repaid Repurchase of Philip Morris common stock (3,960) (3,597) (3 Dividends paid on Philip Morris common stock (4,769) (4,500) (4 Issuance of Philip Morris common stock 779 112 Issuance of Kraft Foods Inc. common stock 8,425 Other (143) (293) --------------------------------------------------------------------------------------------------------Net cash (used in) provided by financing activities (6,440) 2,658 (7 --------------------------------------------------------------------------------------------------------Effect of exchange rate changes on cash and cash equivalents (21) (359) --------------------------------------------------------------------------------------------------------Cash and cash equivalents: (Decrease) increase (484) (4,163) 1 Balance at beginning of year 937 5,100 4 --------------------------------------------------------------------------------------------------------Balance at end of year $ 453 $ 937 $ 5 ========================================================================================================= Cash paid: Interest--Consumer products $ 1,689 $ 1,005 $ 1 ========================================================================================================= --Financial services $ 76 $ 102 $ ========================================================================================================= Income taxes $ 3,775 $ 4,358 $ 4 =========================================================================================================

See notes to consolidated financial statements. 39

Consolidated Statements of Stockholders' Equity (in millions of dollars, except per share data)
Accumulated Other Comprehensive Earnings (Losses) -------------------------------Additional Earnings Currency Common Paid-in Reinvested in Translation Stock Capital the Business Adjustments Other Total --------------------------------------------------------------------------------------------------------Balances, January 1, 1999 $ 935 $ -$ 26,261 $(1,081) $ (25) $(1,106)

Consolidated Statements of Stockholders' Equity (in millions of dollars, except per share data)
Accumulated Other Comprehensive Earnings (Losses) -------------------------------Additional Earnings Currency Common Paid-in Reinvested in Translation Stock Capital the Business Adjustments Other Total --------------------------------------------------------------------------------------------------------Balances, January 1, 1999 $ 935 $ -$ 26,261 $(1,081) $ (25) $(1,106) Comprehensive earnings: Net earnings 7,675 Other comprehensive losses, net of income taxes: Currency translation adjustments (975) (975) Additional minimum pension liability (27) (27) --------------------------------------------------------------------------------------------------------Total other comprehensive losses --------------------------------------------------------------------------------------------------------Total comprehensive earnings --------------------------------------------------------------------------------------------------------Exercise of stock options and issuance of other stock awards 13 Cash dividends declared ($1.84 per share) (4,393) Stock repurchased --------------------------------------------------------------------------------------------------------Balances, December 31, 1999 935 -29,556 (2,056) (52) (2,108) Comprehensive earnings: Net earnings 8,510 Other comprehensive losses, net of income taxes: Currency translation adjustments (808) (808) Additional minimum pension liability (34) (34) --------------------------------------------------------------------------------------------------------Total other comprehensive losses --------------------------------------------------------------------------------------------------------Total comprehensive earnings --------------------------------------------------------------------------------------------------------Exercise of stock options and issuance of other stock awards (37) Cash dividends declared ($2.02 per share) (4,548) Stock repurchased --------------------------------------------------------------------------------------------------------Balances, December 31, 2000 935 -33,481 (2,864) (86) (2,950) Comprehensive earnings: Net earnings 8,560 Other comprehensive losses, net of income taxes: Currency translation adjustments (753) (753) Additional minimum pension liability (89) (89) Change in fair value of derivatives accounted for as hedges 33 33 --------------------------------------------------------------------------------------------------------Total other comprehensive losses --------------------------------------------------------------------------------------------------------Total comprehensive earnings --------------------------------------------------------------------------------------------------------Exercise of stock options and issuance of other stock awards 138 70 Cash dividends declared ($2.22 per share) (4,842) Stock repurchased Sale of Kraft Foods Inc. common stock 4,365 379 7 386 ---------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------Balances, December 31, 2001 $ 935 $ 4,503 $ 37,269 $(3,238) $ (135) $(3,373) =========================================================================================================

See notes to consolidated financial statements. 40

Notes to Consolidated Financial Statements Note 1. Background and Basis of Presentation: - Background: Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris International Inc. and Miller Brewing Company, and its majority owned (83.9%) subsidiary, Kraft Foods Inc., is engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese, convenient meals and beer. Philip Morris Capital Corporation, another wholly-owned subsidiary, is primarily engaged in leasing activities. During November 2001, management announced that the name of the parent company will be changed from Philip Morris Companies Inc. to Altria Group, Inc., pending stockholder approval in 2002. - Basis of presentation: The consolidated financial statements include Philip Morris Companies Inc. and its subsidiaries (the "Company"). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Actual results could differ from those estimates. Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices. Certain prior years' amounts have been reclassified to conform with the current year's presentation. Note 2. Summary of Significant Accounting Policies: - Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. - Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out ("LIFO") method is used to cost substantially all domestic inventories. The cost of other inventories is principally determined by the average cost method. It is a generally recognized industry practice to classify 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. - Impairment of long-lived assets: The Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be

Notes to Consolidated Financial Statements Note 1. Background and Basis of Presentation: - Background: Philip Morris Companies Inc., through its wholly-owned subsidiaries, Philip Morris Incorporated, Philip Morris International Inc. and Miller Brewing Company, and its majority owned (83.9%) subsidiary, Kraft Foods Inc., is engaged in the manufacture and sale of various consumer products, including cigarettes, packaged grocery products, snacks, beverages, cheese, convenient meals and beer. Philip Morris Capital Corporation, another wholly-owned subsidiary, is primarily engaged in leasing activities. During November 2001, management announced that the name of the parent company will be changed from Philip Morris Companies Inc. to Altria Group, Inc., pending stockholder approval in 2002. - Basis of presentation: The consolidated financial statements include Philip Morris Companies Inc. and its subsidiaries (the "Company"). The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of operating revenues and expenses during the reporting periods. Actual results could differ from those estimates. Balance sheet accounts are segregated by two broad types of business. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices. Certain prior years' amounts have been reclassified to conform with the current year's presentation. Note 2. Summary of Significant Accounting Policies: - Cash and cash equivalents: Cash equivalents include demand deposits with banks and all highly liquid investments with original maturities of three months or less. - Inventories: Inventories are stated at the lower of cost or market. The last-in, first-out ("LIFO") method is used to cost substantially all domestic inventories. The cost of other inventories is principally determined by the average cost method. It is a generally recognized industry practice to classify 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. - Impairment of long-lived assets: The Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. The Company performs undiscounted operating cash flow analyses to determine if an impairment exists. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. In October 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 144 provides updated guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets, expands the scope of a discontinued operation to include a component of an entity and eliminates the current exemption to consolidation when control over a subsidiary is likely to be temporary. SFAS No. 144 is effective for the Company on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on the Company's 2002 financial statements. - Depreciation, amortization and goodwill valuation: Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the lives of the assets. Machinery and equipment are

depreciated over periods ranging from 3 to 20 years and buildings and building improvements over periods up to 50 years. Goodwill and other intangible assets substantially comprise brand names purchased through acquisitions. In consideration of the long histories of these brands, goodwill and other intangible assets associated with them are amortized on the straight-line method over 40 years. During 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." Effective January 1, 2002, the Company will no longer be required to amortize indefinite life goodwill and intangible assets as a charge to earnings. In addition, the Company will be required to conduct an annual review of goodwill and other intangible assets for potential impairment. The Company estimates that net earnings and diluted earnings per share ("EPS") would have been approximately $9,569 million and $4.33, respectively, for the year ended December 31, 2001; $9,096 million and $4.00, respectively, for the year ended December 31, 2000; and $8,252 million and $3.43, respectively, for the year ended December 31, 1999, had the provisions of the new standards been applied in those years. The Company does not currently anticipate having to record a charge to earnings for the potential impairment of goodwill or other intangible assets as a result of adoption of these new standards. - Marketing costs: The Company promotes its products with significant marketing activities, including advertising, consumer incentives and trade promotions. Advertising costs are expensed as incurred. Consumer incentive and trade promotion activities are recorded as expense based on amounts estimated as being due to customers and consumers at the end of a period, based principally on the Company's historical utilization and redemption rates. - Income taxes: The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. 41

- Revenue recognition: The Company's consumer products businesses recognize operating revenues upon shipment of goods when title and risk of loss passes to customers. The Company classifies shipping and handling costs as part of cost of sales. For the Company's financial services segment, income attributable to leveraged leases is initially recorded as unearned income and subsequently recognized as finance lease revenue over the terms of the respective leases at a constant after-tax rate of return on the positive net investment. Income attributable to direct finance leases is initially recorded as unearned income and subsequently recognized as finance lease revenue over the terms of the respective leases at a constant pre-tax rate of return on the net investment. The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." As a result, certain items previously included in marketing, administration and research costs on the consolidated statement of earnings will be recorded as a reduction of operating revenues, and an increase in cost of sales and excise taxes on products. These EITF Issues will be effective in the first quarter of 2002. The Company estimates that adoption of EITF Issues No. 00-14 and No. 00-25 will result in a reduction of operating revenues in 2001, 2000 and 1999 of approximately $9.1 billion, $6.9 billion and $5.9 billion, respectively. Marketing, administration and research costs will decline in 2001, 2000 and 1999 by approximately $9.9 billion, $7.6 billion and $6.4 billion, respectively. Cost of sales will increase in 2001, 2000 and 1999 by approximately $600 million, $500 million and $400 million, respectively, and excise taxes on products will increase by approximately $200 million, $200 million and $100 million, respectively. The adoption of these EITF Issues will have no impact on net earnings or basic and diluted EPS. - Hedging instruments: Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively referred to as "SFAS No. 133"). These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive losses, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses are included in earnings in the periods in which

- Revenue recognition: The Company's consumer products businesses recognize operating revenues upon shipment of goods when title and risk of loss passes to customers. The Company classifies shipping and handling costs as part of cost of sales. For the Company's financial services segment, income attributable to leveraged leases is initially recorded as unearned income and subsequently recognized as finance lease revenue over the terms of the respective leases at a constant after-tax rate of return on the positive net investment. Income attributable to direct finance leases is initially recorded as unearned income and subsequently recognized as finance lease revenue over the terms of the respective leases at a constant pre-tax rate of return on the net investment. The Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives" and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." As a result, certain items previously included in marketing, administration and research costs on the consolidated statement of earnings will be recorded as a reduction of operating revenues, and an increase in cost of sales and excise taxes on products. These EITF Issues will be effective in the first quarter of 2002. The Company estimates that adoption of EITF Issues No. 00-14 and No. 00-25 will result in a reduction of operating revenues in 2001, 2000 and 1999 of approximately $9.1 billion, $6.9 billion and $5.9 billion, respectively. Marketing, administration and research costs will decline in 2001, 2000 and 1999 by approximately $9.9 billion, $7.6 billion and $6.4 billion, respectively. Cost of sales will increase in 2001, 2000 and 1999 by approximately $600 million, $500 million and $400 million, respectively, and excise taxes on products will increase by approximately $200 million, $200 million and $100 million, respectively. The adoption of these EITF Issues will have no impact on net earnings or basic and diluted EPS. - Hedging instruments: Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and its related amendment, SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" (collectively referred to as "SFAS No. 133"). These standards require that all derivative financial instruments be recorded on the consolidated balance sheets at their fair value as either assets or liabilities. Changes in the fair value of derivatives are recorded each period in earnings or accumulated other comprehensive losses, depending on whether a derivative is designated and effective as part of a hedge transaction and, if it is, the type of hedge transaction. Gains and losses on derivative instruments reported in accumulated other comprehensive losses are included in earnings in the periods in which earnings are affected by the hedged item. As of January 1, 2001, the adoption of these new standards resulted in a cumulative effect of an accounting change that reduced net earnings by $6 million, net of income taxes of $3 million, and decreased accumulated other comprehensive losses by $15 million, net of income taxes of $8 million. - Stock-based compensation: The Company accounts for employee stock compensation plans in accordance with the intrinsic value-based method permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," which does not result in compensation cost for stock options. - Software costs: The Company capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs, which are not significant, are amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed five years. - Foreign currency translation: The Company translates the results of operations of its foreign subsidiaries using average exchange rates during each period, whereas balance sheet accounts are translated using exchange rates at the end of each period. Currency translation adjustments are recorded as a component of stockholders' equity. Transaction gains and losses for all periods presented were not significant. - Environmental costs: The Company is subject to laws and regulations relating to the protection of the environment. The Company provides for expenses associated with environmental remediation obligations when such amounts are probable and can be reasonably estimated. Such accruals are adjusted as new information develops or circumstances change. While it is not possible to quantify with certainty the potential impact of actions regarding environmental remediation and compliance efforts that the Company may undertake in the future, in the opinion of management, environmental remediation and compliance costs, before taking into account any recoveries from third parties, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

Note 3. Divestitures: During 2001, the Company sold several small food businesses. The aggregate proceeds received in these transactions were $21 million, on which the Company recorded a pre-tax gain of $8 million. During 2000, the Company sold a French confectionery business for proceeds of $251 million, on which a pretax gain of $139 million was recorded. In addition, the Company's beer subsidiary sold its rights to Molson trademarks in the United States for proceeds of $131 million, on which a pre-tax gain of $100 million was recorded. The aggregate proceeds received in divestiture transactions in 2000, including the sale of several small international food, domestic food and beer businesses, were $433 million, on which the Company recorded pretax gains of $274 million. During 1999, the Company sold several small international and domestic food businesses. The aggregate proceeds received in these transactions were $175 million, on which the Company recorded pre-tax gains of $62 million. The operating results of the businesses sold were not material to the Company's consolidated operating results in any of the periods presented. Pre-tax gains on these divestitures were included in marketing, administration and research costs in the Company's consolidated statements of earnings. Note 4. Acquisitions: - Nabisco: On December 11, 2000, the Company acquired all of the outstanding shares of Nabisco Holdings Corp. ("Nabisco") for $55 per share in cash, through its subsidiary Kraft Foods Inc. ("Kraft"). The purchase of the outstanding shares, retirement of employee stock options and other payments totaled approximately $15.2 billion. In addition, the acquisition included the assumption of approximately $4.0 billion of existing Nabisco debt. The acquisition was financed by the Company through the issuance of $12.2 billion of short-term obligations and $3.0 billion of available cash. The acquisition has been accounted for as a purchase. Nabisco's balance sheet was consolidated with the 42

Company as of December 31, 2000; however, Nabisco's earnings subsequent to December 11, 2000 were not included in the consolidated operating results of the Company in 2000 since such amounts were insignificant. Beginning January 1, 2001, Nabisco's earnings have been included in the consolidated operating results of the Company. The Company's interest cost on borrowings associated with acquiring Nabisco has been included in interest and other debt expense, net, on the Company's consolidated statements of earnings for the years ended December 31, 2001 and 2000. During 2001, the Company completed the allocation of excess purchase price relating to Nabisco. As a result, the Company recorded, among other things, the final valuation of property, plant and equipment and intangible assets, primarily trade names, amounts relating to the closure of Nabisco facilities and related deferred income taxes. The final allocation of excess purchase price at December 31, 2001 was as follows:
(in millions) -------------------------------------------------------------------------------Purchase price $ 15,254 Historical value of tangible assets acquired and liabilities assumed (1,271) -------------------------------------------------------------------------------Excess of purchase price over assets acquired and liabilities assumed at the date of acquisition 16,525 Increases for allocation of purchase price: Property, plant and equipment 367 Other assets 347 Accrued postretirement health care costs 230

Company as of December 31, 2000; however, Nabisco's earnings subsequent to December 11, 2000 were not included in the consolidated operating results of the Company in 2000 since such amounts were insignificant. Beginning January 1, 2001, Nabisco's earnings have been included in the consolidated operating results of the Company. The Company's interest cost on borrowings associated with acquiring Nabisco has been included in interest and other debt expense, net, on the Company's consolidated statements of earnings for the years ended December 31, 2001 and 2000. During 2001, the Company completed the allocation of excess purchase price relating to Nabisco. As a result, the Company recorded, among other things, the final valuation of property, plant and equipment and intangible assets, primarily trade names, amounts relating to the closure of Nabisco facilities and related deferred income taxes. The final allocation of excess purchase price at December 31, 2001 was as follows:
(in millions) -------------------------------------------------------------------------------Purchase price $ 15,254 Historical value of tangible assets acquired and liabilities assumed (1,271) -------------------------------------------------------------------------------Excess of purchase price over assets acquired and liabilities assumed at the date of acquisition 16,525 Increases for allocation of purchase price: Property, plant and equipment 367 Other assets 347 Accrued postretirement health care costs 230 Pension liabilities 190 Debt 50 Legal, professional, lease and contract termination costs 129 Other liabilities, principally severance 602 Deferred income taxes 3,583 -------------------------------------------------------------------------------Goodwill and other intangible assets at December 31, 2001 $ 22,023 ================================================================================

Goodwill and other intangible assets at December 31, 2001 include approximately $11.7 billion related to trade names. The closure of a number of Nabisco domestic and international facilities resulted in severance and other exit costs of $379 million, which are included in the above adjustments for the allocation of purchase price. The closures will result in the elimination of approximately 7,500 employees and will require total cash payments of $373 million, of which approximately $74 million has been spent through December 31, 2001. The integration of Nabisco into the operations of the Company will also result in the closure of several existing Kraft facilities. The aggregate charges to the Company's consolidated statement of earnings to close or reconfigure its facilities and integrate Nabisco are estimated to be in the range of $200 million to $300 million. During 2001, the Company incurred pre-tax integration costs of $53 million for site reconfigurations and other consolidation programs in the United States. In October 2001, Kraft announced that it was offering a voluntary retirement program to certain salaried employees in the United States. The program is expected to eliminate approximately 750 employees and will result in an estimated pre-tax charge of approximately $140 million upon final employee acceptance in the first quarter of 2002. Assuming the acquisition of Nabisco occurred at the beginning of 2000 and 1999, pro forma operating revenues would have been $88 billion in 2000 and $86 billion in 1999; pro forma net earnings would have been $8 billion in 2000 and $7 billion in 1999; pro forma basic EPS would have been $3.52 in 2000 and $2.96 in 1999; and pro forma diluted EPS would have been $3.50 in 2000 and $2.95 in 1999. These pro forma results, which are unaudited, do not give effect to any synergies expected to result from the merger of Nabisco's operations with those of the Company, nor do they give effect to the reduction of interest expense from the repayment of borrowings with proceeds from Kraft's initial public offering ("IPO") of its common stock. The pro forma results also do not reflect the effects of SFAS Nos. 141 and 142 on the amortization of goodwill or other intangible assets, or the EITF Issues concerning the classification of certain expenses on the consolidated statements of

earnings. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been consummated and the IPO completed at the beginning of each year, nor are they necessarily indicative of future consolidated operating results. On June 13, 2001, Kraft completed an IPO of 280,000,000 shares of its Class A common stock at a price of $31.00 per share. The Company used the IPO proceeds, net of underwriting discount and expenses, of $8.4 billion to retire a portion of the debt incurred to finance the acquisition of Nabisco. After the completion of the IPO, the Company owns approximately 83.9% of the outstanding shares of Kraft's capital stock through the Company's ownership of 49.5% of Kraft's Class A common stock and 100% of Kraft's Class B common stock. Kraft's Class A common stock has one vote per share while Kraft's Class B common stock has ten votes per share. Therefore, the Company holds 97.7% of the combined voting power of Kraft's outstanding common stock. As a result of the IPO, an adjustment of $8.4 billion to the carrying amount of the Company's investment in Kraft has been reflected on the Company's consolidated balance sheet as an increase to additional paid-in capital of $4.4 billion (net of the recognition of cumulative currency translation adjustments and other comprehensive losses) and minority interest of $3.7 billion. - Other Acquisitions: During 2001, the Company increased its ownership interest in its Argentine tobacco subsidiary for an aggregate cost of $255 million. In addition, the Company purchased coffee businesses in Romania, Morocco and Bulgaria and also acquired confectionery businesses in Russia and Poland. The total cost of these and other smaller acquisitions was $451 million. During 2000, the Company purchased the outstanding common stock of Balance Bar Co., a maker of energy and nutrition snack products. In a separate transaction, the Company also acquired Boca Burger, Inc., a manufacturer and marketer of soy-based meat alternatives. The total cost of these and other smaller acquisitions was $417 million. During 1999, the Company increased its ownership interest in a Portuguese tobacco company from 65% to 90% at a cost of $70 million. The Company also increased its ownership interest in a Polish tobacco company from 75% to 96% at a cost of $104 million. During 1999, the Company purchased four trademarks from the Pabst Brewing Company ("Pabst") and the Stroh Brewery Company and agreed to increase its contract manufacturing of Pabst products. In addition, the Company assumed ownership of the Pabst brewery in Tumwater, Washington. The total cost of the four trademarks and the brewery was $189 million. The effects of these and other smaller acquisitions were not material to the Company's consolidated financial position or results of operations in any of the periods presented. 43

Note 5. Inventories: The cost of approximately 50% and 52% of inventories in 2001 and 2000, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.7 billion and $0.8 billion lower than the current cost of inventories at December 31, 2001 and 2000, respectively. Note 6. Short-Term Borrowings and Borrowing Arrangements: At December 31, 2001 and 2000, the Company's consumer products businesses had short-term borrowings of $4,485 million and $10,173 million, respectively, consisting principally of commercial paper borrowings with an average year-end interest rate of 1.9% and 6.7%, respectively. Of these amounts, the Company reclassified $3.5 billion at December 31, 2001 and $7.0 billion at December 31, 2000 of the commercial paper borrowings to long-term debt based upon its intent and ability to refinance these borrowings.

Note 5. Inventories: The cost of approximately 50% and 52% of inventories in 2001 and 2000, respectively, was determined using the LIFO method. The stated LIFO amounts of inventories were approximately $0.7 billion and $0.8 billion lower than the current cost of inventories at December 31, 2001 and 2000, respectively. Note 6. Short-Term Borrowings and Borrowing Arrangements: At December 31, 2001 and 2000, the Company's consumer products businesses had short-term borrowings of $4,485 million and $10,173 million, respectively, consisting principally of commercial paper borrowings with an average year-end interest rate of 1.9% and 6.7%, respectively. Of these amounts, the Company reclassified $3.5 billion at December 31, 2001 and $7.0 billion at December 31, 2000 of the commercial paper borrowings to long-term debt based upon its intent and ability to refinance these borrowings. In addition, at December 31, 2001 and 2000, the Company's financial services business had short-term commercial paper borrowings of $512 million and $1,027 million, respectively, with an average year-end interest rate of 2.0% and 6.6%, respectively. The fair values of the Company's short-term borrowings at December 31, 2001 and 2000, based upon current market interest rates, approximate the amounts disclosed above. The Company and its subsidiaries maintain credit facilities with a number of lending institutions, amounting to approximately $16.2 billion at December 31, 2001. Approximately $15.6 billion of these facilities were undrawn at December 31, 2001. Certain of these facilities, used to support commercial paper borrowings, are available for general corporate purposes. These facilities require the maintenance of a fixed charges coverage ratio or a minimum net worth. The Company's credit facilities include $7.0 billion (of which $2.0 billion is for the sole use of Kraft) of 5-year revolving credit facilities maturing in July 2006, and $7.0 billion (of which $4.0 billion is for the sole use of Kraft) of 364-day revolving credit facilities maturing in July 2002. Note 7. Long-Term Debt: At December 31, 2001 and 2000, the Company's long-term debt consisted of the following:
(in millions) -------------------------------------------------------------------------------2001 2000 -------------------------------------------------------------------------------Consumer products: Short-term borrowings, reclassified as long-term debt $ 3,488 $ 7,007 Notes, 4.63% to 8.25% (average effective rate 6.56%), due through 2035 12,012 12,901 Debentures, 7.00% to 8.50% (average effective rate 8.36%), $1.2 billion face amount, due through 2027 1,118 1,500 Foreign currency obligations: Euro, 4.50% to 5.63% (average effective rate 5.07%), due through 2008 1,841 1,881 German mark, 5.63%, due 2002 140 143 Other foreign 137 193 Other 365 405 -------------------------------------------------------------------------------19,101 24,030 Less current portion of long-term debt (1,942) (5,775) -------------------------------------------------------------------------------$ 17,159 $ 18,255 ================================================================================

Financial services: Eurodollar bonds, 7.50%, due 2009 $ 498 $ 497 Foreign currency obligations: Swiss franc, 4.00%, due 2006 601 French franc, 6.88%, due 2006 138 141 German mark, 6.50% and 5.38% (average effective rate 5.89%), due 2003 and 2004 255 261 -------------------------------------------------------------------------------$ 1,492 $ 899 ================================================================================

Aggregate maturities of long-term debt, excluding short-term borrowings reclassified as long-term debt, are as follows:
Consumer Financial (in millions) products services ================================================================================ 2002 $1,942 2003 1,581 $ 116 2004 971 139 2005 1,784 2006 2,995 739 2007-2011 4,444 498 2012-2016 397 Thereafter 1,555 ================================================================================

Based on market quotes, where available, or interest rates currently available to the Company for issuance of debt with similar terms and remaining maturities, the aggregate fair value of consumer products and financial services long-term debt, including the current portion of long-term debt, at December 31, 2001 and 2000, was $21.1 billion and $24.9 billion, respectively. 44

Note 8. Capital Stock: Shares of authorized common stock are 12 billion; issued, repurchased and outstanding shares were as follows:
Shares Shares Net Shares Issued Repurchased Outstanding =========================================================================== Balances, January 1, 1999 2,805,961,317 (375,426,742) 2,430,534,575 Exercise of stock options and issuance of other stock awards 4,614,412 4,614,412 Repurchased (96,629,246) (96,629,246) --------------------------------------------------------------------------Balances, December 31, 1999 2,805,961,317 (467,441,576) 2,338,519,741 Exercise of stock options and issuance of other stock awards 7,938,869 7,938,869 Repurchased (137,562,230) (137,562,230) --------------------------------------------------------------------------Balances, December 31, 2000 2,805,961,317 (597,064,937) 2,208,896,380 Exercise of stock

Note 8. Capital Stock: Shares of authorized common stock are 12 billion; issued, repurchased and outstanding shares were as follows:
Shares Shares Net Shares Issued Repurchased Outstanding =========================================================================== Balances, January 1, 1999 2,805,961,317 (375,426,742) 2,430,534,575 Exercise of stock options and issuance of other stock awards 4,614,412 4,614,412 Repurchased (96,629,246) (96,629,246) --------------------------------------------------------------------------Balances, December 31, 1999 2,805,961,317 (467,441,576) 2,338,519,741 Exercise of stock options and issuance of other stock awards 7,938,869 7,938,869 Repurchased (137,562,230) (137,562,230) --------------------------------------------------------------------------Balances, December 31, 2000 2,805,961,317 (597,064,937) 2,208,896,380 Exercise of stock options and issuance of other stock awards 28,184,943 28,184,943 Repurchased (84,578,106) (84,578,106) --------------------------------------------------------------------------Balances, December 31, 2001 2,805,961,317 (653,458,100) 2,152,503,217 ===========================================================================

At December 31, 2001, 237,318,887 shares of common stock were reserved for stock options and other stock awards under the Company's stock plans, and 10 million shares of Serial Preferred Stock, $1.00 par value, were authorized, none of which have been issued. Note 9. Stock Plans: Under the Philip Morris 2000 Performance Incentive Plan (the "2000 Plan"), the Company may grant to eligible employees stock options, stock appreciation rights, restricted stock, reload options and other stock-based awards, as well as cash-based annual and long-term incentive awards. Up to 110 million shares of common stock may be issued under the 2000 Plan, of which no more than 27.5 million shares may be awarded as restricted stock. In addition, the Company may grant up to one million shares of common stock to members of the Board of Directors who are not employees of the Company under the 2000 Stock Compensation Plan for Non-Employee Directors (the "2000 Directors Plan"). Shares available to be granted under the 2000 Plan and the 2000 Directors Plan at December 31, 2001 were 97,229,707 and 848,293, respectively. Stock options are granted at an exercise price of not less than fair value on the date of the grant. Stock options granted under the 2000 Plan or the 2000 Directors Plan (collectively, "the Plans") generally become exercisable on the first anniversary of the grant date and have a maximum term of ten years. The Company applies the intrinsic value-based methodology in accounting for the Plans. Accordingly, no compensation expense has been recognized other than for restricted stock awards. Had compensation cost for

stock option awards under the Plans been determined by using the fair value at the grant date, the Company's net earnings and basic and diluted EPS would have been $8,392 million, $3.85 and $3.80, respectively, for the year ended December 31, 2001; $8,389 million, $3.71 and $3.69, respectively, for the year ended December 31, 2000; and $7,582 million, $3.17 and $3.16, respectively, for the year ended December 31, 1999. The foregoing impact of compensation cost was determined using a modified Black-Scholes methodology and the following assumptions:
Weighted Average Expected Risk-Free Expected Expected Dividend Fair Value at Interest Rate Life Volatility Yield Grant Date ================================================================================ -----------------------------------------------2001 4.85% 5 years 33.75% 4.67% $10.71 -----------------------------------------------2000 6.57 5 31.73 8.98 3.22 1999 5.81 5 26.06 4.41 8.21 ================================================================================

Option activity was as follows for the years ended December 31, 1999, 2000 and 2001:
Weighted Shares Average Subject Exercise Options to Option Price Exercisable =============================================================================== Balance at January 1, 1999 87,203,664 $32.21 68,864,594 Options granted 22,154,585 39.87 Options exercised (5,665,611) 20.37 Options canceled (3,386,670) 30.08 ------------------------------------------------------------------------------Balance at December 31, 1999 100,305,968 34.65 78,423,023 Options granted 41,535,255 21.47 Options exercised (5,263,363) 21.16 Options canceled (3,578,922) 32.87 ------------------------------------------------------------------------------Balance at December 31, 2000 132,998,938 31.11 92,266,885 Options granted 35,636,252 45.64 Options exercised (30,276,835) 25.71 Options canceled (1,223,518) 42.45 ------------------------------------------------------------------------------Balance at December 31, 2001 137,134,837 35.98 103,155,954 ===============================================================================

The weighted average exercise prices of options exercisable at December 31, 2001, 2000 and 1999 were $32.74, $35.30 and $33.19, respectively. The following table summarizes the status of stock options outstanding and exercisable as of December 31, 2001 by range of exercise price:
Options Outstanding Options Exercisable -----------------------------------------------------Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life Price Exercisable Price ============================================================================ $16.35 - $22.09 29,413,632 7 years $20.72 29,413,632 $20.72 24.52 - 34.90 22,107,890 4 29.83 22,107,890 29.83 35.75 - 40.00 38,667,474 7 39.80 38,607,283 39.80 41.62 - 58.72 46,945,841 8 45.29 13,027,149 43.91 ---------------------------------------------------------------------------137,134,837 103,155,954 =========== ===========

45

The Company may grant shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares and rights. Such shares and rights are subject to forfeiture if certain employment conditions are not met. During 2001, 2000 and 1999, the Company granted 889,680, 3,473,270 and 100,000 shares, respectively, of restricted stock to eligible U.S.-based employees and also issued to eligible non-U.S. employees rights to receive 36,210, 1,717,640 and 125,000 equivalent shares, respectively. At December 31, 2001, restrictions on the stock, net of forfeitures, lapse as follows: 2002-6,624,690 shares; 2003-272,250 shares; 2004-126,000 shares; 2005-39,000 shares; and 2006 and thereafter-368,000 shares. The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period. The Company recorded compensation expense related to restricted stock and other stock awards of $89 million, $84 million and $9 million for the years ended December 31, 2001, 2000 and 1999, respectively. The unamortized portion, which is reported as a reduction of earnings reinvested in the business, was $22 million and $83 million at December 31, 2001 and 2000, respectively. Note 10. Earnings per Share: Basic and diluted EPS were calculated using the following for the years ended December 31, 2001, 2000 and 1999:
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Net earnings $8,560 $8,510 $7,675 ================================================================================ Weighted average shares for basic EPS 2,181 2,260 2,393 Plus incremental shares from conversions: Restricted stock and stock rights 7 4 2 Stock options 22 8 8 -------------------------------------------------------------------------------Weighted average shares for diluted EPS 2,210 2,272 2,403 ================================================================================

In 2001, 2000 and 1999, options on 5 million, 69 million and 47 million shares of common stock, respectively, were not included in the calculation of weighted average shares for diluted EPS because the effect of their inclusion would be antidilutive. Note 11. Pre-tax Earnings and Provision for Income Taxes: Pre-tax earnings and provision for income taxes consisted of the following for the years ended December 31, 2001, 2000 and 1999:
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Pre-tax earnings: United States $ 9,105 $ 9,273 $ 8,511 Outside United States 5,179 4,814 4,310 -------------------------------------------------------------------------------Total pre-tax earnings $14,284 $14,087 $ 12,821 ================================================================================

The Company may grant shares of restricted stock and rights to receive shares of stock to eligible employees, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares and rights. Such shares and rights are subject to forfeiture if certain employment conditions are not met. During 2001, 2000 and 1999, the Company granted 889,680, 3,473,270 and 100,000 shares, respectively, of restricted stock to eligible U.S.-based employees and also issued to eligible non-U.S. employees rights to receive 36,210, 1,717,640 and 125,000 equivalent shares, respectively. At December 31, 2001, restrictions on the stock, net of forfeitures, lapse as follows: 2002-6,624,690 shares; 2003-272,250 shares; 2004-126,000 shares; 2005-39,000 shares; and 2006 and thereafter-368,000 shares. The fair value of the restricted shares and rights at the date of grant is amortized to expense ratably over the restriction period. The Company recorded compensation expense related to restricted stock and other stock awards of $89 million, $84 million and $9 million for the years ended December 31, 2001, 2000 and 1999, respectively. The unamortized portion, which is reported as a reduction of earnings reinvested in the business, was $22 million and $83 million at December 31, 2001 and 2000, respectively. Note 10. Earnings per Share: Basic and diluted EPS were calculated using the following for the years ended December 31, 2001, 2000 and 1999:
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Net earnings $8,560 $8,510 $7,675 ================================================================================ Weighted average shares for basic EPS 2,181 2,260 2,393 Plus incremental shares from conversions: Restricted stock and stock rights 7 4 2 Stock options 22 8 8 -------------------------------------------------------------------------------Weighted average shares for diluted EPS 2,210 2,272 2,403 ================================================================================

In 2001, 2000 and 1999, options on 5 million, 69 million and 47 million shares of common stock, respectively, were not included in the calculation of weighted average shares for diluted EPS because the effect of their inclusion would be antidilutive. Note 11. Pre-tax Earnings and Provision for Income Taxes: Pre-tax earnings and provision for income taxes consisted of the following for the years ended December 31, 2001, 2000 and 1999:
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Pre-tax earnings: United States $ 9,105 $ 9,273 $ 8,511 Outside United States 5,179 4,814 4,310 -------------------------------------------------------------------------------Total pre-tax earnings $14,284 $14,087 $ 12,821 ================================================================================ Provision for income taxes: United States federal: Current $ 2,722 $ 2,571 $ 2,810

Deferred 570 736 280 -------------------------------------------------------------------------------3,292 3,307 3,090 State and local 484 552 485 -------------------------------------------------------------------------------Total United States 3,776 3,859 3,575 -------------------------------------------------------------------------------Outside United States: Current 1,516 1,321 1,581 Deferred 115 270 (136) -------------------------------------------------------------------------------Total outside United States 1,631 1,591 1,445 -------------------------------------------------------------------------------Total provision for income taxes $ 5,407 $ 5,450 $ 5,020 ================================================================================

At December 31, 2001, applicable United States federal income taxes and foreign withholding taxes have not been provided on approximately $5.6 billion of accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested. The Company is unable to provide a meaningful estimate of additional deferred taxes that would have been provided were these earnings not considered permanently reinvested. The effective income tax rate on pre-tax earnings differed from the U.S. federal statutory rate for the following reasons for the years ended December 31, 2001, 2000 and 1999:
-------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------U.S. federal statutory rate 35.0% 35.0% 35.0% Increase (decrease) resulting from: State and local income taxes, net of federal tax benefit 2.3 2.6 2.5 Rate differences--foreign operations (2.3) (1.2) (0.6) Goodwill amortization 2.3 1.3 1.4 Other 0.6 1.0 0.9 -------------------------------------------------------------------------------Effective tax rate 37.9% 38.7% 39.2% ================================================================================

The tax effects of temporary differences that gave rise to consumer products deferred income tax assets and liabilities consisted of the following at December 31, 2001 and 2000:
(in millions) -------------------------------------------------------------------------------2001 2000 -------------------------------------------------------------------------------Deferred income tax assets: Accrued postretirement and postemployment benefits $ 1,403 $ 1,421 Settlement charges 1,132 964 Other 859 591 -------------------------------------------------------------------------------Total deferred income tax assets 3,394 2,976 -------------------------------------------------------------------------------Deferred income tax liabilities: Trade names (3,847) Property, plant and equipment (2,142) (2,260) Prepaid pension costs (781) (628) -------------------------------------------------------------------------------Total deferred income tax liabilities (6,770) (2,888) -------------------------------------------------------------------------------Net deferred income tax (liabilities) assets $(3,376) $ 88 ================================================================================

46

Financial services deferred income tax liabilities are primarily attributable to temporary differences from investments in finance leases. Note 12. Segment Reporting: The Company's products include cigarettes, food (consisting principally of a wide variety of snacks, beverages, cheese, grocery products and convenient meals) and beer. A subsidiary of the Company, Philip Morris Capital Corporation, is primarily engaged in leasing activities. These products and services constitute the Company's reportable segments of domestic tobacco, international tobacco, North American food, international food, beer and financial services. The Company's management reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income for the segments excludes general corporate expenses and amortization of goodwill. Interest and other debt expense, net (consumer products), and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by the Company's management. The Company's assets are managed on a worldwide basis by major products and, accordingly, asset information is reported for the tobacco, food, beer and financial services segments. Goodwill and related amortization are principally attributable to the food businesses. Other assets consist primarily of cash and cash equivalents. The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies. Segment data were as follows:
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Operating revenues: Domestic tobacco $ 24,784 $ 22,658 $ 19,596 International tobacco 26,586 26,374 27,506 North American food 25,106 18,461 17,897 International food 8,769 8,071 8,900 Beer 4,244 4,375 4,342 Financial services 435 417 355 -------------------------------------------------------------------------------Total operating revenues $ 89,924 $ 80,356 $ 78,596 ================================================================================ Operating companies income: Domestic tobacco $ 5,264 $ 5,350 $ 4,865 International tobacco 5,406 5,211 4,968 North American food 4,796 3,547 3,190 International food 1,239 1,208 1,063 Beer 481 650 511 Financial services 296 262 228 -------------------------------------------------------------------------------Total operating companies income 17,482 16,228 14,825 Amortization of goodwill and other intangible assets (1,014) (591) (582) General corporate expenses (766) (831) (627) -------------------------------------------------------------------------------Total operating income 15,702 14,806 13,616 Interest and other debt expense, net (1,418) (719) (795) -------------------------------------------------------------------------------Total earnings before income taxes, minority interest and cumulative effect of accounting change $ 14,284 $ 14,087 $ 12,821 ================================================================================

As discussed in Note 16. Contingencies, on May 7, 2001, the trial court in the Engle class action approved a stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the

stipulation and agreed order among Philip Morris Incorporated ("PM Inc."), certain other defendants and the plaintiffs providing that the execution or enforcement of the punitive damages component of the judgment in that case will remain stayed through the completion of all judicial review. As a result of the stipulation, PM Inc. placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the appeal, will be paid to the court and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. As a result, the Company has recorded a $500 million pre-tax charge in marketing, administration and research costs in the consolidated statement of earnings of the domestic tobacco segment for the year ended December 31, 2001. In July 2001, PM Inc. also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM Inc. should it prevail in its appeal of the case. The $1.2 billion escrow account is included in the December 31, 2001 consolidated balance sheet as other assets. Interest income on the $1.2 billion escrow account is being recorded as earned in the Company's consolidated statement of earnings. During 2001, the Company recorded pre-tax charges of $53 million for site reconfigurations and other consolidation programs in the United States. In addition, the Company recorded a pre-tax charge of $29 million to close a North American food factory. These pre-tax charges, which aggregate $82 million, were included in marketing, administration and research costs in the consolidated statement of earnings. During 2001, the Company revised the terms of a contract brewing agreement with Pabst, which resulted in pretax charges of $19 million in marketing, administration and research costs in the consolidated statement of earnings of the beer segment. During 2000, the Company's beer business sold its rights to Molson trademarks in the United States and recorded a pre-tax gain of $100 million in marketing, administration and research costs in the consolidated statement of earnings of the beer segment. During 1999, the Company recorded a pre-tax charge of $29 million in marketing, administration and research costs in the consolidated statement of earnings of the beer segment to write down the book value of three brewing facilities to their estimated fair values. As of December 31, 2001, one of the facilities was closed, while the remaining two facilities were sold. During 1999, PM Inc. announced plans to phase out cigarette production capacity at its Louisville, Kentucky, manufacturing plant by August 2000. PM Inc. recorded pre-tax charges of $183 million during 1999. These charges, which are in marketing, administration and research costs in the consolidated statement of earnings for the domestic tobacco segment, included enhanced severance, pension and postretirement benefits for approximately 1,500 hourly and salaried employees. Severance benefits, which were either paid in a lump sum or as income protection payments over a period of time, commenced upon termination of employment. Payments of enhanced pension and postretirement benefits are being made over the remaining lives of the former employees in accordance with the terms of the related benefit plans. All operating costs of the manufacturing plant, including increased depreciation, were charged to expense as incurred during the closing period. As of June 30, 2000, the facility was closed. During 1999, the Company's North American food business announced that it was offering voluntary retirement incentive or separation programs to certain eligible hourly and salaried employees in the United States (the "Kraft Separation Programs"). Employees electing to terminate employment under the terms of the Kraft Separation Programs were entitled to enhanced retirement or severance benefits. Approximately 1,100 hourly and salaried employees accepted the benefits offered by these 47

programs and elected to retire or terminate. As a result, a pre-tax charge of $157 million was recorded during 1999. This charge was included in marketing, administration and research costs in the consolidated statement of earnings for the North American food segment. Payments of pension and postretirement benefits are made in accordance with the terms of the applicable benefit plans. Severance benefits, which were paid over a period of time, commenced upon dates of termination that ranged from April 1999 to March 2000. The program and related payments were completed during 2000. Salary and related benefit costs of employees prior to the retirement or termination date were expensed as incurred. During 1999, the Company's international tobacco business announced the closure of a cigarette factory and the corresponding reduction of cigarette production capacity in Brazil. Prior to the factory closure, existing employees were offered voluntary dismissal benefits. These benefits were accepted by half of the approximately 1,000 employees at the facility. During the third quarter of 1999, the factory was closed and the remaining

programs and elected to retire or terminate. As a result, a pre-tax charge of $157 million was recorded during 1999. This charge was included in marketing, administration and research costs in the consolidated statement of earnings for the North American food segment. Payments of pension and postretirement benefits are made in accordance with the terms of the applicable benefit plans. Severance benefits, which were paid over a period of time, commenced upon dates of termination that ranged from April 1999 to March 2000. The program and related payments were completed during 2000. Salary and related benefit costs of employees prior to the retirement or termination date were expensed as incurred. During 1999, the Company's international tobacco business announced the closure of a cigarette factory and the corresponding reduction of cigarette production capacity in Brazil. Prior to the factory closure, existing employees were offered voluntary dismissal benefits. These benefits were accepted by half of the approximately 1,000 employees at the facility. During the third quarter of 1999, the factory was closed and the remaining employees were terminated. The Company recorded a pre-tax charge of $136 million in marketing, administration and research costs in the consolidated statement of earnings of the international tobacco segment to write down the tobacco machinery and equipment no longer in use and to recognize the cost of severance benefits. As of December 31, 2000, the remaining liability was insignificant. See Notes 3 and 4 regarding divestitures and acquisitions. For the years ended December 31,
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Depreciation expense: Domestic tobacco $ 187 $ 202 $ 212 International tobacco 294 277 278 North American food 483 310 286 International food 197 189 205 Beer 119 118 114 -------------------------------------------------------------------------------1,280 1,096 1,095 Other 43 30 25 -------------------------------------------------------------------------------Total depreciation expense $ 1,323 $ 1,126 $ 1,120 ================================================================================ Assets: Tobacco $17,791 $15,687 $16,241 Food 55,798 52,071 30,336 Beer 1,782 1,751 1,769 Financial services 8,864 8,402 7,711 -------------------------------------------------------------------------------84,235 77,911 56,057 Other 733 1,156 5,324 -------------------------------------------------------------------------------Total assets $84,968 $79,067 $61,381 ================================================================================ Capital expenditures: Domestic tobacco $ 166 $ 156 $ 122 International tobacco 418 410 561 North American food 761 588 575 International food 340 318 285 Beer 132 135 165 -------------------------------------------------------------------------------1,817 1,607 1,708 Other 105 75 41 -------------------------------------------------------------------------------Total capital expenditures $ 1,922 $ 1,682 $ 1,749 ================================================================================

The Company's operations outside the United States, which are principally in the tobacco and food businesses, are organized into geographic regions within each segment, with Europe being the most significant. Total tobacco and food segment revenues attributable to customers located in Germany, the Company's largest European market, were $7.1 billion, $7.6 billion and $8.9 billion for the years ended December 31, 2001, 2000 and 1999,

respectively. Geographic data for operating revenues and long-lived assets (which consist of all financial services assets and non-current consumer products assets, other than goodwill and other intangible assets) were as follows: For the years ended December 31,
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Operating revenues: United States--domestic $52,098 $43,951 $40,287 --export 3,882 4,354 5,046 Europe 23,197 23,454 25,103 Other 10,747 8,597 8,160 -------------------------------------------------------------------------------Total operating revenues $89,924 $80,356 $78,596 ================================================================================ Long-lived assets: United States $23,284 $21,314 $17,263 Europe 4,332 4,299 4,143 Other 2,529 3,126 2,201 -------------------------------------------------------------------------------Total long-lived assets $30,145 $28,739 $23,607 ================================================================================

Note 13. Benefit Plans: The Company and its subsidiaries sponsor noncontributory defined benefit pension plans covering substantially all U.S. employees. Pension coverage for employees of the Company's non-U.S. subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, the Company and its U.S. and Canadian subsidiaries provide health care and other benefits to substantially all retired employees. Health care benefits for retirees outside the United States and Canada are generally covered through local government plans. - Pension Plans: Net pension (income) cost consisted of the following for the years ended December 31, 2001, 2000 and 1999:
(in millions) U.S. Plans Non-U.S. Plans ------------------------------------------------------------------------------------2001 2000 1999 2001 2000 1999 ------------------------------------------------------------------------------------Service cost $ 189 $ 142 $ 152 $ 100 $ 93 $ 102 Interest cost 595 455 436 174 157 162 Expected return on plan assets (961) (799) (766) (205) (175) (168) Amortization: Net gain on adoption of SFAS No. 87 (10) (22) (23) Unrecognized net (gain) loss from experience differences (34) (53) (22) (3) (3) 3 Prior service cost 22 21 19 7 5 6 Termination, settlement and curtailment (12) (34) 22 ------------------------------------------------------------------------------------Net pension (income) cost $(211) $(290) $(182) $ 73 $ 77 $ 105 =====================================================================================

48

During 2001, 2000 and 1999, employees left the Company under early retirement and workforce reduction programs. This resulted in settlement gains of $12 million in 2001, $34 million in 2000 and additional termination benefits of $128 million, net of settlement and curtailment gains of $106 million in 1999. During 2001, the Company announced that it was offering voluntary early retirement programs to certain eligible salaried employees in the beer and North American food businesses. These programs are expected to eliminate approximately 850 employees and will result in pre-tax charges of approximately $150 million upon final employee acceptance in the first quarter of 2002. The changes in benefit obligations and plan assets, as well as the funded status of the Company's pension plans at December 31, 2001 and 2000, were as follows:
(in millions) U.S. Plans Non-U.S. Plans ---------------------------------------------------------------------------2001 2000 2001 2000 ---------------------------------------------------------------------------Benefit obligation at January 1 $7,602 $5,795 $3,183 $3,037 Service cost 189 142 100 93 Interest cost 595 455 174 157 Benefits paid (605) (464) (169) (138) Acquisitions 71 1,463 (22) 236 Termination, settlement and curtailment 14 11 Actuarial losses 897 175 70 66 Currency 5 (301) Other 55 25 63 33 ---------------------------------------------------------------------------Benefit obligation at December 31 8,818 7,602 3,404 3,183 ---------------------------------------------------------------------------Fair value of plan assets at January 1 10,342 9,621 2,676 2,372 Actual return on plan assets (584) (350) (373) 220 Contributions 223 333 127 58 Benefits paid (599) (480) (127) (107) Acquisitions (45) 1,226 (41) 265 Currency 7 (192) Actuarial gains (losses) 111 (8) 3 60 ---------------------------------------------------------------------------Fair value of plan assets at December 31 9,448 10,342 2,272 2,676 ---------------------------------------------------------------------------Excess (deficit) of plan assets versus benefit obligations at December 31 630 2,740 (1,132) (507) Unrecognized actuarial losses (gains) 1,147 (1,167) 392 (145) Unrecognized prior service cost 185 152 71 46 Unrecognized net transition obligation (3) (11) 9 9 ---------------------------------------------------------------------------Net prepaid pension asset (liability) $1,959 $1,714 $ (660) $ (597) ============================================================================

The combined U.S. and non-U.S. pension plans resulted in a net prepaid pension asset of $1.3 billion and $1.1 billion at December 31, 2001 and 2000, respectively. These amounts were recognized in the Company's consolidated balance sheets at December 31, 2001 and 2000, as other assets of $2.7 billion and $2.6 billion,

During 2001, 2000 and 1999, employees left the Company under early retirement and workforce reduction programs. This resulted in settlement gains of $12 million in 2001, $34 million in 2000 and additional termination benefits of $128 million, net of settlement and curtailment gains of $106 million in 1999. During 2001, the Company announced that it was offering voluntary early retirement programs to certain eligible salaried employees in the beer and North American food businesses. These programs are expected to eliminate approximately 850 employees and will result in pre-tax charges of approximately $150 million upon final employee acceptance in the first quarter of 2002. The changes in benefit obligations and plan assets, as well as the funded status of the Company's pension plans at December 31, 2001 and 2000, were as follows:
(in millions) U.S. Plans Non-U.S. Plans ---------------------------------------------------------------------------2001 2000 2001 2000 ---------------------------------------------------------------------------Benefit obligation at January 1 $7,602 $5,795 $3,183 $3,037 Service cost 189 142 100 93 Interest cost 595 455 174 157 Benefits paid (605) (464) (169) (138) Acquisitions 71 1,463 (22) 236 Termination, settlement and curtailment 14 11 Actuarial losses 897 175 70 66 Currency 5 (301) Other 55 25 63 33 ---------------------------------------------------------------------------Benefit obligation at December 31 8,818 7,602 3,404 3,183 ---------------------------------------------------------------------------Fair value of plan assets at January 1 10,342 9,621 2,676 2,372 Actual return on plan assets (584) (350) (373) 220 Contributions 223 333 127 58 Benefits paid (599) (480) (127) (107) Acquisitions (45) 1,226 (41) 265 Currency 7 (192) Actuarial gains (losses) 111 (8) 3 60 ---------------------------------------------------------------------------Fair value of plan assets at December 31 9,448 10,342 2,272 2,676 ---------------------------------------------------------------------------Excess (deficit) of plan assets versus benefit obligations at December 31 630 2,740 (1,132) (507) Unrecognized actuarial losses (gains) 1,147 (1,167) 392 (145) Unrecognized prior service cost 185 152 71 46 Unrecognized net transition obligation (3) (11) 9 9 ---------------------------------------------------------------------------Net prepaid pension asset (liability) $1,959 $1,714 $ (660) $ (597) ============================================================================

The combined U.S. and non-U.S. pension plans resulted in a net prepaid pension asset of $1.3 billion and $1.1 billion at December 31, 2001 and 2000, respectively. These amounts were recognized in the Company's consolidated balance sheets at December 31, 2001 and 2000, as other assets of $2.7 billion and $2.6 billion, respectively, for those plans in which plan assets exceeded their accumulated benefit obligations, and as other liabilities of $1.4 billion and $1.5 billion, respectively, for those plans in which the accumulated benefit obligations exceeded their plan assets.

For U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $2,677 million, $2,170 million and $1,753 million, respectively, as of December 31, 2001, and $423 million, $320 million and $60 million, respectively, as of December 31, 2000. For non-U.S. plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $1,490 million, $1,343 million and $451 million, respectively, as of December 31, 2001, and $895 million, $804 million and $49 million, respectively, as of December 31, 2000. The following weighted-average assumptions were used to determine the Company's obligations under the plans:
U.S. Plans Non-U.S. Plans -------------------------------------------------------------------------------2001 2000 2001 2000 -------------------------------------------------------------------------------Discount rate 7.00% 7.75% 5.38% 5.52% Expected rate of return on plan assets 9.00 9.00 7.94 7.93 Rate of compensation increase 4.50 4.50 3.68 3.81 ================================================================================

The Company and certain of its subsidiaries sponsor deferred profit-sharing plans covering certain salaried, nonunion and union employees. Contributions and costs are determined generally as a percentage of pre-tax earnings, as defined by the plans. Certain other subsidiaries of the Company also maintain defined contribution plans. Amounts charged to expense for defined contribution plans totaled $231 million, $211 million and $198 million in 2001, 2000 and 1999, respectively. - Postretirement Benefit Plans: Net postretirement health care costs consisted of the following for the years ended December 31, 2001, 2000 and 1999:
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Service cost $ 64 $ 51 $ 56 Interest cost 270 199 188 Amortization: Unrecognized net loss (gain) from experience differences 1 (8) (3) Unrecognized prior service cost (12) (12) (12) Other expense 23 -------------------------------------------------------------------------------Net postretirement health care costs $323 $230 $252 ================================================================================

During 1999, the Company instituted early retirement and work-force reduction programs. These actions resulted in curtailment losses of $23 million in 1999, which are included in other expense above. 49

The Company's postretirement health care plans are not funded. The changes in the benefit obligations of the plans at December 31, 2001 and 2000 were as follows:
(in millions) -------------------------------------------------------------------------------2001 2000 -------------------------------------------------------------------------------Accumulated postretirement benefit obligation at January 1 $3,323 $2,529 Service cost 64 51 Interest cost 270 199 Benefits paid (233) (161)

The Company's postretirement health care plans are not funded. The changes in the benefit obligations of the plans at December 31, 2001 and 2000 were as follows:
(in millions) -------------------------------------------------------------------------------2001 2000 -------------------------------------------------------------------------------Accumulated postretirement benefit obligation at January 1 $3,323 $2,529 Service cost 64 51 Interest cost 270 199 Benefits paid (233) (161) Acquisitions 8 633 Plan amendments 1 2 Actuarial losses 533 70 -------------------------------------------------------------------------------Accumulated postretirement benefit obligation at December 31 3,966 3,323 Unrecognized actuarial (losses) gains (475) 41 Unrecognized prior service cost 63 76 -------------------------------------------------------------------------------Accrued postretirement health care costs $3,554 $3,440 ================================================================================

The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation for U.S. plans was 7.1% in 2000, 6.5% in 2001 and 5.9% in 2002, declining to 5.0% by the year 2005 and remaining at that level thereafter. For Canadian plans, the assumed health care cost trend rate was 8.0% in 2000, 9.0% in 2001 and 8.0% in 2002, declining to 4.0% by the year 2006 and remaining at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rates for each year would increase the accumulated postretirement benefit obligation as of December 31, 2001, and postretirement health care cost (service cost and interest cost) for the year then ended by approximately 8.7% and 12.0%, respectively. A onepercentage-point decrease in the assumed health care cost trend rates for each year would decrease the accumulated postretirement benefit obligation as of December 31, 2001, and postretirement health care cost (service cost and interest cost) for the year then ended by approximately 7.2% and 9.9%, respectively. The accumulated postretirement benefit obligations for U.S. plans at December 31, 2001 and 2000, were determined using assumed discount rates of 7.0% and 7.75%, respectively. The accumulated postretirement benefit obligations for Canadian plans at December 31, 2001 and 2000, were determined using assumed discount rates of 6.75% and 7.0%, respectively. - Postemployment Benefit Plans: The Company and certain of its affiliates sponsor postemployment benefit plans covering substantially all salaried and certain hourly employees. The cost of these plans is charged to expense over the working life of the covered employees. Net postemployment costs consisted of the following for the years ended December 31, 2001, 2000 and 1999:
(in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Service cost $34 $26 $ 24 Amortization of unrecognized net loss 8 6 2 Other expense 161 -------------------------------------------------------------------------------Net postemployment costs $42 $32 $187 ================================================================================

The Company instituted workforce reduction programs in its tobacco and North American food operations in 1999. These actions resulted in incremental postemployment costs, which are shown as other expense above. The Company's postemployment plans are not funded. The changes in the benefit obligations of the plans at

December 31, 2001 and 2000 were as follows:
(in millions) -------------------------------------------------------------------------------2001 2000 -------------------------------------------------------------------------------Accumulated benefit obligation at January 1 $ 656 $ 638 Service cost 34 26 Benefits paid (225) (161) Acquisitions 269 74 Actuarial losses 54 79 -------------------------------------------------------------------------------Accumulated benefit obligation at December 31 788 656 Unrecognized experience losses (144) (89) -------------------------------------------------------------------------------Accrued postemployment costs $ 644 $ 567 ================================================================================

The accumulated benefit obligation was determined using an assumed ultimate annual turnover rate of 0.3% in 2001 and 0.3% in 2000, assumed compensation cost increases of 4.5% in 2001 and in 2000, and assumed benefits as defined in the respective plans. Postemployment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred. Note 14. Additional Information:
For the years ended December 31, (in millions) -------------------------------------------------------------------------------2001 2000 1999 -------------------------------------------------------------------------------Research and development expense $ 647 $ 538 $ 522 ================================================================================ Advertising expense $2,196 $2,353 $2,301 ================================================================================ Interest and other debt expense, net: Interest expense $1,659 $1,078 $1,100 Interest income (241) (359) (305) -------------------------------------------------------------------------------$1,418 $ 719 $ 795 ================================================================================ Interest expense of financial services operations included in cost of sales $ 99 $ 96 $ 89 ================================================================================ Rent expense $ 534 $ 441 $ 467 ================================================================================

Note 15. Financial Instruments: - Derivative financial instruments: The Company operates internationally, with manufacturing and sales facilities in various locations around the world and utilizes certain financial instruments to manage its foreign currency and commodity exposures, primarily related to forecasted transactions and interest rate exposures. Derivative financial instruments are used by the Company, principally to reduce exposures to market risks resulting from fluctuations in interest rates and foreign exchange rates by creating offsetting exposures. The Company is not a party to leveraged derivatives. For a derivative to qualify as a hedge at inception and throughout the hedged period, the Company formally documents the nature and relationships between the hedging instruments and hedged items, as well as its risk-management objectives, strategies for undertaking the various hedge transactions and method of assessing hedge effectiveness. Additionally, for hedges of forecasted transactions, the significant

characteristics and 50

expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction will not occur, the gain or loss would be recognized in earnings currently. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in foreign currency exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Japanese yen, Swiss franc and the euro. At December 31, 2001 and 2000, the Company had option and forward foreign exchange contracts with aggregate notional amounts of $3.7 billion and $5.8 billion, respectively, for the purchase or sale of foreign currencies. The effective portion of unrealized gains and losses associated with forward contracts and the value of option contracts are deferred as a component of accumulated other comprehensive losses until the underlying hedged transactions are reported on the Company's consolidated statement of earnings. The Company uses foreign currency swaps to mitigate its exposure to changes in foreign currency exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. Foreign currency swap agreements are accounted for as cash flow hedges. The Company also uses certain foreign currency denominated debt as net investment hedges of foreign operations. During the year ended December 31, 2001, losses of $18 million, net of income taxes of $10 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments. The Company uses interest rate swaps to hedge the fair value of an insignificant portion of its long-term debt. The differential to be paid or received is accrued and recognized as interest expense. If an interest rate swap agreement is terminated prior to maturity, the realized gain or loss is recognized over the remaining life of the agreement if the hedged amount remains outstanding, or immediately if the underlying hedged exposure does not remain outstanding. If the underlying exposure is terminated prior to the maturity of the interest rate swap, the unrealized gain or loss on the related interest rate swap is recognized in earnings currently. During the year ended December 31, 2001, there was no ineffectiveness relating to these fair value hedges. At December 31, 2001 and 2000, the aggregate notional principal amounts of foreign currency and related interest rate swap agreements were $2.4 billion. Aggregate maturities at December 31, 2001 were as follows (in millions): 2002-$147; 2003-$151; 2004-$228; 2006-$834; and 2008-$1,004. During the year ended December 31, 2001, ineffectiveness related to cash flow hedges was not material. The Company is hedging forecasted transactions for periods not exceeding the next eighteen months and expects substantially all amounts reported in accumulated other comprehensive losses to be reclassified to the consolidated statement of earnings within the next twelve months. The Company is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by the Company's businesses. Accordingly, the Company uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk, cheese and wheat. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar, soybean and energy. In general, commodity forward contracts qualify for the normal purchase exception under SFAS No. 133 and are, therefore, not subject to the provisions of SFAS No. 133. At December 31, 2001 and 2000, the Company had net long commodity positions of $589 million and $617 million, respectively. The effective portion of unrealized gains and losses on commodity futures and option contracts is deferred as a component of accumulated other comprehensive losses and is recognized as a component of cost of sales in the Company's consolidated statement of earnings when the related inventory is sold. Unrealized gains or losses on net commodity positions were immaterial at December 31, 2001 and 2000.

expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur. If it were deemed probable that the forecasted transaction will not occur, the gain or loss would be recognized in earnings currently. Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period. The Company uses forward foreign exchange contracts and foreign currency options to mitigate its exposure to changes in foreign currency exchange rates from third-party and intercompany forecasted transactions. The primary currencies to which the Company is exposed include the Japanese yen, Swiss franc and the euro. At December 31, 2001 and 2000, the Company had option and forward foreign exchange contracts with aggregate notional amounts of $3.7 billion and $5.8 billion, respectively, for the purchase or sale of foreign currencies. The effective portion of unrealized gains and losses associated with forward contracts and the value of option contracts are deferred as a component of accumulated other comprehensive losses until the underlying hedged transactions are reported on the Company's consolidated statement of earnings. The Company uses foreign currency swaps to mitigate its exposure to changes in foreign currency exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity. Foreign currency swap agreements are accounted for as cash flow hedges. The Company also uses certain foreign currency denominated debt as net investment hedges of foreign operations. During the year ended December 31, 2001, losses of $18 million, net of income taxes of $10 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive losses within currency translation adjustments. The Company uses interest rate swaps to hedge the fair value of an insignificant portion of its long-term debt. The differential to be paid or received is accrued and recognized as interest expense. If an interest rate swap agreement is terminated prior to maturity, the realized gain or loss is recognized over the remaining life of the agreement if the hedged amount remains outstanding, or immediately if the underlying hedged exposure does not remain outstanding. If the underlying exposure is terminated prior to the maturity of the interest rate swap, the unrealized gain or loss on the related interest rate swap is recognized in earnings currently. During the year ended December 31, 2001, there was no ineffectiveness relating to these fair value hedges. At December 31, 2001 and 2000, the aggregate notional principal amounts of foreign currency and related interest rate swap agreements were $2.4 billion. Aggregate maturities at December 31, 2001 were as follows (in millions): 2002-$147; 2003-$151; 2004-$228; 2006-$834; and 2008-$1,004. During the year ended December 31, 2001, ineffectiveness related to cash flow hedges was not material. The Company is hedging forecasted transactions for periods not exceeding the next eighteen months and expects substantially all amounts reported in accumulated other comprehensive losses to be reclassified to the consolidated statement of earnings within the next twelve months. The Company is exposed to price risk related to forecasted purchases of certain commodities used as raw materials by the Company's businesses. Accordingly, the Company uses commodity forward contracts, as cash flow hedges, primarily for coffee, cocoa, milk, cheese and wheat. Commodity futures and options are also used to hedge the price of certain commodities, including milk, coffee, cocoa, wheat, corn, sugar, soybean and energy. In general, commodity forward contracts qualify for the normal purchase exception under SFAS No. 133 and are, therefore, not subject to the provisions of SFAS No. 133. At December 31, 2001 and 2000, the Company had net long commodity positions of $589 million and $617 million, respectively. The effective portion of unrealized gains and losses on commodity futures and option contracts is deferred as a component of accumulated other comprehensive losses and is recognized as a component of cost of sales in the Company's consolidated statement of earnings when the related inventory is sold. Unrealized gains or losses on net commodity positions were immaterial at December 31, 2001 and 2000. Hedging activity affected accumulated other comprehensive losses, net of income taxes, during the year ended December 31, 2001, as follows:

(in millions) -------------------------------------------------------------------------------Balance as of January 1, 2001 $ -Impact of SFAS No. 133 adoption 15 Derivative gains transferred to earnings (84) Change in fair value 102 -------------------------------------------------------------------------------Balance as of December 31, 2001 $ 33 ================================================================================

The Company does not engage in speculative use of financial instruments. Derivative gains reported in accumulated other comprehensive losses are a result of qualifying hedging activity. Transfers of these gains from accumulated other comprehensive losses to earnings are offset by losses on the underlying hedged item. - Credit exposure and credit risk: The Company is exposed to credit loss in the event of nonperformance by counterparties. However, the Company does not anticipate nonperformance, and such exposure was not material at December 31, 2001. - Fair value: The aggregate fair value, based on market quotes, of the Company's total debt at December 31, 2001 was $22.6 billion, as compared with its carrying value of $22.1 billion. The aggregate fair value of the Company's total debt at December 31, 2000 was $29.1 billion, approximating its carrying value. See Notes 6 and 7 for additional disclosures of fair value for short-term borrowings and long-term debt. Note 16. Contingencies: Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and Philip Morris International Inc. ("PMI"), the Company's international tobacco subsidiary, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Overview of Tobacco-Related Litigation - Types and Number of Cases: Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost 51

recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and various antitrust suits. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. In July 2000, a jury in a Florida smoking and health class action returned a punitive damages award of approximately $74 billion against PM Inc. (See discussion of the Engle case below.) Plaintiffs' theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below. As of December 31, 2001, there were approximately 1,500 smoking and health cases filed and served on behalf

recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitutes deceptive and unfair trade practices, suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and various antitrust suits. Damages claimed in some of the smoking and health class actions, health care cost recovery cases and other tobacco-related litigation range into the billions of dollars. In July 2000, a jury in a Florida smoking and health class action returned a punitive damages award of approximately $74 billion against PM Inc. (See discussion of the Engle case below.) Plaintiffs' theories of recovery and the defenses raised in the smoking and health and health care cost recovery cases are discussed below. As of December 31, 2001, there were approximately 1,500 smoking and health cases filed and served on behalf of individual plaintiffs in the United States against PM Inc. and, in some instances, the Company, compared with approximately 1,500 such cases on December 31, 2000, and approximately 380 such cases on December 31, 1999. In certain jurisdictions, individual smoking and health cases have been aggregated for trial in a single proceeding; the largest such proceeding aggregates 1,250 cases in West Virginia and is currently scheduled for trial in September 2002. An estimated 10 of the individual cases involve allegations of various personal injuries allegedly related to exposure to environmental tobacco smoke ("ETS"). In addition, approximately 2,875 additional individual cases are pending in Florida by current and former flight attendants claiming personal injuries allegedly related to ETS. The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. As of December 31, 2001, there were an estimated 25 smoking and health purported class actions pending in the United States against PM Inc. and, in some cases, the Company (including three that involve allegations of various personal injuries related to exposure to ETS), compared with approximately 36 such cases on December 31, 2000, and approximately 50 such cases on December 31, 1999. Some of these actions purport to constitute statewide class actions and were filed after May 1996, when the United States Court of Appeals for the Fifth Circuit, in the Castano case, reversed a federal district court's certification of a purported nationwide class action on behalf of persons who were allegedly "addicted" to tobacco products. As of December 31, 2001, there were an estimated 45 health care cost recovery actions, including the suit discussed below under "Federal Government's Lawsuit," filed by the United States government, pending in the United States against PM Inc. and, in some instances, the Company, compared with approximately 52 such cases pending on December 31, 2000, and 60 such cases on December 31, 1999. In addition, health care cost recovery actions are pending in Israel, the Marshall Islands, the Province of British Columbia, Canada, and France (in a case brought by a local agency of the French social security health insurance system). There are also a number of other tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries, including an estimated 64 smoking and health cases brought on behalf of individuals (Argentina (40), Brazil (14), Czech Republic (1), Ireland (1), Israel (1), Italy (2), Japan (1), the Philippines (1), Scotland (1) and Spain (2)), compared with approximately 68 such cases on December 31, 2000, and 55 such cases on December 31, 1999. In addition, as of December 31, 2001, there were 11 smoking and health putative class actions pending outside the United States (Brazil (2), Canada (3), Israel (2) and Spain (4)), compared with 9 such cases on December 31, 2000, and 10 such cases on December 31, 1999. - Pending and Upcoming Trials: Trial is currently underway in Louisiana in a smoking and health class action in which PM Inc. is a defendant and in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs. Additional cases against PM Inc. and, in some instances, the Company, are scheduled for trial through the end of 2002, including two purported smoking and health class actions and a purported Lights/Ultra Lights class action (discussed below) and an estimated 13 individual smoking and health cases, including one trial scheduled to begin in February 2002 in Oregon and two trials scheduled to begin in March 2002 in Louisiana and Rhode Island. In

addition, excluding the cases discussed above, approximately 15 cases involving flight attendants' claims for personal injuries from ETS are currently scheduled for trial during 2002, including two trials scheduled to begin in February 2002 and four trials scheduled to begin in March 2002. Cases against other tobacco companies are also scheduled for trial through the end of 2002. Trial dates, however, are subject to change. - Recent Industry Trial Results: In recent years, several jury verdicts have been returned in tobacco-related litigation. In December 2001, in an individual smoking and health case involving another cigarette manufacturer, a Florida jury awarded a smoker $165,000 in damages, and defendant has filed post-trial motions challenging the verdict. In November 2001, a West Virginia jury returned a verdict in favor of defendants, including PM Inc., in a smoking and health class action in which plaintiffs sought the creation of a fund to pay for medical monitoring of class members. In January 2002, the court denied plaintiffs' motion for a new trial. In October 2001, an Ohio jury returned a verdict in favor of all defendants, including PM Inc., in an individual smoking and health case, and plaintiff has filed post-trial motions seeking a new trial. In June 2001, a California jury awarded a smoker with lung cancer approximately $5.5 million in compensatory damages, and $3 billion in punitive damages against PM Inc. In August 2001, the court reduced the punitive damages award to $100 million, and PM Inc. and plaintiff have appealed. In June 2001, a New York jury awarded $6.8 million in compensatory damages against PM Inc. and a total of $11 million against four other defendants to a Blue Cross and Blue Shield plan seeking reimbursement of health care expenditures allegedly caused by tobacco products. In October 2001, the trial court denied defendants' post-trial motions challenging the verdict and, in November 2001, entered judgment in the case; PM Inc. has appealed. In May 2001, a New Jersey jury returned a verdict in favor of defendants, including PM Inc., in an individual smoking and health case. In April 2001, a Florida jury returned a verdict in favor of defendants, including PM Inc., in an individual smoking and health case brought by a flight attendant claiming personal injuries from ETS. Plaintiff's post-trial motions challenging the jury's verdict were denied in October 2001, and plaintiff has appealed. In February and March 2001, juries in individual 52

smoking and health cases in South Carolina and Texas returned verdicts in favor of other cigarette manufacturers. In January 2001, a mistrial was declared in a case in New York in which an asbestos manufacturer's personal injury settlement trust sought contribution or reimbursement from cigarette manufacturers, including PM Inc., for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and in June 2001, the trust announced that it would not retry the case. In January 2001, a New York jury returned a verdict in favor of defendants, including PM Inc., in an individual smoking and health case. In October 2000, a Florida jury awarded plaintiff in an individual smoking and health case $200,000 in compensatory damages against another cigarette manufacturer. In December 2000, the trial court vacated the jury's verdict and granted defendant's motion for a new trial; plaintiff and defendant have appealed. In July 2000, the jury in the Engle smoking and health class action in Florida returned a verdict assessing punitive damages totaling approximately $145 billion against all defendants in the case, including approximately $74 billion against PM Inc. (See "Engle Class Action," below.) In July 2000, a Mississippi jury returned a verdict in favor of defendant in an individual smoking and health case against another cigarette manufacturer. Plaintiffs' post-trial motions challenging the verdict were denied, and plaintiffs have appealed. In June 2000, a New York jury returned a verdict in favor of all defendants, including PM Inc., in another individual smoking and health case, and plaintiffs appealed. In September 2001, the appellate court dismissed plaintiffs' appeal. In March 2000, a California jury awarded a former smoker with lung cancer $1.72 million in compensatory damages against PM Inc. and another cigarette manufacturer, and $10 million in punitive damages against PM Inc., as well as an additional $10 million against the other defendant. PM Inc. is appealing the verdict and damages award. In June 1999, a Mississippi jury returned a verdict in favor of defendants, including PM Inc., in an action brought on behalf of an individual who died allegedly as a result of exposure to ETS. In May 1999, a Tennessee jury returned a verdict in favor of defendants, including PM Inc., in two of three individual smoking and health cases consolidated for trial. In the third case (not involving PM Inc.), the jury found liability against defendants and

smoking and health cases in South Carolina and Texas returned verdicts in favor of other cigarette manufacturers. In January 2001, a mistrial was declared in a case in New York in which an asbestos manufacturer's personal injury settlement trust sought contribution or reimbursement from cigarette manufacturers, including PM Inc., for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking, and in June 2001, the trust announced that it would not retry the case. In January 2001, a New York jury returned a verdict in favor of defendants, including PM Inc., in an individual smoking and health case. In October 2000, a Florida jury awarded plaintiff in an individual smoking and health case $200,000 in compensatory damages against another cigarette manufacturer. In December 2000, the trial court vacated the jury's verdict and granted defendant's motion for a new trial; plaintiff and defendant have appealed. In July 2000, the jury in the Engle smoking and health class action in Florida returned a verdict assessing punitive damages totaling approximately $145 billion against all defendants in the case, including approximately $74 billion against PM Inc. (See "Engle Class Action," below.) In July 2000, a Mississippi jury returned a verdict in favor of defendant in an individual smoking and health case against another cigarette manufacturer. Plaintiffs' post-trial motions challenging the verdict were denied, and plaintiffs have appealed. In June 2000, a New York jury returned a verdict in favor of all defendants, including PM Inc., in another individual smoking and health case, and plaintiffs appealed. In September 2001, the appellate court dismissed plaintiffs' appeal. In March 2000, a California jury awarded a former smoker with lung cancer $1.72 million in compensatory damages against PM Inc. and another cigarette manufacturer, and $10 million in punitive damages against PM Inc., as well as an additional $10 million against the other defendant. PM Inc. is appealing the verdict and damages award. In June 1999, a Mississippi jury returned a verdict in favor of defendants, including PM Inc., in an action brought on behalf of an individual who died allegedly as a result of exposure to ETS. In May 1999, a Tennessee jury returned a verdict in favor of defendants, including PM Inc., in two of three individual smoking and health cases consolidated for trial. In the third case (not involving PM Inc.), the jury found liability against defendants and apportioned fault equally between plaintiff and defendants. Under Tennessee's system of modified comparative fault, because the jury found plaintiff and defendants to be equally at fault, recovery was not permitted. In March 1999, an Oregon jury awarded the estate of a deceased smoker $800,000 in actual damages, $21,500 in medical expenses and $79.5 million in punitive damages against PM Inc. The court reduced the punitive damages award to $32 million, and PM Inc. has appealed the verdict and damages award. In February 1999, a California jury awarded a former smoker $1.5 million in compensatory damages and $50 million in punitive damages against PM Inc. The court reduced the punitive damages award to $25 million, and PM Inc. appealed. In November 2001, a California district court of appeals affirmed the trial court's ruling; PM Inc. has appealed to the California Supreme Court. In December 1999, a French court, in an action brought on behalf of a deceased smoker, found that another cigarette manufacturer had a duty to warn him about risks associated with smoking prior to 1976, when the French government required warning labels on cigarette packs, and failed to do so. The court did not determine causation or liability, which were considered in subsequent proceedings. In September 2001, a French appellate court ruled in favor of defendant and dismissed plaintiff's claim. - Engle Class Action: Verdicts have been returned and judgment has been entered against PM Inc. and other defendants in the first two phases of this three-phase smoking and health class action trial in Florida. The class consists of all Florida residents and citizens, and their survivors, "who have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarettes that contain nicotine." In July 1999, the jury returned a verdict against defendants in phase one of the trial concerning certain issues determined by the trial court to be "common" to the causes of action of the plaintiff class. Among other things, the jury found that smoking cigarettes causes 20 diseases or medical conditions, that cigarettes are addictive or dependence-producing, defective and unreasonably dangerous, that defendants made materially false statements with the intention of misleading smokers, that defendants concealed or omitted material information concerning the health effects and/or the addictive nature of smoking cigarettes, and that defendants were negligent and engaged in extreme and outrageous conduct or acted with reckless disregard with the intent to inflict emotional

distress. During phase two of the trial, the claims of three of the named plaintiffs were adjudicated in a consolidated trial before the same jury that returned the verdict in phase one. In April 2000, the jury determined liability against the defendants and awarded $12.7 million in compensatory damages to the three named plaintiffs. In July 2000, the same jury returned a verdict assessing punitive damages on a lump sum basis for the entire class totaling approximately $145 billion against the various defendants in the case, including approximately $74 billion severally against PM Inc. PM Inc. believes that the punitive damages award was determined improperly and that it should ultimately be set aside on any one of numerous grounds. Included among these grounds are the following: under applicable law, (i) defendants are entitled to have liability and damages for each plaintiff tried by the same jury, an impossibility due to the jury's dismissal; (ii) punitive damages cannot be assessed before the jury determines entitlement to, and the amount of, compensatory damages for all class members; (iii) punitive damages must bear a reasonable relationship to compensatory damages, a determination that cannot be made before compensatory damages are assessed for all class members; and (iv) punitive damages can "punish" but cannot "destroy" the defendant. In March 2000, at the request of the Florida legislature, the Attorney General of Florida issued an advisory legal opinion stating that "Florida law is clear that compensatory damages must be determined prior to an award of punitive damages" in cases such as Engle. As noted above, compensatory damages for all but three members of the class have not been determined. Following the verdict in the second phase of the trial, the jury was dismissed, notwithstanding that liability and compensatory damages for all but three class members have not yet been determined. According to the trial plan, phase three of the trial will address other class members' claims, including issues of specific causation, reliance, affirmative defenses and other individual-specific issues regarding entitlement to damages, in individual trials before separate juries. It is unclear how the trial plan will be further implemented. The trial plan provides that the punitive damages award should be standard as to each class member and acknowledges that the actual size of the class will not be known until the last class member's case has withstood appeal, i.e., the punitive damages amount would be divided equally among those plaintiffs who, 53

in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal. Following the jury's punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature. The trial judge in the state court, without a hearing, then immediately denied the defendants' post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM Inc. and the Company believe that the entry of judgment by the trial court is unconstitutional and violates Florida law. PM Inc. has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM Inc. has also posted a $100 million bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages ("bond cap legislation"). Plaintiffs had previously indicated that they believe the bond cap legislation is unconstitutional and might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM Inc. to post a bond in the full amount of the judgment and, absent appellate relief, PM Inc. would not be able to stay any attempted execution of the judgment in Florida. PM Inc. and the Company will take all appropriate steps to seek to prevent this worst-case scenario from occurring. In May 2001, the trial court approved a stipulation (the "Stipulation") among PM Inc., certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM Inc. and the other participating defendants through the completion of all judicial review. As a

in addition to the successful phase two plaintiffs, are ultimately successful in phase three of the trial and in any appeal. Following the jury's punitive damages verdict in July 2000, defendants removed the case to federal district court following the intervention application of a union health fund that raised federal issues in the case. In November 2000, the federal district court remanded the case to state court on the grounds that the removal was premature. The trial judge in the state court, without a hearing, then immediately denied the defendants' post-trial motions and entered judgment on the compensatory and punitive damages awarded by the jury. PM Inc. and the Company believe that the entry of judgment by the trial court is unconstitutional and violates Florida law. PM Inc. has filed an appeal with respect to the entry of judgment, class certification and numerous other reversible errors that have occurred during the trial. PM Inc. has also posted a $100 million bond to stay execution of the judgment with respect to the $74 billion in punitive damages that has been awarded against it. The bond was posted pursuant to legislation that was enacted in Florida in May 2000 that limits the size of the bond that must be posted in order to stay execution of a judgment for punitive damages in a certified class action to no more than $100 million, regardless of the amount of punitive damages ("bond cap legislation"). Plaintiffs had previously indicated that they believe the bond cap legislation is unconstitutional and might seek to challenge the $100 million bond. If the bond were found to be invalid, it would be commercially impossible for PM Inc. to post a bond in the full amount of the judgment and, absent appellate relief, PM Inc. would not be able to stay any attempted execution of the judgment in Florida. PM Inc. and the Company will take all appropriate steps to seek to prevent this worst-case scenario from occurring. In May 2001, the trial court approved a stipulation (the "Stipulation") among PM Inc., certain other defendants, plaintiffs and the plaintiff class that provides that execution or enforcement of the punitive damages component of the Engle judgment will remain stayed against PM Inc. and the other participating defendants through the completion of all judicial review. As a result of the Stipulation and in addition to the $100 million bond it previously posted, PM Inc. placed $1.2 billion into an interest-bearing escrow account for the benefit of the Engle class. Should PM Inc. prevail in its appeal of the case, both amounts are to be returned to PM Inc. PM Inc. also placed an additional $500 million into a separate interest-bearing escrow account for the benefit of the Engle class. If PM Inc. prevails in its appeal, this amount will be paid to the court, and the court will determine how to allocate or distribute it consistent with the Florida Rules of Civil Procedure. In connection with the Stipulation, the Company recorded a $500 million pretax charge in its consolidated statement of earnings for the quarter ended March 31, 2001. In other developments, in August 1999, the trial judge denied a motion filed by PM Inc. and other defendants to disqualify the judge. The motion asserted, among other things, that the trial judge was required to disqualify himself because he is a former smoker who has a serious medical condition of a type that the plaintiffs claim, and the jury has found, is caused by smoking, making him financially interested in the result of the case and, under plaintiffs' theory of the case, a member of the plaintiff class. The Third District Court of Appeals denied defendants' petition to disqualify the trial judge. In January 2000, defendants filed a petition for a writ of certiorari to the United States Supreme Court requesting that it review the issue of the trial judge's disqualification, and in May 2000 the writ of certiorari was denied. PM Inc. and the Company remain of the view that the Engle case should not have been certified as a class action. The certification is inconsistent with the overwhelming majority of federal and state court decisions that have held that mass smoking and health claims are inappropriate for class treatment. PM Inc. has filed an appeal challenging the class certification and the compensatory and punitive damages awards, as well as numerous other reversible errors that it believes occurred during the trial to date. Smoking and Health Litigation Plaintiffs' allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state RICO statutes. In certain of these cases, plaintiffs claim that cigarette smoking exacerbated the injuries caused by their exposure to asbestos. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses

raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act. In May 1996, the United States Court of Appeals for the Fifth Circuit held in the Castano case that a class consisting of all "addicted" smokers nationwide did not meet the standards and requirements of the federal rules governing class actions. Since this class decertification, lawyers for plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise "addiction" claims similar to those raised in the Castano case and, in many cases, claims of physical injury as well. As of December 31, 2001, smoking and health putative class actions were pending in Alabama, California, Florida, Illinois, Indiana, Iowa, Louisiana, Michigan, Missouri, Nevada, New Mexico, New York, North Carolina, Oregon, Tennessee, Texas, Utah, West Virginia and the District of Columbia, as well as in Brazil, Canada, Israel and Spain. Class certification has been denied or reversed by courts in 29 smoking and health class actions involving PM Inc. in Arkansas, the District of Columbia, Illinois (2), Iowa, Kansas, Louisiana, Maryland, Michigan, Minnesota, Nevada (4), New Jersey (6), New York (2), Ohio, Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Texas and Wisconsin, while classes remain certified in the Engle case in Florida (discussed above), two cases in California and in a case in Louisiana in which plaintiffs seek the creation of funds to pay for medical monitoring and smoking cessation programs for class members. Some of the decisions denying or granting plaintiffs' motions for class certification are on appeal. In May 1999, the United States Supreme Court declined to review the decision of the United States Court of Appeals for the Third Circuit affirming a lower court's decertification of a class. In November 2001, in the first medical monitoring class action case to go to trial, a West Virginia jury returned a verdict in favor of all defendants, including PM Inc.; in January 2002, the trial court denied plaintiffs' motion for a new trial. 54

Health Care Cost Recovery Litigation - Overview: In certain pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds ("unions"), Native American tribes, insurers and self-insurers such as Blue Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs. The claims asserted in the health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit and statute of limitations. In addition, defendants argue that they should be entitled to "set off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.

Health Care Cost Recovery Litigation - Overview: In certain pending proceedings, domestic and foreign governmental entities and non-governmental plaintiffs, including union health and welfare funds ("unions"), Native American tribes, insurers and self-insurers such as Blue Cross and Blue Shield plans, hospitals, taxpayers and others, are seeking reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees. Certain of the health care cost recovery cases purport to be brought on behalf of a class of plaintiffs. The claims asserted in the health care cost recovery actions include the equitable claim that the tobacco industry was "unjustly enriched" by plaintiffs' payment of health care costs allegedly attributable to smoking, the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state RICO statutes. Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, "unclean hands" (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit and statute of limitations. In addition, defendants argue that they should be entitled to "set off" any alleged damages to the extent the plaintiff benefits economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by "standing in the shoes" of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party. Although there have been some decisions to the contrary, most courts that have decided motions in these cases have dismissed all or most of the claims against the industry. In addition, eight federal circuit courts of appeals, the Second, Third, Fifth, Seventh, Eighth, Ninth, Eleventh and District of Columbia circuits, as well as California and Tennessee intermediate appellate courts, relying primarily on grounds that plaintiffs' claims were too remote, have affirmed dismissals of, or reversed trial courts that had refused to dismiss, health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs' appeals from the cases decided by the courts of appeals for the Second, Third, Ninth and District of Columbia circuits. As of December 31, 2001, there were an estimated 45 health care cost recovery cases pending in the United States against PM Inc., and in some instances, the Company, including the case filed by the United States government, which is discussed below under "Federal Government's Lawsuit." The cases brought in the United States include actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Canada, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 11 Brazilian states, 11 Brazilian cities and a group of Argentine unions. The actions brought by Belize, Bolivia, Ecuador, Guatemala, Honduras, Nicaragua, the Province of Ontario, Panama, the Russian Federation, Tajikistan, Ukraine, Venezuela, 9 Brazilian states and 11 Brazilian cities were consolidated for pre-trial purposes and transferred to the United States District Court for the District of Columbia. The court has remanded the cases of Venezuela, Ecuador and two Brazilian states to state court in Florida, and defendants appealed to the United States Court of Appeals for the District of Columbia Circuit. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the cases brought by Venezuela and the Brazilian state of Espirito Santo were dismissed, and Venezuela has appealed. The district court dismissed the cases brought by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and plaintiffs appealed. In May 2001, the United States Court of Appeals for the District of Columbia Circuit affirmed the district court's dismissals of the cases brought by Guatemala, Nicaragua and Ukraine, and in October 2001, the United States Supreme Court refused to consider plaintiffs' appeal. In November 2001, the Province of Ontario voluntarily dismissed its appeal. In January 2001, the Superior Court of the District of Columbia dismissed the suit brought by the Argentine unions.

In addition to cases brought in the United States, health care cost recovery actions have also been brought in Israel, the Marshall Islands, the Province of British Columbia, Canada, and France, and other entities have stated that they are considering filing such actions. In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In June 2001, a New York jury returned a verdict awarding $6.83 million in compensatory damages against PM Inc. and a total of $11 million against four other defendants in a health care cost recovery action brought by a Blue Cross and Blue Shield plan; in October 2001, the trial court denied defendants' post-trial motions challenging the verdict and, in November 2001, entered judgment in the case; PM Inc. has appealed. - Settlements of Health Care Cost Recovery Litigation: In November 1998, PM Inc. and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the "MSA") with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM Inc. and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the "State Settlement Agreements"). The MSA has received final judicial approval in all 52 settling jurisdictions. The State Settlement Agreements require that the domestic tobacco industry make substantial annual payments in the following amounts (excluding future annual payments contemplated by the agreement with tobacco growers discussed below), subject to adjustment for several factors, including inflation, market share and industry volume: 2001, $9.9 billion; 2002, $11.3 billion; 2003, $10.9 billion; 2004 through 2007, $8.4 billion each year; and, thereafter, $9.4 billion each year. In addition, the domestic tobacco industry is required to pay settling plaintiffs' attorneys' fees, subject to an annual cap of $500 million, as well as additional annual payments of $250 million through 2003. These payment obligations are the several and not joint obligations of each settling defendant. PM Inc.'s portion of ongoing adjusted payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. 55

Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quotaholders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. The State Settlement Agreements have materially adversely affected the volumes of PM Inc. and the Company; the Company believes that they may materially adversely affect the business, volumes, results of operations, cash flows or financial position of PM Inc. and the Company in future periods. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. Certain litigation has arisen challenging the validity of the MSA and alleging violations of antitrust laws.

Accordingly, PM Inc. records its portions of ongoing settlement payments as part of cost of sales as product is shipped. The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions. As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quotaholders. To that end, four of the major domestic tobacco product manufacturers, including PM Inc., and the grower states, have established a trust fund to provide aid to tobacco growers and quota-holders. The trust will be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Future industry payments (2002 through 2008, $500 million each year; 2009 and 2010, $295 million each year) are subject to adjustment for several factors, including inflation, United States cigarette volume and certain other contingent events, and, in general, are to be allocated based on each manufacturer's relative market share. PM Inc. records its portion of these payments as part of cost of sales as product is shipped. The State Settlement Agreements have materially adversely affected the volumes of PM Inc. and the Company; the Company believes that they may materially adversely affect the business, volumes, results of operations, cash flows or financial position of PM Inc. and the Company in future periods. The degree of the adverse impact will depend, among other things, on the rates of decline in United States cigarette sales in the premium and discount segments, PM Inc.'s share of the domestic premium and discount cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to the MSA and the other State Settlement Agreements. Certain litigation has arisen challenging the validity of the MSA and alleging violations of antitrust laws. In April 1999, a putative class action was filed in federal district court on behalf of all firms that directly buy cigarettes in the United States from defendant tobacco manufacturers. The complaint alleged violation of antitrust law, based in part on the MSA. Plaintiffs sought treble damages computed as three times the difference between current prices and the price plaintiffs would have paid for cigarettes in the absence of an alleged conspiracy to restrain and monopolize trade in the domestic cigarette market, together with attorneys' fees. Plaintiffs also sought injunctive relief against certain aspects of the MSA. In March 2000, the court granted defendants' motion to dismiss the complaint, and plaintiffs appealed. In June 2001, the appellate court affirmed the trial court's ruling, and in January 2002, the United States Supreme Court refused to consider plaintiffs' appeal. Since June 1999, a putative class action brought on behalf of certain Native American tribes and other suits challenging the validity of the MSA have been filed against PM Inc., and in certain instances, the Company. Plaintiffs in these cases allege that by entering into the MSA, defendants have violated plaintiffs' constitutional rights or antitrust laws. The case brought on behalf of the Native American tribes was dismissed by the trial court, and the tribes' appeal was denied by the appellate court. In addition, since December 2000, cases have been filed in Virginia and Pennsylvania against governmental entities alleging that enforcement of the MSA is unconstitutional and violates antitrust laws. Neither PM Inc. nor the Company is a party to these suits. - Federal Government's Lawsuit: In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers and others, including PM Inc. and the Company, asserting claims under three federal statutes, the Medical Care Recovery Act ("MCRA"), the Medicare Secondary Payer ("MSP") provisions of the Social Security Act and the Racketeer Influenced and Corrupt Organizations Act ("RICO"). The lawsuit seeks to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants' fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans' health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleges that such costs total more than $20 billion annually. It also seeks various types of equitable and declaratory relief, including disgorgement, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government's future costs of providing health care resulting from defendants' alleged past tortious and wrongful conduct. PM Inc. and the Company moved to dismiss this lawsuit on numerous grounds, including that

the statutes invoked by the government do not provide a basis for the relief sought. In September 2000, the trial court dismissed the government's MCRA and MSP claims, but permitted discovery to proceed on the government's claims for equitable relief under RICO. In October 2000, the government moved for reconsideration of the trial court's order to the extent that it dismissed the MCRA claims for health care costs paid pursuant to government health benefit programs other than Medicare and the Federal Employees Health Benefits Act. In February 2001, the government filed an amended complaint attempting to replead the MSP claims. In July 2001, the court denied the government's motion for reconsideration of the dismissal of the MCRA claims and dismissed the government's amended MSP claims. Trial of the case is currently scheduled for July 2003. In June 2001, representatives of the Department of Justice invited the defendants, including PM Inc. and the Company, to participate in settlement discussions. A meeting with representatives of the Department of Justice was held in July 2001. PM Inc. and the Company cannot predict whether discussions will continue or the outcome of any such discussions. The Company and PM Inc. believe that they have a number of valid defenses to the lawsuit and will continue to vigorously defend it. Certain Other Tobacco-Related Litigation - Lights/Ultra Lights Cases: As of December 31, 2001, there were 11 putative class actions pending against PM Inc. and the Company in California, Florida, Illinois, Massachusetts, Minnesota, Missouri, New Jersey, Ohio (2), Tennessee and West Virginia on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Plaintiffs in these cases allege, among other things, that the use of the terms "Lights" and/or "Ultra Lights" constitutes deceptive and unfair trade practices, and seek injunctive and equitable relief, including restitution. In November 2001, plaintiffs voluntarily dismissed a case in Pennsylvania, and in October 2001, a Massachusetts court certified a statewide class. In February 2001, an Illinois court also certified a class, and trial in this case is scheduled for August 2002. During the first quarter of 2001, plaintiffs voluntarily dismissed cases in Florida and New York. In July 2001, an Arizona court refused to certify a class, and that case has been voluntarily dismissed. 56

- Cigarette Importation Cases: As of December 31, 2001, the European Community, various Departments of Colombia, Ecuador, Belize and Honduras had filed suits in the United States against the Company and certain of its subsidiaries, including PM Inc. and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into the plaintiff jurisdictions in an effort to evade taxes. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In January 2001, the Company and its defendant subsidiaries moved to dismiss the complaints filed in the European Community and Colombia cases. In July 2001, the court dismissed the complaint filed by the European Community for lack of standing, while noting that the ruling is not applicable to suits that the European Community's member states may choose to file, and in August 2001, the European Community and ten member states refiled the complaint. Also, in July 2001, PM Inc. and the Company moved to dismiss the complaint filed by Ecuador. In September 2001, PM Inc. and the Company moved to dismiss the complaints filed by Belize and Honduras. In October 2001, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a cigarette importation case filed against another cigarette manufacturer. In November 2001, the company moved to dismiss the complaint filed by the European Community in August 2001. - Asbestos Contribution Cases: As of December 31, 2001, an estimated 13 suits were pending on behalf of former asbestos manufacturers and affiliated entities against domestic tobacco manufacturers, including PM Inc. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. The aggregate amounts claimed in these cases range into the billions of dollars. - Retail Leaders Case: Three domestic tobacco manufacturers have filed suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became available to retailers in October 1998. The complaint alleges

- Cigarette Importation Cases: As of December 31, 2001, the European Community, various Departments of Colombia, Ecuador, Belize and Honduras had filed suits in the United States against the Company and certain of its subsidiaries, including PM Inc. and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into the plaintiff jurisdictions in an effort to evade taxes. The claims asserted in these cases include negligence, negligent misrepresentation, fraud, unjust enrichment, violations of RICO and its state-law equivalents and conspiracy. Plaintiffs in these cases seek actual damages, treble damages and undisclosed injunctive relief. In January 2001, the Company and its defendant subsidiaries moved to dismiss the complaints filed in the European Community and Colombia cases. In July 2001, the court dismissed the complaint filed by the European Community for lack of standing, while noting that the ruling is not applicable to suits that the European Community's member states may choose to file, and in August 2001, the European Community and ten member states refiled the complaint. Also, in July 2001, PM Inc. and the Company moved to dismiss the complaint filed by Ecuador. In September 2001, PM Inc. and the Company moved to dismiss the complaints filed by Belize and Honduras. In October 2001, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a cigarette importation case filed against another cigarette manufacturer. In November 2001, the company moved to dismiss the complaint filed by the European Community in August 2001. - Asbestos Contribution Cases: As of December 31, 2001, an estimated 13 suits were pending on behalf of former asbestos manufacturers and affiliated entities against domestic tobacco manufacturers, including PM Inc. These cases seek, among other things, contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking. Plaintiffs in most of these cases also seek punitive damages. The aggregate amounts claimed in these cases range into the billions of dollars. - Retail Leaders Case: Three domestic tobacco manufacturers have filed suit against PM Inc. seeking to enjoin the PM Inc. "Retail Leaders" program that became available to retailers in October 1998. The complaint alleges that this retail merchandising program is exclusionary, creates an unreasonable restraint of trade and constitutes unlawful monopolization. In addition to an injunction, plaintiffs seek unspecified treble damages, attorneys' fees, costs and interest. In June 1999, the court issued a preliminary injunction enjoining PM Inc. from prohibiting retail outlets that participate in the program at one of the levels from installing competitive permanent signage in any section of the "industry fixture" that displays or holds packages of cigarettes manufactured by a firm other than PM Inc., or requiring those outlets to allocate a percentage of cigarette-related permanent signage to PM Inc. greater than PM Inc.'s market share. The court also enjoined PM Inc. from prohibiting retailers participating in the program from advertising or conducting promotional programs of cigarette manufacturers other than PM Inc. The preliminary injunction does not affect any other aspect of the Retail Leaders program. In May 2001, the court denied plaintiffs' motion alleging that PM Inc. had violated the preliminary injunction. In July 2001, one plaintiff filed a motion to modify and expand the preliminary injunction. The motion was denied in December 2001. In October 2001, PM Inc. moved for summary judgment dismissing all of plaintiffs' claims. Although no trial date has been set, the court has indicated a probable trial date of May 2002. - Vending Machine Case: Plaintiffs, who began their case as a purported nationwide class of cigarette vending machine operators, allege that PM Inc. has violated the Robinson-Patman Act in connection with its promotional and merchandising programs available to retail stores and not available to cigarette vending machine operators. Plaintiffs request actual damages, treble damages, injunctive relief, attorneys' fees and costs, and other unspecified relief. In June 1999, the court denied plaintiffs' motion for a preliminary injunction. Plaintiffs have withdrawn their request for class action status. In August 2001, the court granted PM Inc.'s motion for summary judgment and dismissed, with prejudice, the claims of ten plaintiffs. In October 2001, the court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following the stipulation of all plaintiffs that the district court's dismissal would, if affirmed, be binding on all plaintiffs. - Tobacco Price Cases: As of December 31, 2001, there were 36 putative class actions pending against PM Inc. and other domestic tobacco manufacturers, as well as, in certain instances, the Company and PMI, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Seven of the putative class actions were filed in various federal district courts by direct purchasers of tobacco products, and the remaining 29 were filed in 14 states and the District of Columbia by retail purchasers of tobacco products. In November 2001, the court granted plaintiff's motion for class certification and denied defendant's motion to dismiss in a case pending in state court in Kansas. In December 2001, the court denied plaintiff's motion for class certification in a case pending in state court in Minnesota. The seven federal class actions have been consolidated. In November 2000, the court

hearing the consolidated cases granted in part and denied in part defendants' motion to dismiss portions of the consolidated complaint. The court has certified a class of plaintiffs who made direct purchases between February 1996 and February 2000. In June 2001, the court granted defendants' motion to dismiss the fraudulent concealment allegations in the complaint. - Tobacco Growers' Case: In February 2000, a suit was filed on behalf of a purported class of tobacco growers and quota-holders, and amended complaints were filed in May 2000 and in August 2000. The second amended complaint alleges that defendants, including PM Inc., violated antitrust laws by bid-rigging and allocating purchases at tobacco auctions and by conspiring to undermine the tobacco quota and price-support program administered by the federal government. In October 2000, defendants filed motions to dismiss the amended complaint and to transfer the case, and plaintiffs filed a motion for class certification. In November 2000, the court granted defendants' motion to transfer the case to the United States District Court for the Middle District of North Carolina. In December 2000, plaintiffs served a motion for leave to file a third amended complaint to add tobacco leaf buyers as defendants. This motion was granted, and the additional parties were served in February 2001. In March 2001, the leaf buyer defendants filed a motion to dismiss the case. In June 2001, the manufacturing and leaf buyer defendants filed a joint memorandum in opposition to plaintiffs' motion for class certification. In July 2001, the court denied the manufacturer and leaf buyer defendants' motions to dismiss the case. - Consolidated Putative Punitive Damages Cases: In September 2000, a putative class action was filed in the federal district court in the Eastern District of New York that purports to consolidate punitive damages claims in ten tobacco-related actions currently pending in the federal district court in the 57

Eastern Districts of New York and Pennsylvania. In November 2000, the court hearing this case indicated that, in its view, it appears likely that plaintiffs will be able to demonstrate a basis for certification of an opt-out compensatory damages class and a non-opt-out punitive damages class. In December 2000, plaintiffs served a motion for leave to file an amended complaint and a motion for class certification. A hearing on plaintiffs' motion for class certification was held in March 2001. Certain Other Actions - National Cheese Exchange Cases: Since 1996, seven putative class actions have been filed by various dairy farmers alleging that Kraft Foods Inc., its subsidiaries and others engaged in a conspiracy to fix and depress the prices of bulk cheese and milk through their trading activity on the National Cheese Exchange. Plaintiffs seek injunctive and equitable relief and unspecified treble damages. Two of the actions were voluntarily dismissed by plaintiffs after class certification was denied. Three cases were consolidated in state court in Wisconsin, and in November 1999, the court granted Kraft's motion for summary judgment. In June 2001, the Wisconsin Court of Appeals affirmed the trial court's ruling. In October 2001, the Wisconsin Supreme Court granted plaintiffs' petition for further review. Kraft's motions to dismiss were granted in the cases pending in Illinois state court and in the United States District Court for the Central District of California. Appellate courts have reversed and remanded both cases for further proceedings. No classes have been certified in any of the cases. In January 2002, following the parties' settlement of the matter, the Illinois case was dismissed with prejudice. - Italian Tax Matters: One hundred ninety-four tax assessments alleging the nonpayment of taxes in Italy (valueadded taxes for the years 1988 to 1996 and income taxes for the years 1987 to 1996) have been served upon certain affiliates of the Company, including six new assessments (for the year 1996), which were served in October and December 2001. The aggregate amount of alleged unpaid taxes assessed to date is the euro equivalent of $2.1 billion. In addition, the euro equivalent of $3.1 billion in interest and penalties has been assessed. The Company anticipates that value-added and income tax assessments may also be received with respect to subsequent years. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 188 of the assessments. The decisions to overturn 185 assessments have been appealed by the tax authorities to the regional appellate court in Milan. To date, the regional appellate court has rejected 51 of the appeals filed by the tax authorities. The tax authorities have appealed 45 of the 51 decisions of the regional appellate court to the Italian Supreme Court, and a hearing on these cases was held in December 2001. Six of the 51 decisions were not appealed and are now final. In a separate proceeding in October 1997, a Naples court dismissed charges of criminal association against certain

Eastern Districts of New York and Pennsylvania. In November 2000, the court hearing this case indicated that, in its view, it appears likely that plaintiffs will be able to demonstrate a basis for certification of an opt-out compensatory damages class and a non-opt-out punitive damages class. In December 2000, plaintiffs served a motion for leave to file an amended complaint and a motion for class certification. A hearing on plaintiffs' motion for class certification was held in March 2001. Certain Other Actions - National Cheese Exchange Cases: Since 1996, seven putative class actions have been filed by various dairy farmers alleging that Kraft Foods Inc., its subsidiaries and others engaged in a conspiracy to fix and depress the prices of bulk cheese and milk through their trading activity on the National Cheese Exchange. Plaintiffs seek injunctive and equitable relief and unspecified treble damages. Two of the actions were voluntarily dismissed by plaintiffs after class certification was denied. Three cases were consolidated in state court in Wisconsin, and in November 1999, the court granted Kraft's motion for summary judgment. In June 2001, the Wisconsin Court of Appeals affirmed the trial court's ruling. In October 2001, the Wisconsin Supreme Court granted plaintiffs' petition for further review. Kraft's motions to dismiss were granted in the cases pending in Illinois state court and in the United States District Court for the Central District of California. Appellate courts have reversed and remanded both cases for further proceedings. No classes have been certified in any of the cases. In January 2002, following the parties' settlement of the matter, the Illinois case was dismissed with prejudice. - Italian Tax Matters: One hundred ninety-four tax assessments alleging the nonpayment of taxes in Italy (valueadded taxes for the years 1988 to 1996 and income taxes for the years 1987 to 1996) have been served upon certain affiliates of the Company, including six new assessments (for the year 1996), which were served in October and December 2001. The aggregate amount of alleged unpaid taxes assessed to date is the euro equivalent of $2.1 billion. In addition, the euro equivalent of $3.1 billion in interest and penalties has been assessed. The Company anticipates that value-added and income tax assessments may also be received with respect to subsequent years. All of the assessments are being vigorously contested. To date, the Italian administrative tax court in Milan has overturned 188 of the assessments. The decisions to overturn 185 assessments have been appealed by the tax authorities to the regional appellate court in Milan. To date, the regional appellate court has rejected 51 of the appeals filed by the tax authorities. The tax authorities have appealed 45 of the 51 decisions of the regional appellate court to the Italian Supreme Court, and a hearing on these cases was held in December 2001. Six of the 51 decisions were not appealed and are now final. In a separate proceeding in October 1997, a Naples court dismissed charges of criminal association against certain present and former officers and directors of affiliates of the Company, but permitted tax evasion and related charges to remain pending. In February 1998, the criminal court in Naples determined that jurisdiction was not proper, and the case file was transmitted to the public prosecutor in Milan. In December 2000, the Milan prosecutor took certain procedural steps that may indicate his intention to recommend that charges be pursued against certain of these present and former officers and directors. The Company, its affiliates and the officers and directors who are subject to the proceedings believe they have complied with applicable Italian tax laws and are vigorously contesting the pending assessments and proceedings.

It is not possible to predict the outcome of the litigation pending against the Company and its subsidiaries. Litigation is subject to many uncertainties. Unfavorable verdicts awarding compensatory and punitive damages against PM Inc. have been returned in the Engle smoking and health class action, several individual smoking and health cases and a health care cost recovery case and are being appealed. It is possible that there could be further adverse developments in these cases and that additional cases could be decided unfavorably. An unfavorable outcome or settlement of a pending smoking and health or health care cost recovery case could encourage the commencement of additional similar litigation. There have also been a number of adverse legislative, regulatory, political and other developments concerning cigarette smoking and the tobacco industry that have received widespread media attention. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional similar litigation. Management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of pending tobacco-related litigation, and the Company has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. The present legislative and litigation

environment is substantially uncertain, and it is possible that the Company's business, volume, results of operations, cash flows or financial position could be materially affected by an unfavorable outcome or settlement of certain pending litigation or by the enactment of federal or state tobacco legislation. The Company and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to all litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, the Company and its subsidiaries may enter into discussions in an attempt to settle particular cases if they believe it is in the best interests of the Company's stockholders to do so. 58

Note 17. Quarterly Financial Data (Unaudited):
(in millions, except per share data) 2001 Quarters --------------------------------------------------------------------------------------------------------1st 2nd 3rd 4t --------------------------------------------------------------------------------------------------------Operating revenues $22,359 $23,188 $22,404 $21,9 ========================================================================================================= Gross profit $ 9,757 $10,270 $ 9,972 $ 9,6 ========================================================================================================= Earnings before cumulative effect of accounting change $ 1,786 $ 2,288 $ 2,328 $ 2,1 Cumulative effect of accounting change (6) --------------------------------------------------------------------------------------------------------Net earnings $ 1,780 $ 2,288 $ 2,328 $ 2,1 ========================================================================================================= Per share data: Basic EPS $ 0.81 $ 1.04 $ 1.07 $ 1. ========================================================================================================= Diluted EPS $ 0.80 $ 1.03 $ 1.06 $ 0. ========================================================================================================= Dividends declared $ 0.53 $ 0.53 $ 0.58 $ 0. ========================================================================================================= Market price--high $ 52.04 $ 53.88 $ 49.76 $ 51. --low $ 38.75 $ 44.00 $ 43.00 $ 44. =========================================================================================================

(in millions, except per share data) 2000 Quarters --------------------------------------------------------------------------------------------------------1st 2nd 3rd 4 --------------------------------------------------------------------------------------------------------Operating revenues $20,040 $20,844 $20,058 $19,4 ========================================================================================================= Gross profit $ 8,287 $ 8,906 $ 8,486 $ 8,4 ========================================================================================================= Net earnings $ 2,009 $ 2,171 $ 2,319 $ 2,0 ========================================================================================================= Per share data: Basic EPS $ 0.87 $ 0.96 $ 1.04 $ 0. ========================================================================================================= Diluted EPS $ 0.87 $ 0.95 $ 1.03 $ 0. ========================================================================================================= Dividends declared $ 0.48 $ 0.48 $ 0.53 $ 0. ========================================================================================================= Market price--high $ 24.63 $ 28.75 $ 34.00 $ 45. --low $ 18.69 $ 20.38 $ 23.00 $ 29. =========================================================================================================

Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total for the year. During 2001, the Company recorded pre-tax charges as follows:
(in millions) 2001 Quarters ---------------------------------------------------------------------------------------------------------

Note 17. Quarterly Financial Data (Unaudited):
(in millions, except per share data) 2001 Quarters --------------------------------------------------------------------------------------------------------1st 2nd 3rd 4t --------------------------------------------------------------------------------------------------------Operating revenues $22,359 $23,188 $22,404 $21,9 ========================================================================================================= Gross profit $ 9,757 $10,270 $ 9,972 $ 9,6 ========================================================================================================= Earnings before cumulative effect of accounting change $ 1,786 $ 2,288 $ 2,328 $ 2,1 Cumulative effect of accounting change (6) --------------------------------------------------------------------------------------------------------Net earnings $ 1,780 $ 2,288 $ 2,328 $ 2,1 ========================================================================================================= Per share data: Basic EPS $ 0.81 $ 1.04 $ 1.07 $ 1. ========================================================================================================= Diluted EPS $ 0.80 $ 1.03 $ 1.06 $ 0. ========================================================================================================= Dividends declared $ 0.53 $ 0.53 $ 0.58 $ 0. ========================================================================================================= Market price--high $ 52.04 $ 53.88 $ 49.76 $ 51. --low $ 38.75 $ 44.00 $ 43.00 $ 44. =========================================================================================================

(in millions, except per share data) 2000 Quarters --------------------------------------------------------------------------------------------------------1st 2nd 3rd 4 --------------------------------------------------------------------------------------------------------Operating revenues $20,040 $20,844 $20,058 $19,4 ========================================================================================================= Gross profit $ 8,287 $ 8,906 $ 8,486 $ 8,4 ========================================================================================================= Net earnings $ 2,009 $ 2,171 $ 2,319 $ 2,0 ========================================================================================================= Per share data: Basic EPS $ 0.87 $ 0.96 $ 1.04 $ 0. ========================================================================================================= Diluted EPS $ 0.87 $ 0.95 $ 1.03 $ 0. ========================================================================================================= Dividends declared $ 0.48 $ 0.48 $ 0.53 $ 0. ========================================================================================================= Market price--high $ 24.63 $ 28.75 $ 34.00 $ 45. --low $ 18.69 $ 20.38 $ 23.00 $ 29. =========================================================================================================

Basic and diluted EPS are computed independently for each of the periods presented. Accordingly, the sum of the quarterly EPS amounts may not agree to the total for the year. During 2001, the Company recorded pre-tax charges as follows:
(in millions) 2001 Quarters --------------------------------------------------------------------------------------------------------1st 2nd 3rd 4 --------------------------------------------------------------------------------------------------------Litigation-related expense $500 Loss on sale of a North American food factory 29 Nabisco integration costs $37 $ Contract brewing agreement 19 --------------------------------------------------------------------------------------------------------$529 $ -$56 $ =========================================================================================================

During 2000, the Company recorded a $139 million pre-tax gain related to the sale of a French confectionery business in the third quarter and a $100 million pre-tax gain related to the sale of beer rights in the fourth quarter.

business in the third quarter and a $100 million pre-tax gain related to the sale of beer rights in the fourth quarter.

The principal stock exchange, on which the Company's common stock (par value $0.33 1/3 per share) is listed, is the New York Stock Exchange. At January 31, 2002, there were approximately 131,700 holders of record of the Company's common stock. 59

Report of Independent Accountants To the Board of Directors and Stockholders of Philip Morris Companies Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Philip Morris Companies Inc. and its subsidiaries (the "Company") at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP New York, New York January 28, 2002

Company Report on Financial Statements The consolidated financial statements and all related financial information herein are the responsibility of the Company. The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting principles. Other financial information in the annual report is consistent with that in the financial statements. The Company maintains a system of internal controls that it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the Company, which includes written policies and procedures, careful selection and training of personnel, and audits by a professional staff of internal auditors. PricewaterhouseCoopers LLP, independent accountants, have audited and reported on the Company's consolidated financial statements. Their audits were performed in accordance with generally accepted auditing standards. The Audit Committee of the Board of Directors, composed of six non-management directors, meets periodically with PricewaterhouseCoopers LLP, the Company's internal auditors and management representatives to review internal accounting control, auditing and financial reporting matters. Both PricewaterhouseCoopers LLP and the internal auditors have unrestricted access to the Audit Committee and may meet with it without management representatives being present. 60

Report of Independent Accountants To the Board of Directors and Stockholders of Philip Morris Companies Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, stockholders' equity and cash flows present fairly, in all material respects, the consolidated financial position of Philip Morris Companies Inc. and its subsidiaries (the "Company") at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS LLP New York, New York January 28, 2002

Company Report on Financial Statements The consolidated financial statements and all related financial information herein are the responsibility of the Company. The financial statements, which include amounts based on judgments, have been prepared in accordance with generally accepted accounting principles. Other financial information in the annual report is consistent with that in the financial statements. The Company maintains a system of internal controls that it believes provides reasonable assurance that transactions are executed in accordance with management's authorization and properly recorded, that assets are safeguarded, and that accountability for assets is maintained. The system of internal controls is characterized by a control-oriented environment within the Company, which includes written policies and procedures, careful selection and training of personnel, and audits by a professional staff of internal auditors. PricewaterhouseCoopers LLP, independent accountants, have audited and reported on the Company's consolidated financial statements. Their audits were performed in accordance with generally accepted auditing standards. The Audit Committee of the Board of Directors, composed of six non-management directors, meets periodically with PricewaterhouseCoopers LLP, the Company's internal auditors and management representatives to review internal accounting control, auditing and financial reporting matters. Both PricewaterhouseCoopers LLP and the internal auditors have unrestricted access to the Audit Committee and may meet with it without management representatives being present. 60

Exhibit 21 SUBSIDIARIES OF THE COMPANY Certain active subsidiaries of the Company and their subsidiaries as of December 31, 2001, are listed below. The names of certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted.

Exhibit 21 SUBSIDIARIES OF THE COMPANY Certain active subsidiaries of the Company and their subsidiaries as of December 31, 2001, are listed below. The names of certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, have been omitted.
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Name ---152999 Canada Inc. .................................................................................. 20th Century Denmark Limited ........................................................................ A/S Maarud .......................................................................................... AB Estrella ......................................................................................... AB Kraft Foods Lietuva .............................................................................. Abal Hermanos S.A. .................................................................................. AGF SP, Inc. ........................................................................................ Airco IHC, Inc. ..................................................................................... Ajinomoto General Foods, Inc. ....................................................................... Aktieselskabet FMD af 11. juni 1920 ................................................................. Balance Bar Company ................................................................................. Beech-Nut Life Savers (Panama) S.A................................................................... Beijing Nabisco Food Company Ltd. ................................................................... Boca Foods Company .................................................................................. Burlington Foods, Inc. .............................................................................. C.A. Tabacalera Nacional ............................................................................ Cafe GRAND'MERE S.A. ................................................................................ Callard & Bowser-Suchard, Inc. ...................................................................... Canale S.A. ......................................................................................... Capri Sun, Inc. ..................................................................................... Celis Brewery, Inc. ................................................................................ Chrysalis Technologies Incorporated ................................................................. Churny Company, Inc. ................................................................................ Closed Joint Stock Company Kraft Foods Ukraine ...................................................... Compania Venezolana de Conservas C.A. ............................................................... Corporativo Kraft SRL ............................................................................... Cote d'Or Italia S.r.l. ............................................................................. Covenco Holding C.A. ................................................................................ Dart Resorts Inc. ................................................................................... Dely, S.A. .......................................................................................... Distribuidora Pan Americana, S.A. ................................................................... Dong Suh Foods Corporation .......................................................................... Dong Suh Oil & Fats Co. Ltd. ........................................................................ DR SPV, LLC ......................................................................................... El Gallito Industrial, S.A. ......................................................................... Establecimiento Modelo Terrabusi S.A. ............................................................... Estrella A/S ........................................................................................ f6 Cigarettenfabrik Dresden GmbH .................................................................... Fattorie Osella S.p.A. .............................................................................. Fleischmann International, Inc. ..................................................................... Fleischmann Nabisco Uruguay S.A...................................................................... Foster's USA, LLC ................................................................................... Franklin Baker Company of the Philippines ........................................................... Freezer Queen Ltd. .................................................................................. FTR Holding S.A. .................................................................................... Fulmer Corporation Limited .......................................................................... Gelatinas Ecuatoriana S.A. ..........................................................................

Name ---General Foods Credit Corporation .................................................................... General Foods Credit Investors No. 1 Corporation .................................................... General Foods Credit Investors No. 2 Corporation .................................................... General Foods Credit Investors No. 3 Corporation .................................................... General Foods Foreign Sales Corporation ............................................................. Gevaliarosteriet AB ................................................................................. Godfrey Phillips (Malaysia) Sdn. Bhd. ............................................................... Grant Holdings, Inc. ................................................................................

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Name ---General Foods Credit Corporation .................................................................... General Foods Credit Investors No. 1 Corporation .................................................... General Foods Credit Investors No. 2 Corporation .................................................... General Foods Credit Investors No. 3 Corporation .................................................... General Foods Foreign Sales Corporation ............................................................. Gevaliarosteriet AB ................................................................................. Godfrey Phillips (Malaysia) Sdn. Bhd. ............................................................... Grant Holdings, Inc. ................................................................................ Grant Transit Co. ................................................................................... Grundstucksgemeinschaft Kraft Foods ................................................................. HAG GF AG ........................................................................................... HAG-Coffex .......................................................................................... Hervin Holdings, Inc. ............................................................................... HNB Investment Corp. ................................................................................ IKM S. de R.L. de C.V. .............................................................................. Industria e Comercio de Produtos Alimenticios Cerqueirense Ltda. .................................... Industrias Alimenticias Maguary Ltda. ............................................................... Intertaba S.p.A. .................................................................................... Iracema Industrias de Caju Ltda. .................................................................... Jacob Leinenkugel Brewing Company, Inc. ............................................................. Jacobs Suchard Alimentos do Brasil Ltda. ............................................................ JSC Philip Morris Ukraine ........................................................................... Jupiter Produtos Alimenticios Ltda. ................................................................. KFI - USLLC I ...................................................................................... KFI - USLLC II ..................................................................................... KFI - USLLC IV ...................................................................................... KFI - USLLC V ....................................................................................... KFI - USLLC VII ..................................................................................... KFI - USLLC IX ...................................................................................... KFI - USLLC XI ...................................................................................... KFI - USLLC XIII .................................................................................... KJS Limited ......................................................................................... Kraft Canada Inc. ................................................................................... Kraft Food Ingredients Corp. ........................................................................ Kraft Foods (Australia) Limited ..................................................................... Kraft Foods (New Zealand) Limited ................................................................... Kraft Foods (Philippines), Inc. ..................................................................... Kraft Foods (Puerto Rico), Inc. ..................................................................... Kraft Foods (Singapore) Pte Ltd ..................................................................... Kraft Foods (Thailand) Limited ...................................................................... Kraft Foods Argentina S.A. .......................................................................... Kraft Foods AS ...................................................................................... Kraft Foods Belgium S.A. ............................................................................ Kraft Foods Brasil, S.A. ............................................................................ Kraft Foods Bulgaria AD ............................................................................. Kraft Foods Central & Eastern Europe Service B.V. ................................................... Kraft Foods CR s.r.o. ............................................................................... Kraft Foods Danmark ApS ............................................................................. Kraft Foods Danmark Holding A/S ..................................................................... Kraft Foods de Mexico S.A. de C.V. .................................................................. Kraft Foods Deutschland GmbH & Co. KG ............................................................... Kraft Foods Deutschland Holding GmbH ................................................................ Kraft Foods Dominicana, S.A..........................................................................

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Kraft Kraft Kraft Kraft Kraft Kraft Kraft Kraft Kraft Kraft Kraft Kraft Kraft

Foods Foods Foods Foods Foods Foods Foods Foods Foods Foods Foods Foods Foods

Name ---Egypt LLC ............................................................................... Espana, S.A. ............................................................................ France .................................................................................. Hellas S.A. ............................................................................. Holding (Europa) GmbH .................................................................. Holdings, Inc. .......................................................................... Hors Domicile............................................................................ Hungaria Kft. ........................................................................... Inc. .................................................................................... International Beverages, Inc. ........................................................... International Services, Inc. ............................................................ International, Inc. ..................................................................... Investments Inc. ........................................................................

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Name ---Kraft Foods Egypt LLC ............................................................................... Kraft Foods Espana, S.A. ............................................................................ Kraft Foods France .................................................................................. Kraft Foods Hellas S.A. ............................................................................. Kraft Foods Holding (Europa) GmbH .................................................................. Kraft Foods Holdings, Inc. .......................................................................... Kraft Foods Hors Domicile............................................................................ Kraft Foods Hungaria Kft. ........................................................................... Kraft Foods Inc. .................................................................................... Kraft Foods International Beverages, Inc. ........................................................... Kraft Foods International Services, Inc. ............................................................ Kraft Foods International, Inc. ..................................................................... Kraft Foods Investments Inc. ........................................................................ Kraft Foods Ireland Limited ......................................................................... Kraft Foods Italia S.p.A. ........................................................................... Kraft Foods Jamaica Limited ......................................................................... Kraft Foods Laverune ................................................................................ Kraft Foods Limited ................................................................................. Kraft Foods Limited (Asia) .......................................................................... Kraft Foods Manufacturing Corporation ............................................................... Kraft Foods Manufacturing GmbH & Co. KG ............................................................. Kraft Foods Manufacturing Midwest, Inc. ............................................................. Kraft Foods Manufacuring West, Inc. ................................................................. Kraft Foods Maroc S.A. .............................................................................. Kraft Foods Mexico Holding I BV ..................................................................... Kraft Foods Mexico Holdings II BV.................................................................... Kraft Foods Namur S.A. .............................................................................. Kraft Foods Nederland B.V. .......................................................................... Kraft Foods Norge AS ................................................................................ Kraft Foods North America, Inc. ..................................................................... Kraft Foods Oesterreich GmbH......................................................................... Kraft Foods Peru S.A. ............................................................................... Kraft Foods Polska Sp.z o.o. ........................................................................ Kraft Foods Portugal Produtos Alimentares Lda. ...................................................... Kraft Foods Produktion GmbH ......................................................................... Kraft Foods R & D, Inc. ............................................................................. Kraft Foods Romania SA .............................................................................. Kraft Foods Schweiz AG .............................................................................. Kraft Foods Schweiz Holding AG ...................................................................... Kraft Foods Slovakia a.s. ........................................................................... Kraft Foods Strasbourg .............................................................................. Kraft Foods Sverige AB .............................................................................. Kraft Foods Taiwan Limited........................................................................... Kraft Foods UK Ltd. ................................................................................. Kraft Foods Uruguay, S.A. ........................................................................... Kraft Guangtong Food Company, Limited ............................................................... Kraft Jacobs Suchard (Australia) Pty. Ltd. .......................................................... Kraft Jacobs Suchard Service AG (Switzerland) ....................................................... Kraft Japan, K.K. ................................................................................... Kraft Korea Inc. .................................................................................... Kraft Pizza Company ................................................................................. Kraft Tianmei Food (Tianjin) Co., Ltd. .............................................................. Kraftsa Kraft Sabanci Gida Pazarlama ve Tic. A.S..................................................... Krema Limited .......................................................................................

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Name ---La Loire Investment Corp. ........................................................................... La Seine Investment Corp. ........................................................................... Landers y Cia, S.A. ................................................................................. Le Rhone Investment Corp. ........................................................................... Leite Gloria do Nordeste S.A. ....................................................................... Marsa Kraft Jacobs Suchard Sabanci Gida Sanayi ve Ticaret A.S. ...................................... Martlet Importing Co. Inc. .......................................................................... Massalin Particulares S.A. .......................................................................... Michigan Investment Corp. ........................................................................... Miller Brewing 1855, Inc. ........................................................................... Miller Brewing Company .............................................................................. Miller Brewing of Europe, Ltd. ......................................................................

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Name ---La Loire Investment Corp. ........................................................................... La Seine Investment Corp. ........................................................................... Landers y Cia, S.A. ................................................................................. Le Rhone Investment Corp. ........................................................................... Leite Gloria do Nordeste S.A. ....................................................................... Marsa Kraft Jacobs Suchard Sabanci Gida Sanayi ve Ticaret A.S. ...................................... Martlet Importing Co. Inc. .......................................................................... Massalin Particulares S.A. .......................................................................... Michigan Investment Corp. ........................................................................... Miller Brewing 1855, Inc. ........................................................................... Miller Brewing Company .............................................................................. Miller Brewing of Europe, Ltd. ...................................................................... Mirabell Salzburger Confiserie-und Bisquit GmbH ..................................................... NABEC, S.A. ......................................................................................... Nabisco (China) Limited ............................................................................. Nabisco (Thailand) Limited .......................................................................... Nabisco Brands Holdings Denmark Limited ............................................................. Nabisco Caribbean Export, Inc. ...................................................................... Nabisco de Nicaragua, S.A. .......................................................................... Nabisco Euro Holdings Ltd. .......................................................................... Nabisco Food (Suzhou) Co. Ltd. ...................................................................... Nabisco Group Ltd. .................................................................................. Nabisco Holdings II B.V. ............................................................................ Nabisco Hong Kong Limited ........................................................................... Nabisco International Limited ....................................................................... Nabisco International M.E./Africa L.L.C. ............................................................ Nabisco International, Inc. ......................................................................... Nabisco International, S.A. ......................................................................... Nabisco Inversiones S.A. ............................................................................ Nabisco Investments, Inc. ........................................................................... Nabisco Philippines, Inc. ........................................................................... Nabisco Royal Argentina LLC ......................................................................... Nabisco Royal de Honduras, S.A. ..................................................................... Nabisco Royal del Ecuador, S.A. ..................................................................... Nabisco Royal, Inc. ................................................................................. Nabisco South Africa (Proprietary) Limited .......................................................... Nabisco Taiwan Corporation .......................................................................... Nabisco Trading AG .................................................................................. Nabisco Venezuela, C.A............................................................................... OAO Philip Morris Kuban ............................................................................. OJSS Philip Morris Kazakhstan ....................................................................... One Channel Corp. ................................................................................... Orecla Realty, Inc. ................................................................................. Oy Estrella AB ...................................................................................... Oy Kraft Foods Finland Ab ........................................................................... P.M. Beverage Holdings, Inc. ........................................................................ P.T. Kraft Ultrajaya Indonesia ...................................................................... Park (1989) B.V. .................................................................................... Park (U.K.) Limited ................................................................................. Park Export Corporation ............................................................................. Pavlides S.A. Chocolate Manufacturers ............................................................... Phenix Leasing Corporation .......................................................................... Phenix Management Corporation ....................................................................... Philip Morris (Malaysia) Sdn. Bhd. ..................................................................

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Philip Philip Philip Philip Philip Philip Philip Philip Philip Philip Philip Philip

Morris Morris Morris Morris Morris Morris Morris Morris Morris Morris Morris Morris

Name ---(Thailand) Ltd. ....................................................................... Asia Limited .......................................................................... Belgium S.A. .......................................................................... Brasil S.A. ........................................................................... Capital (Ireland) Limited ............................................................. Capital Corporation ................................................................... Corporate Services Inc. ............................................................... CR a.s. ............................................................................... Duty Free Inc. ........................................................................ Finance Europe B.V. ................................................................... France S.A.S. ......................................................................... G.m.b.H. ..............................................................................

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Name ---Philip Morris (Thailand) Ltd. ....................................................................... Philip Morris Asia Limited .......................................................................... Philip Morris Belgium S.A. .......................................................................... Philip Morris Brasil S.A. ........................................................................... Philip Morris Capital (Ireland) Limited ............................................................. Philip Morris Capital Corporation ................................................................... Philip Morris Corporate Services Inc. ............................................................... Philip Morris CR a.s. ............................................................................... Philip Morris Duty Free Inc. ........................................................................ Philip Morris Finance Europe B.V. ................................................................... Philip Morris France S.A.S. ......................................................................... Philip Morris G.m.b.H. .............................................................................. Philip Morris Hellas A.E.B.E. ....................................................................... Philip Morris Holland B.V. .......................................................................... Philip Morris Hungary Cigarette Manufacturing and Trading Ltd. ...................................... Philip Morris Incorporated .......................................................................... Philip Morris Information Services Limited .......................................................... Philip Morris International Finance Corporation ..................................................... Philip Morris International Inc. .................................................................... Philip Morris International Management S.A. ......................................................... Philip Morris Kabushiki Kaisha ...................................................................... Philip Morris Korea C.H. ............................................................................ Philip Morris Latin America Inc. .................................................................... Philip Morris Limited ............................................................................... Philip Morris Ljubljana d.o.o. ...................................................................... Philip Morris Management Corp. ...................................................................... Philip Morris Mexico S.A. de C.V. ................................................................... Philip Morris Paraguay S.A. ......................................................................... Philip Morris Philippines Inc. ...................................................................... Philip Morris Polska S.A. ........................................................................... Philip Morris Products Inc. ......................................................................... Philip Morris Products S.A. ........................................................................ Philip Morris Reunion s.a.r.l. ...................................................................... Philip Morris Romania S.R.L. ........................................................................ Philip Morris S.p.A. ................................................................................ Philip Morris SA, Philip Morris Sabanci Pazarlama ve Satis A.S. ..................................... Philip Morris Sales & Marketing Ltd. ................................................................ Philip Morris Singapore Pte. Ltd. ................................................................... Philip Morris Slovakia s.r.o. ....................................................................... Philip Morris Spain S.A. ............................................................................ Philip Morris Taiwan S.A. ........................................................................... Philip Morris World Trade S.A. ...................................................................... PHILSA Philip Morris Sabanci Sigara ve Tutunculuk Sanayi ve Ticaret A.S. ............................ PMCC Investors No. 1 Corporation .................................................................... PMCC Investors No. 2 Corporation .................................................................... PMCC Investors No. 3 Corporation .................................................................... PMCC Investors No. 4 Corporation .................................................................... PMCC Leasing Corporation ............................................................................ Posto Apolo Ltda. ................................................................................... Productos Confitados Salvavidas de Guatemala, S.A. .................................................. Productos Kraft SRL ................................................................................. Produtos Alimenticios Fleischmann e Royal Ltda. ..................................................... Produtos Alimenticios Pilar Ltda. ................................................................... Produtos Alimenticios Royal S.A. ....................................................................

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Name ---PT Nabisco Foods .................................................................................... PT Philip Morris Indonesia .......................................................................... Riespri, S.A. ....................................................................................... Roskill Cartage and Storage Limited ................................................................. San Dionisio Realty Corporation ..................................................................... SB Leasing Inc. ..................................................................................... Seven Seas Foods, Inc. .............................................................................. Stella D'oro Biscuit Co., Inc. ...................................................................... Suchard Limited ..................................................................................... Suchard Schokolade Ges. MbH ......................................................................... Superior AgResource, Inc. ........................................................................... Tabacalera Centroamericana S.A. .....................................................................

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Name ---PT Nabisco Foods .................................................................................... PT Philip Morris Indonesia .......................................................................... Riespri, S.A. ....................................................................................... Roskill Cartage and Storage Limited ................................................................. San Dionisio Realty Corporation ..................................................................... SB Leasing Inc. ..................................................................................... Seven Seas Foods, Inc. .............................................................................. Stella D'oro Biscuit Co., Inc. ...................................................................... Suchard Limited ..................................................................................... Suchard Schokolade Ges. MbH ......................................................................... Superior AgResource, Inc. ........................................................................... Tabacalera Centroamericana S.A. ..................................................................... Tabacalera Costarricense S.A. ....................................................................... Tabacalera de El Salvador S.A. de C.V. .............................................................. Tabaqueira, S.A. .................................................................................... Taloca AG ........................................................................................... Taloca Ltda. ........................................................................................ Tevalca Holding C.A. ................................................................................ The Fleischmann Corporation ......................................................................... The Hervin Company .................................................................................. The Kenco Coffee Company Limited .................................................................... Trademarks LLC....................................................................................... Transapolo-Transportes Rodoviarios Apolo Ltda. ...................................................... Trimaran Leasing Investors, L.L.C.-II ............................................................... UAB Philip Morris Lietuva ........................................................................... Vict. Th. Engwall & Co., Inc. ....................................................................... Votesor BV .......................................................................................... West Indies Yeast Company Limited ................................................................... Wolverine Investment Corp. .......................................................................... Yili-Nabisco Biscuit & Food Company Limited ......................................................... ZAO Philip Morris Izhora ............................................................................ ZAO Philip Morris Neva ..............................................................................

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Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Post-Effective Amendment No. 13 to the Registration Statement of Philip Morris Companies Inc. (the "Company") on Form S-14 (File No. 2-96149) and in the Company's Registration Statements on Form S-3 (File No. 333-35143) and Form S-8 (File Nos. 33328631, 333-20747, 333-16127, 33-1479, 33-10218, 33-13210, 33-14561, 33-1480, 33-17870, 33-38781, 33-39162, 33-37115, 33-40110, 33-48781, 33-59109, 33-63975, 333-43478, 333-43484 and 333-71268) of our report dated January 28, 2002 relating to the consolidated financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 28, 2002 relating to the financial statement schedule, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York March 19, 2002

Exhibit 24 POWER OF ATTORNEY

Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Post-Effective Amendment No. 13 to the Registration Statement of Philip Morris Companies Inc. (the "Company") on Form S-14 (File No. 2-96149) and in the Company's Registration Statements on Form S-3 (File No. 333-35143) and Form S-8 (File Nos. 33328631, 333-20747, 333-16127, 33-1479, 33-10218, 33-13210, 33-14561, 33-1480, 33-17870, 33-38781, 33-39162, 33-37115, 33-40110, 33-48781, 33-59109, 33-63975, 333-43478, 333-43484 and 333-71268) of our report dated January 28, 2002 relating to the consolidated financial statements, which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 28, 2002 relating to the financial statement schedule, which appears in this Form 10-K.
/s/ PRICEWATERHOUSECOOPERS LLP

New York, New York March 19, 2002

Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 27th day of February, 2002.
/s/ ELIZABETH E. BAILEY ________________________________________ Elizabeth E. Bailey

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act

Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 27th day of February, 2002.
/s/ ELIZABETH E. BAILEY ________________________________________ Elizabeth E. Bailey

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ HAROLD BROWN ________________________________________ Harold Brown

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ HAROLD BROWN ________________________________________ Harold Brown

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 27th day of February, 2002.
/s/ JANE EVANS ________________________________________ Jane Evans

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 27th day of February, 2002.
/s/ JANE EVANS ________________________________________ Jane Evans

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ J. DUDLEY FISHBURN ________________________________________ J. Dudley Fishburn

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ J. DUDLEY FISHBURN ________________________________________ J. Dudley Fishburn

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ CARLOS SLIM HELU ________________________________________ Carlos Slim Helu

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ CARLOS SLIM HELU ________________________________________ Carlos Slim Helu

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ ROBERT E. R. HUNTLEY ________________________________________ Robert E. R. Huntley

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ ROBERT E. R. HUNTLEY ________________________________________ Robert E. R. Huntley

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 27th day of February, 2002.
/s/ BILLIE JEAN KING ________________________________________ Billie Jean King

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, her true and lawful attorney, for her and in her name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set her hand and seal this 27th day of February, 2002.
/s/ BILLIE JEAN KING ________________________________________ Billie Jean King

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ RUPERT MURDOCH ________________________________________ Rupert Murdoch

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ RUPERT MURDOCH ________________________________________ Rupert Murdoch

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ JOHN D. NICHOLS ________________________________________ John D. Nichols

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ JOHN D. NICHOLS ________________________________________ John D. Nichols

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ LUCIO A. NOTO ________________________________________ Lucio A. Noto

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ LUCIO A. NOTO ________________________________________ Lucio A. Noto

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ WILLIAM H. WEBB ________________________________________ William H. Webb

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ WILLIAM H. WEBB ________________________________________ William H. Webb

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ STEPHEN M. WOLF ________________________________________ Stephen M. Wolf

Exhibit 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Item 3. of this Annual Report on Form 10-K and Note 16 to the Company's Consolidated Financial Statements included as Exhibit 13 hereto, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf

POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris Companies Inc., a Virginia corporation (the "Company"), does hereby constitute and appoint Geoffrey C. Bible, Louis C. Camilleri and Charles R. Wall, or any one or more of them, his true and lawful attorney, for him and in his name, place and stead, to execute, by manual or facsimile signature, electronic transmission or otherwise, the Annual Report on Form 10-K of the Company for the year ended December 31, 2001 and any amendments or supplements to said Annual Report and to cause the same to be filed with the Securities and Exchange Commission, together with any exhibits, financial statements and schedules included or to be incorporated by reference therein, hereby granting to said attorneys full power and authority to do and perform all and every act and thing whatsoever requisite or desirable to be done in and about the premises as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things which said attorneys may do or cause to be done by virtue of these Present. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and seal this 27th day of February, 2002.
/s/ STEPHEN M. WOLF ________________________________________ Stephen M. Wolf

Exhibit 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Item 3. of this Annual Report on Form 10-K and Note 16 to the Company's Consolidated Financial Statements included as Exhibit 13 hereto, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental and nongovernmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitute deceptive and unfair trade practices, suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and various antitrust suits. Governmental plaintiffs in the health care cost recovery actions include the federal government, various cities and counties in the United States and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds ("unions"), Native American tribes, insurers and self-insurers, taxpayers and others. The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since November 13, 2001 are also described. SMOKING AND HEALTH LITIGATION The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates, including PMI, as of February 15, 2002, and describes certain developments in these cases since November 13, 2001. Consolidated Individual Smoking and Health Cases

Exhibit 99.1 CERTAIN PENDING LITIGATION MATTERS AND RECENT DEVELOPMENTS As described in Item 3. of this Annual Report on Form 10-K and Note 16 to the Company's Consolidated Financial Statements included as Exhibit 13 hereto, there are legal proceedings covering a wide range of matters pending in various U.S. and foreign jurisdictions against the Company, its subsidiaries and affiliates, including PM Inc. and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases alleging personal injury and purporting to be brought on behalf of a class of individual plaintiffs, (iii) health care cost recovery cases brought by governmental and nongovernmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, and (iv) other tobacco-related litigation. Other tobacco-related litigation includes class action suits alleging that the use of the terms "Lights" and "Ultra Lights" constitute deceptive and unfair trade practices, suits by foreign governments seeking to recover damages for taxes lost as a result of the allegedly illegal importation of cigarettes into their jurisdictions, suits by former asbestos manufacturers seeking contribution or reimbursement for amounts expended in connection with the defense and payment of asbestos claims that were allegedly caused in whole or in part by cigarette smoking and various antitrust suits. Governmental plaintiffs in the health care cost recovery actions include the federal government, various cities and counties in the United States and certain foreign governmental entities. Non-governmental plaintiffs in these cases include union health and welfare trust funds ("unions"), Native American tribes, insurers and self-insurers, taxpayers and others. The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since November 13, 2001 are also described. SMOKING AND HEALTH LITIGATION The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates, including PMI, as of February 15, 2002, and describes certain developments in these cases since November 13, 2001. Consolidated Individual Smoking and Health Cases In Re Tobacco Litigation (Individual Personal Injury cases), Circuit Court of Ohio County, West Virginia, consolidated January 11, 2000. In West Virginia, all smoking and health cases alleging personal injury have been transferred to the State's Mass Litigation Panel. The transferred cases include individual cases and putative class actions. All pending individual cases as well as cases filed in or transferred to the court by September 8, 2000 are to be included in a single consolidated trial. Approximately 1,250 individual cases have been filed. The trial court's order provides for the trial to be conducted in two phases. The issues to be tried in phase one are "general liability issues common to all defendants including, if appropriate, defective product theory, negligence theory, warranty theory; and any other theories supported by pretrial development" as well as entitlement to punitive damages and a punitive damages multiplier. Pursuant to the court's order, the individual claims of the plaintiffs whose cases have been consolidated will be tried on an individual basis or "in reasonably sized trial groups" during the second phase of the trial. Trial is scheduled to begin in September 2002. 1

Flight Attendant Litigation The settlement agreement entered into in the case of Broin, et al., v. Philip Morris Companies Inc., et al., permitted members of the purported class to bring individual suits as to their alleged injuries. As of November 1, 2001, approximately 2,835 of these suits were pending in the Circuit Court of Dade County, Florida against PM Inc. and three other cigarette manufacturers. In October 2000, the court held that the flight attendants will not be required to prove the substantive liability elements of their claims for negligence, strict liability and breach of

Flight Attendant Litigation The settlement agreement entered into in the case of Broin, et al., v. Philip Morris Companies Inc., et al., permitted members of the purported class to bring individual suits as to their alleged injuries. As of November 1, 2001, approximately 2,835 of these suits were pending in the Circuit Court of Dade County, Florida against PM Inc. and three other cigarette manufacturers. In October 2000, the court held that the flight attendants will not be required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover damages, if any, other than establishing that the plaintiffs' alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded. In October 2001, the appellate court dismissed defendants' appeal of the trial court's ruling and, defendants have appealed to the Florida Supreme Court. To date, an estimated 17 such cases are scheduled for trial during 2002. Domestic Class Actions Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Court, Dade County, Florida, filed May 5, 1994. See Item 3. Legal Proceedings for a discussion of this case. Norton, et al. v. RJR Nabisco Holdings Corporation, et al., Superior Court, Madison County, Indiana, filed May 3, 1996. Scott, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed May 24, 1996. The court granted plaintiffs' motion for class certification on behalf of Louisiana cigarette smokers seeking the creation of funds to pay the costs of monitoring the medical conditions of members of the purported class and providing them with smoking cessation programs. In May 2001, the trial court issued a trial plan that calls for adjudication of defendants' liability to the entire class based solely on evidence of the two class representatives and defendants appealed to the intermediate appellate court and the Louisiana Supreme Court seeking to vacate the trial plan. In June 2001, the appeals were denied. Trial of the case began in June 2001. Defendants filed writs challenging the trial court's jury selection procedures with the intermediate appellate court and the Louisiana Supreme Court, which were granted in part. In December 2001, defendants again filed writs with the intermediate appellate court asserting that there were errors in the jury selection. The writs were granted in part and jury selection has been reopened. Connor, et al. v. The American Tobacco Company, et al., Second Judicial District Court, Bernalillo County, New Mexico, filed October 10, 1996. In December 2001, the court dismissed the case for lack of prosecution. In February 2002, the court granted plaintiffs' motion to reinstate the case. In Re: Tobacco Litigation (Medical Monitoring cases) (formerly McCune, et al. v. The American Tobacco Company, et al.), Circuit Court, West Virginia, filed January 31, 1997. In November 2001, the jury returned a verdict in favor of all defendants. In January 2002, the court denied plaintiffs' motion for a new trial. Muncie (formerly Ingle and formerly Woods), et al. v. Philip Morris Incorporated, et al., Circuit Court, McDowell County, West Virginia, filed February 4, 1997. Cole, et al. v. The Tobacco Institute, Inc., et al., United States District Court, Eastern District, Texarkana Division, Texas, filed May 5, 1997. In December 2001, the United States Court of Appeals for the Fifth Circuit affirmed the trial court's May 2000 dismissal of the case. 2

Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Eastern District, Tennessee, filed May 23, 1997. Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2001, the court granted in part plaintiff's motion for class certification and certified a class comprised of residents of California who smoked at least one of defendants' cigarettes between June 1993 and April 2001 and who were exposed to defendants' marketing and advertising activities in California.

Anderson, et al. v. The American Tobacco Company, Inc., et al., United States District Court, Eastern District, Tennessee, filed May 23, 1997. Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2001, the court granted in part plaintiff's motion for class certification and certified a class comprised of residents of California who smoked at least one of defendants' cigarettes between June 1993 and April 2001 and who were exposed to defendants' marketing and advertising activities in California. Certification was granted as to plaintiff's claims that defendants violated California Business and Professions Code Sections 17200 and 17500. The court denied the motion as to plaintiff's claims under the California Consumer Legal Remedies Act. Defendants filed a writ with the court of appeals challenging the trial court's class certification ruling; the writ was denied in November 2001 and defendants sought further review in the California Supreme Court, which denied defendants' petition in January 2002. Trial is scheduled for October 2002. Mahoney (formerly Fitz), et al. v. R.J. Reynolds Tobacco Company, et al., United States District Court, Southern District, Iowa, filed June 20, 1997. In October 2001, the court denied plaintiffs' motion for class certification. In November 2001, the United States Court of Appeals for the Eighth Circuit denied plaintiffs' motion for leave to appeal. Badillo, et al. v. The American Tobacco Company, et al., United States District Court, Nevada, filed October 8,1997. In July 2001, the court denied plaintiffs' motion for class certification, and plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit. Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997. Jackson, et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, Utah, filed February 13, 1998. Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998. Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. In November 2000, the court granted the plaintiffs' motion for class certification on behalf of minor California residents who smoked at least one cigarette between April 1994 and December 1999 with respect to defendants' alleged violation of the California Business and Professions Code Section 17200. Defendants appealed the class certification ruling to the court of appeals and also sought interlocutory review by the California Supreme Court, both of which were denied. Trial is scheduled for July 2002. Christensen, et al. v. Philip Morris Companies Inc., et al., United States District Court, Nevada, filed April 3, 1998. In July 2001, the court denied plaintiffs' motion for class certification, and plaintiffs have asked the court to certify its ruling for interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. Cleary, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed June 3, 1998. Creekmore, et al. v. Brown & Williamson, et al., Superior Court, Bucombe County, North Carolina, filed July 31, 1998. In February 2002, plaintiffs moved to have the case dismissed without prejudice. Jimenez, et al. v. Brown & Williamson Tobacco Corporation, et al., Second Judicial District Court, County of Bernalillo, New Mexico, filed August 20, 1998. In December 2001, the court dismissed the case for lack of prosecution. In February 2002, the court granted plaintiffs' motion to reinstate the case. 3

Cypret (formerly Jones), et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998. Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 9, 1999. In September 2000, a putative class action was filed which purports to consolidate punitive

Cypret (formerly Jones), et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998. Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 9, 1999. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) In November 2000, the court denied plaintiffs' motion for class certification, but indicated its intent to certify a class in Simon, et al., v. Philip Morris Incorporated, et al. (Simon II). Julian, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Montgomery County, Alabama, filed April 14, 1999. Decie, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed April 21, 2000. In September 2000, a putative class action was filed which purports to consolidate punitive damage claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Ebert, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed August 9, 2000 (not yet served). In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) Vandermeulen, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed September 18, 2000. Sims, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed May 23, 2001. Johnson, et al. v. Newport Lorillard, et al., United States District Court, Southern District, New York, filed October 31, 2001. Lowe, et al., v. Philip Morris Incorporated, et al., United States District Court, District of Oregon, filed November 19, 2001. Trivisonno, et al., v. Philip Morris Incorporated, et al., United States District Court, Northern District, Ohio, filed January 14, 2002. International Class Actions Caputo (formerly LeTourneau) v. Imperial Tobacco Limited, et al., Ontario Court of Justice, Toronto, Canada, filed January 13, 1995. The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of Sao Paulo, Brazil, filed July 25, 1995. Anacont-Associacao Nacional de Assistencia ao Consumidor e Trebalhador v. Souza Cruz S.A., et al., State Bankruptcy Court, Rio de Janiero, Brazil, filed March 10, 1998. During 2000, the court dismissed the action, and plaintiff has appealed. Fortin, et al. v. Imperial Tobacco Ltd., et al., Quebec Superior Court, Canada, filed on or about September 11, 1998. 4

Conseil Quebecois sur le Tabac v. RJR-Macdonald Inc., et al., Quebec Superior Court, Canada, filed November 20, 1998. Yabin Galidi, et al. v. Dubek Ltd., et al., Tel Aviv-Yaffo Region Court, Israel, filed July 12, 1999. In March 2002, the case was dismissed. Ragoonanan, et al. v. Imperial Tobacco Limited, et al., Superior Court of Justice, Ontario, Canada, filed January 11, 2000. Yas'ur, et al. v. Dubek Ltd., et al., Tel Aviv-District Court, Israel, filed November 22, 2000 (not yet served). Asociacion Espanola de Laringectomizados y Multiados de la voz v. Altadis S.A. et al., Court of First Instance No. 5, Section 1, Barcelona, Spain, filed January 3, 2001. Asociacion Vallisoletana de Laringectomizados v. Altadis S.A., et al., Court of First Instance, No. 9, Valadolid, Spain, filed January 4, 2001. In February 2002, the case was dismissed and plaintiff has appealed. Asociacion Viscaina de Laringectomizados v. Altadis S.A., et al., Court of First Instance, No. 9, Bilbao, Spain, filed January 5, 2001. Asociacion de Laringectomizados de Leon v. Altadis S.A., et al., Court of First Instance, No. 10, Section 1, Leon, Spain, filed January 3, 2001. HEALTH CARE COST RECOVERY LITIGATION The following lists the health care cost recovery actions pending against PM Inc. and, in some cases, the Company and/or its other subsidiaries and affiliates as of February 15, 2002, and describes certain developments in these cases since November 13, 2001. As discussed in Item 3. Legal Proceedings in 1998 PM Inc. and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the "MSA") settling the health care cost recovery claims of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas. Settlement agreements settling similar claims had previously been entered into with the states of Mississippi, Florida, Texas and Minnesota. The Company believes that the claims in the city/county, taxpayer and certain of the other health care cost recovery actions listed below are released in whole or in part by the MSA or that recovery in any such actions should be subject to the offset provisions of the MSA. City/County Cases County of Cook v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed April 18, 1997. In September 1999, the judge granted in part and denied in part defendants' motion to dismiss the complaint. In August 2001, the trial court granted defendants' motion for judgment on the pleadings and dismissed the case in its entirety, and plaintiffs have appealed. City of St. Louis, et al. v. American Tobacco, et al., Circuit Court for the City of St. Louis, Missouri, filed November 23, 1998. In November 2001, the court granted in part and denied in part defendants' motion to dismiss and dismissed three of plaintiffs' 11 claims. 5

County of St. Louis v. American Tobacco, et al., Circuit Court for the City of St. Louis, Missouri, filed December 3, 1998. The case is currently stayed. County of Wayne v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Michigan, filed December 7, 1999. In August 2000, following arguments on defendants' motion for judgment on the pleadings, the district court certified certain state law questions to the Michigan Supreme Court. In January 2002, the Michigan Supreme Court ruled that the Michigan Attorney General has the authority to release the claims of counties and other subdivisions in matters of state interest.

County of St. Louis v. American Tobacco, et al., Circuit Court for the City of St. Louis, Missouri, filed December 3, 1998. The case is currently stayed. County of Wayne v. Philip Morris Incorporated, et al., United States District Court, Eastern District, Michigan, filed December 7, 1999. In August 2000, following arguments on defendants' motion for judgment on the pleadings, the district court certified certain state law questions to the Michigan Supreme Court. In January 2002, the Michigan Supreme Court ruled that the Michigan Attorney General has the authority to release the claims of counties and other subdivisions in matters of state interest. County of McHenry, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed July 13, 2000. The case has been stayed pending the outcome of the appeal in County of Cook v. Philip Morris Incorporated, et al. discussed above. Ament, et al. v. Thompson, et al., Circuit Court, Dane County, Wisconsin, filed April 28, 2000. In September 2001, the court granted defendants' motion to dismiss the case, and plaintiffs appealed. Plaintiffs voluntarily dismissed their appeal in January 2002. Lapean, et al., v. Thompson, et al., Circuit Court, Dane County, Wisconsin, filed April 28, 2000. In September 2001, the court granted defendants' motion to dismiss the case, and plaintiffs appealed. Plaintiffs voluntarily dismissed their appeal in January 2002. Corcoran, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Pennsylvania, filed May 25, 2001. In October 2001, the court granted plaintiffs' motion to dismiss the case without prejudice. Department of Justice Case The United States of America v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed September 22, 1999. See Item 3. Legal Proceedings, for a discussion of this case. International Cases Republic of the Marshall Islands v. The American Tobacco Company, et al., High Court, Republic of the Marshall Islands, filed October 20, 1997. In June 2001, the court entered a final judgment reflecting the parties' stipulation of dismissal, and plaintiff has appealed the trial court's February 2001 ruling that dismissed most of plaintiff's claims. The Republic of Panama v. The American Tobacco Company, Inc., United States District Court, District of Columbia, filed September 11, 1998. In July 2000, the United States Court of Appeals for the Fifth Circuit vacated the ruling by the United States District Court for the Eastern District of Louisiana that granted plaintiff's motion to remand the case to the Civil District Court, Orleans Parish, Louisiana. In November 2000, the case was transferred to the Multidistrict Litigation Proceeding pending before the United States District Court for the District of Columbia (see In re Tobacco/Government Health Care Cost Litigation (MDL No. 1279) (the "MDL Proceeding" discussed below)). 6

Kupat Holim Clalit v. Philip Morris Incorporated, et al., Jerusalem District Court, Israel, filed September 28, 1998. The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 20, 1999. In February 1999, this case was removed to federal court by defendants and subsequently transferred on the court's own motion to the federal district court for the District of Columbia in March 1999. It is currently pending in the MDL Proceeding discussed below. The Republic of Venezuela v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed January 27, 1999. This case was removed to federal court by defendants in February 1999 and

Kupat Holim Clalit v. Philip Morris Incorporated, et al., Jerusalem District Court, Israel, filed September 28, 1998. The Republic of Bolivia v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 20, 1999. In February 1999, this case was removed to federal court by defendants and subsequently transferred on the court's own motion to the federal district court for the District of Columbia in March 1999. It is currently pending in the MDL Proceeding discussed below. The Republic of Venezuela v. Philip Morris Companies Inc., et al., Eleventh Judicial Circuit, Dade County, Florida, filed January 27, 1999. This case was removed to federal court by defendants in February 1999 and subsequently transferred to the MDL Proceeding discussed below. The court hearing the MDL Proceeding remanded the case to Florida state court in June 2000, and defendants have appealed to the United States Court of Appeals for the District of Columbia Circuit. In November 2001, the Florida court dismissed the case, and plaintiff has appealed. The Caisse Primaire d'Assurance Maladie of Saint-Nazaires v. SEITA, et al., Civil Court of Saint-Nazaires, France, filed June 1999. In re Tobacco/Governmental Health Care Costs Litigation (MDL No. 1279), United States District Court, District of Columbia, consolidated June 1999. In June 1999, the United States Judicial Panel on Multidistrict Litigation transferred foreign government health care cost recovery actions brought by Nicaragua, Venezuela, and Thailand to the District of Columbia for coordinated pretrial proceedings with two such actions brought by Bolivia and Guatemala already pending in that court. Subsequently, the resulting proceeding has also included filed cases brought by the following foreign governments: Ukraine, the Brazilian States of Espirito Santo, Goias, Mato Grosso do Sul, Para, Parana, Piaui, Rondonia, Sao Paulo and Tocantins, Panama, the Province of Ontario, Canada, Ecuador, the Russian Federation, Honduras, Tajikistan, Belize, the Kyrgyz Republic and 11 Brazilian cities. The cases brought by Thailand and the Kyrgyz Republic have been voluntarily dismissed. The district court has dismissed the complaints filed by Guatemala, Nicaragua, Ukraine and the Province of Ontario, and plaintiffs appealed. In May 2001, the United States Court of Appeals for the District of Columbia Circuit affirmed the dismissal of the complaints filed by Guatemala, Nicaragua and Ukraine. In October 2001, the United States Supreme Court refused to consider further appeals in these three cases. In November 2001, the Province of Ontario voluntarily dismissed its appeal. The district court has remanded the Venezuela, Goias, Ecuador and Espirito Santo actions to Florida state court and, defendants have appealed to the United States Court of Appeals for the District of Columbia Circuit. Subsequent to remand, the Ecuador case was voluntarily dismissed. In November 2001, the Venezuela and Espirito Santo actions were dismissed and Venezuela has appealed. The State of Rio de Janeiro of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., District Court, Angelina County, Texas, filed July 12, 1999. The State of Goias of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed October 18, 1999. This case was removed to federal court by defendants in November 1999 and subsequently transferred to the MDL Proceeding discussed above. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants have appealed to the United States Court of Appeals for the District of Columbia Circuit. The State of Sao Paulo of the Federal Republic of Brazil v. Philip Morris Companies Inc., et al., Civil District Court, Orleans Parish, Louisiana, filed February 9, 2000. In May 2001, the United States Court of Appeals for the Fifth Circuit vacated the district court's May 2000 ruling that granted plaintiffs' motion to remand the case to state court. Plaintiff's petition for rehearing was denied in September 2001 and, plaintiff has petitioned the United States Supreme Court seeking further review. 7

The State of Espirito Santo of the Federal Republic of Brazil v. Brooke Group, et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed February 20, 2000. This case was removed to federal court by defendants in April 2000 and subsequently transferred to the MDL Proceeding discussed above. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants have

The State of Espirito Santo of the Federal Republic of Brazil v. Brooke Group, et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed February 20, 2000. This case was removed to federal court by defendants in April 2000 and subsequently transferred to the MDL Proceeding discussed above. The court hearing the MDL Proceeding remanded the case to Florida state court in July 2000, and defendants have appealed to the United States Court of Appeals for the District of Columbia Circuit. In November 2001, the Florida court dismissed the case. The State of Mato Grosso do Sul, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed July 19, 2000. In August 2000, this case was removed to federal court by defendants, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The Russian Federation v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed on August 25, 2000. In September 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The Republic of Honduras v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed October 5, 2000. In October 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The State of Tocantins, Brazil v. The Brooke Group Ltd. Inc., et al., United States District Court, District of Columbia, filed October 24, 2000. In November 2000, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The State of Piaui, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed December 13, 2000. In January 2001, this case was removed to federal court by defendants and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. The Republic of Tajikistan v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed January 22, 2001. In February 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001. The Republic of Belize v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed April 5, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Belford Roxo, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Belo Horizonte, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Caripicuiba, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. 8

City of Duque de Caxias, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Joao Pessoa, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of

City of Duque de Caxias, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Joao Pessoa, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Jundiai, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Mage, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Nilopolis-RJ, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Nova Iguacu, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of Rio de Janiero, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. City of San Bernardo de Campo, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Para, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Parana, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Rondonia, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed May 8, 2001. In May 2001, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. State of Pernambuco, Brazil v. Philip Morris Companies Inc., et al., United States District Court, District of Columbia, filed December 28, 2001. In January 2002, this case was removed to federal court, and subsequently transferred to the MDL Proceeding discussed above where it is currently pending. Union Cases 9

Central Illinois Carpenters Health and Welfare Trust Fund, et al. v. Philip Morris Incorporated, et al., Circuit Court, Third Judicial Circuit, Madison County, Illinois, filed May 30, 1997. Eastern States Health and Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed July 28, 1997. In March 2000, the court granted defendants' motion for dismissal.

Central Illinois Carpenters Health and Welfare Trust Fund, et al. v. Philip Morris Incorporated, et al., Circuit Court, Third Judicial Circuit, Madison County, Illinois, filed May 30, 1997. Eastern States Health and Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed July 28, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal. Operating Engineers Local 12 Health and Welfare Trust Fund, et al. v. American Tobacco, Inc., et al., Superior Court, San Diego County, California, filed September 17, 1997. In March 2000, the court ruled that plaintiffs are not permitted to use California's unfair business practices statute to seek monetary damages for their claims. In April 2000, the plaintiffs voluntarily dismissed the remaining claims with prejudice and appealed certain trial court rulings to the state court of appeals. In October 2001, the California Court of Appeals affirmed the trial court's ruling. Plaintiffs appealed to the California Supreme Court, which has granted review but deferred further action pending disposition of related issues in another case. Puerto Rican ILGWU Health & Welfare Fund, et al. v. Philip Morris Incorporated, et al., Supreme Court, County of New York, New York, filed September 17, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiffs have appealed the dismissal. IBEW Local 25 Health and Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. IBEW Local 363 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 138, 138A and 138B International Union of Operating Engineers Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 840, International Brotherhood of Teamsters Health and Insurance Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Long Island Regional Council of Carpenters Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed November 25, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Day Care Council - Local 205 D.C. 1707 Welfare Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 1199 Home Care Industry Benefit Fund v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. Local 1199 National Benefit Fund for Health and Human Services Employees v. Philip Morris Incorporated, et al., Supreme Court, New York County, New York, filed December 8, 1997. In March 2000, the court granted defendants' motion for dismissal. Plaintiff has appealed the dismissal. 10

National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed February 27, 1998. The named plaintiffs in this case are eight union trust funds. The district court denied plaintiffs' motion for class certification in September 2000. In October 2000, the plaintiffs petitioned the United States Court of Appeals for the Second Circuit for review of that order. The

National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed February 27, 1998. The named plaintiffs in this case are eight union trust funds. The district court denied plaintiffs' motion for class certification in September 2000. In October 2000, the plaintiffs petitioned the United States Court of Appeals for the Second Circuit for review of that order. The Second Circuit has not yet announced whether it will accept plaintiffs' petition for review. The district court has also ruled that plaintiffs may proceed to trial with the claims of only one union trust fund, which must be a New York based fund. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) The district court has granted plaintiffs' motion to include their claims in Simon II and stayed this case pending the resolution of Simon II. In July 2001, the court further stayed this case pending resolution of the appeal in Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al. discussed below. Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 29, 1999. In June 2000, the court denied defendants' motion to dismiss the case. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) In July 2001, the court stayed this case pending resolution of the appeal in Blue Cross and Blue Shield of New Jersey, Inc. et al. v. Philip Morris Incorporated, et al., discussed below. Construction Laborers of Greater St. Louis Health and Welfare Fund, et al. v. Philip Morris Incorporated, et. al., Circuit Court, St. Louis, Missouri, filed January 19, 2001 (not yet served). Native American Cases Sisseton-Wahpeton Sioux Tribe v. Philip Morris Incorporated, et al., Tribal Court of the Sisseton-Wahpeton Sioux Tribe, filed May 8, 1998. On December 1, 1999, the appellate court granted defendants' petition for interlocutory appeal from the trial court's order that granted in part and denied in part defendants' motion to dismiss the complaint. The trial and appellate courts have stayed proceedings in this case until there is a ruling on defendants' dismissal motion in Acoma Pueblo, et al. v. American Tobacco Company Co., et al. (discussed below). After the Acoma case was dismissed, plaintiff indicated that it would consider a voluntary dismissal without prejudice of the case, but to date has not filed such a motion. Standing Rock Sioux Tribe v. American Tobacco Company, et al., Tribal Court of the Standing Rock Sioux Indian Reservation, North Dakota, filed May 8, 1998. In February 2002, the case was voluntarily dismissed without prejudice. Acoma Pueblo, et al. v. American Tobacco Co., et al., United States District Court, New Mexico, filed June 16, 1999. In July 2001, the court granted defendant's motion to dismiss the case without prejudice. In September 2001, plaintiff moved for reconsideration of the court's order, which was denied in November 2001. Navajo Nation v. Philip Morris Incorporated, et al., District Court, Window Rock, Arizona, filed August 11, 1999. In January 2002, the court granted in part defendants motion to dismiss the case and dismissed all of plaintiff's claims, except one, and plaintiff has moved for reconsideration. The Alabama Coushatta Tribe of Texas v. American Tobacco Co., et al., United States District Court, Eastern District, Texas, filed August 30, 2000. In August 2001, the court granted defendant's motion to dismiss the complaint, and plaintiff has appealed. 11

Insurer and Self-Insurer Cases Group Health Plan, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed March 11, 1998. In January 2002, the court granted defendants' motion for summary judgment dismissing the case, and plaintiffs have appealed.

Insurer and Self-Insurer Cases Group Health Plan, et al. v. Philip Morris Incorporated, et al., United States District Court, Minnesota, filed March 11, 1998. In January 2002, the court granted defendants' motion for summary judgment dismissing the case, and plaintiffs have appealed. Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed April 29, 1998. In September 2000, the court severed the claims of one plaintiff, Empire Blue Cross and Blue Shield ("Empire"), from those of the other plaintiffs. Trial of Empire's claims commenced March 2001, and in June 2001, the jury returned a verdict in favor of Empire on two of its claims and awarded Empire up to approximately $17.8 million in compensatory damages, including $6.8 million against PM Inc., and no punitive damages. In July 2001, the court stayed the remaining Blue Cross plans' cases pending the outcome of Empire's appeal, and denied plaintiff's motion to treble the damage award. In October 2001, the court denied defendants' post-trial motions challenging the verdict, and in November 2001, entered judgment. In February 2002, the court awarded plaintiff approximately $38 million for attorneys' fees. PM Inc. has appealed. Betriebskrankenkasse Aktiv, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York, filed September 28, 2000. In February 2002, upon the stipulation of the parties the case was dismissed without prejudice subject to plaintiffs being able to refile the case in the event the Blue Cross and Blue Shield case discussed above is ultimately resolved in favor of plaintiffs in that case. Taxpayer Cases State of Tennessee, et al., ex. rel. Beckom, et al. v. The American Tobacco Company, et al., Chancery Court, Monroe County, Tennessee, filed May 8, 1997. In April 2000, the United States Court of Appeals for the Sixth Circuit affirmed in part the ruling by the United States District Court for the Eastern District of Tennessee that plaintiffs lacked standing to pursue their federal claims. The Sixth Circuit was unable to determine whether any of plaintiffs' state law claims survived. As a result of the ruling, the case was remanded to state court for additional proceedings. In August 2000, the state court entered an order dismissing all claims brought on the relation on the State of Tennessee and all plaintiffs' claims brought on behalf of Tennessee taxpayers. Since entry on that order, defendants moved for judgment on the pleadings. In August 2001, the court entered an order dismissing the case. Temple, et al. v. The State of Tennessee, et al., United States District Court, Middle District, Tennessee, filed February 7, 2000. Plaintiffs' complaint seeks class certification of those individuals who are Medicaid/TennCare recipients who have allegedly suffered from smoking-related injuries. Plaintiffs claim that the MSA funds belong to individuals under Tennessee's "made wide" doctrine and they further seek a declaration that the MSA is unconstitutional. Plaintiffs have recently moved for leave to amend their complaint again. Defendants have moved to disqualify plaintiffs' counsel and have moved to dismiss the lawsuit for lack of prosecution. Other Cases Perry, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, Tennessee, filed September 30, 1996. In April 2001, the court granted defendants' motion to dismiss the case, and plaintiffs have appealed. Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed December 23, 1997. In September 2000, a putative class action was filed which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District 12

Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) A.O. Fox Memorial Hospital et al. v. The American Tobacco Company, et al., Supreme Court, Nassau County, New York, filed March 30, 2000. In December 2001, the court dismissed the case for failure to state a claim. Plaintiff has appealed.

Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) A.O. Fox Memorial Hospital et al. v. The American Tobacco Company, et al., Supreme Court, Nassau County, New York, filed March 30, 2000. In December 2001, the court dismissed the case for failure to state a claim. Plaintiff has appealed. CERTAIN OTHER TOBACCO-RELATED ACTIONS The following lists certain other tobacco-related litigation pending against the Company and/or various subsidiaries and others as of November 1, 2001, and describes certain developments since August 13, 2001. Lights/Ultra Lights Cases Gesser (formerly Cummis), et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Middlesex County, New Jersey, filed July 9, 1998. McNamara, et al. v. Philip Morris Companies, Inc. and Philip Morris Incorporated, Court of Common Pleas, Montgomery County, Pennsylvania, filed July 16, 1998. In November 2001, plaintiffs voluntarily dismissed the case. Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998. In October 2001, the court granted plaintiffs' motion for class certification. McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filed January 19, 1999. Marrone, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Court of Common Pleas, Medina County, Ohio, filed November 8, 1999. Miles, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Madison County, Illinois, filed February 10, 2000. Plaintiffs' motion for class certification was granted in February 2001. Trial is scheduled for January 2003. Ratliff (formerly Bauer), et al. v. Philip Morris Companies Inc., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000. Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed February 23, 2001. In February 2002, the court granted plaintiffs' motion for class certification. Philipps, et al. v. Philip Morris Incorporated, et al., Court of Common Pleas, Medina County, Ohio, filed May 1, 2001. Moore, et al. v. Philip Morris Incorporated, et al., United States District Court, Northern District, West Virginia, filed August 10, 2001. Curtis, et al. v. Philip Morris Companies Inc., et al., United States District Court, Minnesota, filed November 28, 2001. 13

Fischer, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, California, filed December 5, 2001. Cigarette Importation Cases Department of Amazonas, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern

Fischer, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, California, filed December 5, 2001. Cigarette Importation Cases Department of Amazonas, et al. v. Philip Morris Companies Inc., et al., United States District Court, Eastern District New York, filed May 19, 2000. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim. The Republic of Ecuador v. Philip Morris Incorporated, et al., United States District Court, Southern District, Florida, filed June 5, 2000. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim. The Republic of Belize v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim. The Republic of Honduras v. Philip Morris Companies Inc., et al., United States District Court, Southern District, Florida, filed May 8, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim. The European Community, et al. v. RJR Nabisco, Inc. et al., United States District Court, Eastern District, New York, filed August 6, 2001. In February 2002, the court granted defendants' motion to dismiss the complaint for failure to state a claim. Asbestos Contribution Cases Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed September 15, 1997. Raymark Industries, Inc. v. Brown & Williamson Tobacco Corporation, et al., United States District Court, Northern District, Atlanta Division, Georgia, filed September 15, 1997. Fibreboard Corporation, et al. v. The American Tobacco Company, et al., Superior Court, Alameda County, California, filed December 11, 1997. Keene Creditors Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed December 19, 1997. Raymark Industries, Inc. v. R. J. Reynolds Tobacco Company, et al., Circuit Court, Fourth Judicial Circuit, Duval County, Florida, filed December 31, 1997 (not yet served). Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York, filed January 30, 1998. In September 2000, a putative class action was filed in the United States District Court for the Eastern District of New York which purports to consolidate punitive damages claims in this case with certain other cases pending in the United States District Court, Eastern District, New York. (See Simon, et al. v. Philip Morris Incorporated, et al., (Simon II) discussed below.) In July 2001, the court stayed this case pending resolution of the appeal in Blue Cross and Blue Shield of New Jersey, Inc. et al. v. Philip Morris Incorporated, et al., discussed above. Owens Corning v. R.J. Reynolds Tobacco Company, et al., Circuit Court, Fayette, Mississippi, filed August 30, 1998. In July 2001, the court granted defendants' motion for summary judgment dismissing the claims of the 14

asbestos company plaintiff, and plaintiff has appealed.

asbestos company plaintiff, and plaintiff has appealed. UNR Asbestos-Disease Claims Trust v. Brown & Williamson Tobacco Corporation, et al., Supreme Court, New York County, New York, filed March 15, 1999. Combustion Engineering, Inc., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). T&N, Ltd., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed December 18, 2000 (not yet served). Combustion Engineering, Inc., et al., v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2001. In January 2002, plaintiffs voluntarily dismissed the case. Gasket Holdings, et al. v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2001 (not yet served). T&N, Ltd., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Claiborne County, Mississippi, filed April 18, 2001. In January 2002, plaintiffs voluntarily dismissed the case. W.R. Grace & Co. Conn., et al. v. RJR Nabisco, Inc., et al., Circuit Court, Jefferson County, Mississippi, filed April 24, 2001 (not yet served). Retail Leaders Case R.J. Reynolds Tobacco Company, et al. v. Philip Morris Incorporated, United States District Court, Middle District, North Carolina, filed March 12, 1999. In October 2001, PM Inc. moved for summary judgment on all of plaintiffs' claims. Trial is scheduled for May 2002. Vending Machine Case Lewis d/b/a B&H Vendors v. Philip Morris Incorporated, United States District Court, Middle District, Tennessee, filed February 3, 1999. In August 2001, the court granted PM Inc.'s motion for summary judgment and dismissed, with prejudice, the claims of ten plaintiffs whose cases had previously been set for trial in November 2000. The claims of the remaining plaintiffs have been stayed pending final disposition of the ten claims previously scheduled for trial. In October 2001, the district court certified its decision for appeal to the United States Court of Appeals for the Sixth Circuit following plaintiff's stipulation that the district court's dismissal would, if affirmed, be binding on all plaintiffs. Tobacco Price Cases 15

The following are putative class actions filed by tobacco wholesalers/distributors and by smokers, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Buffalo Tobacco Products, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed February 8, 2000. In June 2000, the United States Judicial Panel on Multidistrict litigation transferred this case to the United States District Court, Northern District, Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342 discussed below.) DelSeronne, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed February 8, 2000. Plaintiffs' motion for class certification and defendants' motion for summary judgment are pending.

The following are putative class actions filed by tobacco wholesalers/distributors and by smokers, alleging that defendants conspired to fix cigarette prices in violation of antitrust laws. Buffalo Tobacco Products, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed February 8, 2000. In June 2000, the United States Judicial Panel on Multidistrict litigation transferred this case to the United States District Court, Northern District, Georgia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342 discussed below.) DelSeronne, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Wayne County, Michigan, filed February 8, 2000. Plaintiffs' motion for class certification and defendants' motion for summary judgment are pending. Greer, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000. Lennon v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed February 9, 2000. In October 2001, the court granted defendants' motion to dismiss. Munoz, et al. v. R. J. Reynolds, et al., Superior Court, San Francisco, California, filed February 9, 2000. Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000. In November 2001, the court granted plaintiffs' motion for class certification. Gray, M.D., et al. v. Philip Morris Companies Inc., et al., Superior Court, Pima County, Arizona, filed February 11, 2000. In March 2001, the trial court dismissed the case, and plaintiffs have appealed. Brownstein, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Broward County, Florida, filed February 14, 2000. Morse v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 14, 2000. Ulan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 17, 2000. Williamson Oil Company, Inc. v. Philip Morris Companies, et al., United States District Court, Northern District, Georgia, filed February 18, 2000. Shafer v. Philip Morris Companies Inc., et al., District Court, Morton County, North Dakota, filed February 16, 2000. Sullivan v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000. Teitler v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed February 22, 2000. Peirona v. Philip Morris Companies Inc., et al., Superior Court, San Francisco County, California, filed February 28, 2000. Cusatis v. Philip Morris Companies Inc., et al., Circuit Court, Milwaukee County, Wisconsin, filed February 28, 2000. Sand v. Philip Morris Companies Inc., et al., Superior Court, Los Angeles, California, filed February 28, 2000. 16

Amsterdam Tobacco Corp., et al. v. Philip Morris Companies et al., United States District Court, Northern District, Georgia, filed March 6, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342 discussed below.)

Amsterdam Tobacco Corp., et al. v. Philip Morris Companies et al., United States District Court, Northern District, Georgia, filed March 6, 2000. In June 2000, the United States Judicial Panel on Multidistrict Litigation transferred this case from United States District Court, District of Columbia. (See In Re: Cigarette Antitrust Litigation, MDL No. 1342 discussed below.) Nierman v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 6, 2000. In October 2001, the court granted defendants' motion to dismiss. Sylvester v. Philip Morris Companies Inc., et al., Supreme Court, New York County, New York, filed March 8, 2000. In October 2001, the court granted defendants' motion to dismiss. I. Goldschlack v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed March 9, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL 1342 discussed below.) Suwanee Swifty Stores, Inc., D.I.P. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 14, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL 1342 discussed below.) Holiday Markets, Inc., et al. v. Philip Morris Companies Inc., United States District Court, Northern District, Georgia, filed March 17, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this case to the United States District Court, Northern District of Georgia. (See In Re: Cigarette Antitrust Litigation, MDL 1342 discussed below.) Taylor, et al. v. Philip Morris Companies Inc., et al., Superior Court, Cumberland County, Maine, filed March 24, 2000. Romero, et al. v. Philip Morris Companies Inc., et al., First Judicial District Court, Rio Arriba County, New Mexico, filed April 10, 2000. Belch, et al. v. Philip Morris Companies Inc., et al., Superior Court, Alameda County, California, filed April 11, 2000. Belmonte, et al. v. R. J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000. Aguayo, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed April 11, 2000. Swanson, et al. (formerly Vetter, et al.) v. Philip Morris Companies Inc., et al., District Court, Hughes County, South Dakota, filed April 18, 2000. Ludke, et al. v. Philip Morris Companies Inc., et al., District Court, Hennepin County, Minnesota, filed April 20, 2000. In November 2001, the court denied plaintiff's motion for class certification. Kissel, et al. (formerly Quickle, et al.) v. Philip Morris Companies Inc., et al., First Judicial Circuit Court, Ohio County, West Virginia, filed May 2, 2000. Hartz Foods, et al. v. Philip Morris Companies Inc., et al., United States District Court, Northern District, Georgia, filed May 10, 2000. In June 2000, the United States Panel on Multidistrict Litigation transferred this 17

case to the United States District Court, Northern District of Georgia (See In Re: Cigarette Antitrust Litigations MDL 1342 discussed below.) Baker, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000.

case to the United States District Court, Northern District of Georgia (See In Re: Cigarette Antitrust Litigations MDL 1342 discussed below.) Baker, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000. Campe, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 15, 2000. Barnes v. Philip Morris Companies Inc., et al., Superior Court, District of Columbia, filed May 18, 2000. Lau, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed May 25, 2000. In Re: Cigarette Antitrust Litigation MDL 1342, Federal Multidistrict Litigation Panel, United States District Court, Northern District, Georgia, Atlanta Division, filed June 7, 2000. (Coordinated litigation of all federal cases.) Plaintiffs' motion for class certification was granted in January 2001. Defendants' motions for summary judgment are pending. Philips, et al. v. R.J. Reynolds, et al., Superior Court, Alameda County, California, filed June 9, 2000. Pooler/Unruh, et al. v. R.J. Reynolds, et al., Second Judicial District, Washoe County, Nevada, filed June 9, 2000. Saylor, et al. v. Philip Morris Companies Inc., et al. Circuit Court, Washington County, Tennessee, filed August 15, 2001. Defendants' motion to dismiss the case is pending. Tobacco Growers' Case DeLoach, et al. v. Philip Morris Incorporated et al., United States District Court, District of Columbia, filed February 16, 2000. MSA-Related Cases The following are cases in which plaintiffs have challenged the validity of the Master Settlement Agreement described in Item 3. Legal Proceedings. Forces Action Project, LLC, et al. v. The State of California, et al., United States District Court, Northern District, California, filed January 23, 1999. In August 2001, the United States Court of Appeals for the Ninth Circuit affirmed the district court's dismissal of plaintiffs' claims based on lack of standing, and reversed the district court's denial of plaintiffs' motion for leave to file an amended complaint. In January 2002, the district court denied plaintiffs' new motion to amend the complaint, and plaintiff has appealed. A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., United States District Court, Western District, Pennsylvania, filed April 12, 1999. In March 2000, the court granted in part defendants' motion to dismiss the complaint. Thereafter, plaintiffs and Philip Morris stipulated to a dismissal without prejudice of the claim that had not been dismissed by the court and plaintiffs appealed. In June 2001, the United States Court of Appeals for the Third Circuit affirmed the district court's ruling and plaintiffs have petitioned the United States Supreme Court for review of the appellate court's ruling. In January 2002, the United States Supreme Court refused to hear plaintiffs' appeal. A.D. Bedell Company, Inc. v. Philip Morris Incorporated, et al., Supreme Court, Cattaraugus County, New York, filed October 18, 1999. In November 1999, the court denied a motion to dismiss the complaint and denied a motion to vacate the temporary restraining order enjoining Philip Morris from refusing to sell products 18

to plaintiff. Defendant filed an appeal from the court's denial of the motion to dismiss and the motion to vacate. In May 2000, the appellate court granted in part and denied in part defendants' motion to dismiss the case. The case has been stayed pending resolution of A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al.,

to plaintiff. Defendant filed an appeal from the court's denial of the motion to dismiss and the motion to vacate. In May 2000, the appellate court granted in part and denied in part defendants' motion to dismiss the case. The case has been stayed pending resolution of A.D. Bedell Wholesale Co. v. Philip Morris Incorporated, et al., discussed above. PTI, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Central District, California, filed August 13, 1999. In May 2000, the court dismissed plaintiffs' claims. Star Scientific Inc. v. Mark E. Earley, United States District Court, Eastern District, Virginia, filed December 15, 2000. Plaintiff, a cigarette manufacturer, filed a suit against the Commonwealth of Virginia challenging the constitutionality of the MSA and the legislation enacted to enforce it. The Company was not named as a defendant in the suit. In March 2001, the district court entered a final order dismissing the case on the grounds that plaintiff lacked standing to assert the constitutional challenges to the MSA and that the challenge of the qualifying statute failed to state a claim upon which relief can be granted, and plaintiff has appealed. In January 2002, the United States Court of Appeals for the Fourth Circuit affirmed the district court's decision rejecting plaintiff's claims. Mariana, et al. v. William, et. al., United States District Court, Middle District, Pennsylvania, filed October 31, 2001. Plaintiffs, seeking to enjoin the Commonwealth of Pennsylvania's receipt of funds pursuant to the MSA, allege that enforcement of the MSA is unconstitutional and violates antitrust laws. Neel, et al. v. Strong, et al., Circuit Court of St. Louis County, Missouri, filed January 8, 2002. Plaintiffs, two Missouri residents and taxpayers, seek to enjoin the payment by PM Inc. and other tobacco companies of attorneys' fees to counsel who represented the State of Missouri in its health care cost recovery suit against the tobacco industry, and allege that the Missouri fee payment agreement violates certain provisions of the Missouri Constitution. Consolidated Putative Punitive Damages Cases Simon, et al. v. Philip Morris Incorporated, et al., (Simon II), United States District Court, Eastern District, New York, filed September 6, 2000. In November 2000, the court indicated that it intends to certify a class in this action which purports to consolidate punitive damages claims in the following ten actions: Simon, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Decie, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York; Ebert, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; National Asbestos Workers Medical Fund, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Bergeron, et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Blue Cross and Blue Shield of New Jersey, Inc., et al. v. Philip Morris Incorporated, et al., United States District Court, Eastern District, New York; Mason, et al. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York; Robert A. Falise, et al. v. The American Tobacco Company, et al., United States District Court, Southern District, New York; H. K. Porter Company, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York; and Raymark Industries, Inc. v. The American Tobacco Company, et al., United States District Court, Eastern District, New York. The court heard arguments on plaintiffs' motion for class certification in March 2001. In June 2001, the Falise case was dismissed. In July 2001, the H.K. Porter case was dismissed. 19

CERTAIN OTHER ACTIONS The following lists certain other actions pending against subsidiaries of the Company and others as of November 1, 2001. National Cheese Exchange Cases Consolidated Action: (Servais, et al. v. Kraft Foods, Inc. and the National Cheese Exchange, Inc., Circuit Court,

CERTAIN OTHER ACTIONS The following lists certain other actions pending against subsidiaries of the Company and others as of November 1, 2001. National Cheese Exchange Cases Consolidated Action: (Servais, et al. v. Kraft Foods, Inc. and the National Cheese Exchange, Inc., Circuit Court, Dane County, Wisconsin, filed May 5, 1997; Dodson, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, Wisconsin, filed July 1, 1997; Noll, et al. v. Kraft Foods, Inc., et al., Circuit Court, Dane County, Wisconsin, filed July 11, 1997). Knevelboard Dairies, et al. v. Kraft Foods, Inc., et al., United States District Court, Central District, California, filed April 14, 1998. Environmental Matters State of Missouri v. Kraft Foods, Inc., et al., Circuit Court, Missouri, filed March 14, 2000. In December 2001, Kraft Foods North America, Inc. ("KFNA") settled a civil enforcement action in which the State of Missouri alleged that KFNA had violated state solid waste and clean water laws in its handling of spent weiner casings. In May 2001, the Attorney General for the State of Ohio notified KFNA that it may be subject to an enforcement action for alleged violations of the state's water pollution control law at its production facility in Farmdale, Ohio. The Ohio Attorney General has alleged that this facility has exceeded its water permit effluent limits and violated its reporting requirements. The State has offered to attempt to negotiate a settlement of this matter, and KFNA, Inc. has accepted the offer to do so. The State has not yet identified the relief it may seek in this matter. 20

Exhibit 99.2 TRIAL SCHEDULE FOR CERTAIN CASES Set forth below is a listing of smoking and health class actions and consolidated individual cases, currently scheduled for trial through 2002 against PM Inc. and, in some cases, the Company, as well as the Retail Leaders case. Trial dates, however, are subject to change.
Case (Jurisdiction) ------------------R.J. Reynolds Tobacco Company, et al. v. Philip Morris Incorporated (North Carolina) Daniels, et al. v. Philip Morris Companies Inc., et al. (California) In Re: Tobacco Litigation (Individual Personal Injury cases) (West Virginia) Brown, et al. v. The American Tobacco Company, Inc., et al. (California) Type of Action -------------Retail Leaders Case Trial Date ---------May 20, 2002

Smoking and Health Class Action

July 1, 2002

Consolidated Individual Smoking and Health Cases

September 2002

Smoking and Health Class Action

October 11, 2002

Exhibit 99.2 TRIAL SCHEDULE FOR CERTAIN CASES Set forth below is a listing of smoking and health class actions and consolidated individual cases, currently scheduled for trial through 2002 against PM Inc. and, in some cases, the Company, as well as the Retail Leaders case. Trial dates, however, are subject to change.
Case (Jurisdiction) ------------------R.J. Reynolds Tobacco Company, et al. v. Philip Morris Incorporated (North Carolina) Daniels, et al. v. Philip Morris Companies Inc., et al. (California) In Re: Tobacco Litigation (Individual Personal Injury cases) (West Virginia) Brown, et al. v. The American Tobacco Company, Inc., et al. (California) Type of Action -------------Retail Leaders Case Trial Date ---------May 20, 2002

Smoking and Health Class Action

July 1, 2002

Consolidated Individual Smoking and Health Cases

September 2002

Smoking and Health Class Action

October 11, 2002

Below is a schedule setting forth by month the number of individual smoking and health cases, including cases brought by current and former flight attendants claiming personal injuries allegedly related to environmental tobacco smoke, against PM Inc. and, in some cases, the Company, that are currently scheduled for trial through the end of the year 2002. 2002 April (8) May (7) June (6) July (1) August (3) September (2) October (3) November (2)

Below is a schedule setting forth by month the number of individual smoking and health cases, including cases brought by current and former flight attendants claiming personal injuries allegedly related to environmental tobacco smoke, against PM Inc. and, in some cases, the Company, that are currently scheduled for trial through the end of the year 2002. 2002 April (8) May (7) June (6) July (1) August (3) September (2) October (3) November (2)