Philip Morris International Inc. (Form: 10-K, Received: 02/26/2009 13:42:16)

/s/ L OUIS C. C AMILLERI

February 26, 2009

(Louis C. Camilleri

Attorney-in-fact)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-33708

PHILIP MORRIS INTERNATIONAL INC.

(Exact name of registrant as specified in its charter)


Virginia		13-3435103
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

120 Park Avenue, New York, New York		10017
(Address of principal executive offices)		(Zip Code)

917-663-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, no par value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ * No ¨

*The	registrant became subject to the Securities Exchange Act of 1934 on March 7, 2008.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer þ	Accelerated filer ¨	Non-accelerated filer ¨	Smaller reporting company ¨
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of June 30, 2008 the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was approximately $102 billion based on the closing sale price of the common stock as reported on the New York Stock Exchange.

Class

Outstanding at January 30, 2009

Common Stock,

no par value

2,003,949,893 shares

DOCUMENTS INCORPORATED BY REFERENCE


Document		Parts Into Which Incorporated
Portions of the registrant’s annual report to shareholders for the year ended December 31, 2008 (the “2008 Annual Report”)		Parts I, II, and IV

Portions of the registrant’s definitive proxy statement for use in connection with its annual meeting of stockholders to be held on May 5, 2009, to be filed with the Securities and Exchange Commission (“SEC”) on or about March 26, 2009		Part III

TABLE OF CONTENTS


		Page

PART I

Item 1.	Business	1

Item 1A.	Risk Factors	11

Item 1B.	Unresolved Staff Comments	15

Item 2.	Properties	15

Item 3.	Legal Proceedings	16

Item 4.	Submission of Matters to a Vote of Security Holders	26

PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	27

Item 6.	Selected Financial Data	28

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 8.	Financial Statements and Supplementary Data	28

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28

Item 9A.	Controls and Procedures	28

Item 9B.	Other Information	28

PART III

Item 10.	Directors, Executive Officers and Corporate Governance	29

Item 11.	Executive Compensation	30

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	30

Item 13.	Certain Relationships and Related Transactions, and Director Independence	30

Item 14.	Principal Accounting Fees and Services	30

PART IV

Item 15.	Exhibits and Financial Statement Schedules	31

Signatures		35

In this report, “PMI,” “we,” “us” and “our” refers to Philip Morris International Inc. and subsidiaries.

PART I

Item 1.

Business.

(a) General Development of Business

General

Philip Morris International Inc. is a Virginia holding company incorporated in 1987. Our subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States of America. Our products are sold in approximately 160 countries and, in many of these countries, they hold the number one or number two market share position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises both international and local brands.

Our portfolio of international and local brands is led by Marlboro , the world’s best selling international cigarette, which accounted for approximately 36% of our total 2008 shipment volume. Marlboro is complemented in the premium price category by Merit, Parliament and Virginia Slims . Our leading mid-price brands are L&M and Chesterfield . Our leading brands in the profitable low-price segment include Bond Street , Lark , Muratti, Next, Philip Morris and Red & White .

We also own a number of important local brands, such as A Mild , Dji Sam Soe and A Hijau in Indonesia, Diana in Italy, Optima and Apollo-Soyuz in Russia, Morven Gold in Pakistan, Boston in Colombia, Belmont, Canadian Classics and Number 7 in Canada, Best and Classic in Serbia, f6 in Germany, Delicados in Mexico, Assos in Greece and Petra in the Czech Republic and Slovakia. While there are a number of markets where local brands remain important, international brands are expanding their share in numerous markets. With international brands contributing approximately 75% of our shipment volume in 2008, we are well positioned to continue to benefit from this trend.

Separation from Altria Group, Inc.

Prior to March 28, 2008, we were a wholly-owned subsidiary of Altria Group, Inc. (“Altria”). On January 30, 2008, the Altria Board of Directors announced Altria’s plans to spin off all of its interest in PMI to Altria’s stockholders in a tax-free transaction pursuant to Section 355 of the U.S. Internal Revenue Code. The distribution of all of our shares owned by Altria (the “Spin-off”), was made on March 28, 2008 (the “Distribution Date”), to stockholders of record as of the close of business on March 19, 2008 (the “Record Date”). Altria distributed one share of our common stock for each share of Altria common stock outstanding on the Record Date.

Holders of Altria stock options were treated similarly to public stockholders and, accordingly, had their stock awards split into two instruments. Holders of Altria stock options received the following stock options, which, immediately after the Spin-off, had an aggregate intrinsic value equal to the intrinsic value of the pre-spin Altria options:

•

a new PMI option (issued by us) to acquire that number of shares of our common stock equal to the number of Altria options held by such person on the Distribution Date; and

•

an adjusted Altria option for the same number of shares of Altria common stock with a reduced exercise price.

As stipulated by the Employee Matters Agreement between PMI and Altria (described below), the exercise price of each option was set to reflect the relative market values of PMI and Altria shares by allocating the price of Altria common stock before the distribution ($73.83) to PMI shares ($51.44) and Altria shares ($22.39), and then multiplying each of these allocated values by the Option Conversion

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Ratio. The Option Conversion Ratio is equal to the exercise price of the Altria option, prior to any adjustment for the distribution, divided by $73.83. As a result, the new PMI option and the adjusted Altria option have an aggregate intrinsic value equal to the intrinsic value of the pre-split Altria option.

Holders of Altria restricted stock or deferred stock awarded prior to January 30, 2008, retained their existing awards and received the same number of shares of our restricted or deferred stock. The restricted stock and deferred stock will not vest until the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria deferred stock awarded on January 30, 2008, who were employed by Altria after the Distribution Date, received additional shares of deferred stock of Altria to preserve the intrinsic value of the award. Recipients of Altria deferred stock awarded on January 30, 2008, who were employed by us after the Distribution Date, received substitute shares of our deferred stock to preserve the intrinsic value of the award.

To the extent that employees of Altria and its remaining subsidiaries received our stock options, Altria reimbursed us in cash for the Black-Scholes fair value of the stock options received. To the extent that our employees held Altria stock options, we reimbursed Altria in cash for the Black-Scholes fair value of the stock options. To the extent that employees of Altria and its remaining subsidiaries received PMI deferred stock, Altria paid us the fair value of the PMI deferred stock less the value of projected forfeitures. To the extent that our employees held Altria restricted stock or deferred stock, we reimbursed Altria in cash for the fair value of the restricted or deferred stock less the value of projected forfeitures and any amounts previously charged to us for the restricted or deferred stock. Based upon the number of Altria stock awards outstanding at the Distribution Date, the net amount of these reimbursements resulted in a payment of $449 million from Altria to us. This reimbursement from Altria is reflected as an increase to our additional paid-in capital on the December 31, 2008 consolidated balance sheet.

On March 28, 2008, we entered into a Transition Services Agreement with Altria Corporate Services, Inc. (“ALCS”), a wholly-owned subsidiary of Altria, pursuant to which ALCS provided select services to us for certain transition periods not to exceed twenty-four months to ensure continuity of activity following the Spin-off. The transition services included, among others, consulting services related to risk management, benefit administration and information technology as well as the transfer of transaction processing (accounts payable and expense reports) for certain Latin American markets.

On March 28, 2008, we entered into an Employee Matters Agreement with Altria. The Employee Matters Agreement governs PMI’s and Altria’s respective obligations with respect to employees, compensation and benefit plans, treatment of holders of Altria stock options, restricted stock and deferred stock with respect to PMI, and cooperation between the companies in the sharing of employee information and maintenance of confidentiality.

On March 28, 2008, we entered into a Tax Sharing Agreement with Altria. The Tax Sharing Agreement generally governs PMI’s and Altria’s respective rights, responsibilities and obligations for pre-distribution periods and for potential taxes on the Spin-off. With respect to any potential taxes resulting from the Spin-off, responsibility for the tax will be allocated to the party that acted (or failed to act) in a manner which resulted in the tax.

Effective as of January 1, 2008, we entered into an Intellectual Property Agreement with Philip Morris USA Inc. (“PM USA”), a wholly-owned subsidiary of Altria. The Intellectual Property Agreement governs the ownership of intellectual property between PMI and PM USA. Information about the Intellectual Property Agreement is set forth under Other Matters – Intellectual Property .

The shares issued as of the Distribution Date equal the number of shares of Altria common stock outstanding on the Record Date. As a result, on the Distribution Date, we had 2,108,901,789 shares of

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common stock outstanding. The same number of shares is being used to calculate both diluted earnings per share and basic earnings per share for all periods prior to the Distribution Date as no PMI equity awards were outstanding prior to the Distribution Date.

Other:

Manufacturing Optimization Program:

In 2008, we terminated our contract manufacturing arrangement with PM USA. We completed the process of shifting all of our PM USA contract manufactured production, which approximated 57 billion cigarettes annually in 2007, to our facilities in Europe during the fourth quarter of 2008. During the first quarter of 2008, we recorded exit costs of $15 million related to the termination of our manufacturing contract with PM USA. The program generated pre-tax savings of $71 million in 2008 and is expected to provide total pre-tax annual savings of approximately $179 million by 2009.

Asset Impairment and Exit Costs:

Since 2005, we announced plans to streamline various administrative functions and operations. These plans resulted in the announced closure or partial closure of nine production facilities through December 31, 2008, the largest of which is the closure of a factory in Munich, Germany announced in 2006. As a result of these announcements and the Manufacturing Optimization Program discussed above, we recorded pre-tax charges of $84 million, $195 million and $126 million for the years ended December 31, 2008, 2007 and 2006, respectively. The pre-tax charges primarily related to severance costs. The 2006 pre-tax charges included $57 million of costs related to the Munich, Germany factory closure. In 2007, asset impairment and exit costs also included general corporate pre-tax charges of $13 million related to fees associated with the Spin-off. Cash payments related to our exit costs were $99 million, $131 million and $44 million for the years ended December 31, 2008, 2007 and 2006, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $115 million. As of December 31, 2008, the streamlining of these various functions and operations has resulted in the elimination of approximately 3,600 positions. These actions generated pre-tax cost savings beginning in 2005, with cumulative estimated annual cost savings of approximately $295 million through the end of 2008, of which $110 million were incremental savings in 2008.

Source of Funds — Dividends

We are a legal entity separate and distinct from our direct and indirect subsidiaries. Accordingly, our right, and thus the right of our creditors and stockholders, to participate in any distribution of the assets or earnings of any subsidiary is subject to the prior claims of creditors of such subsidiary, except to the extent that claims of our company itself as a creditor may be recognized. As a holding company, our principal sources of funds, including funds to make payment on the debt securities, are from the receipt of dividends and repayment of debt from our subsidiaries. Our principal wholly-owned and majority-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or to make other distributions with respect to their common stock.

(b) Financial Information About Segments

We divide our markets into four geographic regions, which constitute our segments for financial reporting purposes:

•

The European Union (“EU”) Region is headquartered in Lausanne, Switzerland and covers all the EU countries except for Slovenia, Bulgaria and Romania, and also comprises Switzerland, Norway and Iceland, which are linked to the EU through trade agreements.

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•

The Eastern Europe, Middle East and Africa (“EEMA”) Region is also headquartered in Lausanne and covers the Balkans (including Slovenia, Bulgaria and Romania), the former Soviet Union (excluding Estonia, Latvia and Lithuania), Mongolia, Turkey, the Middle East and Africa and our international duty free business.

•

The Asia Region is headquartered in Hong Kong and covers all other Asian countries as well as Australia, New Zealand, and the Pacific Islands.

•

The Latin America & Canada Region is headquartered in New York and covers the South American continent, Central America, Mexico, the Caribbean and Canada.

Net revenues and operating companies income* (together with a reconciliation to operating income) attributable to each such segment for each of the last three years are set forth in Note 11. Segment Reporting to our consolidated financial statements (“Note 11”), which is incorporated herein by reference to the 2008 Annual Report. See Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of our operating results by business segment.

The relative percentages of operating companies income attributable to each reportable segment were as follows:


	2008		2007		2006
European Union	45.4	%	46.9	%	41.5	%
Eastern Europe, Middle East and Africa	29.9		27.2		24.6
Asia	19.7		20.2		21.9
Latin America & Canada	5.0		5.7		12.0

	100.0	%	100.0	%	100.0	%

Our 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 intangibles. The accounting policies of the segments are the same as those described in Note 2. Summary of Significant Accounting Policies to our consolidated financial statements and are incorporated herein by reference to the 2008 Annual Report.

We use the term net revenues to refer to our operating revenues from the sale of our products, net of sales and promotion incentives. Our net revenues and operating income are affected by various factors, including the volume of products we sell, the price of our products, changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium price brands to mid-price or low-price brands in any given market (product mix). Mix can also refer to the proportion of volume in more profitable markets versus volume in less profitable markets (geographic mix). We are often required to collect excise taxes from our customers and then remit them to local governments, and, in those circumstances, we include excise taxes as a component of net revenues and as part of our cost of sales. Aside from excise taxes, our cost of sales consists principally of tobacco leaf, non-tobacco raw materials, labor and manufacturing costs.

Our marketing, administration and research costs include the costs of marketing our products, other costs generally not related to the manufacture of our products, and costs incurred to develop new products. The most significant components of our marketing, administration and research costs are selling and marketing expenses, which relate to the cost of our sales force as well as to the advertising and promotion of our products.

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(c) Narrative Description of Business

Our subsidiaries and affiliates and their licensees manufacture, market and sell tobacco products outside the United States.

Our total cigarette shipments increased 2.5% in 2008 to 869.8 billion units. We estimate that international cigarette market shipments were approximately 5.6 trillion units in 2008, a 2.7% increase over 2007. We estimate that our share of the international cigarette market (which is defined as worldwide cigarette volume excluding the United States) was approximately 15.6%, 15.6% and 15.4% in 2008, 2007 and 2006, respectively. Excluding the People’s Republic of China (“PRC”), we estimate that our share of the international cigarette market was approximately 25.8%, 25.2% and 24.6% in 2008, 2007 and 2006, respectively. Shipments of our principal brand, Marlboro , increased 0.2% in 2008, and represented approximately 9.2% of the international cigarette market, excluding PRC, in 2008, 2007 and 2006.

We have a cigarette market share of at least 15%, and, in a number of instances substantially more than 15%, in approximately 90 markets, including Argentina, Australia, Austria, Belgium, Colombia, the Czech Republic, Finland, France, Germany, Greece, Hungary, Indonesia, Italy, Japan, Kazakhstan, Mexico, the Netherlands, the Philippines, Poland, Portugal, Romania, Russia, Saudi Arabia, Serbia, Singapore, Spain, Sweden, Switzerland, Turkey and Ukraine.

Acquisitions

Rothmans Inc.:

On July 31, 2008, we announced that we had entered into an agreement with Rothmans Inc. (“Rothmans”), which is located in Canada, to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans for CAD $30 per share in cash, or approximately CAD $2.0 billion ($1.9 billion based on the exchange rate prevailing at the time of the acquisition). Prior to this agreement, Rothmans’ sole holding was a 60% interest in Rothmans, Benson & Hedges Inc. (“RBH”). The remaining 40% interest in RBH was owned by us. In October 2008, we completed the acquisition of all the Rothmans shares. From January 2008 to September 2008, we recorded equity earnings on our equity interest in RBH. After the completion of the acquisition, Rothmans became a consolidated subsidiary of PMI and, as a result, we recorded all of Rothmans’ earnings during the fourth quarter of 2008. Rothmans contributed $50 million of incremental operating income and $22 million of incremental net earnings during the fourth quarter of 2008.

Mexico:

In November 2007, we acquired an additional 30% interest in our Mexican tobacco business from Grupo Carso, S.A.B. de C.V. (“Grupo Carso”), which increased our ownership interest to 80%, for $1.1 billion. After this transaction was completed, Grupo Carso retained a 20% interest in the business. A director of PMI has an affiliation with Grupo Carso. We also entered into an agreement with Grupo Carso which provides the basis for us to potentially acquire, or for Grupo Carso to potentially sell to us, Grupo Carso’s remaining 20% in the future.

Holdings in the Dominican Republic:

In November 2006, we exchanged our 47.5% interest in E. León Jimenes, C. por. A. (“ELJ”) , which included a 40% indirect interest in ELJ’s beer subsidiary, for 100% ownership of ELJ’s cigarette subsidiary, Industria de Tabaco León Jimenes, S.A. (“ITLJ”), and $427 million of cash. As a result of this transaction, we now own 100% of the cigarette business and no longer hold an interest in ELJ’s beer business. The exchange of our interest in ELJ’s beer subsidiary resulted in a pre-tax gain on sale of $488 million.

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Other:

In June 2008, we purchased the fine cut trademark Interval and certain other trademarks in the other tobacco products category (“OTP”) from Imperial Tobacco Group PLC for $407 million.

During the first quarter of 2007, we acquired an additional 58.2% interest in a Pakistan cigarette manufacturer, Lakson Tobacco Company Limited (“Lakson Tobacco”), which increased our total ownership interest in Lakson Tobacco from 40% to approximately 98%, for $388 million.

In the fourth quarter of 2006, we purchased from British American Tobacco the Muratti and Ambassador trademarks in certain markets, as well as the rights to L&M and Chesterfield in Hong Kong, in exchange for the rights to Benson & Hedges in certain African markets and a payment of $115 million.

The effect of these other acquisitions above, in the aggregate, was not material to our consolidated financial position, results of operations or operating cash flows in any of the periods presented.

In February 2009, we entered into an agreement with Swedish Match AB (“SWMA”), to establish an exclusive joint venture to commercialize Swedish style snus and other smoke-free tobacco products worldwide, outside of Scandinavia and the United States. We and SWMA will license exclusively to the joint venture an agreed list of trademarks and intellectual property. The effect of this agreement is not expected to be material to our consolidated financial position, results of operations or operating cash flows.

In February 2009, we purchased the fine cut trademark Petterøes worldwide and other cigarette trademarks sold primarily in Norway and Sweden. The transaction is projected to be modestly accretive to net earnings in 2009. The effect of this acquisition is not expected to be material to our consolidated financial position, results of operations or operating cash flows.

Distribution and Sales

The distribution and sales strategy for our products is tailored to the characteristics of each market, including retailer needs and capabilities, the wholesale infrastructure, our competitive position, costs and the regulatory framework. Our goals are speed, efficiency and widespread availability of our products, while at the same time contributing to the success of our direct and indirect trade partners. The four main types of distribution that we use across the globe are:

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Direct Sales and Distribution (“DSD”), where we have set up our own distribution directly to retailers.

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Single independent distributors who are responsible for distribution within a single market.

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Exclusive Zonified Distribution (“EZD”), where distributors have an exclusive territory within a country to enable them to obtain a suitable return on their investment.

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Distribution through wholesalers, where we supply either national or regional wholesalers who then service the retail trade.

In many countries we also service key accounts, including gas stations, retail chains and supermarkets, directly.

Our distribution and sales systems are supported by sales forces that in the aggregate total approximately 16,800 worldwide. Our sales forces are well trained, recognized by trade surveys for their professionalism, and have developed a long lasting relationship with the wholesale and retail

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trade, thus providing us with a superior presence at the point of sale, as evidenced by our leading market share position. In addition, our consumer engagement teams work together with the sales forces to engage adult smokers in promotional activities and to support new product launches.

Our products are advertised and promoted through various media and channels, including, where permitted by law, point of sale communications, brand events, access-controlled websites, print and direct communication to verified adult smokers. Our direct communication with verified adult smokers utilize mail, email and text messaging. Promotional activities include, where permitted by law, competitions, invitation to events, interactive programs, consumer incentive items and price promotions. To support advertising and promotional activities in the markets, we have a dedicated consumer engagement group that develops innovative engagement tools based on the latest technologies and consumer trends.

Competition

We are subject to highly competitive conditions in all aspects of our business. We compete primarily on the basis of product quality, brand recognition, brand loyalty, taste, innovation, packaging, service, marketing, advertising and price. Our competitors include three large international tobacco companies and several regional and local tobacco companies and, in some instances, government-owned tobacco enterprises, principally in China, Egypt, Thailand, Taiwan, Vietnam and Algeria. Industry consolidation and privatizations of governmental enterprises have led to an overall increase in competitive pressures. Some competitors have different profit and volume objectives, and some international competitors are less susceptible to changes in currency exchange rates. We compete predominantly with American type blended cigarettes, such as Marlboro and Chesterfield , which are the most popular across many of our markets. We seek to compete in all profitable price segments.

Procurement and Raw Materials

Our strategy is to procure tobacco and non-tobacco materials through third parties. We believe that this provides us with greater flexibility and is the most cost effective approach.

We purchase tobacco leaf of various grades and styles throughout the world, primarily through independent tobacco dealers. We also contract directly with farmers in several countries including the United States, Argentina, Mexico, Indonesia, Ecuador, Dominican Republic, Poland, Colombia and Portugal.

Our largest sources of supply are:

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The United States for Virginia (flue-cured) and Burley tobaccos, particularly higher quality varieties for use in leading international brands.

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Brazil, particularly for Virginia tobaccos but also for Burley.

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Indonesia, mostly for domestic use in kretek products.

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Turkey and Greece, mostly for Oriental.

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Argentina and Malawi, mostly for Burley.

We believe that there is an adequate supply of tobacco in the world markets to satisfy our current and anticipated production requirements.

In addition to tobacco leaf, we purchase a wide variety of other non-tobacco materials from a total of approximately 370 suppliers. Our top 10 suppliers of non-tobacco materials combined represent more than 52% of our total non-tobacco material purchases. The three most significant non-tobacco

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materials that we purchase are printed paper board used in packaging, acetate tow used in filter making and fine paper used in cigarette manufacturing. In addition, the supply of cloves is of particular importance to our Indonesian business.

Business Environment

Information called for by this Item is hereby incorporated by reference to the paragraphs captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Operating Results by Business Segment—Business Environment” on pages 28 to 35 of the 2008 Annual Report and made a part hereof.

Other Matters

Customers

None of our business segments are dependent upon a single customer or a few customers, the loss of which would have a material adverse effect on our consolidated results of operations.

Employees

As of December 31, 2008, we employed approximately 75,600 people worldwide, including employees under temporary contracts and hourly paid part time staff. Our businesses are subject to a number of laws and regulations relating to our relationship with our employees. Generally, these laws and regulations are specific to the location of each business. In addition, in accordance with European Union requirements, we have established a European Works Council composed of management and elected members of our workforce. We believe that our relations with our employees and their representative organizations are excellent.

Executive Officers of the Registrant

The disclosure regarding executive officers is set forth under the heading “Executive Officers as of February 15, 2009” in Item 10 of Part III of this Form 10-K and is incorporated herein by reference.

Research and Development

Our research efforts are directed toward understanding the biochemical and physiological mechanisms of tobacco-related diseases at the functional molecular level. We also seek to understand the structure, threshold and interaction of smoke constituents. This research serves as the cornerstone for our applied research efforts to improve our existing products and to develop products that have the potential to reduce the risk of tobacco-related diseases. Our efforts currently focus on the removal of certain harmful smoke constituents using agronomic practices, smoke generation at lower temperatures, heat generation and transfer, biotechnology and material science. Our principal goals are to:

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Build the ability to predict disease risk. The ability to develop and assess potentially reduced risk tobacco products requires state of the art analytical capabilities in order to understand disease mechanisms and specifically the complex role of tobacco smoke constituents in the development of tobacco related diseases. The research that we are currently undertaking is intended to enable us to develop a model to predict with a known degree of certainty the risk profiles of potentially reduced risk products. We believe that a critical element to successfully commercialize reduced risk products will be our ability to make scientifically sound and substantiated statements about the potential quantified reduction in health risk delivered by them.

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•

Develop innovative reduced risk products. We are relentlessly working on a range of initiatives that may result in commercially viable product proposals.

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Support and reinforce our conventional product business. We seek to be at the forefront of cigarette and packaging innovation. Significant investments have been made in new product development efforts for conventional products, resulting in a wide range of product enhancements and the launch of innovative new products. Further, with the increase in product regulations, supporting the conventional cigarette business has expanded and is expected to become more complex, requiring additional capacity for analysis and testing in compliance with applicable laws and regulations.

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Research and develop technology platforms that can potentially lead to the development of alternative uses of tobacco.

The research and development expense for the years ended December 31, 2008, 2007 and 2006 are set forth in Note 13. Additional Information to our financial statements, which is incorporated herein by reference to the 2008 Annual Report.

Intellectual Property

Our trademarks are valuable assets and their protection and their reputation are essential to us. We own the trademark rights to all of our principal brands, including Marlboro , in all countries where we use them. PM USA owns the trademark rights to its brands, including Marlboro , within the United States, its territories and possessions.

In addition, we own more than 1,500 patents worldwide, and our patent portfolio, as a whole, is material to our business; however, no one patent or group of related patents is material to us. We also have proprietary secrets, technology, know-how, processes and other intellectual property rights that are not registered.

Effective as of January 1, 2008, PMI entered into an Intellectual Property Agreement with PM USA. The Intellectual Property Agreement governs the ownership of intellectual property between PMI and PM USA. Ownership of the jointly funded intellectual property has been allocated as follows:

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PMI owns all rights to the jointly funded intellectual property outside the United States, its territories and possessions; and

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PM USA owns all rights to the jointly funded intellectual property in the United States, its territories and possessions.

The Intellectual Property Agreement contains provisions concerning intellectual property that is independently developed by us or PM USA following the Distribution. For the first two years following the Distribution, if we or PM USA independently develop new intellectual property that satisfies certain conditions and is incorporated into a new product or included in a patent application, the new intellectual property will be subject to the geographic allocation described above. For ten years following the Distribution, independently developed intellectual property may be subject to rights under certain circumstances that would allow either us or PM USA a priority position to obtain the rights to the new intellectual property from the other party, with the price and other terms to be negotiated.

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In the event of a dispute between us and PM USA under the Intellectual Property Agreement, we have agreed with PM USA to submit the dispute first, to negotiation between our and PM USA’s senior executives, and then, to binding arbitration.

Seasonality

Our business segments are not significantly affected by seasonality, although in certain markets cigarette consumption trends rise during the summer months due to longer daylight time and tourism.

Environmental Regulation

We are subject to applicable multi-national, national and local environmental laws and regulations in the countries in which we do business. We have specific programs across our business units designed to meet applicable environmental compliance requirements and reduce wastage as well as water and energy consumption. We have developed and implemented a consistent environmental and occupational health and safety (“EHS”) management system, which involves policies, standard practices and procedures at all our manufacturing centers. We also conduct regular safety assessments at our offices, warehouses and car fleet organizations. Furthermore, we have engaged an external certification body to validate the effectiveness of our EHS management system at all our manufacturing centers around the world, in comparison with internationally recognized standards. Our subsidiaries expect to continue to make capital and other expenditures in connection with environmental laws and regulations. Although it is not possible to predict precise levels of environmental-related expenditures, compliance with such laws and regulations, including the payment of any remediation costs and the making of such expenditures, has not had, and is not expected to have, a material adverse effect on our consolidated results of operations, capital expenditures, financial position, earnings or competitive position.

(d) Financial Information About Geographic Areas

The amounts of net revenues and long-lived assets attributable to each of our geographic segments for each of the last three fiscal years are set forth in Note 11.

(e) Available Information

We are required to file with the SEC annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Investors may read and copy any document that we file, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Investors may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, from which investors can electronically access our SEC filings.

We make available free of charge on or through our website (www.pmintl.com), our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Investors can access our filings with the SEC by visiting www.pmintl.com.

The information on our website is not, and shall not be deemed to be, a part of this report or incorporated into any other filings we make with the SEC.

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Item

1A. Risk Factors.

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking statements contained in this Annual Report. Any of the following risks could materially adversely affect our business, our operating results, our financial condition and the actual outcome of matters as to which forward-looking statements are made in this Annual Report.

Forward-Looking and Cautionary Statements

We may from time to time make written or oral forward-looking statements, including statements contained in filings with the SEC, in reports to stockholders and in press releases and investor webcasts. You can identify these forward-looking statements by use of words such as “strategy,” “expects,” “continues,” “plans,” “anticipates,” “believes,” “will,” “estimates,” “intends,” “projects,” “goals,” “targets” and other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements and whether to invest in or remain invested in our securities. In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, we are identifying important factors that, individually or in the aggregate, could cause actual results and outcomes to differ materially from those contained in any forward-looking statements made by us; any such statement is qualified by reference to the following cautionary statements. We elaborate on these and other risks we face throughout this document, particularly in the “Business Environment” sections preceding our discussion of operating results of our business. You should understand that it is not possible to predict or identify all risk factors. Consequently, you should not consider the following to be a complete discussion of all potential risks or uncertainties. We do not undertake to update any forward-looking statement that we may make from time to time except in the normal course of our public disclosure obligations.

Risks Related to Our Business and Industry

Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may affect our profitability disproportionately and make us less competitive versus certain of our competitors.

Tax regimes, including excise taxes, sales taxes and import duties, can disproportionately affect the retail price of manufactured cigarettes versus other tobacco products, or disproportionately affect the relative retail price of our manufactured cigarette brands versus cigarette brands manufactured by certain of our competitors. Because our portfolio is weighted toward the premium price manufactured cigarette category, tax regimes based on sales price can place us at a competitive disadvantage in certain markets. As a result, our volume and profitability may be adversely affected in these markets.

Increases in cigarette taxes are expected to continue to have an adverse impact on our sales of cigarettes, due to resulting lower consumption levels, a shift in sales from manufactured cigarettes to other tobacco products and from the premium price to the mid-price or low-price cigarette categories where we may be under-represented, from local sales to legal cross-border purchases of lower price products or to illicit products such as contraband and counterfeit.

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The European Commission is seeking to alter minimum retail selling price systems.

Several EU Member States have enacted laws establishing a minimum retail selling price for cigarettes and, in some cases, other tobacco products. The European Commission has commenced proceedings against these Member States, claiming that minimum retail selling price systems infringe EU law. If the European Commission’s infringement actions are successful, they could adversely impact excise tax levels and/or price gaps in those markets.

Our business faces significant governmental action aimed at increasing regulatory requirements with the goal of preventing the use of tobacco products.

Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volume in many of our markets, and we expect that such actions will continue to reduce consumption levels. Significant regulatory developments will take place over the next few years in most of our markets, driven principally by the World Health Organization’s Framework Convention on Tobacco Control (“FCTC”). The FCTC is the first international public health treaty on tobacco, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. In addition, the FCTC has led to increased efforts by tobacco control advocates and public health organizations to reduce the palatability and appeal of tobacco products to adult smokers. Regulatory initiatives that have been proposed, introduced or enacted include:

•

the levying of substantial and increasing tax and duty charges;

•

restrictions or bans on advertising, marketing and sponsorship;

•

the display of larger health warnings, graphic health warnings and other labeling requirements;

•

restrictions on packaging design, including the use of colors and generic packaging;

•

restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

•

requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;

•

requirements regarding testing, disclosure and use of tobacco product ingredients;

•

increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

•

elimination of duty free allowances for travelers; and

•

encouraging litigation against tobacco companies.

Partly because of some or a combination of these measures, unit sales of tobacco products in certain markets, principally Western Europe and Japan, have been in general decline and we expect this trend to continue. Our operating income could be significantly affected by any significant decrease in demand for our products, any significant increase in the cost of complying with new regulatory requirements and requirements that lead to a commoditization of tobacco products.

Litigation related to cigarette smoking and exposure to ETS could substantially reduce our profitability and could severely impair our liquidity.

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results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Please see Item 3. Legal Proceedings of this Form 10-K for a discussion of tobacco-related litigation.

We face intense competition and our failure to compete effectively could have a material adverse effect on our profitability and results of operations.

We compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-price products or innovative products, higher cigarette taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products. Competitors include three large international tobacco companies and several regional and local tobacco companies and, in some instances, government-owned tobacco enterprises, principally in China, Egypt, Thailand, Taiwan, Vietnam and Algeria. Industry consolidation and privatizations of governmental enterprises have led to an overall increase in competitive pressures. Some competitors have different profit and volume objectives and some international competitors are less susceptible to changes in currency exchange rates.

Because we have operations in numerous countries, our results may be influenced by economic, regulatory and political developments in many countries.

Some of the countries in which we operate face the threat of civil unrest and can be subject to regime changes. In others, nationalization, terrorism, conflict and the threat of war may have a significant impact on the business environment. Economic, political, regulatory or other developments could disrupt our supply chain or our distribution capabilities. In addition, such developments could lead to loss of property or equipment that are critical to our business in certain markets and difficulty in staffing and managing our operations, which could reduce our volumes, revenues and net earnings. In certain markets, we are dependent on governmental approvals of various actions such as price changes.

In addition, despite our high ethical standards and rigorous control and compliance procedures aimed at preventing and detecting unlawful conduct, given the breadth and scope of our international operations, we may not be able to detect all potential improper or unlawful conduct by our international partners and employees.

We may be unable to anticipate changes in consumer preferences or to respond to consumer behavior influenced by economic downturns.

Our tobacco business is subject to changes in consumer preferences, which may be influenced by local economic conditions. To be successful, we must:

•

promote brand equity successfully;

•

anticipate and respond to new consumer trends;

•

develop new products and markets and broaden brand portfolios;

•

improve productivity; and

•

be able to protect or enhance margins through price increases.

In periods of economic uncertainty, consumers may tend to purchase lower price brands, and the volume of our premium price, high price and mid-price brands and our profitability could suffer accordingly.

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We lose revenue as a result of counterfeiting, contraband and cross-border purchases.

Large quantities of counterfeit cigarettes are sold in the international market. We believe that Marlboro is the most heavily counterfeited international cigarette brand, although we cannot quantify the amount of revenue we lose as a result of this activity. In addition, our revenues are reduced by contraband and legal cross-border purchases.

From time to time, we are subject to governmental investigations on a range of matters.

Investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain markets and allegations of false and misleading usage of descriptors such as “lights” and “ultra lights.” We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our business could be materially affected by an unfavorable outcome of pending or future investigations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Operating Results by Business Segment—Business Environment—Governmental Investigations” for a description of governmental investigations to which we are subject.

We may be unsuccessful in our attempts to produce cigarettes with the potential to reduce the risk of smoking-related diseases.

We continue to seek ways to develop commercially viable new product technologies that may reduce the risk of smoking. Our goal is to develop products whose potential for risk reduction can be substantiated and meet adult smokers’ taste expectations. We may not succeed in these efforts. If we do not succeed, but one or more of our competitors do, we may be at a competitive disadvantage. Further, we cannot predict whether regulators will permit the marketing of tobacco products with claims of reduced risk to consumers, which could significantly undermine the commercial viability of these products.

Our reported results could be adversely affected by currency exchange rates and currency devaluations could impair our competitiveness.

We conduct our business primarily in local currency and, for purposes of financial reporting, the local currency results are translated into U.S. dollars based on average exchange rates prevailing during a reporting period. During times of a strengthening U.S. dollar, our reported net revenues and operating income will be reduced because the local currency will translate into fewer U.S. dollars. During periods of local economic crises, foreign currencies may be devalued significantly against the U.S. dollar, reducing our margins. Actions to recover margins may result in lower volume and a weaker competitive position.

The repatriation of our foreign earnings and change in the earnings mix may increase our effective tax rate.

Because we are a U.S. holding company, our most significant source of funds will be distributions from our non-U.S. subsidiaries. These distributions may result in a residual U.S. tax cost. It may be advantageous to us in certain circumstances to significantly increase the amount of such distributions, which could result in a material increase in our overall tax rate in the years such distributions take place.

Our ability to grow may be limited by our inability to introduce new products, enter new markets or to improve our margins through higher pricing and improvements in our brand and geographic mix.

Our profitability may suffer if we are unable to introduce new products or enter new markets successfully, to raise prices or maintain an acceptable proportion of our sales of higher margin products and sales in higher margin geographies.

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We may be unable to expand our portfolio through successful acquisitions.

One element of our growth strategy is to strengthen our brand portfolio and market positions through selective acquisitions. Acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There is no assurance that we will be able to acquire attractive businesses on favorable terms or that future acquisitions will be accretive to earnings.

Government mandated prices, production control programs, shifts in crops driven by economic conditions and adverse weather patterns may increase the cost or reduce the quality of the tobacco and other agricultural products used to manufacture our products.

As with other agricultural commodities, the price of tobacco leaf and cloves can be influenced by imbalances in supply and demand, and crop quality can be influenced by variations in weather patterns. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products could cause farmers to plant less tobacco. Any significant change in tobacco leaf and clove prices, quality and quantity could affect our profitability and our business.

Our ability to implement our strategy of attracting and retaining the best global talent may be impaired by the decreasing social acceptance of cigarette smoking.

The tobacco industry competes for talent with consumer products and other companies that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best global talent.

We could incur significant indemnity obligations if our action or failure to act causes the Distribution to be taxable.

Under the tax sharing agreement between Altria and us, we have agreed to indemnify Altria and its affiliates if we take, or fail to take, any action where such action, or failure to act, precludes the Spin-off from qualifying as a tax-free transaction. For a discussion of these restrictions, please see “The Distribution—U.S. Federal Income Tax Consequences of the Distribution,” which is included in our Registration Statement on Form 10.

Your percentage ownership of our common shares may be diluted by future acquisitions.

One of the purposes of the Spin-off was to provide us with focused common stock that can be used to fund acquisitions. To the extent we issue new shares of common stock to fund acquisitions, your percentage ownership of our shares will be diluted. There is no assurance that the effect of this dilution will be offset by accretive earnings from the acquisition.

Item 1B.

Unresolved Staff Comments.

None.

Item 2.

Properties.

As of December 31, 2008, we operated and owned 58 manufacturing facilities, operated two leased manufacturing facilities, one in Korea and one in Mexico, and maintained 23 contract manufacturing relationships with third parties. In addition, we work with 37 third-party operators in Indonesia who manufacture our hand-rolled cigarettes.

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PMI Owned Manufacturing Facilities


	EU	EEMA	Asia	Latin America & Canada	TOTAL
Fully integrated	9	8	9	9	35
Make-pack	—	—	6	4	10
Other	3	1	2	7	13

Total	12	9	17	20	58

In 2008, 19 of our facilities each manufactured over 10 billion cigarettes and an additional 8 facilities each produced over 30 billion units. Our largest factories are in Bergen-op-Zoom (Holland), Izhora-St. Petersburg (Russia), Berlin (Germany), Izmir (Turkey), Krakow (Poland), Kharkiv (Ukraine), Tanauan (Philippines), Krasnodar (Russia), Albarraque (Portugal), Sukorejo (Indonesia) and Neuchatel (Switzerland). Our smallest factories are mostly in Latin America, where due to tariff constraints we have established small manufacturing units in individual markets, several of which are make-pack operations. We fully operate newly constructed factories in Greece and Indonesia. We will continue to optimize our manufacturing base, taking into consideration the evolution of trade blocks. We also own a factory in Munich (Germany), which ceased operating in 2008 and therefore is not included in the above table.

The plants and properties owned or leased and operated by our subsidiaries are maintained in good condition and are believed to be suitable and adequate for present needs.

Item 3.

Legal Proceedings.

Legal proceedings covering a wide range of matters are pending or threatened against us, and/or our subsidiaries, and/or our indemnitees in various jurisdictions. Our indemnitees include distributors, licensees, and others that have been named as parties in certain cases and that we have agreed to defend, as well as pay costs and some or all of judgments, if any, that may be entered against them. Altria Group, Inc. and PM USA are also indemnitees, in certain cases, pursuant to the terms of the Distribution Agreement between Altria Group, Inc. and PMI. Various types of claims are raised in these proceedings, including, among others, product liability, consumer protection, antitrust, and tax.

It is possible that there could be adverse developments in pending cases against us and our subsidiaries. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation.

Damages claimed in some of the tobacco-related litigation are significant and, in certain cases in Brazil, Israel, Nigeria and Canada, range into the billions of dollars. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the litigation is in its early stages and litigation is subject to uncertainty. However, as discussed below, we have to date been largely successful in defending tobacco-related litigation.

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possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.

It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, we and each of our subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that we have valid defenses to the litigation pending against us, as well as valid bases for appeal of adverse verdicts, if any. All such cases are, and will continue to be, vigorously defended. However, we and our subsidiaries may enter into settlement discussions in particular cases if we believe it is in our best interests to do so.

The table below lists the number of tobacco-related cases pending against us and/or our subsidiaries or indemnitees as of February 15, 2009, December 31, 2007 and 2006:


Type of Case	Number of Cases Pending as of February 15, 2009	Number of Cases Pending as of December 31, 2007	Number of Cases Pending as of December 31, 2006
Individual Smoking and Health Cases	125	136	137
Smoking and Health Class Actions	5	3	2
Health Care Cost Recovery Actions	10	8	3
Lights Class Actions	3	2	2
Individual Lights Cases (small claims court)(1)	2,010	2,026	17
Public civil actions	12	9	5

(1)	The 2,010 cases are all pending in small claims courts in Italy where the maximum damage award claimed is approximately one thousand Euros per case.

Since 1995, when the first tobacco-related litigation was filed against a PMI entity, approximately 297 Smoking and Health, Lights and Health Care Cost Recovery cases in which we and/or one of our subsidiaries and indemnitees was a defendant have been dismissed. In addition, eight cases have been decided in favor of plaintiffs. Five of these cases have subsequently reached final resolution in our favor, one has been annulled and returned to the trial court for further proceedings, and two remain on appeal. To date, we have paid total judgments including costs of approximately six thousand Euros. These payments were made in order to appeal three Italian small claims cases, two of which were subsequently reversed on appeal and one of which remains on appeal. To date, no tobacco-related case has been finally resolved in favor of a plaintiff against us, our subsidiaries or indemnitees.

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The table below lists the verdicts and post-trial developments in the two pending cases (excluding one individual case on appeal from Italian small claims court) in which verdicts were returned in favor of plaintiffs:


Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
February 2004	Brazil/ADESF	Class Action	The Civil Court of São Paulo found defendants liable without hearing evidence. The court did not assess moral or actual damages, which were to be assessed in a second phase of the case. The size of the class was not defined in the ruling.	In April 2004, the court clarified its ruling, awarding “moral damages” of R$1,000 (approximately $450) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case. The size of the class still has not been estimated. Defendants appealed to the São Paulo Court of Appeals, and the case, including the execution of the judgment, was stayed pending appeal. On November 12, 2008, the São Paulo Court of Appeals annulled the ruling finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In addition, the defendants have filed a constitutional appeal to the Federal Supreme Court on the basis that the plaintiff did not have standing to bring the lawsuit. This appeal is still pending.

October 2003	Brazil/Da Silva	Individual Smoking and Health	The Court of Appeal of Rio Grande do Sul reversed the trial court ruling in favor of Philip Morris Brasil and awarded plaintiffs R$768,000 (approximately $343,000).	In December 2004, a larger panel of the Court of Appeal of Rio Grande do Sul overturned the adverse decision. Plaintiff has appealed to the Supreme Court. The appeal is pending.

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Pending claims related to tobacco products generally fall within the following categories:

Smoking and Health Litigation : These cases primarily allege personal injury and are brought by individual plaintiffs or on behalf of a class of individual plaintiffs. Plaintiffs’ allegations of liability in these 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, violations of deceptive trade practice laws and consumer protection statutes. Plaintiffs in these cases seek various forms of relief, including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include licit activity, failure to state a claim, lack of defect, lack of proximate cause, assumption of the risk, contributory negligence, and statute of limitations.

As of February 15, 2009, there were a number of smoking and health cases pending against our subsidiaries or indemnitees, as follows:

•

125 cases brought by individual plaintiffs against our subsidiaries (122) or indemnitees (3) in Argentina (43), Australia (2), Brazil (53), Canada (1), Chile (11), Costa Rica (1), Finland (3), Greece (1), Israel (1), Italy (5), Japan (1), the Philippines (1), Poland (1), and Scotland (1), compared with 136 such cases on December 31, 2007, and 137 cases on December 31, 2006; and

•

5 cases brought on behalf of classes of individual plaintiffs against our subsidiaries in Brazil (2), Bulgaria (1) and Canada (2), compared with 3 such cases on December 31, 2007, and 2 such cases on December 31, 2006.

In the individual cases in Finland, in which our indemnitees (our former licensees now known as Amer Sports Corporation and Amerintie 1 Oy) and another member of the industry are defendants. Plaintiffs allege personal injuries as a result of smoking. All three cases were tried together before the District Court of Helsinki . Trial began in March 2008, and concluded in May 2008. In October 2008, the District Court issued decisions in favor of defendants in all three cases. Plaintiffs have filed appeals.

In the first class action pending in Brazil, 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 São Paulo, Brazil, filed July 25, 1995, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer organization, is seeking damages for smokers and former smokers, and injunctive relief. In February 2004, the trial court found defendants liable without hearing evidence. The court did not assess moral or actual damages, which were to be assessed in a second phase of the case. The size of the class was not defined in the ruling. In April 2004, the court clarified its ruling, awarding “moral damages” of R$1,000 (approximately $450) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case. The size of the class still has not been estimated. Defendants appealed to the São Paulo Court of Appeals, and the case, including the execution of the judgment, was stayed pending appeal. In November 2008, the São Paulo Court of Appeals annulled the ruling finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In addition, the defendants have filed a constitutional appeal to the Federal Supreme Court on the basis that the consumer association did not have standing to bring the lawsuit. This appeal is still pending.

In the second class action pending in Brazil, Public Prosecutor of São Paulo v. Philip Morris Brasil Industria e Comercio Ltda, Civil Court of the City of São Paulo, Brazil, filed August 6, 2007, our subsidiary is a defendant. The plaintiff, the Public Prosecutor of the State of São Paulo, is seeking (1) unspecified damages on behalf of all smokers nationwide, former smokers, and their relatives; (2) unspecified damages on behalf of people exposed to environmental tobacco smoke (“ETS”) nationwide, and their relatives; and (3) reimbursement of the health care costs allegedly incurred for the treatment of tobacco-related diseases by all 26 States, approximately 5,000 Municipalities, and the

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Federal District. In an interim ruling issued in December 2007, the trial court limited the scope of this claim to the State of São Paulo only. Our subsidiary was served with the claim in February 2008, and filed its answer to the complaint in March 2008. In December 2008, the trial court issued a decision declaring that it lacked jurisdiction and transferred the case to the Nineteenth Lower Civil Court in São Paulo where the ADESF case is pending.

In the class action in Bulgaria, Yochkolovski v. Sofia BT AD, et al., Sofia City Court, Bulgaria, filed March 12, 2008, our subsidiaries and other members of the industry are defendants. The plaintiff brought a collective claim on behalf of classes of 1) smokers who were allegedly misled by tar and nicotine yields and 2) minors who were allegedly misled by marketing. Plaintiff seeks damages for economic loss, pain and suffering, medical treatment, and withdrawal from the market of all cigarettes that allegedly do not comply with tar and nicotine labeling requirements. The court dismissed the youth marketing claims, and plaintiff appealed that decision. The court also has ordered plaintiff to provide additional evidence in support of the remaining claims. Our subsidiaries have not been served with the complaint.

In the first class action pending in Canada, Cecilia Letourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI Macdonald Corp., Quebec Superior Court, Canada, filed in September 1998, our subsidiary and two other Canadian manufacturers are defendants. The plaintiff, an individual smoker, is seeking compensatory and unspecified punitive damages for each member of the class who is deemed “addicted” to smoking. The class was certified in 2005. Defendants’ motion to dismiss on statute-of-limitations grounds was denied in May 2008. Discovery is ongoing; no trial date has been set.

In the second class action pending in Canada, Conseil Quebecois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, our subsidiary and two other Canadian manufacturers are defendants. The plaintiff, an individual smoker, is seeking compensatory and unspecified punitive damages for each member of the class who suffers from certain smoking-related diseases. The class was certified in 2005. Discovery is ongoing; no trial date has been set.

Health Care Cost Recovery Litigation : These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of health care cost expenditures allegedly caused by tobacco products. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery including unjust enrichment, negligence, negligent design, strict liability, breach of express and implied warranties, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, defective product, failure to warn, sale of cigarettes to minors, and claims under statutes governing competition and deceptive trade practices. Plaintiffs in these cases seek various forms of relief including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, remoteness of injury, failure to state a claim, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), and statute of limitations.

As of February 15, 2009, there were a total of 10 health care cost recovery cases pending against us, our subsidiaries and indemnitees, compared with 8 such cases on December 31, 2007, and 3 such cases on December 31, 2006, as follows:

•

3 cases brought against us, our subsidiaries and our indemnitees in Canada (2) and in Israel (1); and

•

7 cases brought in Nigeria (6) and Spain (1) against our subsidiaries.

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In the first health care cost recovery case pending in Canada, 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, we, our subsidiary, our indemnitee (PM USA), and other members of the industry are defendants. The plaintiff, the government of the province of British Columbia, brought a claim based upon legislation enacted by the province authorizing the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, resulting from a “tobacco related wrong.” The Supreme Court has held that the statute is constitutional. We and certain other non-Canadian defendants challenged the jurisdiction of the court. The court rejected the jurisdictional challenge and the case is in the early stages of litigation. At the request of the parties, the trial date scheduled for September 2010 has been cancelled. No new trial date has been set.

On March 13, 2008, a second health care cost recovery case was filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al., Court of Queen’s Bench of New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, in which we, our subsidiary, our indemnitees (PM USA and Altria Group, Inc.), and other members of the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation is very similar to the law introduced in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur, as a result of a “tobacco related wrong.” Our subsidiary, indemnitees, and we have been served with the complaint. Preliminary motions are pending before the Court.

In the case in Israel, Kupat Holim Clalit v. Philip Morris USA, et al., Jerusalem District Court, Israel, filed September 28, 1998, we, our subsidiary, and our indemnitee (PM USA), together with other members of the industry are defendants. The plaintiff, a private health care provider, brought a claim seeking reimbursement of the cost of treating its members for alleged smoking-related illnesses for the years 1990-1998. Certain defendants filed a motion to dismiss the case. The motion was rejected, and those defendants filed a motion with the Israel Supreme Court for leave to appeal. The appeal was heard by the Supreme Court in March 2005, and the parties are awaiting the court’s decision.

In the first case in Nigeria, The Attorney General of Lagos State v. British American Tobacco (Nigeria) Limited, et al., High Court of Lagos State, Lagos, Nigeria, filed April 30, 2007, our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. In February 2008, our subsidiary was served with a Notice of Discontinuance. The claim was formally dismissed in March 2008. However, the plaintiff has since refiled its claim. Our subsidiary has been served with the refiled complaint but is contesting service. We currently conduct no business in Nigeria.

In the second case in Nigeria, The Attorney General of Kano State v. British American Tobacco (Nigeria) Limited, et al., High Court of Kano State, Kano, Nigeria, filed May 9, 2007, our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. The case is in the early stages of litigation, and the defendants have filed various preliminary motions upon which the court is yet to rule. Our subsidiary is contesting service.

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plaintiff’s failure to comply with various procedural requirements when filing and serving the claim. The plaintiff did not appeal the dismissal. However, in October 2008, the plaintiff refiled its claim. Our subsidiary has not yet been served with the refiled complaint.

In the fourth case in Nigeria, The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria) Limited, et al., High Court of Oyo State, Ibadan, Nigeria, filed May 25, 2007, our subsidiary and other members of the industry are defendants . Plaintiffs seek reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. The case is in the early stages of litigation, and the defendants have filed various preliminary motions upon which the court is yet to rule. Our subsidiary is contesting service.

In the fifth case in Nigeria, The Attorney General of the Federation v. British American Tobacco (Nigeria) Limited, et al., Federal High Court, Abuja, Nigeria, filed July 25, 2007, our subsidiary and other members of the industry are defendants . Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. Our subsidiary has not yet been served with the claim.

In the sixth case in Nigeria, The Attorney General of Akwa Ibom State v. British American Tobacco (Nigeria) Limited, et al., High Court of Akwa Ibom State, Uyo, Nigeria , the exact filing date is unknown at this time. Our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases, payment of anticipated costs of treating alleged smoking-related diseases, various forms of injunctive relief, plus punitive damages. Plaintiff has voluntarily dismissed its case against our subsidiary. Therefore, this case is not included in the above pending case count and will not be reported in the future.

In the seventh case in Nigeria, The Attorney General of Ogun State v. British American Tobacco (Nigeria) Limited, et al., High Court of Ogun State, Abeokuta, Nigeria , filed February 26, 2008, our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various forms of injunctive relief, plus punitive damages. Our subsidiary was served with notice of the claim in December 2008, but is contesting service.

In the series of proceedings in Spain, Junta de Andalucia, et al. v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, the first of which was filed February 21, 2002, our subsidiary and other members of the industry were defendants. The plaintiffs sought reimbursement for the cost of treating certain of their citizens for various smoking-related illnesses. In May 2004, the first instance court dismissed the initial case, finding that the State was a necessary party to the claim, and thus, the claim must be filed in the Administrative Court. The plaintiffs appealed. In February 2006, the appellate court affirmed the lower court’s dismissal. The plaintiffs then filed notice that they intended to pursue their claim in the Administrative Court against the State. Because they were defendants in the original proceeding, our subsidiary and other members of the industry filed notices with the Administrative Court that they are interested parties in the case. In September 2007, the plaintiffs filed their complaint in the Administrative Court. In November 2007, the Administrative Court dismissed the claim. The plaintiffs asked the Administrative Court to reconsider its decision dismissing the case, and that request was rejected in a ruling rendered in February 2008. Plaintiffs appealed to the Supreme Court. In June 2008, our subsidiary filed a brief of appearance before the Supreme Court giving notice that it is an interested party in the appeal proceedings initiated by the plaintiffs. The Administrative Court has recognized our subsidiary as a party. Plaintiffs have filed a second claim in the Administrative Court against the Ministry of Economy. This second claim seeks the same relief as the original claim, but relies on a different procedural posture. The Administrative Court has recognized our subsidiary as a party.

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Lights Cases : These cases, brought by individual plaintiffs, or on behalf of a class of individual plaintiffs, allege that the use of the term “lights” constitutes fraudulent and misleading conduct. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery including misrepresentation, deception, and breach of consumer protection laws. Plaintiffs seek various forms of relief including restitution, and compensatory and other damages. Defenses raised include lack of causation, lack of reliance, assumption of the risk, and statute of limitations.

As of February 15, 2009, there were a number of lights cases pending against our subsidiaries and indemnitees, as follows:

•

3 cases brought on behalf of various classes of individual plaintiffs (some overlapping) in Israel, compared with 2 such cases on December 31, 2007 and December 31, 2006;

•

2,010 cases brought by individuals against our subsidiaries in the equivalent of small claims courts in Italy where the maximum damages claimed are approximately one thousand Euros per case, compared with 2,026 such cases on December 31, 2007, and 23 such cases on December 31, 2006.

In one class action pending in Israel, El-Roy, et al. v. Philip Morris Incorporated, et al., District Court of Tel-Aviv/Jaffa, Israel, filed January 18, 2004, our subsidiary and our indemnitees (PM USA and our former importer Menache H. Eliachar Ltd.) are defendants. The plaintiffs filed a purported class action claiming that the class members were misled by the descriptor “lights” into believing that Lights cigarettes are safer than full flavor cigarettes. The claim seeks recovery of the purchase price of Lights cigarettes and compensation for distress for each class member. Hearings took place in November 2008 regarding whether the case meets the legal requirements necessary to allow it to proceed as a class action. The parties will now file final briefs on class certification.

The claims in a second class action pending in Israel, Navon, et al. v. Philip Morris Products USA, et al., District Court of Tel-Aviv/Jaffa, Israel , filed December 5, 2004, against our indemnitee (our distributor M.H. Eliashar Distribution Ltd.) and other members of the industry are similar to those in El-Roy, and the case is currently stayed pending a ruling on class certification in El-Roy .

In the third class action pending in Israel, Numberg, et al. v. Philip Morris Products S.A., et al., District Court of Tel Aviv/Jaffa, Israel, filed May 19, 2008, our subsidiaries and our indemnitee (our distributor M.H. Eliashar Distribution Ltd.) and other members of the industry are defendants. The plaintiffs filed a purported class action claiming that the class members were misled by pack colors, terms such as “slims” or “super slims” or “blue,” and text describing tar and nicotine yields. Plaintiffs allege that these pack features misled consumers to believe that the cigarettes with those descriptors are safer than full flavor cigarettes. Plaintiffs seek recovery of the price of the brands at issue that were purchased from December 31, 2004 to the date of filing of the claim. They also seek compensation for mental anguish and punitive damages. Our subsidiaries Philip Morris Ltd. and Philip Morris Products S.A., and our indemnitee M.H. Eliashar Distribution Ltd., have been served with the claim.

Public Civil Actions : Claims have been filed either by an individual, or a public or private entity, seeking to protect collective or individual rights, such as the right to health, the right to information or the right to safety. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery including product defect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.

As of February 15, 2009, there were 12 public civil actions pending against our subsidiaries in Argentina (1), Brazil (3), Colombia (7) and Venezuela (1), compared with 9 such cases on December 31, 2007, and 5 such cases on December 31, 2006.

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In the public civil action in Argentina, Asociación Argentina de Derecho de Danos v. Massalin Particulares S.A., et al., Civil Court of Buenos Aires, Argentina, filed February 26, 2007, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer association, seeks the establishment of a relief fund for reimbursement of medical costs associated with diseases allegedly caused by smoking. Our subsidiary filed its answer to the complaint in September 2007.

In the first public civil action in Brazil, Osorio v. Philip Morris Brasil Industria e Comercio Ltda., et al., Federal Court of São Paulo, Brazil, filed September 2003, our subsidiary, another member of the industry and various government entities are defendants . The plaintiff seeks a ban on the production and sale of cigarettes on the grounds that they are harmful to health and cause the government to spend money on health care. Plaintiff alleges that smoking violates the Brazilian constitutional right to health, that smokers have no free will because they are addicted, and that ETS is harmful. Plaintiff seeks the suspension of the defendants’ licenses to manufacture cigarettes, the revocation of any import licenses for tobacco-related products, the collection of all tobacco-containing products from the market, and a daily fine amounting to R$1 million (approximately $446,000) for any violation of the injunction order. Our subsidiary filed its answer to the complaint in June 2004.

In the second public civil action in Brazil, Associacao dos Consumidores Explorados do Distrito Federal v. Sampoerna Tabacos America Latina Ltda., State Trial Court of Brasilia, Brazil, filed April 18, 2006, our subsidiary is a defendant. The plaintiff, a consumer association, seeks a ban on the production and sale of cigarettes on the grounds that they are harmful to health. Plaintiff’s complaint also requests that a fine amounting to R$1 million (approximately $446,000) per day be imposed should the ban be granted and defendant continue to produce or sell cigarettes. Our subsidiary filed a response to the complaint in May 2006. The trial court dismissed the case in November 2007. Plaintiff appealed. In November 2008, the appellate court affirmed the trial court’s dismissal. Plaintiff has filed a further appeal.

In the third public civil action pending in Brazil, The Brazilian Association for the Defense of Consumer Health (SAUDECON) v. Philip Morris Brasil Industria e Comercio Ltd and Souza Cruz S.A., Civil Court of City of Porto Alegre, Brazil, filed November 3, 2008, our subsidiary is a defendant. The plaintiff, a consumer organization, is asking the court to establish a fund that will be used to provide treatment, for a minimum of two years, to smokers who claim to be addicted and who do not otherwise have access to smoking cessation treatment. Plaintiff requests that each defendant’s liability be determined according to its market share. Our subsidiary was served with the complaint in December 2008, and filed its answer in January 2009.

In the first public civil action in Colombia, Garrido v. Philip Morris Colombia S.A., Civil Court of Bogotá , Colombia, filed August 28, 2006, our subsidiary is a defendant. The plaintiff seeks various forms of injunctive relief, including the ban of the use of “lights” descriptors, and requests that defendant be ordered to finance a national campaign against smoking. Our subsidiary filed its answer in April 2007.

In the second public civil action in Colombia, Garrido v. Coltabaco (Garrido II), Civil Court of Bogotá, Colombia, filed October 27, 2006, our subsidiary is a defendant. The plaintiff’s claims are identical to those in Garrido , above. Our subsidiary filed its answer in April 2007.

In the third public civil action in Colombia, Morales v. Philip Morris Colombia S.A. and Colombian Government, Administrative Court of Bogotá, Colombia, filed February 12, 2007, our subsidiary and a government entity are defendants. The plaintiff alleges violations of the collective right to a healthy environment, public health rights, and the rights of consumers, and that the government failed to protect those rights. Plaintiff seeks various monetary damages and other relief, including a ban on descriptors and a ban on cigarette advertising. Our subsidiary filed its answer to the complaint in March 2007.

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In the fourth public civil action in Colombia , Morales, et al. v. Coltabaco (Morales II), Civil Court of Bogotá, Colombia, filed February 5, 2008, our subsidiary is a defendant. The plaintiffs allege misleading advertising, product defect, failure to inform, and the targeting of minors in advertising and marketing. Plaintiffs seek various monetary relief including a percentage of the costs incurred by the state each year for treating tobacco-related illnesses to be paid to the Ministry of Social Protection (from the date of incorporation of Coltabaco). After this initial payment, plaintiffs seek a fixed annual contribution to the government of $50 million. Plaintiffs also request that a statutory incentive award be paid to them for filing the claim. Our subsidiary filed its answer in July 2008.

In the fifth public civil action in Colombia, Morales, et al. v. Productora Tabacalera de Colombia S.A. (Protabaco), et al., (Morales III), Administrative Court of Bogotá, Colombia , filed December 19, 2007, two of our subsidiaries, other members of the industry, and various government entities are defendants. The plaintiffs’ claims are identical to those in Morales II , above. Our subsidiaries filed their answers in August 2008.

In the sixth public civil action in Colombia, Guzman v. Coltabaco, et al., Administrative Court of Bogotá, Colombia, filed May 8, 2007, our subsidiary, another member of the industry, and various government entities are defendants. The plaintiff is seeking economic restitution to the country, an increase in sales tax for cigarettes, as well as various forms of injunctive relief. Our subsidiary filed its answer in June 2007.

In the seventh public civil action in Colombia, Roche v. Philip Morris Colombia S.A., Civil Court of Bogotá, Colombia, filed November 14, 2008, our subsidiary is a defendant. Plaintiff alleges violations of the collective right to health because the defendant failed to include information about ingredients and their toxicity on cigarette packs. Plaintiff asks the court to order our subsidiary to immediately cease manufacture and/or distribution of cigarettes until information on ingredients and toxicity is included on packs. Our subsidiary was served with the claim in December 2008, and filed its answer in January 2009.

In the public civil action in Venezuela, Federation of Consumers and Users Associations (FEVACU), et al. v. National Assembly of Venezuela and the Venezuelan Ministry of Health, Constitutional Chamber of the Venezuelan Supreme Court , filed April 29, 2008, the Company was not named as a defendant, the plaintiff published a notice pursuant to court order, notifying all interested parties to appear in the case. In January 2009, our subsidiary appeared in the case in response to this notice. The plaintiffs purport to represent the right to health of the citizens of Venezuela and claims that the government failed to protect adequately its citizens’ right to health. The claim asks the court to order the government to enact stricter regulations on the manufacture and sale of tobacco products. In addition, the plaintiffs ask the court to order companies involved in the tobacco industry to allocate a percentage of their “sales or benefits” to establish a fund to pay for the health care costs of treating smoking-related diseases. In October 2008, the court ruled that plaintiffs have standing to file the claim and that the claim meets the threshold admissibility requirements.

Other Litigation: Other litigation includes an antitrust suit and various tax cases:

•

Antitrust: One case brought on behalf of a class of individual plaintiffs in the state of Kansas in the United States against us and other members of the industry alleging price-fixing; and

•

Tax: In Brazil, there are 92 tax cases involving Philip Morris Brasil S.A. relating to the payment of state tax on the sale and transfer of goods and services, federal social contributions, excise, social security and income tax, and other matters. Thirty-two of these cases are under administrative review by the relevant fiscal authorities and 60 are under judicial review by the courts.

In the antitrust class action in Kansas, Smith v. Philip Morris Companies, Inc., et al., District Court of Seward County, Kansas, filed February 7, 2000, we and other members of the industry are

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defendants . The plaintiff asserts that the defendant cigarette companies engaged in an international conspiracy to fix wholesale prices of cigarettes and sought certification of a class comprised of all persons in Kansas who were indirect purchasers of cigarettes from the defendants. The plaintiff claims unspecified economic damages resulting from the alleged price-fixing, trebling of those damages under the Kansas price-fixing statute and counsel fees. The trial court granted plaintiff’s motion for class certification and refused to permit the defendants to appeal. The case is now in the discovery phase. No trial date has yet been set.

Guarantees

At December 31, 2008, our third-party guarantees, which are primarily related to excise taxes, were $49 million, of which $44 million have no specific expiration dates. The remainder ($5 million) expires through 2012, with no guarantees expiring during 2009. We are required to perform under these guarantees in the event that a third party fails to make contractual payments. We do not have a liability on our consolidated balance sheet at December 31, 2008, as the fair value of these guarantees is insignificant due to the fact that the probability of future payments under these guarantees is remote.

Under the terms of the Distribution Agreement between Altria and us, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. We will indemnify Altria and PM USA for liabilities related to tobacco products manufactured by us or contract manufactured for us by PM USA, and PM USA will indemnify us for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for us. We do not have a liability recorded on our balance sheet at December 31, 2008, as the fair value of this indemnification is insignificant since the probability of future payments under this indemnification is remote.

Item 4.

Submission of Matters to a Vote of Security Holders.

None.

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PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our share repurchase activity for each of the three months in the quarter ended December 31, 2008 was as follows:


Period	Total Number of Shares Repurchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
October 1, 2008 – October 31, 2008(1)	3,955,490	$	47.38	90,112,425	$	8,301,070,583

November 1, 2008 – November 30, 2008(1)	732,000	$	40.92	90,844,425	$	8,271,117,143

December 1, 2008 – December 31, 2008(1)	15,931,050	$	42.10	106,775,475	$	7,600,379,258

Pursuant to Publicly Announced Plans or Programs	20,618,540	$	43.07

October 1, 2008 – October 31, 2008(3)	711	$	45.99

November 1, 2008 – November 30, 2008(3)	—	$	—

December 1, 2008 – December 31, 2008(3)	7,752	$	41.29

For the Quarter Ended December 31, 2008	20,627,003	$	43.07

(1)	On January 30, 2008, we adopted and announced a $13.0 billion two-year share repurchase program that began on May 1, 2008. These share repurchases have been made pursuant to this program.

(2)	Aggregate number of shares repurchased under the share repurchase program as of the end of the period presented.

(3)	Shares repurchased represent shares tendered to us by employees who vested in restricted stock and rights, or exercised stock options, and used shares to pay all, or a portion of, the related taxes and/or option exercise price.

The principal stock exchange, on which our common stock (no par value) is listed, is the New York Stock Exchange. At January 30, 2009, there were approximately 96,200 holders of record of our common stock.

Our common stock is also listed on the NYSE Euronext/Paris and Swiss stock exchanges.

The other information called for by this Item is hereby incorporated by reference to the paragraph captioned “Quarterly Financial Data (Unaudited)” on page 82 of the 2008 Annual Report and made a part hereof.

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Item 6.

Selected Financial Data.

The information called for by this Item is hereby incorporated by reference to the information with respect to 2004-2008 appearing under the caption “Selected Financial Data—Five-Year Review” on page 47 of the 2008 Annual Report and made a part hereof.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The information called for by this Item is hereby incorporated by reference to the paragraphs captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) on pages 21 to 46 of the 2008 Annual Report and made a part hereof.

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk.

The information called for by this Item is hereby incorporated by reference to the paragraphs in the MD&A captioned “Market Risk” and “Value at Risk” on pages 42 to 43 of the 2008 Annual Report and made a part hereof.

Item 8.

Financial Statements and Supplementary Data.

The information called for by this Item is hereby incorporated by reference to the 2008 Annual Report as set forth under the caption “Quarterly Financial Data (Unaudited)” on page 82 and in the Index to Consolidated Financial Statements and Schedules (see Item 15) and made a part hereof.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A.

Controls and Procedures.

(a)	Disclosure Controls and Procedures

PMI carried out an evaluation, with the participation of PMI’s management, including PMI’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of PMI’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, PMI’s Chief Executive Officer and Chief Financial Officer concluded that PMI’s disclosure controls and procedures are effective. There have been no changes in PMI’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, PMI’s internal control over financial reporting.

See Exhibit 13 for the Report of Management on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm on page 83 to 84 of the 2008 Annual Report incorporated herein by reference and made a part hereof.

Item 9B.

Other Information.

None.

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PART III

Except for the information relating to the executive officers set forth in Item 10 and the information relating to equity compensation plans set forth in Item 12, the information called for by Items 10-14 is hereby incorporated by reference to PMI’s definitive proxy statement for use in connection with its annual meeting of stockholders to be held on May 5, 2009 that will be filed with the SEC on or about March 26, 2009 (the “proxy statement”), and, except as indicated therein, made a part hereof.

Item 10.

Directors, Executive Officers and Corporate Governance.

Executive Officers as of February 15, 2009:


Name	Office	Age
Louis C. Camilleri	Chairman and Chief Executive Officer	54
André Calantzopoulos	Chief Operating Officer	51
Paolo Degola ¹⁾	President, European Union	52
Mark Friedman	Deputy General Counsel	52
G. Penn Holsenbeck	Vice President and Corporate Secretary	62
Even Hurwitz	Senior Vice President, Corporate Affairs	47
Marco Kuepfer	Vice President Finance and Treasurer	51
Jean-Claude Kunz	President, EEMA Region & PMI Duty Free	55
Matteo Pellegrini	President, Asia	46
Joachim Psotta	Vice President and Controller	51
Daniele Regorda	Senior Vice President, Human Resources	51
Hermann Waldemer	Chief Financial Officer	51
Charles R. Wall	Vice Chairman and General Counsel	63
Miroslaw Zielinski	President, Latin America & Canada	47

1)	Mr. Degola will retire effective March 31, 2009, and will be succeeded by Mr. Jacek Olczak, currently serving as our Managing Director Germany and Austria.

All of the above-mentioned officers, except for Messrs. Camilleri, Holsenbeck and Wall, have been employed by us in various capacities during the past five years.

Prior to the Distribution Date, Mr. Camilleri served as the Chairman and Chief Executive Officer of Altria, positions he held from August 2002 and April 2002, respectively. Mr. Camilleri also served as a director of Kraft from March 2001 to December 2007 and as Kraft’s Chairman from September 2002 until the completion of the spin-off of Kraft on March 30, 2007.

Prior to the Distribution Date, Mr. Holsenbeck served as Vice President, Associate General Counsel and Corporate Secretary of Altria, a position he held since joining Altria in 1995.

Mr. Wall has been our Vice Chairman since the Distribution Date and also became General Counsel in November 2008. Prior to the Distribution Date, Mr. Wall served as Senior Vice President and General Counsel of Altria, a position he held since February 2000.

Codes of Conduct and Corporate Governance

We have adopted the Philip Morris International Code of Conduct, which complies with requirements set forth in Item 406 of Regulation S-K. This Code of Conduct applies to all of our employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We have also adopted a code of

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business conduct and ethics that applies to the members of our Board of Directors. These documents are available free of charge on our website at www.pmintl.com and will be provided free of charge to any stockholder requesting a copy by writing to: Corporate Secretary, Philip Morris International Inc., 120 Park Avenue, New York, NY 10017.

In addition, we have adopted corporate governance guidelines and charters for our Audit, Compensation and Leadership Development, Product Innovation and Regulatory Affairs and Nominating and Corporate Governance committees of the Board of Directors. All of these documents are available free of charge on our web site at www.pmintl.com, are included in our definitive proxy statement, and will be provided free of charge to any stockholder requesting a copy by writing to: Corporate Secretary, Philip Morris International Inc., 120 Park Avenue, New York, NY 10017. Any waiver granted by Philip Morris International Inc. to its principal executive officer, principal financial officer or controller under the code of ethics, or certain amendments to the code of ethics, will be disclosed on our website at www.pmintl.com.

The information on our website is not, and shall not be deemed to be, a part of this Report or incorporated into any other filings made with the SEC.

Item 11.

Executive Compensation.

Refer to “Compensation and Leadership Development Committee Matters” and “Compensation of Directors” sections of the proxy statement.

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The number of shares to be issued upon exercise or vesting and the number of shares remaining available for future issuance under PMI’s equity compensation plans at December 31, 2008, were as follows:


	Number of Shares to be Issued upon Exercise of Outstanding Options and Vesting of Deferred Stock	Weighted Average Exercise Price of Outstanding Options		Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans
Equity compensation plans approved by stockholders(1)	27,729,608	$	22.99	36,926,402

(1) Approved by Altria as our sole stockholder prior to the Spin-off.

Refer to “Ownership of Equity Securities” section of the proxy statement.

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

Refer to “Related Person Transactions and Code of Conduct” and “Independence of Nominees” sections of the proxy statement.

Item 14.

Principal Accounting Fees and Services .

Refer to “Audit Committee Matters” section of the proxy statement.

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PART IV

Item 15.

Exhibits and Financial Statement Schedules .

(a) Index to Consolidated Financial Statements and Schedules


		2008 Annual Report Page
Data incorporated by reference to Philip Morris International Inc.’s 2008 Annual Report:
Consolidated Balance Sheets at December 31, 2008 and 2007		48-49
Consolidated Statements of Earnings for the years ended December 31, 2008, 2007 and 2006		50
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006		51
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		52-53
Notes to Consolidated Financial Statements		54-82
Report of Independent Registered Public Accounting Firm		83
Report of Management on Internal Control Over Financial Reporting		84

Schedules have been omitted either because such schedules are not required or are not applicable.

(b) The following exhibits are filed as part of this Report:



2.1	—	Distribution Agreement between Altria Group, Inc. and Philip Morris International Inc. dated January 30, 2008 (incorporated by reference to Exhibit 2.1 to the Registration Statement on Form 10 filed February 7, 2008).

3.1	—	Amended and Restated Articles of Incorporation of Philip Morris International Inc. (incorporated by reference to Exhibit 3.1 to the Registration Statement on Form 10 filed February 7, 2008).

3.2	—	Amended and Restated By-laws of Philip Morris International Inc. (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed March 31, 2008).

4.1	—	Specimen Stock Certificate of Philip Morris International Inc. (incorporated by reference to Exhibit 4.1 to the Registration Statement on Form 10 filed February 7, 2008).

4.2	—	Indenture dated as of April 25, 2008, between Philip Morris International Inc. and HSBC Bank USA, National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-3, dated April 25, 2008).

4.3	—	The Registrant agrees to furnish copies of any instruments defining the rights of holders of long-term debt of the Registrant and its consolidated subsidiaries that does not exceed 10 percent of the total assets of the Registrant and its consolidated subsidiaries to the Commission upon request.

10.1	—	Transition Services Agreement between Altria Corporate Services, Inc. and Philip Morris International Inc., dated as of March 28, 2008 (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed March 31, 2008).

10.2	—	Tax Sharing Agreement between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008 (incorporated by reference to Exhibit 10.3 to Current Report on Form 8-K filed March 31, 2008).

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10.3	—	Employee Matters Agreement between Altria Group, Inc. and Philip Morris International Inc., dated as of March 28, 2008 (incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K filed March 31, 2008).

10.4	—	Intellectual Property Agreement between Philip Morris International Inc. and Philip Morris USA Inc., dated as of January 1, 2008 (incorporated by reference to Exhibit 10.4 to the Registration Statement on Form 10 filed March 5, 2008).

10.5	—	Credit Agreement relating to a US$3,000,000,000 5-Year Revolving Credit Facility (including a US$900,000,000 swingline option) and a US$1,000,000,000 3-Year Revolving Credit Facility (including a US$300,000,000 swingline option) and a EUR 1,500,000,000 364-Day Term Loan Facility dated as of December 4, 2007 among Philip Morris International Inc. and the Initial Lenders named therein and J.P. Morgan Europe Limited as Facility Agent and Swingline Agent and J.P. Morgan PLC, Citigroup Global Markets Limited, Credit Suisse, Cayman Islands Branch, Deutsche Bank Securities Inc., Goldman Sachs Credit Partners L.P. and Lehman Brothers Inc. as Mandated Lead Arrangers and Bookrunners (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form 10 filed February 7, 2008).

10.6	—	Credit Agreement relating to EUR 2,000,000,000 5-Year Revolving Credit Facility (including a EUR 1,000,000,000 swingline option) and a EUR 2,500,000,000 3-Year Term Loan Facility dated as of 12 May 2005 among Philip Morris International Inc. and the Initial Lenders named therein and Citibank International plc as Facility Agent and Swingline Agent, Citigroup Global Markets Limited, Credit Suisse First Boston, Cayman Islands Branch, Deutsche Bank Securities Inc. and J.P. Morgan plc as Mandated Lead Arrangers and Bookrunners and ABN AMRO Bank N.V., HSBC Bank plc and Société Générale as Mandated Lead Arrangers (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form 10 filed September 27, 2007).

10.7	—	Anti-Contraband and Anti-Counterfeit Agreement and General Release dated July 9, 2004 and Appendices (Portions of this exhibit have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission) (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form 10 filed February 7, 2008).

10.8	—	Philip Morris International Inc. Automobile Policy (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form 10 filed February 7, 2008).

10.9	—	Philip Morris International Inc. Financial Counseling Program (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form 10 filed February 7, 2008).

10.10	—	Amended and Restated Philip Morris International Benefit Equalization Plan.

10.11	—	Philip Morris International Inc. 2008 Performance Incentive Plan (incorporated by reference to Exhibit 10.10 to the Registration Statement on Form 10 filed February 7, 2008).

10.12	—	Form of Philip Morris International Inc. 2008 Performance Incentive Plan Deferred Stock Agreement (Pre-2008 Grants) (incorporated by reference to Exhibit 10.11 to the Registration Statement on Form 10 filed February 7, 2008).

10.13	—	Form of Philip Morris International Inc. 2008 Performance Incentive Plan Deferred Stock Agreement (2008 Grants) (incorporated by reference to Exhibit 10.12 to the Registration Statement on Form 10 filed February 7, 2008).

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10.14	—	Form of Philip Morris International Inc. 2008 Performance Incentive Plan Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.13 to the Registration Statement on Form 10 filed February 7, 2008).

10.15	—	Form of Philip Morris International Inc. 2008 Performance Incentive Plan Restricted Stock Agreement (2009 Grants) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed February 10, 2009).

10.16	—	Form of Philip Morris International Inc. 2008 Performance Incentive Plan Deferred Stock Agreement (2009 Grants) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed February 10, 2009).

10.17	—	Pension Fund of Philip Morris in Switzerland (IC) (incorporated by reference to Exhibit 10.14 to the Registration Statement on Form 10 filed February 7, 2008).

10.18	—	Summary of Supplemental Pension Plan of Philip Morris in Switzerland (incorporated by reference to Exhibit 10.15 to the Registration Statement on Form 10 filed February 7, 2008).

10.19	—	Form of Restated Employee Grantor Trust Enrollment Agreement (Executive Trust Arrangement) (incorporated by reference to Exhibit 10.18 to the Registration Statement on Form 10 filed February 7, 2008).

10.20	—	Form of Restated Employee Grantor Trust Enrollment Agreement (Secular Trust Arrangement) (incorporated by reference to Exhibit 10.19 to the Registration Statement on Form 10 filed February 7, 2008).

10.21	—	Philip Morris International Inc. 2008 Stock Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.20 to the Registration Statement on Form 10 filed March 5, 2008).

10.22	—	Philip Morris International Inc. 2008 Deferred Fee Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.21 to the Registration Statement on Form 10 filed on February 7, 2008).

10.23	—	Amendment to Employment Agreement with André Calantzopoulos. The employment agreement was previously filed as Exhibit 10.22 to the Registration Statement on Form 10 filed on February 7, 2008 and incorporated by reference to this Exhibit 10.23.

10.24	—	Amendment to Employment Agreement with Jean-Claude Kunz. The employment agreement was previously filed as Exhibit 10.23 to the Registration Statement on Form 10 filed on February 7, 2008 and incorporated by reference to this Exhibit 10.24.

10.25	—	Amendment to Employment Agreement with Hermann Waldemer. The employment agreement was previously filed as Exhibit 10.24 to the Registration Statement on Form 10 filed on February 7, 2008 and incorporated by reference to this Exhibit 10.25.

10.26	—	Agreement with Louis C. Camilleri (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form 10 filed on February 7, 2008).

10.27	—	Amended and Restated Supplemental Management Employees’ Retirement Plan.

10.28	—	Support Agreement, dated as of July 31, 2008, between Rothmans Inc., Philip Morris International Inc. and Latin America and Canada Holdings Limited (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on July 31, 2008).

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10.29	—	Amendment and Waiver Agreement dated as of February 6, 2009 to the Credit Agreement dated December 4, 2007 by and among Philip Morris International Inc., the Lenders party thereto and JP Morgan Europe Limited, as facility agent and swingline agent.

10.30	—	Supplemental Equalization Plan.

10.31	—	Form of Supplemental Equalization Plan Employee Grantor Trust Enrollment Agreement (Secular Trust).

10.32	—	Form of Supplemental Equalization Plan Employee Grantor Trust Enrollment Agreement (Executive Trust).

12	—	Statement regarding computation of ratios of earnings to fixed charges.

13	—	Pages 20 to 84 of the 2008 Annual Report, but only to the extent set forth in Items 1, 5-8, 9A, and 15 hereof. With the exception of the aforementioned information incorporated by reference in this Annual Report on Form 10-K, the 2008 Annual Report is not to be deemed “filed” as part of this Report.

21	—	Subsidiaries of Philip Morris International Inc.

23	—	Consent of independent registered public accounting firm.

24	—	Powers of attorney.

31.1	—	Certification of the Registrant’s Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	—	Certification of the Registrant’s Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	—	Certification of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	—	Certification of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


PHILIP MORRIS INTERNATIONAL INC.

By:		/s/ L OUIS C. C AMILLERI
		(Louis C. Camilleri Chairman and Chief Executive Officer)

Date: February 26, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:


Signature	Title	Date

/s/ L OUIS C. C AMILLERI (Louis C. Camilleri)	Director, Chairman and Chief Executive Officer	February 26, 2009

/s/ H ERMANN W ALDEMER (Hermann Waldemer)	Chief Financial Officer	February 26, 2009

/s/ J OACHIM P SOTTA (Joachim Psotta)	Vice President and Controller	February 26, 2009

*HAROLD BROWN, MATHIS CABIALLAVETTA, J. DUDLEY FISHBURN, GRAHAM MACKAY, SERGIO MARCHIONNE, LUCIO A. NOTO, CARLOS SLIM HELÚ, STEPHEN M. WOLF	Directors

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Exhibit 10.10

PHILIP MORRIS INTERNATIONAL BENEFIT EQUALIZATION PLAN

Effective as of January 1, 2008

(As amended and in effect on March 28, 2008)

(Adopted on

December 23, 2008)

TABLE OF CONTENTS


		Page No
ARTICLE I	DEFINITIONS	3

ARTICLE II	BENEFIT EQUALIZATION RETIREMENT ALLOWANCES AND BENEFIT EQUALIZATION PROFIT-SHARING ALLOWANCES	14

ARTICLE III	FUNDS FROM WHICH ALLOWANCES ARE PAYABLE	22

ARTICLE IV	THE ADMINISTRATOR	23

ARTICLE V	AMENDMENT AND DISCONTINUANCE OF THE PLAN	24

ARTICLE VI	FORMS; COMMUNICATIONS	25

ARTICLE VII	INTERPRETATION OF PROVISIONS	26

ARTICLE VIII	CHANGE IN CONTROL PROVISIONS	27

PHILIP MORRIS INTERNATIONAL BENEFIT EQUALIZATION PLAN

The Philip Morris International Benefit Equalization Plan governs the rights of an Employee whose benefit under the Retirement Plan or the Profit-Sharing Plan, or both Qualified Plans, is subject to one or more of the Statutory Limitations, or to the nondiscrimination requirements of Section 401(a)(4) of the Code and the coverage requirements of Section 410(b) of the Code. The liabilities allocable to Employees, former employees and retired employees of the international tobacco operations conducted by the Company and the other Participating Companies have been transferred from the Benefit Equalization Plan maintained by Altria Corporate Services, Inc. to the Plan.

Employees who received target payments pursuant to a Supplemental Enrollment Agreement generally are not eligible to participate in the Plan with respect to services provided after December 31, 2004, but, instead, are eligible to accrue future benefits under a separate plan. It is intended that Grandfathered Benefit Equalization Retirement Allowances and Grandfathered Benefit Equalization Profit-Sharing Allowances with respect to Grandfathered Employees and Grandfathered Retired Employees (as well as their spouses and beneficiaries) not be subject to the requirements of Section 409A of the Code and that the Plan be interpreted and administered in accordance with this intention.

The Plan as hereinafter set forth shall be effective with respect to Employees who incur a Separation from Service on or after January 1, 2008, except as otherwise provided herein. The Plan will also be the source of benefits to former employees of Philip Morris International Inc. and its subsidiaries who terminated employment prior to January 1, 2008. The provisions of the Plan shall not be construed to change the time and form of payment of that portion of the Benefit Equalization Retirement Allowance (referred to as a Grandfathered Benefit Equalization Retirement Allowance) and that portion of the Benefit Equalization Profit-Sharing Allowance (referred to as a Grandfathered Benefit Equalization Profit-Sharing Allowance) considered deferred before January 1, 2005 (within the meaning of Final Regulation §1.409A-6(a)(2) and other provisions of the Final Regulations) of a Grandfathered Retired Employee.

The rights of a person whose Separation from Service or date of becoming an Inactive Participant is before January 1, 2008 shall be governed by the provisions of the plan in which he was a participant as in effect on his Separation from Service or date of becoming an Inactive Participant, as the case may be, except to the extent that the administrator of the plan has determined in his sole discretion to administer the plan in good faith compliance with Section 409A of the Code and any then published guidance and to not subject any Grandfathered Benefit Equalization Retirement Allowance and Grandfathered Benefit Equalization Profit-Sharing Allowance to Section 409A of the Code.

The Plan is comprised of three separate plans, programs or arrangements. Each plan shall be treated as a separate plan, program or arrangement from the other plans. One of the plans provides benefits to a Retired Employee (or his Spouse or other Beneficiary) solely in excess of the Section 415 Limitations; the second plan provides benefits to a Retired Employee (or his Spouse or other Beneficiary) attributable solely to the Compensation Limitation; and the third plan provides benefits to a Retired Employee (or his Spouse or other Beneficiary) because payment of the benefit from one or both of the Qualified Plans could result in a failure to meet

the nondiscrimination requirements of Section 401(a)(4) of the Code or the coverage requirements of Section 410(b) of the Code.

ARTICLE I

DEFINITIONS

The following terms as used herein and in the Preamble shall have the meanings set forth below. Any capitalized term used herein or in the Preamble and not defined below shall have the meaning set forth in the Retirement Plan or the Profit-Sharing Plan, as the context may require.

(a) “ Actuarial Equivalent ” shall mean a benefit which is at least equivalent in value to the benefit otherwise payable pursuant to the terms of the Plan, based on the actuarial principles and assumptions set forth in Exhibit I to the Retirement Plan.

(b) “ Allowance ” or “ Allowances ” shall mean a Benefit Equalization Retirement Allowance, determined under ARTICLE IIA(1) of the Plan and a Benefit Equalization Profit-Sharing Allowance, determined under ARTICLE IIB of the Plan.

(i) In the case of a Retired Employee who is to receive all or a portion of his Benefit Equalization Retirement Allowance after his Separation from Service in a Single Sum Payment pursuant to ARTICLE IIC(1)(a), ARTICLE IIC(1)(b) or ARTICLE IIC(1)(c)(z) of the Plan, but who dies after his Separation from Service and before such Single Sum Payment is made:

(1) if the Retired Employee is married on the date of his death, the Beneficiary of such Single Sum Payment shall be the Spouse to whom he was married on the date of death; and

(2) if the Retired Employee is not married on the date of his death, the Beneficiary of such Single Sum Payment shall be the Retired Employee’s estate.

An Employee or Retired Employee may designate any other person or persons as the Beneficiary who is to receive a Single Sum Payment of his Benefit Equalization Retirement Allowance in the event that he dies after his Separation from Service and before such Single Sum Payment is paid to him by timely filing a beneficiary designation form with the Administrator (or his delegate), provided, however, that if the Employee or Retired Employee is married on the date of the filing of such beneficiary designation form, his Spouse must consent, in writing before a notary public or a duly authorized representative of his Participating Company, to such designation.

(ii) In the case of a Grandfathered Employee who is a Secular Trust Participant who has elected pursuant to ARTICLE IIC(2) of the Plan to receive after his Separation from Service that portion of his Benefit Equalization Retirement Allowance equal to the Grandfathered Benefit Equalization Retirement Allowance in the form of an Optional Payment described in ARTICLE I(x)(i)(1) or (2) of the Plan, the person or persons designated by the

Grandfathered Employee to receive (or who, pursuant to the terms of such Optional Payment, will receive) after his death a benefit according to the option elected by the Grandfathered Employee.

(iii) In the case of an Employee or Retired Employee who has been credited with a Benefit Equalization Profit-Sharing Allowance and who dies prior to the payment of such Benefit Equalization Profit-Sharing Allowance (or prior to the payment of the then remaining balance of such Benefit Equalization Profit-Sharing Allowance in the case of a Grandfathered Employee who has elected pursuant to ARTICLE IID(3) of the Plan to receive that portion of his Benefit Equalization Profit-Sharing Allowance equal to the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of an Optional Payment described in ARTICLE I(x)(ii) of the Plan):

(1) if the Employee or Retired Employee is married on the date of his death, the Beneficiary of such Benefit Equalization Profit-Sharing Allowance shall be the Spouse to whom he was married on the date of death; and

(2) if the Employee or Retired Employee is not married on the date of his death, the Beneficiary of such Benefit Equalization Profit-Sharing Allowance shall be the Employee’s or Retired Employee’s estate.

An Employee or Retired Employee may designate any other person or persons (including a trust created by the Employee or Retired Employee during his lifetime or by will) as Beneficiary of his Benefit Equalization Profit-Sharing Allowance in the event of his death by timely filing a beneficiary designation form with the Administrator (or his delegate), provided, however, that if the Employee or Retired Employee is married on the date of the filing of such beneficiary designation form, his Spouse must consent, in writing before a notary public or a duly authorized representative of his Participating Company, to such designation.

(d) “ Benefit Equalization Joint and Survivor Allowance ” shall mean the total amount that would be payable during a twelve (12) month period as a reduced Benefit Equalization Retirement Allowance to a Retired Employee for life and after his death the amount payable to his Spouse for life equal to one-half of the reduced Benefit Equalization Retirement Allowance payable to the Retired Employee (regardless of whether such form of benefit was available to such Retired Employee and his Spouse), which together shall be the Actuarial Equivalent of the Benefit Equalization Retirement Allowance of the Retired Employee.

(e) “ Benefit Equalization Profit-Sharing Allowance ” or “ Profit-Sharing Allowance ” shall mean the benefit determined under ARTICLE IIB of the Plan and payable at the times and in the forms set forth in ARTICLE IID of the Plan. The Benefit Equalization Profit-Sharing Allowance shall be comprised of the Grandfathered Benefit Equalization Profit-Sharing Allowance, if any, and the remaining portion of such Allowance.

(f) “ Benefit Equalization Retirement Allowance ” shall mean the benefit determined under ARTICLE IIA of the Plan and payable at the times and in the forms set forth in

ARTICLE IIC of the Plan. The Benefit Equalization Retirement Allowance shall be comprised of the Grandfathered Benefit Equalization Retirement Allowance, if any, and the remaining portion of such Allowance.

(g) “ Benefit Equalization Survivor Allowance ” shall mean the benefit payable to:

(i) the Spouse of a Deceased Employee; and

(ii) the Spouse of a deceased Retired Employee;

in an amount equal one-half of the reduced Benefit Equalization Retirement Allowance which would have been payable in the form of a Benefit Equalization Joint and Survivor Allowance to the Deceased Employee or deceased Retired Employee (regardless of whether such form of benefit was available to such Deceased Employee or deceased Retired Employee).

(h) “ Benefits Committee ” shall mean the Philip Morris International Benefits Committee.

(i) “ BEP Benefit Commencement Date ” shall mean the date on which the benefit to which the recipient is entitled to is paid or commences to be paid pursuant to the application filed in accordance with ARTICLE IIE of the Plan, or if no such application is filed, in accordance with the terms of the Plan as determined in the sole discretion of the Administrator. All such Allowances not paid in a Single Sum Payment are paid in arrears so that the actual date of payment shall be the first day of the calendar month next succeeding the BEP Benefit Commencement Date.

(1) (i) Except as provided in clauses (ii), (iii) and (iv) of this ARTICLE I(i)(1) of the Plan, the BEP Benefit Commencement Date of the Benefit Equalization Retirement Allowance shall be the Payment Date, but not later than the Latest Payment Date.

(ii) (A) Except as provided in clauses (B) and (C) of this ARTICLE I(i)(1)(ii), the BEP Benefit Commencement Date of that portion of a Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable in the form of an Optional Payment pursuant to an election under ARTICLE IIC(2) of the Plan to a Grandfathered Retired Employee who is a Secular Trust Participant shall be the Benefit Commencement Date of the Grandfathered Retired Employee’s Full, Deferred or Early Retirement Allowance under the Retirement Plan.

(B) The BEP Benefit Commencement Date of that portion of a Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable in the form of an Optional Payment with respect to a Grandfathered Retired Employee who voluntarily retires within the one (1) year period following the date of the filing of his application for an Optional Payment with the Administrator pursuant to ARTICLE IIC(2) of the Plan, or whose employment is terminated for misconduct (as determined by the Benefits Committee) within such one (1) year period, shall be the first day of the month following the expiration of the one (1) year period following the date of the filing of his application for an Optional Payment.

(C) The BEP Benefit Commencement Date of the benefit payable pursuant to ARTICLE IIC(2)(e) of the Plan to the Beneficiary of a Grandfathered Retired Employee who died after his Date of Retirement and prior to his BEP Benefit Commencement Date shall be the first day of the month following the death of the deceased Grandfathered Retired Employee.

(iii) The BEP Benefit Commencement Date of that portion of a Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance payable to a Grandfathered Retired Employee who is only eligible for a Vested Retirement Allowance at his Separation from Service shall be the Benefit Commencement Date of the Retired Employee’s Vested Retirement Allowance under the Retirement Plan.

(iv) The BEP Benefit Commencement Date of any Benefit Equalization Retirement Allowance described in ARTICLE IIA(1)(f) shall be the benefit commencement date of such Allowance as set forth in the General Release Agreement; provided, however, that if no time of payment is specified, the BEP Benefit Commencement Date shall be the Payment Date, but no later than the 15 ^th day of the third month following the end of the Employee’s Participating Company first taxable year in which the right is no longer subject to a substantial risk of forfeiture; provided, however, that no such Benefit Equalization Retirement Allowance shall change either the time or form of payment of the Benefit Equalization Retirement Allowance (including a Grandfathered Benefit Equalization Retirement Allowance) otherwise payable pursuant to the terms of the Plan.

(2) (A) Except as provided in clause (B) of this ARTICLE I(i)(2), the BEP Benefit Commencement Date of the Benefit Equalization Profit-Sharing Allowance shall be the Payment Date, but not later than the Latest Payment Date.

(B) The BEP Benefit Commencement Date of that portion of a Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance that is payable in the form of an Optional Payment pursuant to an election under ARTICLE IID(3) of the Plan to a Grandfathered Retired Employee who is a Secular Trust Participant shall be the date specified in the application.

(3) (A) Except as provided in clause (B) of this ARTICLE I(i)(3), the BEP Benefit Commencement Date of the Benefit Equalization Survivor Allowance payable to the Spouse of a Deceased Employee or deceased Retired Employee shall be the Survivor Allowance Payment Date, but not later than the Survivor Allowance Latest Payment Date.

(B) The BEP Benefit Commencement Date of that portion of the Benefit Equalization Survivor Allowance that is derived from the Grandfathered Benefit Equalization Retirement Allowance that is payable to:

(1) the Spouse of a Grandfathered Deceased Employee; or

(2) the Spouse of a deceased Grandfathered Retired Employee,

shall, in each case, be the Benefit Commencement Date of the Survivor Allowance payable to such Spouse under the Retirement Plan, provided that the Spouse may elect in accordance with the provisions of ARTICLE II, A5(c) or (f) of the Retirement Plan, as applicable to the Spouse, that the BEP Benefit Commencement Date be the first day of any month thereafter, but not later than the later of (i) the first day of the second calendar month following the month in which the Grandfathered Deceased Employee or deceased Grandfathered Retired Employee died (or if his date of birth was on the first day of a calendar month, the first day of the calendar month next following the calendar month in which the Grandfathered Deceased Employee or deceased Grandfathered Retired Employee died), or (ii) the date that would have been the Grandfathered Deceased Employee’s or deceased Grandfathered Retired Employee’s Unreduced Early Retirement Benefit Commencement Date.

(j) “ Change in Circumstance ” shall mean, with respect to a Grandfathered Employee or Grandfathered Retired Employee who is a Secular Trust Participant:

(1) the marriage of the Grandfathered Employee or Grandfathered Retired Employee;

(2) the divorce of the Grandfathered Employee or Grandfathered Retired Employee from his spouse (determined in accordance with applicable state law), provided:

(A) such spouse was the Beneficiary who is to receive an Optional Payment, or

(B) the Grandfathered Employee or Grandfathered Retired Employee elected pursuant to ARTICLE IIC(2) of the Plan to receive an Optional Payment pursuant to ARTICLE (x)(i)(1) of the Plan;

(3) the death of the Beneficiary designated by the Grandfathered Employee or Grandfathered Retired Employee to receive an Optional Payment after the death of the Grandfathered Retired Employee; or

(4) a medical condition of the Beneficiary, based on medical evidence satisfactory to the Administrator, which is expected to result in the death of the Beneficiary within five (5) years of the filing of an application for change in Optional Payment method pursuant to ARTICLE IIC(2) or ARTICLE IID(3) hereof.

(k) “ Company ” shall mean PMI Global Services Inc. PMI Global Services Inc. is the sponsor of the Plan.

(l) “ Compensation ” shall have the same meaning as in the Retirement Plan.

(m) “ Compensation Limitation ” shall mean the limitation of Section 401(a)(17) of the Code on the annual compensation of an Employee which may be taken into account under the Qualified Plans.

(n) “ Earned and Vested ” shall mean, when referring to an Allowance or any portion of an Allowance, an amount that, as of January 1, 2005, is not subject to a substantial risk of

forfeiture (as defined in Treasury Regulation §1.83-3(c)) or a requirement to perform future services.

(o) “ Employee ” shall mean any person employed by a Participating Company who has accrued a benefit under the Retirement Plan or the Profit-Sharing Plan, but whose entire accrued benefit, if computed without regard to the Statutory Limitations, cannot be paid under the Retirement Plan or Profit-Sharing Plan, or both Qualified Plans, as a result of the Statutory Limitations, provided that an Employee shall not include:

(i) an EPF Employee; or

(ii) effective on and after January 1, 2005, a TP Employee; provided, however, that nothing shall deprive such employee of any Grandfathered Benefit Equalization Retirement Allowance and Grandfathered Benefit Equalization Profit-Sharing Allowance earned prior to January 1, 2005.

(p) “ Grandfathered Benefit Equalization Joint and Survivor Allowance ” shall mean the total amount that would be payable during a twelve (12) month period as a reduced Grandfathered Benefit Equalization Retirement Allowance to a Grandfathered Retired Employee for life and after his death the amount payable to his Spouse for life equal to one-half of the reduced Grandfathered Benefit Equalization Retirement Allowance payable to the Grandfathered Retired Employee, which together shall be the Actuarial Equivalent of the Grandfathered Benefit Equalization Retirement Allowance of the Grandfathered Retired Employee.

(q) “ Grandfathered Benefit Equalization Optional Payment Allowance ” shall mean, with respect to a Grandfathered Retired Employee who is a Secular Trust Participant, that portion of his Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance and equal to the total amount payable during a twelve (12) month period in accordance with one of the payment methods described in ARTICLE II, A4(d) of the Retirement Plan and designated by the Grandfathered Retired Employee in his application for an Optional Payment under ARTICLE IIC(2) of the Plan, pursuant to which the Grandfathered Retired Employee receives for life after his Date of Retirement a reduced Grandfathered Benefit Equalization Retirement Allowance in equal monthly payments for life and after his death after his Date of Retirement his Beneficiary receives for life a benefit in equal monthly payments according to the option elected by the Grandfathered Retired Employee, which together shall be the Actuarial Equivalent of the Grandfathered Benefit Equalization Retirement Allowance payable in equal monthly payments for the life of the Grandfathered Retired Employee after his Date of Retirement.

(r) “ Grandfathered Benefit Equalization Profit-Sharing Allowance ” shall mean that portion of a Grandfathered Retired Employee’s Benefit Equalization Profit-Sharing Allowance as of December 31, 2004, the right to which is Earned and Vested as of December 31, 2004, plus any future contributions to the account, the right to which was Earned and Vested as of December 31, 2004, but only to the extent such contributions are actually made, plus earnings (whether actual or notional) attributable to such Grandfathered Benefit Equalization Profit-Sharing Allowance as of December 31, 2004, or to such income.

(s) “ Grandfathered Benefit Equalization Retirement Allowance ” shall mean the present value of that portion (or all) of the Benefit Equalization Retirement Allowance earned to December 31, 2004 to which the Grandfathered Employee or Retired Grandfathered Employee would have been entitled under the Plan if he had voluntarily terminated services without cause on or before December 31, 2004 and received payment of such benefit on the earliest permissible date following termination of employment in the form with the greatest value, expressed for purposes of this calculation as a single life annuity commencing at age 65; provided, however, that for any subsequent year such Grandfathered Benefit Equalization Retirement Allowance may increase to equal the present value of such portion of his benefit the Grandfathered Employee or Grandfathered Retired Employee actually becomes entitled to, in the form and at the time actually paid, determined in accordance with the terms of the Plan (including applicable Statutory Limitations) as in effect on October 3, 2004, without regard to any further services rendered by the Grandfathered Employee or Grandfathered Retired Employee after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than an election with respect to the time and form of an available benefit). In computing the Grandfathered Benefit Equalization Retirement Allowance of a Grandfathered Employee who is eligible for an Early Retirement Allowance, whether reduced or unreduced (but is not eligible for a Full or Deferred Retirement Allowance) under the Retirement Plan as of the Grandfathered Employee’s Separation from Service or, in the discretion of the Administrator, the end of the Grandfathered Employee’s policy severance, such Grandfathered Benefit Equalization Retirement Allowance shall be the Actuarial Equivalent of the Grandfathered Employee’s Grandfathered Benefit Equalization Retirement Allowance, computed as though such benefit were payable under the terms of the Retirement Plan in the form of a Retirement Allowance commencing on the first day of the month coincident with or next following the Grandfathered Employee’s Separation from Service or, in the discretion of the Administrator, the end of the Grandfathered Employee’s policy severance; provided, however, that solely for purposes of determining the early retirement factor to be applied in determining the Actuarial Equivalent of such benefit, the earliest date on which the Grandfathered Employee shall be treated as being entitled to an unreduced benefit under the Retirement Plan for purposes of Exhibit I to the Retirement Plan shall be the earliest date on which the Grandfathered Employee would have been entitled to an unreduced benefit if the Grandfathered Employee had voluntarily terminated employment on December 31, 2004.

(t) “ Grandfathered Deceased Employee ” shall mean a Grandfathered Employee who died while he was an Employee at a time when he had a nonforfeitable right to any portion of his Benefit Equalization Retirement Allowance.

(u) “ Grandfathered Employe e” shall mean:

(i) A Grandfathered Employee who is eligible for a Grandfathered Benefit Equalization Retirement Allowance that was Earned and Vested; or

(ii) A Grandfathered Employee who is eligible for a Grandfathered Benefit Equalization Profit-Sharing Allowance,

and who, in either instance, is a participant in the executive trust or is a Secular Trust Participant.

(v) “ Grandfathered Retired Employee ” shall mean:

(i) a Retired Employee who is eligible for a Grandfathered Benefit Equalization Retirement Allowance that was Earned and Vested; and

(ii) a Retired Employee who is eligible for a Grandfathered Benefit Equalization Profit-Sharing Allowance.

(w) “ Latest Payment Date ” shall mean the later of:

(i) December 31 ^st of the year in which the Payment Date occurs, and

(ii) the fifteenth day of the third month following the Payment Date.

(x) “ Optional Payment ” shall mean:

(i) the following optional forms in which that portion of a Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance of a Grandfathered Retired Employee who is a Secular Trust Participant may be paid:

(1) in equal monthly payments for the life of the Grandfathered Retired Employee,

(2) a Grandfathered Benefit Equalization Joint and Survivor Allowance, or

(3) a Grandfathered Benefit Equalization Optional Payment Allowance, and

(ii) in the case of that portion of a Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance of a Grandfathered Employee or Grandfathered Retired Employee, any of the methods of distribution permitted under ARTICLE VII of the Profit-Sharing Plan (other than a Single Sum Payment payable at the Benefit Commencement Date described in ARTICLE I(i)(2)(A) of the Plan) and in the event the Grandfathered Employee or Grandfathered Retired Employee dies before distribution of that portion of his Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance is made, commences to be made or is fully distributed, to his Beneficiary in accordance with the method of distribution designated by such Grandfathered Employee or Grandfathered Retired Employee; provided, however, that payment to a Beneficiary who is not the Spouse of the Grandfathered Employee or Grandfathered Retired Employee shall be made no later than one (1) year following the death of the Grandfathered Employee or Grandfathered Retired Employee.

Any election to receive an Optional Payment with respect to any Allowance or Allowances under the Plan shall be independent of any election with respect to benefits

payable under the Retirement Plan, the Profit-Sharing Plan, or any other plan of a member of the Controlled Group.

(y) “ Payment Date ” shall mean the first day of the third calendar month following the month in which the Employee Separates from Service; provided, however, that in all cases of a Separation from Service other than on account of death, the Payment Date in the case of a Specified Employee shall be the first day of the calendar month following the date that is six (6) months following the date that such Specified Employee Separates from Service.

(z) “ Plan ” shall mean the Philip Morris International Benefit Equalization Plan described herein and in any amendments hereto.

(aa) “ Profit-Sharing Plan ” shall mean the Philip Morris International Deferred Profit-Sharing Plan, effective January 1, 2008, and as amended from time to time.

(bb) “ Qualified Plans ” shall mean the Retirement Plan and the Profit-Sharing Plan.

(cc) “ Retired Employee ” shall mean a former Employee who is eligible for or in receipt of, an Allowance. A Retired Employee shall cease to be such when he has received all of the Allowances payable to him under the Plan.

(dd) “ Retirement Plan ” shall mean the Philip Morris International Retirement Plan, effective as of January 1, 2008, and as amended from time to time.

(ee) “ Section 415 Limitations ” shall mean:

(i) in the case of the Retirement Plan, the limitations on benefits applicable to defined benefit plans set forth in Section 415 of the Code and the Treasury Regulations promulgated thereunder, and

(ii) in the case of the Profit-Sharing Plan, the limitations on contributions applicable to defined contribution plans set forth in Section 415 of the Code and the Treasury Regulations promulgated thereunder.

(ff) “ Secular Trust Participant ” shall mean a Grandfathered Employee who is a participant in the secular trust arrangement.

(gg) “ Separation from Service ”, “ Separates from Service ” or “ Separated from Service ” shall each have the same meaning as the term “separation from service” in Treasury Regulation §1.409A-1(h)(1); provided, however, that with respect to the payment of any Grandfathered Allowance that is not subject to Section 409A of the Code, such terms shall mean the date that the Employee terminated his services as an Employee with his Participating Company and each other member of the Controlled Group.

(hh) “ Single Sum Payment ” shall mean payment of a benefit or portion of a benefit in a single payment to a Retired Employee, or to the Spouse or other Beneficiary of an Employee, Deceased Employee or deceased Retired Employee. A Single Sum Payment shall be (i) the Actuarial Equivalent of the (or portion of the) Benefit Equalization Retirement Allowance

payable in equal monthly payments during a twelve (12) month period for the life of the Retired Employee, and (ii) the Actuarial Equivalent of the (or portion of the) Benefit Equalization Survivor Allowance payable in equal monthly payments during a twelve (12) month period for the life of the Spouse of the Deceased Employee or deceased Retired Employee, in each case using the actuarial principles and assumptions set forth in Exhibit A to the Plan; provided, however, that a Single Sum Payment with respect to a Grandfathered Employee who is a Secular Trust Participant shall equal the greater of (i) the amount determined pursuant to the foregoing provisions of this ARTICLE I(hh) and (ii) the amount required to purchase a single life annuity (or, for purposes of Appendix 2, a Benefit Equalization Joint and Survivor Allowance) equal to the benefit otherwise identified under the Plan from a licensed commercial insurance company, as determined in the sole discretion of the Administrator.

(i) A Single Sum Payment shall be the exclusive form of distribution of the Benefit Equalization Retirement Allowance, except with respect to:

(1) that portion of the Benefit Equalization Retirement Allowance derived solely from the Grandfathered Benefit Equalization Retirement Allowance and that is payable to a Grandfathered Retired Employee who is only eligible for a Vested Retirement Allowance at his Separation from Service; and

(2) that portion of the Benefit Equalization Retirement Allowance derived solely from the Grandfathered Benefit Equalization Retirement Allowance and that is payable to a Grandfathered Retired Employee who is a Secular Trust Participant who has timely elected to receive after his Date of Retirement that portion of his Benefit Equalization Retirement Allowance equal to the Grandfathered Benefit Equalization Retirement Allowance in the form of an Optional Payment pursuant to ARTICLE IIC(2) of the Plan and which election does not cease to be of any force and effect pursuant to ARTICLE IIC(2) hereof.

(ii) A Single Sum Payment shall be the exclusive form of distribution of the Benefit Equalization Survivor Allowance, except with respect to that portion of the Benefit Equalization Survivor Allowance derived solely from the Grandfathered Benefit Equalization Retirement Allowance payable to the Spouse of a Grandfathered Deceased Employee or the Spouse of a deceased Grandfathered Retired Employee.

(iii) A Single Sum Payment shall be the exclusive form of distribution of the Benefit Equalization Profit-Sharing Allowance, except with respect to that portion of the Benefit Equalization Profit-Sharing Allowance derived solely from the Grandfathered Benefit Equalization Profit-Sharing Allowance payable to a Grandfathered Retired Employee who has timely elected to receive after his Date of Retirement that portion of his Benefit Equalization Profit-Sharing Allowance equal to the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of an Optional Payment pursuant to ARTICLE IID(3) of the Plan.

(ii) “ Specified Employee ” shall have the meaning given in Treasury Regulation §1.409A-1(i).

(jj) “ Statutory Limitations ” shall mean:

(i) the Section 415 Limitations, and

(ii) the Compensation Limitation.

(kk) “ Survivor Allowance Latest Payment Date ” shall mean the later of:

(i) December 31 ^st of the year in which the Survivor Allowance Payment Date occurs, and

(ii) the fifteenth day of the third month following the Survivor Allowance Payment Date.

(ll) “ Survivor Allowance Payment Date ” shall mean the first day of the third calendar month following the month in which the Deceased Employee or deceased Retired Employee died.

(mm) “ TP Employee ” shall mean a Grandfathered Employee who has elected to participate in the target payment arrangement.

The masculine pronoun shall include the feminine pronoun unless the context clearly requires otherwise.

ARTICLE II

BENEFIT EQUALIZATION RETIREMENT ALLOWANCES AND

BENEFIT EQUALIZATION PROFIT-SHARING ALLOWANCES

A.	Benefit Equalization Retirement Allowances and other benefits payable under this Plan shall be as follows:

(1) (a) Subject to the provisions of subparagraphs (c), (d) and (e) of this ARTICLE IIA(1), the Benefit Equalization Retirement Allowance with respect to a Retired Employee (other than a Grandfathered Employee who is a TP Employee) shall equal the sum of (i) and (ii) below:

(i) the amount by which the Retirement Allowance under the Retirement Plan accrued to the Date of Retirement, if computed without regard to the Statutory Limitations, exceeds the amount of the Retirement Allowance actually payable under the Retirement Plan, plus

(ii) in the case of a Retired Employee who is eligible to receive an enhanced benefit under the Qualified Plan (such as a benefit payable pursuant to a voluntary early retirement program or a shutdown benefit), but whose additional accrued benefit resulting solely from participation in such program or benefit may not be paid from the Qualified Plan because of the nondiscrimination requirements of Section 401(a)(4) of the Code, or the coverage requirements of Section 410(b) of the Code, the amount of such additional accrued benefit payable to such Retired Employee solely as a result of his participation in such program or benefit.

(b) Subject to the provisions of subparagraphs (c), (d) and (e) of this ARTICLE IIA(1), the Benefit Equalization Retirement Allowance with respect to a Grandfathered Retired Employee who is a TP Employee shall equal the Grandfathered Benefit Equalization Retirement Allowance.

(c) In no event shall any increase in a Grandfathered Employee’s Benefit Equalization Retirement Allowance resulting from an amendment to the Retirement Plan to add or remove a subsidized benefit change the time and form of payment of the Benefit Equalization Retirement Allowance earned prior to the date of such amendment.

(d) In the event that all or any portion of the Benefit Equalization Retirement Allowance with respect to the Retired Employee described in ARTICLE IIA(1)(a) or (b) is paid in a Single Sum Payment in accordance with the provisions of ARTICLE IIC prior to the Retired Employee’s Benefit Commencement Date under the Retirement Plan, the amount of such Benefit Equalization Retirement Allowance shall equal the amount by which the Retirement Allowance under the Retirement Plan accrued to the Date of Retirement, if computed without regard to the Statutory Limitations, is reasonably estimated by the Administrator to exceed the amount of the Retirement Allowance which is projected by the Administrator to be actually payable under the Retirement Plan.

(e) In the event that all or any portion of the Benefit Equalization Retirement Allowance with respect to a Retired Employee described in ARTICLE IIA(1)(a) or (b) of the Plan is paid in a Single Sum Payment in accordance with the provisions of ARTICLE IIC prior to the date the Retired Employee shall have specified on his application for retirement as the Benefit Commencement Date of his Retirement Allowance under the Retirement Plan, the Single Sum Payment shall be calculated based on the assumption that the Retired Employee elected to receive a Retirement Allowance at his Unreduced Early Retirement Benefit Commencement Date or Unreduced Vested Retirement Benefit Commencement Date, as applicable to the Retired Employee.

(f) If, as a result of the execution of a General Release Agreement (and not revoking it), (A) an Employee first obtains a legally binding right to payment of an increase in his Benefit Equalization Retirement Allowance, (B) as of the first date the Employee obtains a legally binding right to such increase it is subject to a substantial risk of forfeiture (within the meaning of Treasury Regulation §1.409A-1(d)), then the amount of such increase in the Benefit Equalization Retirement Allowance with respect to such Employee shall be the amount as set forth in the General Release Agreement and shall be payable at the BEP Benefit Commencement Date specified in ARTICLE I(i)(1)(iv), provided, however, that no such increase in an Employee’s Benefit Equalization Allowance shall change either the time or form of payment of the Grandfathered Benefit Equalization Retirement Allowance of a Grandfathered Employee otherwise payable pursuant to the terms of the Plan. The provisions of this paragraph are in lieu of and not in addition to the benefits provided pursuant to the provisions of ARTICLE IIA(1)(a)(ii) of the Plan.

(2) The Spouse of:

(i) a Deceased Employee; or

(ii) a deceased Retired Employee (other than a Grandfathered Retired Employee who is a Secular Trust Participant who made an election for a Grandfathered Benefit Equalization Optional Payment Allowance and designated a Beneficiary other than his Spouse and or is described in clause (iii) hereof) who has died after his Date of Retirement and before his BEP Benefit Commencement Date; or

(iii) a Grandfathered Retired Employee who is a Secular Trust Participant whose request for an Optional Payment pursuant to ARTICLE I(x)(i)(1) or (2) of the Plan with respect to that portion of his Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Allowance has been granted by the Administrator, but who has died after his Date of Retirement and before his BEP Benefit Commencement Date,

shall, in each case, be eligible to receive a Benefit Equalization Survivor Allowance.

B.	Benefit Equalization Profit-Sharing Allowances payable under this Plan shall be as follows:

(1)

(a) The Benefit Equalization Profit-Sharing Allowance of a Retired Employee (other than a Grandfathered Employee who is a TP Employee) shall equal the amounts which would have been credited, but were not credited to his Company Account as a result of the Statutory Limitations.

(b) The Benefit Equalization Profit-Sharing Allowance of a Grandfathered Employee who is a TP Employee shall equal the Grandfathered Benefit Equalization Profit-Sharing Allowance.

(2)

All such amounts shall be deemed to have been invested in Part A of the Fund (as defined in the Profit-Sharing Plan) and valued in accordance with the provisions of the Profit-Sharing Plan.

C.	BEP Benefit Commencement Date and termination of Benefit Equalization Retirement Allowances payable in the form of an Optional Payment:

(1)

(a) The Benefit Equalization Retirement Allowance payable pursuant to ARTICLE IIA(1)(a) of the Plan shall be distributed to a Retired Employee who is not a Grandfathered Retired Employee in a Single Sum Payment on the BEP Benefit Commencement Date specified in ARTICLE I(i)(1)(i) of the Plan. If a Retired Employee described in ARTICLE IIA(1)(a) dies after his Date of Retirement and before payment of his Benefit Equalization Retirement Allowance is paid in a Single Sum Payment, his Beneficiary shall receive a Single Sum Payment on the Benefit Commencement Date specified in ARTICLE I(i)(1)(i) of the Plan.

(b) The Benefit Equalization Retirement Allowance payable pursuant to ARTICLE IIA(1)(a) or (b) of the Plan shall be distributed to a Grandfathered Retired Employee who is eligible for an Early, Full or Deferred Retirement Allowance at his Separation from Service in a Single Sum Payment on the BEP Benefit Commencement Date specified in ARTICLE I(i)(1)(i) of the Plan, unless, in the case of a Grandfathered Retired Employee who is a Secular Trust Participant, the Administrator has approved the election of the Grandfathered Retired Employee to have distribution of that portion of his Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance made in the form of an Optional Payment, in which case the BEP Benefit Commencement Date of his Grandfathered Benefit Equalization Retirement Allowance made in the form of an Optional Payment shall be as specified in ARTICLE I(i)(1)(ii)(A) or ARTICLE I(i)(1)(ii)(B) of the Plan, as applicable to the Grandfathered Retired Employee. If a Grandfathered Retired Employee described in ARTICLE IIA(1)(a) or (b) of the Plan who is eligible for an Early, Full or Deferred Retirement Allowance at his Separation from Service dies after his Date of Retirement and before payment of his Benefit Equalization Retirement Allowance in a Single Sum Payment, his Beneficiary shall receive a Single Sum Payment on the BEP Benefit

Commencement Date specified in ARTICLE I(i)(1)(i) of the Plan, provided, however, that the Administrator has not granted the Grandfathered Retired Employee’s application to receive an Optional Payment.

(c) The Benefit Equalization Retirement Allowance payable pursuant to ARTICLE IIA(1)(a) or (b) of the Plan shall be distributed to a Grandfathered Retired Employee who is only eligible for a Vested Retirement Allowance at his Separation from Service, as follows:

(y) that portion of the Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Allowance shall be distributed in accordance with the Grandfathered Retired Employee’s BEP Benefit Commencement Date described in ARTICLE I(i)(1)(iii) of the Plan and shall be paid in the same form of Optional Payment which the Grandfathered Retired Employee’s Vested Retirement Allowance is paid from the Retirement Plan; and

(z) that portion of the Benefit Equalization Retirement Allowance that is not the Grandfathered Benefit Equalization Allowance shall be distributed to the Retired Employee in a Single Sum Payment on Benefit Commencement Date specified in ARTICLE I(i)(1)(i) of the Plan. The amount of the Benefit Equalization Retirement Allowance to be distributed in a Single Sum Payment pursuant to this ARTICLE IIC(1)(c)(z) of the Plan shall equal the present value of such Allowance that would be payable to the Grandfathered Retired Employee as of the date he will attain the age of sixty-five (65). The present value of such Benefit Equalization Retirement Allowance shall be determined as of the first day of the month following the month in which the Grandfathered Retired Employee Separated from Service (or died, in the case of a payment to the Spouse of the deceased Grandfathered Retired Employee).

(d) If any Benefit Equalization Retirement Allowance payable in a Single Sum Payment is paid after the Payment Date, interest (at a rate determined in the sole discretion of the Administrator), from the date the Retired Employee Separated from Service to the last day of the month preceding the month in which payment is made, shall be added to the amount of the Benefit Equalization Retirement Allowance otherwise payable to the Retired Employee (or Spouse).

(2) (a)(i) A Grandfathered Retired Employee who is a Secular Trust Participant who is eligible to retire on a Full, Deferred or Early Retirement Allowance at his Separation from Service may make application to the Administrator to receive an Optional Payment with respect to his Grandfathered Benefit Equalization Retirement Allowance in lieu of the Single Sum Payment otherwise payable after his Date of Retirement. The application for an Optional Payment shall specify:

(ii) the form in which such Optional Payment is to be paid; and

(iii) the Beneficiary, if any, who will receive benefits after the death of the Grandfathered Retired Employee; and

(iv) the BEP Benefit Commencement Date.

(b) In the case of a Grandfathered Retired Employee who eighteen (18) months prior to attaining the age of sixty-five (65) years could be compulsorily retired by his Participating Company upon attaining the age of sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in Employment Act, any application for an Optional Payment must be filed with the Administrator more than one (1) year preceding the date the Grandfathered Retired Employee attains the age of sixty-five (65) years.

(c) The Administrator may grant or deny any such application in its sole and absolute discretion. Except as provided in Subparagraphs (d)(i) and (g) of this ARTICLE IIC, a Grandfathered Retired Employee shall not receive that portion of his Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance in the form of a Single Sum Payment after the Administrator has granted the Grandfathered Retired Employee application for an Optional Payment. In the event the Grandfathered Retired Employee incurs a Change in Circumstance on or after the date of the filing of the application for an Optional Payment and prior to his BEP Benefit Commencement Date, the Grandfathered Retired Employee may file an application with the Administrator within ninety (90) days of the Change in Circumstance, but in no event later than his BEP Benefit Commencement Date, to change the form of Optional Payment, or to change the Beneficiary who is to receive a benefit after the death of the Grandfathered Retired Employee in accordance with the Optional Payment method originally filed with the Administrator.

(d) An application for an Optional Payment shall be of no force and effect if:

(i) the Grandfathered Retired Employee does not retire on a Full, Deferred or Early Retirement Allowance;

(ii) the Grandfathered Retired Employee incurs a disability at any time before the date his Optional Payment commences to be made which causes him to be eligible for benefits under the Philip Morris International Long-Term Disability Plan; or

(iii) the Grandfathered Retired Employee is retired for ill health, or disability under ARTICLE II, A 3(a) of the Retirement Plan.

(e) In the event the application for an Optional Payment is of no force and effect as a result of an event described in clauses (ii) or (iii) of ARTICLE IIC(2)(d) of the Plan, payment of that portion of the Grandfathered Retired Employee’s Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance shall be made in a Single Sum Payment pursuant to ARTICLE IIC(1)(a) of the Plan on the Payment Date, but not later than the Latest Payment Date, but otherwise such application for an Optional Payment shall be effective on the Grandfathered Retired Employee’s Date of Retirement on a Full, Deferred or Early Retirement Allowance and the Grandfathered Retired Employee’s benefits shall commence on the BEP Benefit Commencement Date specified in ARTICLE I(i)(1)(ii)(A) of the Plan; provided, however, that if within the one (1) year period following the date of the filing of the application with the Administrator the Grandfathered Retired Employee voluntarily retires or his employment is terminated for misconduct (as determined by the Administrator) by any member of the Controlled Group, the Optional Payment

shall be reduced by one percent (1%) for each month (or portion of a month) by which the month in which the Grandfathered Retired Employee’s termination of employment precedes the first anniversary of the filing of the application with the Administrator and his benefits shall commence in the BEP Benefit Commencement Date specified in ARTICLE I(i)(1)(ii)(B) of the Plan.

(f) If a Grandfathered Retired Employee whose request for an Optional Payment in the form of a Grandfathered Benefit Equalization Optional Payment Allowance has been granted by the Administrator dies after his Date of Retirement and prior to his BEP Benefit Commencement Date, his Beneficiary shall be eligible to receive that portion of the Grandfathered Benefit Equalization Optional Payment Allowance elected by the Grandfathered Retired Employee which is payable after the death of the Grandfathered Retired Employee.

(g) Notwithstanding the preceding provisions of this Paragraph C,

(i) the Administrator may cause the distribution of that portion of the Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance to any group of similarly situated Grandfathered Retired Employees (or their Spouses or other Beneficiaries) in a Single Sum Payment or as an Optional Payment; and

(ii) the Administrator shall distribute that portion of an Employee’s Benefit Equalization Retirement Allowance that is the Grandfathered Benefit Equalization Retirement Allowance in a Single Sum Payment if such portion of the Benefit Equalization Retirement Allowance payable in equal monthly payments is not more than $250 per month.

(3) The Benefit Equalization Survivor Allowance payable pursuant to ARTICLE IIA(2) shall be paid in a Single Sum Payment on the BEP Benefit Commencement Date described in ARTICLE I(i)(3)(A) of the Plan, provided, however, that the portion of the Benefit Equalization Survivor Allowance that is derived from the Grandfathered Benefit Equalization Retirement Allowance shall be paid on the BEP Benefit Commencement Date described in ARTICLE I(i)(3)(B) of the Plan.

(4) The Benefit Equalization Optional Payment Allowance payable pursuant to ARTICLE IIA(3) shall be paid on the BEP Benefit Commencement Date described in ARTICLE (i)(1)(C) of the Plan.

D.	Commencement and termination of Benefit Equalization Profit-Sharing Allowances:

(1) The Benefit Equalization Profit-Sharing Allowance payable pursuant to ARTICLE IIB(1) of the Plan shall be distributed to the Retired Employee in a Single Sum Payment on the Payment Date, but not later than the Latest Payment Date, unless, solely in the case of a Grandfathered Retired Employee, the Administrator has approved his election to have distribution of that portion of his Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance made in accordance with ARTICLE IID(3) of the Plan.

(2) If an Employee or Retired Employee dies before his Single Sum Payment has been paid and without having the approval by the Administrator for payment of that portion of his Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of an Optional Payment, the Single Sum Payment otherwise payable to the Employee or Retired Employee shall be paid to his Beneficiary on the Payment Date, but not later than the Latest Payment Date.

(3) (a) A Grandfathered Employee who is a Secular Trust Participant may make application to the Administrator to receive an Optional Payment with respect to that portion of his Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance in lieu of the Single Sum Payment otherwise payable to him on the Benefit Commencement Date specified in ARTICLE I(i)(2)(A) after he becomes a Grandfathered Retired Employee. The application for an Optional Payment shall specify:

(i) the form in which such Optional Payment is to be paid;

(ii) the Beneficiary who will receive the balance of that portion of his Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance after the death of the Grandfathered Employee or Grandfathered Retired Employee.

(b) In the case of a Grandfathered Employee who eighteen (18) months prior to attaining the age of sixty-five (65) years could be compulsorily retired by his Participating Company upon attaining the age of sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in Employment Act, any application for an Optional Payment must be filed with the Administrator more than one (1) year preceding the date the Grandfathered Employee attains the age of sixty-five (65) years.

(c) The Administrator may grant or deny any such application in its sole and absolute discretion. A Grandfathered Employee shall not receive that portion of his Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance in the form of a Single Sum Payment after the Administrator has granted the Grandfathered Employee’s application for an Optional Payment. In the event the Grandfathered Employee or Grandfathered Retired Employee has elected to receive his Optional Payment over the joint life expectancies of he and his Beneficiary and incurs a Change in Circumstance described in ARTICLE I(j)(2), (3) or (4) hereof on or after the date of the filing of the application and prior to the date his Optional Payment commences to be paid, the Grandfathered Employee or Grandfathered Retired Employee may file an application with the Administrator within ninety (90) days of the Change in Circumstance, but in no event later than the date his Optional Payment is scheduled to commence to be paid to designate a new Beneficiary or elect to receive his Optional Payment over the life expectancy of the Grandfathered Employee or Grandfathered Retired Employee.

(d) If within the one (1) year period following the date of the filing of the application for an Optional Payment with the Administrator, the Grandfathered Employee voluntarily retires (other than for ill health, disability or hardship under ARTICLE II, A

(3)(a) of the Retirement Plan), voluntarily terminates his employment with his Participating Company (other than for a disability which causes him to be eligible for benefits under the Long-Term Disability Plan for Salaried Employees), or his employment is terminated for misconduct (as determined by the Administrator) by any member of the Controlled Group, the Optional Payment shall be reduced in the same manner as specified in ARTICLE IIC(2)(e) hereof.

(e) If a Grandfathered Retired Employee dies after he Separates from Service and prior to the date his Grandfathered Benefit Equalization Profit-Sharing Allowance is paid or commences to be paid, payment shall be made to his Beneficiary commencing in the form and on the date specified in the application.

(4) Notwithstanding the preceding provisions of this Paragraph D,

(a) the Administrator may cause the distribution of that portion of the Benefit Equalization Profit-Sharing Allowance that is the Grandfathered Benefit Equalization Profit-Sharing Allowance to any group of similarly situated Beneficiaries in a Single Sum Payment or as an Optional Payment and

(b) the Administrator shall distribute a Grandfathered Employee’s or Grandfathered Retired Employee’s Benefit Equalization Profit-Sharing Allowance in a Single Sum Payment if the value of such Benefit Equalization Profit-Sharing Allowance is not more than $10,000.

E.	Application or Notification for Payment of Allowances:

An application for retirement pursuant to ARTICLE II, B of the Retirement Plan shall be deemed notification to the Administrator of the BEP Benefit Commencement Date of a Benefit Equalization Retirement Allowance (or other benefit) in accordance with the terms of this Plan. In the event a Grandfathered Employee shall not have elected an Optional Payment method with respect to his Grandfathered Benefit Equalization Retirement Allowance, any such notification shall specify the Beneficiary to whom payment of the Single Sum Payment shall be made in the event the Employee dies after his Date of Retirement and prior to his BEP Benefit Commencement Date.

An Employee or Retired Employee (or Beneficiary) shall make application to the Administrator (or his delegate) for distribution of Benefit Equalization Profit-Sharing Allowance under this Plan.

ARTICLE III

FUNDS FROM WHICH ALLOWANCES ARE PAYABLE

Individual accounts shall be established for the benefit of each Employee and Retired Employee (or Beneficiary) under the Plan. Any benefits payable from an individual account shall be payable solely to the Employee, Retired Employee (or Beneficiary) for whom such account was established. The Plan shall be unfunded. All benefits intended to be provided under the Plan shall be paid from time to time from the general assets of the Employee’s or Retired Employee’s Participating Company and paid in accordance with the provisions of the Plan; provided, however, that the Participating Companies reserve the right to meet the obligations created under the Plan through one or more trusts or other agreements. In no event shall any such trust or trusts be outside of the United States. The contributions by each Participating Company on behalf of its Employees and Retired Employees to the individual accounts established pursuant to the provisions of the Plan, whether in trust or otherwise, shall be in an amount which such Participating Company, with the advice of an actuary, determines to be sufficient to provide for the payment of the benefits under the Plan.

ARTICLE IV

THE ADMINISTRATOR

The general administration of the Plan shall be vested in the Administrator.

All powers, rights, duties and responsibilities assigned to the Administrator under the Retirement Plan applicable to this Plan shall be the powers, rights, duties and responsibilities of the Administrator under the terms of this Plan, except that the Administrator shall not be a fiduciary (within the meaning of Section 3(21) of ERISA) with respect to any portion or all of the Plan which is intended to be exempt from the requirements of ERISA pursuant to Section 4(b)(5) of ERISA or which is described in Section 401(a)(1) of ERISA and exempt from the requirements of Part 4 of Title I of ERISA.

ARTICLE V

AMENDMENT AND

DISCONTINUANCE OF THE PLAN

The Board may, from time to time, and at any time, amend the Plan; provided, however, that authority to amend the Plan is delegated to the following committees or individuals where approval of the Plan amendment or amendments by the shareholders of Philip Morris International Inc. is not required: (1) to the Benefits Committee, if the amendment (or amendments) will not increase the annual cost of the Plan by $10,000,000 and (2) to the Administrator, if the amendment (or amendments) will not increase the annual cost of the Plan by $500,000.

Any amendment to the Plan may effect a substantial change in the Plan and may include (but shall not be limited to) any change deemed by the Company to be necessary or desirable to obtain tax benefits under any existing or future laws or rules or regulations thereunder; provided, however, that no such amendment shall deprive any Employee, Retired Employee (or Beneficiary) of any Allowances accrued at the time of such amendment.

The Plan may be discontinued at any time by the Board; provided, however, that such discontinuance shall not deprive any Employee, Retired Employee (or Beneficiary) of any Allowances accrued at the time of such discontinuance.

ARTICLE VI

FORMS; COMMUNICATIONS

The Administrator shall provide such appropriate forms as it may deem expedient in the administration of the Plan and no action to be taken under the Plan for which a form is so provided shall be valid unless upon such form. Any Plan communication may be made by electronic medium to the extent allowed by applicable law. The Administrator may adopt reasonable procedures to enable an Employee or Retired Employee to make an election using electronic medium (including an interactive telephone system and a website on the Intranet).

All communications concerning the Plan shall be in writing addressed to the Administrator at such address as may from time to time be designated. No communication shall be effective for any purpose unless received by the Administrator.

ARTICLE VII

INTERPRETATION OF PROVISIONS

The Administrator shall have the full power and authority to grant or deny requests for payment of a Benefit Equalization Retirement Allowance in accordance with a form of distribution authorized under the Retirement Plan and to grant or deny requests for payment of a Benefit Equalization Profit-Sharing Allowance in accordance with a form of distribution authorized under the Profit-Sharing Plan to the extent permitted under Code §409A. The Management Committee shall have the full power and authority to grant or deny requests for payment of a Benefit Equalization Retirement Allowance or Benefit Equalization Profit-Sharing Allowance by the Administrator.

The Administrator shall have full power and authority with respect to all other matters arising in the administration, interpretation and application of the Plan, including discretionary authority to construe plan terms and provisions, to determine all questions that arise under the Plan such as the eligibility of any employee of a Participating Company to participate under the Plan; to determine the amount of any benefit to which any person is entitled to under the Plan; to make factual determinations and to remedy any ambiguities, inconsistencies or omissions of any kind.

The Plan is intended to comply with the applicable requirements of Section 409A of the Code. Accordingly, where applicable, this Plan shall at all times be construed and administered in a manner consistent with the requirements of Section 409A of the Code and applicable regulations without any diminution in the value of benefits. Notwithstanding the preceding sentence, no Participating Company shall be liable to any person if the Internal Revenue Service or any court or other authority having jurisdiction over such matter determines for any reason that any payment under this Plan is subject to taxes, penalties or interest as a result of failing to comply with Section 409A of the Code.

ARTICLE VIII

CHANGE IN CONTROL PROVISIONS

A. In the event of a Change in Control, each Employee shall be fully vested in his Allowances and any other benefits accrued through the date of the Change in Control (“Accrued Benefits”). Each Employee (or his Beneficiary) shall, upon the Change in Control, be entitled to a lump sum in cash, payable within 30 days of the Change in Control, equal to the Actuarial Equivalent of his Accrued Benefits, determined using actuarial assumptions no less favorable than those used under the Supplemental Management Employees’ Retirement Plan immediately prior to the Change in Control.

B. Definition of Change in Control.

“Change in Control” shall mean the happening of any of the following events with respect to a Grandfathered Benefit Equalization Retirement Allowance and Grandfathered Benefit Equalization Profit-Sharing Allowance:

(1) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, and amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Philip Morris International Inc. (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of Philip Morris International Inc. entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that the following acquisitions shall not constitute a Change in Control: (i) any acquisition directly from Philip Morris International Inc., (ii) any acquisition by Philip Morris International Inc., (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Philip Morris International Inc. or any corporation controlled by Philip Morris International Inc. or (iv) any acquisition by any corporation pursuant to a transaction described in clauses (i), (ii) and (iii) of paragraph (3) of this Section B; or

(2) Individuals who, as of the date hereof, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Philip Morris International Inc.’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(3) Approval by the shareholders of Philip Morris International Inc. of a reorganization, merger, share exchange or consolidation (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common

Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Philip Morris International Inc. through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of Philip Morris International Inc. or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or

(4) Approval by the shareholders of Philip Morris International Inc. of (i) a complete liquidation or dissolution of Philip Morris International Inc. or (ii) the sale or other disposition of all or substantially all of the assets of Philip Morris International Inc., other than to a corporation, with respect to which following such sale or other disposition, (A) more than 80% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) less than 20% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of Philip Morris International Inc. or such corporation), except to the extent that such Person owned 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such sale or other disposition of assets of Philip Morris International Inc. or were elected, appointed or nominated by the Board.

“Change in Control” shall mean the happening of any of the events specified in Treasury Regulation §1.409A- 3(i)(5)(v), (vi) (vii) with respect to that portion of a Benefit Equalization Allowance that is not a Grandfathered Benefit Equalization Retirement Allowance and that portion of a Benefit Equalization Profit-Sharing Allowance that is not a Grandfathered Benefit Equalization Profit-Sharing Allowance. For purposes of determining if a Change in Control has

occurred, the Change in Control event must relate to a corporation identified in Treasury Regulation §1.409A-3(i)(5)(ii), provided, however, that (i) the spin-off of the shares of Philip Morris International Inc. to the shareholders of Altria Group, Inc. shall not be considered to be a Change in Control, and (ii) any change in the Incumbent Board coincident with such spin-off shall not be considered to be a Change in Control.

EXHIBIT A

BENEFIT EQUALIZATION PLAN

ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT

INTEREST RATE: The average of the monthly rate of interest specified in Section 417(e)(3)(A)(ii)(II) of the Code, but published for 24 months preceding the Employee’s Date of Retirement, less 1/2 of 1%.

MORTALITY ASSUMPTION: The mortality table specified in Section 417(e)(3)(A)(ii)(I) of the Code and Section 1.417(e)-1(c)(2) of the Treasury Regulations (currently the table prescribed in Revenue Ruling 2001-62).

Exhibit 10.23

LOGO

PERSONAL AND CONFIDENTIAL


To: André CALANTZOPOULOS		Lausanne, April 4, 2008

Dear André,

We are pleased to confirm your appointment, effective as of April 1, 2008, to the position of Chief Operating Officer, reporting to Mr Louis Camilleri, Chairman and Chief Executive Officer, Philip Morris International Inc. Your annual base salary is being increased


from CHF		1’250’080.--p.a.
to CHF		1’320’000.--p.a.

Your new annual base salary also includes the merit increase.

Your salary Band, which is B, remains at its present level.

Following the change in salary, your new Position in Range will be now 40%.

Please note that your salary will next be reviewed on April 1, 2009.

All other conditions relating to your employment with Philip Morris International Management S.A. remain as stated in your letter of employment issued at the time of the engagement and, if applicable, in any subsequent amendments.

We take this opportunity of wishing you continued success and satisfaction.


		Yours sincerely,

		/ S / P ETER -P AUL A DRIAANSEN

		Peter-Paul Adriaansen
		Director HR Decision Support & Business Partner Switzerland

Copy : L. Camilleri

ref: cc

Philip Morris International Management S.A.

AVENUE DE RHODANIE 50 - CASE POSTALE 1171 - 1001 LAUSANNE - SWITZERLAND - TELEPHONE : +41 58 242 00 00 - TELEFAX: +41 58 242 01 01

www.philipmorrisinternational.com

Exhibit 10.24

LOGO

PERSONAL AND CONFIDENTIAL


To: Jean-Claude KUNZ		Lausanne, April 4, 2008

Dear Jean-Claude,

We are pleased to confirm, effective as of April 1, 2008, that your annual base salary is being increased


from CHF		942’240.--p.a.
to CHF		1’014’000.--p.a.

Your new annual base salary also includes the merit increase.

Your salary Band has been changed and is now C.

Following the change in salary and Band, your new Position in Range will be now 29%. Your Position Title of President EEMA Region & PMI Duty Free remains unchanged. You will report to André Calantzopoulos, Chief Operating Officer.

Please note that your salary will next be reviewed on April 1, 2009.

We take this opportunity of wishing you continued success and satisfaction.


		Yours sincerely,

		/ S / P ETER -P AUL A DRIAANSEN

		Peter-Paul Adriaansen
		Director HR Decision Support & Business Partner Switzerland

Copy : A. Calantzopoulos

ref: cc

Philip Morris International Management S.A.

AVENUE DE RHODANIE 50 - CASE POSTALE 1171 - 1001 LAUSANNE - SWITZERLAND - TELEPHONE : +41 58 242 00 00 - TELEFAX: +41 58 242 01 01

www.philipmorrisinternational.com

Exhibit 10.25

LOGO

PERSONAL AND CONFIDENTIAL


To: Hermann WALDEMER		Lausanne, April 4, 2008

Dear Hermann,

We are pleased to confirm your appointment, effective as of April 1, 2008, to the position of Chief Financial Officer, reporting to Mr Louis Camilleri, Chairman and Chief Executive Officer, Philip Morris International Inc. Your annual base salary is being increased


from CHF		908’570.-- p.a.
to CHF		1’032’500.--p.a.

Your new annual base salary also includes the merit increase.

Your salary Band has been changed and is now B.

Following the change in Band and salary, your new Position in Range will be now 16%.

Please note that your salary will next be reviewed on April 1, 2009.

We take this opportunity of wishing you continued success and satisfaction.


		Yours sincerely,

		/ S / P ETER -P AUL A DRIAANSEN

		Peter-Paul Adriaansen
		Director HR Decision Support & Business Partner Switzerland

Copy : L. Camilleri

ref: cc

Philip Morris International Management S.A.

AVENUE DE RHODANIE 50 - CASE POSTALE 1171 - 1001 LAUSANNE - SWITZERLAND - TELEPHONE : +41 58 242 00 00 - TELEFAX: +41 58 242 01 01

www.philipmorrisinternational.com

Exhibit 10.27

PHILIP MORRIS INTERNATIONAL

SUPPLEMENTAL MANAGEMENT EMPLOYEES’ RETIREMENT PLAN

Effective March 28, 2008

(As amended and in effect as of March 28, 2008)

(Adopted on

December 23, 2008)

TABLE OF CONTENTS


			Page
PREAMBLE			1

ARTICLE I DEFINITIONS			2

	(a)	Accredited Service	2
	(b)	Actuarial Equivalent	2
	(c)	Administrator	2
	(d)	Allowances	2
	(e)	Appointee	2
	(f)	Beneficiary	3
	(g)	Benefit Equalization Plan	4
	(h)	Change in Circumstance	4
	(i)	Change of Control	5
	(j)	Chief Executive Officer	7
	(k)	Company	7
	(l)	Compensation	7
	(m)	Deceased Participant	8
	(n)	Deceased Retired Participant	8
	(o)	Earned and Vested	8
	(p)	Employee	8
	(q)	Exchange Act	8
	(r)	Grandfathered Deceased Participant	8
	(s)	Grandfathered Deceased Retired Participant	8
	(t)	Grandfathered Participant	8
	(u)	Grandfathered Retired Participant	9
	(v)	Grandfathered Supplemental Retirement Allowance	9
	(w)	Grandfathered Supplemental Survivor Allowance	10
	(x)	Grandfathered Supplemental SIB Allowance	10
	(y)	Latest Payment Date	10
	(z)	Optional Payment	11
	(aa)	Other Plan	11
	(bb)	Participant	12
	(cc)	Payment Date	12
	(dd)	Plan	12
	(ee)	Predecessor Plan	12
	(ff)	Profit-Sharing Plan	12
	(gg)	Retired Participant	13
	(hh)	Salaried Retirement Plan	13
	(ii)	Secular Trust Participant	13
	(jj)	Separation from Service, Separates from Service or Separated from Service	13
	(kk)	Single Sum Payment	13
	(ll)	SMERP Benefit Payment Date	14
	(mm)	Specified Employee	16


	(nn)	Supplemental Joint and Survivor Allowance	16
	(oo)	Supplemental Optional Payment Allowance	17
	(pp)	Supplemental Profit-Sharing Allowance or Profit-Sharing Allowance	17
	(qq)	Supplemental Retirement Allowance	17
	(rr)	Supplemental SIB Allowance Payment Date	17
	(ss)	Supplemental Survivor Allowance	17
	(tt)	Supplemental Survivor Allowance Payment Date	18
	(uu)	Supplemental SIB Allowance	18
	(vv)	Survivor Income Benefit Plan	18
	(ww)	Vested Retirement Allowance	18

ARTICLE II SUPPLEMENTAL RETIREMENT AND RELATED ALLOWANCES			19

	A.	Supplemental Retirement Allowances	19
	B.	Supplemental Survivor Allowances, Supplemental SIB Allowances and Supplemental Optional Payment Allowances	20
	C.	SMERP Benefit Payment Date and Termination of Supplemental Retirement Allowances, Supplemental Survivor Allowances, Supplemental Survivor Income Benefit Allowances and Allowances Payable in the Form of an Optional Payment	21
	D.	Reduction of Benefits	25
	E.	Application or Notification for Payment of Allowances	26

ARTICLE III SUPPLEMENTAL PROFIT-SHARING ALLOWANCES			28

	A.	Supplemental Profit-Sharing Allowances	28
	B.	Credits to Supplemental Profit-Sharing Allowance; SMERP Benefit Payment Date	28

ARTICLE IV FUNDS FROM WHICH ALLOWANCES ARE PAYABLE			29

	A.	Establishment and Maintenance of Individual Accounts; Contributions	29
	B.	Maintenance of Book Reserves	29

ARTICLE V ADMINISTRATION			30

	A.	Duties of the Administrator	30
	B.	Applicability of Duties of the Administrator under the Salaried Retirement Plan to the Plan	30

ARTICLE VI AMENDMENT AND DISCONTINUANCE OF THE PLAN			31

	A.	Amendment of the Plan by the Board of Directors of Philip Morris International Inc., the Committee and the Administrator	31
	B.	Termination of the Plan	31
	C.	Change of Control Provisions	31

ARTICLE VII FORMS; COMMUNICATIONS			32

	A.	Forms; Use of Electronic Media	32


	B.	Communications Concerning the Plan	32

ARTICLE VIII INTERPRETATION OF PROVISIONS			33

	A.	Discretionary Authority to Interpret the Plan	33

ARTICLE IX APPLICABILITY OF PROVISIONS OF SALARIED RETIREMENT PLAN AND SURVIVOR INCOME BENEFIT PLAN			34

	A.	Applicability of Provisions of Salaried Retirement Plan and Survivor Income Benefit Plan to the Plan	34

ARTICLE X CERTAIN RIGHTS AND LIMITATIONS			35

	A.	Nonassignment and Nonalienation	35
	B.	Benefits Conditioned on Meeting All Requirements under the Plan	35

EXHIBIT A ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT			36

APPENDIX 1			37

PHILIP MORRIS INTERNATIONAL

SUPPLEMENTAL MANAGEMENT EMPLOYEES’ RETIREMENT PLAN

PREAMBLE

The Philip Morris International Supplemental Management Employees’ Retirement Plan as hereinafter set forth governs the rights of any Employee designated as a Participant under the Predecessor Plan on or after March 28, 2008 and whose Separation from Service or Date of Retirement is on or after March 28, 2008. The Plan shall also govern the rights of any Employee designated as a Participant on or after March 28, 2008.

Effective as of March 28, 2008, the liabilities allocable to employees, former employees and retired employees of the international tobacco operations conducted by Philip Morris International Inc. and its subsidiaries were transferred from the Predecessor Plan to the Plan.

It is intended that Grandfathered Supplemental Retirement Allowances, Grandfathered Supplemental Survivor Allowances, Grandfathered Supplemental Profit-Sharing Allowances and Grandfathered Supplemental Survivor Income Benefit Allowances with respect to Grandfathered Participants (and their spouses and beneficiaries) not be subject to the requirements of Section 409A of the Code and that the Plan be interpreted in accordance with this intention. The provisions of the Plan shall not be construed to change the time and form of payment of the Grandfathered Supplemental Retirement Allowance, Grandfathered Supplemental Survivor Allowance and Grandfathered Supplemental Survivor Income Benefit Allowance considered deferred before January 1, 2005 (within the meaning of Treasury Regulation §1.409A-6(a)(2) and other provisions of the Treasury Regulations under Section 409A of the Code) of a Grandfathered Participant who is a Secular Trust Participant.

ARTICLE I

DEFINITIONS

The following terms as used herein and in the Preamble shall have the meanings set forth below. Any capitalized term used herein or in the Preamble and not defined below shall have the meaning set forth in the Salaried Retirement Plan, the Profit-Sharing Plan or the Survivor Income Benefit Plan, as the context may require.

(a) Accredited Service

Accredited Service shall have the same meaning as in the Salaried Retirement Plan, provided, however, that Accredited Service shall also include the additional periods of Accredited Service which may be credited to a Participant pursuant to the provisions of Article II, A (1) (a) of the Plan pursuant to the designation of an Employee as a Participant under the Plan in accordance with Article I (bb) of the Plan.

(b) Actuarial Equivalent

Actuarial Equivalent shall mean a benefit which is at least equivalent in value to the benefit otherwise payable pursuant to the terms of the Plan, based on the actuarial principles and assumptions set forth in Exhibit I to the Salaried Retirement Plan.

Administrator shall have the same meaning as in the Salaried Retirement Plan, except that the Administrator shall not be a fiduciary (within the meaning of Section 3(21) of ERISA) with respect to any portion or all of the Plan which is intended to be exempt from the requirements of ERISA pursuant to Section 4(b)(5) thereof.

(d) Allowances

Allowances shall mean a Supplemental Retirement Allowance determined under Article II, A of the Plan, a Supplemental Profit-Sharing Allowance determined under Article III of the Plan and a Supplemental Survivor Allowance determined under Article II, B of the Plan and Supplemental Survivor Income Benefit Allowance determined under Article II, B of the Plan.

(e) Appointee

Appointee shall mean the person or entity who, pursuant to the provisions of the Plan, is empowered, in his or its sole discretion, to designate an Employee as a Participant and grant one or more Allowances under the Plan.

(1) Appointee of a non-chief executive officer .

The Appointee with respect to an Employee who is not a chief executive officer of a Participating Company shall be the chief executive officer of his Participating Company.

(2) Appointee of chief executive officer .

The Appointee with respect to an Employee who is a chief executive officer of a Participating Company other than Philip Morris International Inc. shall be the Chief Executive Officer.

(3) Appointee of Chief Executive Officer .

The Appointee of the Chief Executive Officer shall be the Compensation Committee of the Board of Directors of Philip Morris International Inc.

(f) Beneficiary

Beneficiary shall mean:

(1) Single Sum Payments . In the case of a Retired Participant whose form of payment of all or a portion of his Supplemental Retirement Allowance after his Separation from Service is a Single Sum Payment pursuant to Article II, C of the Plan, but who dies after his Separation from Service and before such Single Sum Payment is made:

(A) if the Retired Participant is married on the date of his death, the Beneficiary of such Single Sum Payment shall be the Spouse to whom he was married on the date of death; and

(B) if the Retired Participant is not married on the date of his death, the Beneficiary of such Single Sum Payment shall be Retired Participant’s estate.

A Participant or Retired Participant may designate any other person or persons as the Beneficiary who is to receive a Single Sum Payment of all or any portion of his Supplemental Retirement Allowance in the event that he dies after his Separation from Service and before such Single Sum Payment is made by timely filing a beneficiary designation form with the Administrator (or his delegate), provided, however, that if the Participant or Retired Participant is married on the date of the filing of such beneficiary designation form, his Spouse must consent, in writing before a notary public to such designation.

(2) Optional Payment . In the case of a Grandfathered Participant who has elected pursuant to Article II, C (6) of the Plan to receive after his Separation from Service that portion of his Supplemental Retirement Allowance equal to the Grandfathered Supplemental Retirement Allowance in the form of an Optional Payment described in Article I, (z) (2) or (3) of the Plan, the Beneficiary of such Grandfathered Supplemental Retirement Allowance shall be the person or persons designated by the Grandfathered Participant to receive (or who, pursuant to the terms of such Optional Payment, will receive) after his death a benefit according to the option elected by the Grandfathered Participant.

(3) Supplemental Profit-Sharing Allowance . In the case of a Participant or Inactive Participant who has been credited with a Supplemental Profit-Sharing Allowance and who dies prior to the payment of such Supplemental Profit-Sharing Allowance:

(A) if the Participant or Inactive Participant is married on the date of his death, the Beneficiary of such Supplemental Profit-Sharing Allowance shall be the Spouse to whom he was married on the date of death; and

(B) if the Participant or Inactive Participant is not married on the date of his death, the Beneficiary of such Supplemental Profit-Sharing Allowance shall be the Participant’s or Inactive Participant’s estate.

A Participant or Inactive Participant may designate any other person or persons (including a trust created by the Participant or Inactive Participant during his lifetime or by will) as the Beneficiary of his Supplemental Profit-Sharing Allowance in the event of his death by timely filing a beneficiary designation form with the Administrator (or his delegate), provided that if the Participant or Inactive Participant is married on the date of the filing of such beneficiary designation form, his Spouse must consent, in writing before a notary public to such designation.

(g) Benefit Equalization Plan

Benefit Equalization Plan shall mean the Philip Morris International Benefit Equalization Plan, effective as of January 1, 2008, and as amended from time to time, but only to the extent that benefits are payable pursuant to Article II, A thereof.

(h) Change in Circumstance

Change in Circumstance shall mean:

(1) Marriage . The marriage of the Grandfathered Participant;

(2) Divorce . The divorce of the Grandfathered Participant from his Spouse (determined in accordance with applicable state law), provided

(A) such Spouse was the Beneficiary who is to receive an Optional Payment, or

(B) the Grandfathered Participant elected pursuant to Article II, C (6) of the Plan to receive an Optional Payment pursuant to Article I, (z) (1) of the Plan;

(3) Death . The death of the Beneficiary designated by the Grandfathered Participant to receive an Optional Payment after the death of the Grandfathered Participant; or

(4) Medical Condition . A medical condition of the Beneficiary, based on medical evidence satisfactory to the Administrator, which is expected to result in the

death of the Beneficiary within five (5) years of the filing of an application for change in Optional Payment method pursuant to Article II, C (6) of the Plan.

(i) Change of Control

(1) Change of Control shall mean the happening of any of the following events with respect to a Grandfathered Supplemental Retirement Allowance, a Grandfathered Supplemental Survivor Income Benefit Allowance and Grandfathered Supplemental Profit-Sharing Allowance:

(A) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Philip Morris International Inc. (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of Philip Morris International Inc. entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from Philip Morris International Inc., (ii) any acquisition by Philip Morris International Inc., (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by Philip Morris International Inc. or any corporation controlled by Philip Morris International Inc. or (iv) any acquisition by any corporation pursuant to a transaction described in clauses (i), (ii) and (iii) of subparagraph (C) of this Article I, (i) (1) of the Plan; or

(B) Individuals who, as of the date hereof, constitute the Board of Directors of Philip Morris International Inc. (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board of Directors of Philip Morris International Inc.; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Philip Morris International Inc.’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board of Directors of Philip Morris International Inc.; or

(C) Approval by the shareholders of Philip Morris International Inc. of a reorganization, merger, share exchange or consolidation (a “Business Combination”), in each case, unless, following such Business Combination:

(i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately

prior to such Business Combination beneficially own, directly or indirectly, more than 80% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns Philip Morris International Inc. through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be;

(ii) no Person (excluding any employee benefit plan (or related trust) of Philip Morris International Inc. or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination; and

(iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors of Philip Morris International Inc., providing for such Business Combination; or

(D) Approval by the shareholders of Philip Morris International Inc. of (1) a complete liquidation or dissolution of Philip Morris International Inc. or (2) the sale or other disposition of all or substantially all of the assets of Philip Morris International Inc., other than to a corporation, with respect to which following such sale or other disposition:

(i) more than 80% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be;

(ii) less than 20% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of Philip Morris International Inc. or such corporation), except to the extent that such Person owned 20% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition; and

(iii) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board of Directors of Philip Morris International Inc., providing for such sale or other disposition of assets of Philip Morris International Inc. or were elected, appointed or nominated by the Board of Directors of Philip Morris International Inc.; and

(2) Change of Control shall mean the happening of any of the events specified in Treasury Regulation §1.409A-3(i)(5)(v), (vi) and (vii) with respect to that portion of a Supplemental Retirement Allowance that is not a Grandfathered Supplemental Retirement Allowance, that portion of a Supplemental Survivor Income Benefit Allowance that is not a Grandfathered Supplemental Survivor Income Benefit Allowance and that portion of a Supplemental Profit-Sharing Allowance that is not a Grandfathered Supplemental Profit-Sharing Allowance. For purposes of determining if a Change of Control has occurred, the Change of Control event must relate to a corporation identified in Treasury Regulation §1.409A-3(i)(5)(ii), provided, however, that (i) the spin-off of the shares of Philip Morris International Inc. to the shareholders of Altria Group, Inc. shall not be considered to be a Change of Control, and (ii) any change in the Incumbent Board coincident with such spin-off shall not be considered to be a Change of Control.

(j) Chief Executive Officer

Chief Executive Officer shall mean the chief executive officer of Philip Morris International Inc.

(k) Company

Company shall mean PMI Global Services Inc. PMI Global Services Inc. is the sponsor of the Plan.

(l) Compensation

Compensation shall have the same meaning as in the Salaried Retirement Plan, except that in computing the Retirement Allowance and Supplemental Retirement Allowance of an Employee in salary Band A or B who was not age fifty-five (55) or older at December 31, 2006, Compensation shall mean the lesser of (i) his annual base salary plus annual incentive award, and

(ii) annual base salary plus annual incentive award at a business rating of 100 and individual performance rating of “Exceeds.”

(m) Deceased Participant

Deceased Participant shall mean any Participant who died while he was an Employee and who had a nonforfeitable right to any portion of his Supplemental Retirement Allowance.

(n) Deceased Retired Participant

Deceased Retired Participant shall mean any Retired Participant who died after his Date of Retirement but prior to the SMERP Benefit Payment Date of his Supplemental Retirement Allowance.

(o) Earned and Vested

Earned and Vested shall mean, when referring to an Allowance or any portion of an Allowance, an amount that, as of January 1, 2005, is not subject to a substantial risk of forfeiture (as defined in Treasury Regulation §1.83-3(c)) or a requirement to perform future services.

(p) Employee

Employee shall mean any person who (1) is employed on a salaried basis by a Participating Company, (2) is a member of a select group of management or a highly compensated employee, and (3) is a participant in the Salaried Retirement Plan, the Profit-Sharing Plan, or both such plans.

(q) Exchange Act

Exchange Act shall mean the Securities Exchange Act of 1934, as amended from time to time, and any successor thereto.

(r) Grandfathered Deceased Participant

Grandfathered Deceased Participant shall mean a Grandfathered Participant who died while he was an Employee and who had a nonforfeitable right to any portion of his Supplemental Retirement Allowance.

(s) Grandfathered Deceased Retired Participant

Grandfathered Deceased Retired Participant shall mean a Retired Participant who, at the time of his death, was eligible to receive a Grandfathered Supplemental Retirement Allowance that was Earned and Vested.

(t) Grandfathered Participant

Grandfathered Participant shall mean:

(1) a Participant who is eligible for a Grandfathered Supplemental Retirement Allowance that was Earned and Vested; or

(2) a Participant who is eligible for a Grandfathered Supplemental Profit-Sharing Allowance that was Earned and Vested;

and who, in each instance, is a participant in the executive trust or is a Secular Trust Participant.

(u) Grandfathered Retired Participant

Grandfathered Retired Participant shall mean a Retired Participant who is eligible for a Grandfathered Supplemental Retirement Allowance.

(v) Grandfathered Supplemental Retirement Allowance

Grandfathered Supplemental Retirement Allowance shall mean the present value of that portion (or all) of the Supplemental Retirement Allowance earned to December 31, 2004 to which the Grandfathered Participant would have been entitled under the Plan if he had voluntarily terminated services without cause on December 31, 2004 and received a payment on the earliest possible date allowed under the Plan to receive payment of a Supplemental Retirement Allowance following the termination of services and receive the benefits in the form with the maximum value; provided, however, that for any subsequent year such Grandfathered Supplemental Retirement Allowance may increase to equal the present value of the benefit the Grandfathered Participant actually becomes entitled to, in the form and at the time actually paid, determined in accordance with the terms of the Plan (including applicable Statutory Limitations) as in effect on October 3, 2004, without regard to any further services rendered by the Grandfathered Participant after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than an election with respect to the time and form of an available benefit). In computing that portion of the Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance of a Grandfathered Participant who is eligible for an Early Retirement Allowance, whether reduced or unreduced (but is not eligible for a Full or Deferred Retirement Allowance) under the Salaried Retirement Plan as of the Grandfathered Participant’s Separation from Service, or, in the discretion of the Administrator, the end of the Grandfathered Participant’s policy severance, such Grandfathered Supplemental Retirement Allowance shall be the Actuarial Equivalent of that portion of the Grandfathered Participant’s Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance, computed as though such benefit were payable under the terms of the Salaried Retirement Plan in the form of a Retirement Allowance commencing on the first day of the month coincident with or next following the Grandfathered Participant’s Separation from Service or, in the discretion of the Administrator, the end of the Grandfathered Participant’s policy severance; provided, however, that solely for purposes of determining the early retirement factor to be applied in determining the Actuarial Equivalent of such benefit, the earliest date on which the Grandfathered Participant shall be treated as being entitled to an unreduced benefit under the Salaried Retirement Plan for purposes of Exhibit 1 to the Salaried Retirement Plan shall be the earliest date on which the Grandfathered Participant would have been entitled to an unreduced benefit if the Grandfathered Participant had voluntarily terminated employment on December 31, 2004.

(w) Grandfathered Supplemental Survivor Allowance

Grandfathered Supplemental Survivor Allowance shall mean the present value of that portion (or all) of the Supplemental Retirement Allowance earned to December 31, 2004 to which the Spouse of the Grandfathered Participant or Grandfathered Retired Participant would have been entitled under the Plan if he had died on December 31, 2004 and his Spouse had received a payment on the earliest possible date allowed under the Plan to receive payment of a Supplemental Survivor Allowance following the date of death and receive the benefits in the form with the maximum value; provided, however, that for any subsequent year such Grandfathered Supplemental Survivor Allowance may increase to equal the present value of the benefit the Spouse of the Grandfathered Participant or Grandfathered Retired Participant actually becomes entitled to, in the form and at the time actually paid, determined in accordance with the terms of the Plan (including applicable Statutory Limitations) as in effect on October 3, 2004, without regard to any further services rendered by the Grandfathered Participant or Grandfathered Retired Participant after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than an election with respect to the time and form of an available benefit).

(x) Grandfathered Supplemental SIB Allowance

Grandfathered Supplemental SIB Allowance shall mean the present value of that portion (or all) of the Supplemental SIB Allowance earned to December 31, 2004 to which the Spouse of a Grandfathered Participant or of a Grandfathered Retired Participant would have been entitled under the Plan if he had died on December 31, 2004 and his Spouse had received a payment on the earliest possible date allowed under the Plan to receive payment of a Supplemental SIB Allowance following the date of death and receive the benefits in the form with the maximum value; provided, however, that for any subsequent year such Grandfathered Supplemental SIB Allowance may increase to equal the present value of the benefit the Spouse of the Grandfathered Participant or Grandfathered Retired Participant actually becomes entitled to, in the form and at the time actually paid, determined in accordance with the terms of the Plan (including applicable Statutory Limitations) as in effect on October 3, 2004, without regard to any further services rendered by the Grandfathered Participant or Grandfathered Retired Participant after December 31, 2004, or any other events affecting the amount of or the entitlement to benefits (other than an election with respect to the time and form of an available benefit).

(y) Latest Payment Date

Latest Payment Date shall mean:

(1) in the case of a Supplemental Retirement Allowance, the later of:

(A) December 31 ^st of the year in which the Payment Date occurs, and

(B) the fifteenth day of the third month following the Payment Date;

(2) in the case of a Supplemental Survivor Allowance, the later of:

(A) December 31 ^st of the year in which the Supplemental Survivor Allowance Payment Date occurs, and

(B) the fifteenth day of the third month following the Supplemental Survivor Allowance Payment Date; and

(3) in the case of a Supplemental SIB Allowance, the later of:

(A) December 31 ^st of the year in which the Supplemental SIB Allowance Payment Date occurs, and

(B) the fifteenth day of the third month following the Supplemental SIB Allowance Payment Date.

(4) in the case of a Supplemental Profit-Sharing Allowance, the later of:

(A) December 31 ^st of the year in which the Payment Date occurs, and

(B) the fifteenth day of the third month following the Payment Date.

(z) Optional Payment

Optional Payment shall mean the following optional forms in which that portion of a Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance of a Grandfathered Retired Participant may be paid:

(1) in equal monthly payments for the life of the Grandfathered Retired Participant,

(2) in the form of a Grandfathered Supplemental Joint and Survivor Allowance, or

(3) in the form of a Grandfathered Supplemental Optional Payment Allowance.

Any election to receive an Optional Payment with respect to any Grandfathered Supplemental Retirement Allowance under the Plan shall be independent of any election with respect to benefits payable under any Other Plan.

(aa) Other Plan

Other Plan shall mean:

(1) the Salaried Retirement Plan,

(2) the Benefit Equalization Plan,

(3) any other plan, except a defined contribution or similar plan, maintained by the Company, or any domestic or foreign subsidiary or affiliate of Philip Morris International Inc., which provides retirement income to one or more employees on or after termination of employment, and

(4) any employment contract or other agreement between an Employee and Philip Morris International Inc. or any other member of the Controlled Group providing for retirement benefits or benefits in the event of a termination of employment or upon a Change of Control of Philip Morris International Inc. or of any other member of the Controlled Group.

(bb) Participant

Participant shall mean an Employee who has been designated as such by his Appointee pursuant to the terms of the Plan. The designation of an Employee as a Participant by a chief executive officer of a Participating Company shall be communicated in writing to the Administrator. An Employee shall become a Participant as of the date designated in writing by his Appointee. Except as otherwise specifically provided for in the Plan, a Participant shall cease to be such whenever he ceases to be an Employee; provided, however, that a Secular Trust Participant shall cease to accrue further benefits under this Plan as of December 31, 2004 and shall only be entitled to the Grandfathered Supplemental Retirement Allowance, Grandfathered Supplemental Survivor Allowance, Grandfathered Supplemental Profit-Sharing Allowance and Grandfathered Supplemental Survivor Income Benefit Allowance and nothing shall deprive such individual of any such Allowance.

(cc) Payment Date

Payment Date shall mean the first day of the third calendar month following the month in which the Participant Separates from Service; provided, however, that in all cases of a Separation from Service other than on account of death, the Payment Date in the case of a Specified Employee shall be the first day of the calendar month following the date that is six (6) months following the date that such Specified Employee Separates from Service.

(dd) Plan

Plan shall mean the Philip Morris International Supplemental Management Employees’ Retirement Plan described herein and in any amendments hereto.

(ee) Predecessor Plan

Predecessor Plan shall mean the Supplemental Management Employees’ Retirement Plan, sponsored by Altria Client Services Inc.

(ff) Profit-Sharing Plan

Profit-Sharing Plan shall mean Philip Morris International Deferred Profit-Sharing Plan, effective January 1, 2008, and as amended from time to time.

(gg) Retired Participant

Retired Participant shall mean a former Participant who is eligible for, or in receipt of, a Supplemental Retirement Allowance from the Plan. A former Participant shall cease to be a Retired Participant as of the date he receives a Single Sum Payment, or upon full payment of his Allowance or Allowances pursuant to the terms of the Plan as determined in the sole discretion of the Administrator.

(hh) Salaried Retirement Plan

Salaried Retirement Plan shall mean the Philip Morris International Retirement Plan, effective as of January 1, 2008, and as amended from time to time.

(ii) Secular Trust Participant shall mean a Grandfathered Employee who is identified as a Secular Trust Participant in Appendix 1.

(jj) Separation from Service , Separates from Service or Separated from Service

Separation from Service, Separates from Service or Separated from Service shall each have the same meaning as the term “separation from service” in Treasury Regulation §1.409A-1(h)(1).

(kk) Single Sum Payment

Single Sum Payment shall mean the payment of a benefit or portion of a benefit in a single payment to a Retired Participant or to the Spouse or other Beneficiary of a Deceased Participant or Deceased Retired Participant. A Single Sum Payment shall be (i) the Actuarial Equivalent of the (or portion of the) Supplemental Retirement Allowance payable in equal monthly payments during a twelve (12) month period for the life of the Retired Participant, (ii) the Actuarial Equivalent of the (or portion of the) Supplemental Survivor Allowance payable in equal monthly payments during a twelve (12) month period for the life of the Spouse of the Deceased Participant or Deceased Retired Participant and (iii) the Actuarial Equivalent of the (or portion of the) Supplemental Survivor Income Benefit Allowance payable in equal monthly payments during a twelve (12) month period for the life of the Spouse of the Deceased Participant or Deceased Retired Participant; provided, however, that if a Grandfathered Participant is a Secular Trust Participant, a Single Sum Payment shall equal the greater of (i) the amount determined pursuant to the foregoing provisions of this Article I(kk) and (ii) the amount required to purchase a single life annuity (or, for purposes of Appendix 1, a Supplemental Joint and Survivor Allowance) equal to the benefit otherwise identified under the Plan from a licensed commercial insurance company, as determined in the sole discretion of the Administrator.

(i) A Single Sum Payment shall be the exclusive form of distribution of the Supplemental Retirement Allowance, except with respect to:

(A) that portion of the Supplemental Retirement Allowance derived solely from the Grandfathered Supplemental Retirement Allowance and that is payable to a Grandfathered Retired Participant who is only eligible for a Vested Retirement Allowance at his Separation from Service; and

(B) that portion of the Supplemental Retirement Allowance derived solely from the Grandfathered Supplemental Retirement Allowance and that is payable to a Grandfathered Retired Participant who has timely elected to receive after his Date of Retirement that portion of his Supplemental Retirement Allowance equal to the Grandfathered Supplemental Retirement Allowance in the form of an Optional Payment pursuant to Article II, C (6) of the Plan and which election does not cease to be of any force and effect pursuant to Article II, C (6) of the Plan.

(ii) A Single Sum Payment shall be the exclusive form of distribution of the Supplemental Survivor Allowance, except with respect to that portion of the Supplemental Survivor Allowance derived solely from that portion of the Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance payable to the Spouse of a Grandfathered Deceased Participant or the Spouse of a deceased Grandfathered Retired Participant.

(iii) A Single Sum Payment shall be the exclusive form of distribution of the Supplemental Profit-Sharing Allowance.

(iv) A Single Sum Payment shall be the exclusive Form of Payment of the Supplemental Survivor Allowance, except with respect to the Grandfathered Supplemental Survivor Allowance.

(v) A Single Sum Payment shall be the exclusive Form of Payment of the Supplemental Survivor Income Benefit Allowance, except with respect to the Grandfathered Supplemental Survivor Income Benefit Allowance.

(ll) SMERP Benefit Payment Date

SMERP Benefit Payment Date shall mean the date on which the benefit to which the recipient is entitled is paid (or, solely in the case of a Grandfathered Supplemental Retirement Allowance, Grandfathered Supplemental Survivor Allowance and Grandfathered Supplemental Survivor Income Benefit Allowance, the date the benefit commences to be paid) pursuant to the application filed in accordance with Article II, E of the Plan, or if no such application is filed, in accordance with the terms of the Plan as determined by the Administrator. All such Allowances not paid in a Single Sum Payment are paid in arrears so that the actual date of payment shall be the first day of the calendar month next succeeding the SMERP Benefit Payment Date.

(1) Supplemental Retirement Allowance .

(A) Except as provided in clauses (B), (C) and (D) hereof, the SMERP Benefit Payment Date of the Supplemental Retirement Allowance shall be the Payment Date, but not later than the Latest Payment Date.

(B) The SMERP Benefit Payment Date of that portion of a Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance payable in the form of an Optional Payment pursuant to an

election under Article II, C (6) of the Plan to a Grandfathered Retired Participant shall be the Benefit Commencement Date of the Grandfathered Retired Participant’s Full, Deferred or Early Retirement Allowance under the Salaried Retirement Plan.

(C) The SMERP Benefit Payment Date of that portion of a Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance payable in the form of an Optional Payment with respect to a Grandfathered Retired Participant who voluntarily retires within the one (1) year period following the date of filing of his application for an Optional Payment with the Administrator pursuant to Article II, C (6) of the Plan or whose employment is terminated for misconduct (as determined by the Administrator) within such one (1) year period, shall be the first day of the month following the expiration of the one (1) year period following the date of the filing of his application for an Optional Payment.

(D) The SMERP Benefit Payment Date of that portion of a Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance payable to a Grandfathered Retired Participant who is only eligible for a Vested Retirement Allowance at his Separation from Service shall be the Benefit Commencement Date of the Grandfathered Retired Participant’s Vested Retirement Allowance under the Salaried Retirement Plan.

(2) Supplemental Survivor Allowance .

(A) Except as provided in clause (B), the SMERP Benefit Payment Date of the Supplemental Survivor Allowance payable to the Spouse of a Deceased Participant or Deceased Retired Participant pursuant to Article II, B of the Plan shall be the Supplemental Survivor Allowance Payment Date, but not later than the Latest Payment Date.

(B) The SMERP Benefit Payment Date of that portion of the Supplemental Survivor Allowance that is the Grandfathered Supplemental Survivor Allowance that is payable to the Spouse of a Grandfathered Deceased Participant, or to the Spouse of a Grandfathered Deceased Retired Participant, shall, in each case, be the Benefit Commencement Date of the Survivor Allowance payable to such Spouse under the Salaried Retirement Plan, provided that the Spouse may elect in accordance with the provisions of Article II, A 5(c) or (f) of the Salaried Retirement Plan, as applicable to the Spouse, that the SMERP Benefit Payment Date be the first day of any month thereafter, but not later than the later of:

(i) the first day of the second calendar month following the month in which the Grandfathered Deceased Participant or Grandfathered Deceased Retired Participant died (or if his date of birth was on the first day of a calendar month, the first day of the calendar month next

following the calendar month in which the Grandfathered Deceased Participant or Grandfathered Deceased Retired Participant died), or

(ii) the date that would have been the Grandfathered Deceased Participant’s or Grandfathered Deceased Retired Participant’s Unreduced Early Retirement Benefit Commencement Date.

The final payment of that portion of the Supplemental Survivor Allowance that is the Grandfathered Supplemental Survivor Allowance shall be the first day of the month following the death of the Spouse.

(3) Supplemental SIB Allowance .

(A) Except as provided in clause (B) hereof, the SMERP Benefit Payment Date of the Supplemental SIB Allowance payable to the Spouse of a Deceased Participant pursuant to Article II, B (1) (b), or of a Retired Participant pursuant to Article II, B (3) shall be the Supplemental SIB Allowance Payment Date, but not later than the Supplemental SIB Allowance Latest Payment Date.

(B) The SMERP Benefit Payment Date of that portion of the Supplemental SIB Allowance equal to the Grandfathered Supplemental SIB Allowance payable to the Spouse of a Grandfathered Deceased Participant pursuant to Article II, B (1) (b) of the Plan, or to the Spouse of a Grandfathered Deceased Retired Participant pursuant to Article II, B (3) of the Plan shall be the Benefit Commencement Date of the Survivor Income Benefit Allowance payable to such Spouse under the Survivor Income Benefit Plan. The last payment of such Supplemental SIB Allowance shall be the same date as the last payment of the Survivor Income Benefit Allowance under the Survivor Income Benefit Plan.

(4) Supplemental Optional Payment Allowance . The SMERP Benefit Payment Date of the Supplemental Optional Payment Allowance payable to the Beneficiary of a Grandfathered Deceased Retired Participant pursuant to Article II, B of the Plan shall be the first day of the calendar month following the death of the Grandfathered Deceased Retired Participant. The final payment of the Supplemental Optional Payment Allowance shall be the first day of the month following the death of the Beneficiary.

(mm) Specified Employee

Specified Employee shall have the meaning given in Treasury Regulation §1.409A-1(i).

(nn) Supplemental Joint and Survivor Allowance

Supplemental Joint and Survivor Allowance shall mean the total amount that would be payable during a twelve (12) month period as a reduced Supplemental Retirement Allowance to a Retired Participant for life and after his death the amount payable to his Spouse for life equal to one-half of the reduced Supplemental Retirement Allowance payable to the Retired Participant

(regardless of whether such form of benefit was available to such Retired Participant and his Spouse), which together shall be the Actuarial Equivalent of the Supplemental Retirement Allowance of the Retired Participant.

(oo) Supplemental Optional Payment Allowance

Supplemental Optional Payment Allowance shall mean, with respect to that portion of a Grandfathered Retired Participant’s Supplemental Retirement Allowance equal to the Grandfathered Supplemental Retirement Allowance, the total amount payable during a twelve (12) month period in accordance with one of the payment methods described in Article II, A 4(d) of the Salaried Retirement Plan and designated by the Grandfathered Participant in his application for an Optional Payment under Article II, C (6) of the Plan, pursuant to which the Grandfathered Participant receives for life after his Date of Retirement a reduced Supplemental Retirement Allowance in equal monthly payments and after his death after his Date of Retirement his Beneficiary receives for life a benefit in equal monthly payments according to the option elected by the Grandfathered Participant, which together shall be the Actuarial Equivalent of the Grandfathered Supplemental Retirement Allowance payable in equal monthly payments for the life of the Retired Participant after his Date of Retirement.

(pp) Supplemental Profit-Sharing Allowance or Profit-Sharing Allowance

Supplemental Profit-Sharing Allowance or Profit-Sharing Allowance shall mean the benefit determined under Article III of the Plan and payable on the Payment Date, but not later than the Latest Payment Date. The Supplemental Profit-Sharing Allowance shall be comprised of the Grandfathered Supplemental Profit-Sharing Allowance, if any, and the remaining portion of such Profit-Sharing Allowance.

(qq) Supplemental Retirement Allowance

Supplemental Retirement Allowance shall mean the benefit determined under Article II, A (1) of the Plan. The Supplemental Retirement Allowance shall be comprised of the Grandfathered Supplemental Retirement Allowance, if any, and the remaining portion of such Allowance.

(rr) Supplemental SIB Allowance Payment Date

Supplemental SIB Allowance Payment Date shall mean the first day of the third calendar month following the month in which the Participant or Retired Participant dies.

(ss) Supplemental Survivor Allowance

Supplemental Survivor Allowance shall mean the benefit payable to:

(1) the Spouse of a Deceased Participant; and

(2) the Spouse of a Deceased Retired Participant;

in an amount equal one-half of the reduced Supplemental Retirement Allowance which would have been payable in the form of a Supplemental Joint and Survivor Allowance to the Deceased

Participant or Deceased Retired Participant (regardless of whether such form of benefit was available to such Deceased Participant or Deceased Retired Participant).

(tt) Supplemental Survivor Allowance Payment Date

Supplemental Survivor Allowance Payment Date shall mean the first day of the third calendar month following the month in which the Deceased Participant or Deceased Retired Participant died.

(uu) Supplemental SIB Allowance

(1) Supplemental SIB Allowance shall mean the total amount payable during a twelve (12) month period in equal monthly payments to the Spouse of a Deceased Participant or to the Spouse of a Deceased Retired Participant equal to one-half of the reduced Supplemental Retirement Allowance which would have been payable to the Deceased Participant or Deceased Retired Participant had he elected to receive a Supplemental Joint and Survivor Allowance.

(2) No Supplemental SIB Allowance shall be payable with respect to any Deceased Participant or Deceased Retired Participant whose request to receive an Optional Payment has been granted by the Administrator.

(vv) Survivor Income Benefit Plan

Survivor Income Benefit Plan shall mean the Philip Morris International Survivor Income Benefit Plan, effective as of January 1, 2008, and as amended from time to time.

(ww) Vested Retirement Allowance

Vested Retirement Allowance shall mean the Retirement Allowance payable pursuant to Article II, A (6) of the Salaried Retirement Plan, provided, however, that a Participant who is only eligible for a Vested Retirement Allowance may be deemed to be eligible for an Early Retirement Allowance for any and all purposes of this Plan if in accordance with his designation as a Participant in the Plan; provided, however, that no such designation on or after October 3, 2004 shall change the time and form of payment of a Grandfathered Supplemental Retirement Allowance, the Grandfathered Supplemental Survivor Allowance and the Grandfathered Supplemental Survivor Income Benefit Allowance of a Grandfathered Participant or Grandfathered Retired Participant.

The masculine pronoun shall include the feminine pronoun unless the context clearly requires otherwise.

ARTICLE II

SUPPLEMENTAL RETIREMENT AND RELATED ALLOWANCES

A. S UPPLEMENTAL R ETIREMENT A LLOWANCES

(1) Supplemental Retirement Allowances . A Participant may be granted one or more of the following Supplemental Retirement Allowances under the Plan:

(a) A Supplemental Retirement Allowance in an amount determined by using the formula for calculating the Participant’s Retirement Allowance under the Salaried Retirement Plan, but, subject to the limitations of Article II, A (2) of the Plan, crediting Accredited Service in addition to that credited to the Participant pursuant to the Salaried Retirement Plan in recognition of previous service by the Participant deemed to be of special value to the Company or his Participating Company;

(b) A Supplemental Retirement Allowance in an amount equal to:

(i) a stated dollar amount per year, or

(ii) a stated percentage of the Participant’s Five-Year Average Compensation, or

(iii) the Participant’s Retirement Allowance under the Salaried Retirement Plan, which Supplemental Retirement Allowance accrues at a rate as a percentage of the Participant’s Five-Year Average Compensation which is greater than the rate of accrual under the Salaried Retirement Plan, such Supplemental Retirement Allowance to be calculated in individual instances on the basis of specific instructions which may depart only for such purpose from the terms, conditions and requirements of the Salaried Retirement Plan; or

(c) A Supplemental Retirement Allowance in an amount determined by using the formula for calculating the Participant’s Retirement Allowance under the Salaried Retirement Plan, such Supplemental Retirement Allowance to be payable on and after the Participant’s retirement in an amount which is greater than the Retirement Allowance otherwise payable to the Participant at such age.

(2) Limitation on Accredited Service . If a Supplemental Retirement Allowance under Article II, A (1) of the Plan is determined pursuant to a formula in the Salaried Retirement Plan using the Participant’s Compensation (including awards under incentive compensation plans of a Participating Company), the aggregate number of years of Accredited Service used in calculating the amount of the Participant’s Supplemental Retirement Allowance under this Plan shall not exceed thirty-five (35) years.

(3) Appendix I . The name of each Participant and the Supplemental Retirement Allowance awarded to him pursuant to Article II, A (1) of the Plan shall be set forth in Appendix I to the Plan.

(4) Payment . Payment of such Supplemental Retirement Allowance shall be made to such Participant at the time and in the form specified in Article II, C of the Plan.

B.	S UPPLEMENTAL S URVIVOR A LLOWANCES , S UPPLEMENTAL SIB A LLOWANCES AND S UPPLEMENTAL O PTIONAL P AYMENT A LLOWANCES

(1) Deceased Participants .

(a) The Spouse of a Deceased Participant shall be eligible to receive a Supplemental Survivor Allowance.

(b) If the death of the Deceased Participant occurs prior to his attaining the age of sixty-one (61) years and he has (or is deemed to have) completed five (5) years or more of Accredited Service as of the date of his death, his Spouse shall be eligible to receive a Supplemental SIB Allowance on the SMERP Benefit Payment Date specified in Article I, ( ll ) (3) of the Plan. Such Supplemental SIB Allowance shall be determined by using the formula under the Salaried Retirement Plan and assuming such Deceased Participant had continued in the employ of his Participating Company until the age of sixty-five (65) years, that his compensation (as defined in the Survivor Income Benefit Plan, or in the designation of the Employee as a Participant in the Plan) for all periods of time subsequent to his death and until age sixty-five (65) had been his compensation as in effect immediately prior to his death and that the Deceased Participant died the day after attaining the age of sixty-five (65) years. In determining the amount of such Supplemental SIB Allowance, the Social Security Integration Level shall be the Social Security Integration Level (determined in accordance with the provisions of the Social Security Act in effect on the date of death of the Deceased Participant) as would be in effect on the date such Deceased Participant would have attained his Social Security Retirement Age. Such Supplemental SIB Allowance shall be reduced by the amount of any Supplemental Survivor Allowance payable pursuant to Article II, B (1) (a) of the Plan.

(2) Deceased Retired Participants .

(a) The Spouse of a Deceased Retired Participant shall be eligible to receive a Supplemental Survivor Allowance on the SMERP Benefit Payment Date specified in Article I, ( ll ) (2) of the Plan; provided that in the case of a Grandfathered Deceased Retired Participant, the Administrator has not granted his request to have payment of his Grandfathered Supplemental Retirement Allowance paid in the form of a Supplemental Optional Payment Allowance. Such Supplemental Survivor Allowance shall be reduced by the amount of any Supplemental Retirement Allowance payable pursuant to Article II, C (1)(a)(ii) of the Plan.

(b) The Beneficiary of a Grandfathered Deceased Retired Participant whose request for an Optional Payment in the form of a Supplemental Optional Payment Allowance has been granted by the Administrator, but who has died after his Date of Retirement and prior to his SMERP Benefit Payment Date shall be eligible to receive

that portion of the Supplemental Optional Payment Allowance elected by the Retired Participant which is payable after the death of the Retired Participant. Payment shall be made on the SMERP Benefit Payment Date specified in Article I ( ll ) (4) of the Plan.

(3) Retired Participant Who Was a Grandfathered Participant

The Spouse of a Grandfathered Retired Participant who elected an Optional Payment described in Article I (z)(1) of the Plan pursuant to Article II, C (6) of the Plan and who has died after his SMERP Benefit Date shall be eligible to receive a Supplemental SIB Allowance on the SMERP Benefit Payment Date specified in Article I, ( ll ) (3)(B) of the Plan.

(4) Objective of Benefit . It is the intention of the provisions of this Paragraph B. to provide a benefit to the Spouse or other Beneficiary of a Deceased Participant or Deceased Retired Participant in the same instances as such Spouse or other Beneficiary would receive a benefit under the terms of the Salaried Retirement Plan or the Survivor Income Benefit Plan, as applicable to such Spouse or other Beneficiary, and the provisions of this Article II, B of the Plan shall be construed and interpreted in a manner that is consistent with that objective.

C.	SMERP B ENEFIT P AYMENT D ATE AND T ERMINATION OF S UPPLEMENTAL R ETIREMENT A LLOWANCES , S UPPLEMENTAL S URVIVOR A LLOWANCES , S UPPLEMENTAL S URVIVOR I NCOME B ENEFIT A LLOWANCES AND A LLOWANCES P AYABLE IN THE F ORM OF AN O PTIONAL P AYMENT

(1) Supplemental Retirement Allowances .

(a) For Retired Participants other than Grandfathered Retired Participants:

(i) The Supplemental Retirement Allowance shall be paid to a Retired Participant in a Single Sum Payment on his SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (A) of the Plan.

(ii) If a Retired Participant dies after his Date of Retirement and before payment of his Supplemental Retirement Allowance is paid in a Single Sum Payment, his Beneficiary shall receive a Single Sum Payment on the SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (A) of the Plan.

(b) For Grandfathered Retired Participants.

(i) The Grandfathered Supplemental Retirement Allowance of a Grandfathered Retired Participant eligible for an Early, Full or Deferred Retirement Allowance at his Separation from Service shall be paid in a Single Sum Payment on the SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (A) of the Plan, unless the Administrator has approved the Grandfathered Retired Participant’s election to have distribution of that portion of his Supplemental Retirement Allowance that is the Grandfathered Supplemental Retirement Allowance made in the form of an Optional Payment pursuant to Article II, C (6)

of the Plan, in which case his Grandfathered Benefit Equalization Retirement Allowance shall be paid in the form of Optional Payment as specified in Article I, (z) of the Plan, as applicable to the Grandfathered Retired Participant on the SMERP Benefit Payment Date set forth in Article I, ( ll ) (1) (B) or (C) of the Plan.

(ii) If a Grandfathered Retired Participant who is eligible for an Early, Full or Deferred Retirement Allowance at his Separation from Service dies after his Separation from Service and before payment of that portion of his Supplemental Retirement Allowance that is to be paid in a Single Sum Payment, his Beneficiary shall receive such Single Sum Payment on the SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (A) of the Plan.

(iii) The Grandfathered Supplemental Retirement Allowance of a Grandfathered Retired Participant who is only eligible for a Vested Retirement Allowance shall be paid in the same form of Optional Payment which the Grandfathered Retired Participant’s Vested Retirement Allowance is paid from the Salaried Retirement Plan and shall commence to be paid to the Retired Participant on his SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (D) of the Plan.

(c) Payments In Advance of Payment under any Other Plan. In the event the Supplemental Retirement Allowance with respect to the Retired Participant is paid in a Single Sum Payment prior to:

(i) the Retired Participant’s Benefit Commencement Date, the amount of such Supplemental Retirement Allowance shall equal the amount reasonably estimated by the Administrator to be actually payable under the Plan; or

(ii) the date the Retired Participant shall have specified on his application for retirement as the Benefit Commencement Date of his Retirement Allowance under the Salaried Retirement Plan, the Single Sum Payment shall be calculated based on the assumption that the Retired Employee elected to receive a Retirement Allowance at his Unreduced Early Retirement Benefit Commencement Date.

(2) Supplemental Survivor Allowances .

(a) The Supplemental Survivor Allowance payable pursuant to Article II, B (1) (a) of the Plan to the Spouse of a Deceased Participant who was not a Grandfathered Participant or pursuant to Article II, B (2) (a) to the Spouse of a Deceased Retired Participant who was not a Grandfathered Deceased Retired Participant shall be paid to the Spouse in a Single Sum Payment on the SMERP Benefit Payment Date specified in Article I, ( ll ) (2) (A) of the Plan.

(b) The Grandfathered Supplemental Survivor Allowance shall be paid to the Spouse in the same form and at the same time as the Survivor Allowance is paid from the

Salaried Retirement Plan commencing on the SMERP Benefit Payment Date as specified in Article I, ( ll ) (2) (B) of the Plan.

(3) Supplemental SIB Allowances .

(a) The Supplemental SIB Allowance payable pursuant to Article II, B (1) (b) of the Plan to the Spouse of a Deceased Participant who is not a Grandfathered Participant shall be paid to the Spouse in a Single Sum Payment on the SMERP Benefit Payment Date specified in Article I, ( ll ) (3) (A) of the Plan.

(b) The Grandfathered Supplemental SIB Allowance shall be paid to the Spouse in the same form as the Survivor Income Benefit Allowance is paid from the Survivor Income Benefit Plan commencing on the SMERP Benefit Payment Date specified in Article I, ( ll ) (3) (B) of the Plan.

(4) Supplemental Optional Payment Allowance . The Supplemental Optional Payment Allowance payable pursuant to Article II, B (3) of the Plan to the Beneficiary of a Grandfathered Deceased Retired Participant shall be paid in the form of Optional Payment approved by the Administrator commencing on the SMERP Benefit Payment Date specified in Article I, ( ll ) (4) of the Plan.

(5) Termination of Grandfathered Allowances .

(a) The payment of any Grandfathered Supplemental Retirement Allowance, Grandfathered Supplemental Survivor Allowance and Grandfathered Optional Payment Allowance in any form other than a Single Sum Payment shall terminate on the same date as payment would terminate under the Salaried Retirement Plan.

(b) The payment of any Grandfathered Supplemental SIB Allowance in any form other than a Single Sum Payment shall terminate on the same date as payment would terminate under the Survivor Income Benefit Plan.

(6) Optional Payment . A Grandfathered Participant who is eligible to retire on a Full, Deferred or Early Retirement Allowance may make application to the Administrator to receive an Optional Payment with respect to his Grandfathered Supplemental Retirement Allowance in lieu of the Single Sum Payment otherwise payable after his Separation from Service.

(a) The application for an Optional Payment shall specify:

(i) the form in which such Optional Payment is to be paid,

(ii) the Beneficiary, if any, who will receive benefits after the death of the Employee, and

(iii) the SMERP Benefit Payment Date.

(b) In the case of a Participant who eighteen (18) months prior to attaining the age of sixty-five (65) years could be compulsorily retired by his Participating Company upon attaining the age of sixty-five (65) years pursuant to Section 12(c) of the Age Discrimination in Employment Act, any application for an Optional Payment must be filed with the Administrator more than one (1) year preceding the date the Participant attains the age of sixty-five (65) years.

(c) The Administrator shall notify the Committee of all applications for an Optional Payment. The Administrator may grant or deny any such application in its sole and absolute discretion. Except as provided in Subparagraphs (d) and (e) of this Article II, C (6) of the Plan, a Participant shall not receive his Grandfathered Supplemental Retirement Allowance in the form of a Single Sum Payment after the Administrator has granted the Participant’s application for an Optional Payment. In the event the Participant or Retired Participant incurs a Change in Circumstance on or after the date of the filing of the application for an Optional Payment and prior to his SMERP Benefit Payment Date, the Participant or Retired Participant may file an application with the Administrator within ninety (90) days of the Change in Circumstance, but in no event later than his SMERP Benefit Payment Date, to change the form of Optional Payment, or to change the Beneficiary who is to receive a benefit after the death of the Retired Participant in accordance with the Optional Payment method originally filed with the Administrator.

(d) An application for an Optional Payment with respect to a Grandfathered Participant’s Grandfathered Supplemental Retirement Allowance in lieu of the Single Sum Payment otherwise payable after his Separation from Service shall be of no force and effect if:

(i) the Participant does not retire on a Full, Deferred or Early Retirement Allowance,

(ii) the Participant incurs a disability at any time before the date his Optional Payment commences to be made which causes him to be eligible for benefits under the Philip Morris International Long-Term Disability Plan or any other long-term disability plan of a Participating Company, or

(iii) the Participant is retired for ill health, disability or hardship under Article II, A 3.(a) of the Salaried Retirement Plan.

(e) In the event the application for an Optional Payment is of no force and effect as a result of an event described in clauses (ii) or (iii) of Article II, C (6) (d) of the Plan, payment of the Grandfathered Participant’s Supplemental Retirement Allowance shall be made in a Single Sum Payment pursuant to Article II, C (1) (a) of the Plan on the SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (A) of the Plan, but otherwise such application for an Optional Payment shall be effective on the Participant’s Date of Retirement on a Full, Deferred or Early Retirement Allowance and the Grandfathered Participant’s Grandfathered Supplemental Retirement Allowance

shall commence on the SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (B) of the Plan; provided, however, that if within the one (1) year period following the date of the filing of the application with the Administrator the Grandfathered Participant voluntarily retires or his employment is terminated for misconduct (as determined by the Administrator) by any member of the Controlled Group, the Optional Payment shall be reduced by one percent (1%) for each month (or portion of a month) by which the month in which the Retired Participant’s termination of employment precedes the first anniversary of the filing of the application with the Administrator and his benefits shall commence in the SMERP Benefit Payment Date specified in Article I, ( ll ) (1) (C) of the Plan.

(7) Exceptions . Notwithstanding the preceding provisions of this Paragraph C,

(a) the Administrator may cause the distribution of the Grandfathered Supplemental Retirement Allowance to any group of similarly situated Grandfathered Retired Participants (or their Spouses or other Beneficiaries) in a Single Sum Payment or as an Optional Payment; and

(b) the Administrator shall distribute the Grandfathered Supplemental Retirement Allowance in a Single Sum Payment if such Allowance payable in equal monthly payments is not more than $250 per month.

(8) Actuarial Equivalents . Any Supplemental Survivor Allowance or Supplemental Optional Payment Allowance payable under this Plan to any Spouse or other Beneficiary commencing at an age other than the Retired Participant’s Normal Retirement Age shall be the Actuarial Equivalent of the benefit payable pursuant to the terms of the Plan in equal monthly payments for life commencing at the Retired Participant’s Normal Retirement Age.

(9) Delayed Single Sum Payments . If any Single Sum Payment is made later than the date otherwise specified in this Article II, C of the Plan and such late payment is not due in whole or in part to the fault of the Retired Participant (or his Beneficiary), interest at a rate to be determined by the Administrator shall be added to such Single Sum Payment.

D. R EDUCTION OF B ENEFITS

(1) Supplemental Retirement Allowance .

(a) The Supplemental Retirement Allowance payable to a Retired Participant shall be reduced by the greater of:

(i) the Actuarial Equivalent of the benefits payable pursuant to any Other Plan to the extent that service used to determine the amount of benefits payable from such Other Plan is also used to calculate the amount of a Retired Participant’s Supplemental Retirement Allowance under this Plan, or

(ii) the amount set forth in, or determined in accordance with, the Participant’s designation as such pursuant to Article I, (bb) of the Plan, assuming

in each case that the Participant elected to receive such benefits in equal monthly payments for his life.

(2) Supplemental Survivor Allowance or Supplemental Survivor Income Benefit Allowance . Any Supplemental Survivor Allowance or Supplemental Survivor Income Benefit Allowance payable to the Spouse of a Deceased Participant or of a Deceased Retired Participant pursuant to Article II, B of the Plan shall be reduced by the Actuarial Equivalent of the maximum benefits for which the Spouse was actually eligible under the Salaried Retirement Plan, the Benefit Equalization Plan and the Survivor Income Benefit Plan assuming that the Participant elected to receive a Retirement Allowance under the Salaried Retirement Plan and a benefit equalization retirement allowance under the Benefit Equalization Plan in equal monthly payments for the life of the Retired Participant.

(3) Supplemental Optional Payment Allowance . Any Supplemental Optional Payment Allowance payable to the Beneficiary of a Grandfathered Deceased Retired Participant pursuant to Article II, B of the Plan shall be reduced by the Actuarial Equivalent of the benefits payable pursuant to the Salaried Retirement Plan and the Benefit Equalization Plan assuming that the Grandfathered Deceased Retired Participant had elected to receive such benefits in equal monthly payments for life.

(4) Employment Outside of United States . The Supplemental Retirement Allowance of a Participant, who as a result of employment outside of the United States, has benefits accrued to him under the social security, or similar laws, of a country other than the United States may, in the discretion of the Administrator, be reduced by the Actuarial Equivalent of such benefits, assuming that such Participant elected to receive such benefits in equal monthly payments for life.

(5) Prior Single Sum Payment . No benefits shall be payable to the Spouse or other beneficiary of a Deceased Retired Participant pursuant to Article II, B of the Plan, if prior to his death the Deceased Retired Participant received a Single Sum Payment from this Plan or the Single Sum Payment is made after his death to his Spouse or a beneficiary.

E. A PPLICATION OR N OTIFICATION FOR P AYMENT OF A LLOWANCES

(1) Notification of SMERP Benefit Payment Date . An application for retirement pursuant to Article II, B of the Salaried Retirement Plan shall be deemed notification to the Administrator of the SMERP Benefit Payment Date of a Supplemental Retirement Allowance (or other benefit) in accordance with the terms of this Plan.

(2) Notification of Beneficiary . In the event a Grandfathered Participant shall not have elected an Optional Payment method with respect to that portion of his Supplemental Retirement Allowance that is Grandfathered Supplemental Retirement Allowance, the Grandfathered Participant may specify the Beneficiary to whom payment of the Single Sum Payment shall be made in the event the Grandfathered Participant dies after his Separation from Service, but prior to his SMERP Benefit Payment Date. If no Beneficiary is specified, the

Beneficiary shall be the Participant’s Spouse, and if there is no Spouse, the Beneficiary shall be the Grandfathered Participant’s estate.

ARTICLE III

SUPPLEMENTAL PROFIT-SHARING ALLOWANCES

A. S UPPLEMENTAL P ROFIT -S HARING A LLOWANCES

A Participant may be granted a Supplemental Profit-Sharing Allowance equal to the amount, if any, by which the sum of the Operating Company Contribution which would have been made to the Profit-Sharing Plan and the amount which would have been credited to his account under the Benefit Equalization Plan had such Participant been eligible to participate in such plans for a plan year, exceeds the amount, if any, of employer contributions (excluding any contributions which the Participant has elected to have an employer make on his behalf pursuant to a cash or deferred arrangement) actually made or credited for the plan year on behalf of such Participant under a defined contribution plan qualified under Section 401(a) of the Code, an excess benefit plan (as defined in ERISA) and a plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees maintained by any other member of the Controlled Group.

B. C REDITS TO S UPPLEMENTAL P ROFIT -S HARING A LLOWANCE ; SMERP B ENEFIT P AYMENT D ATE

(1) Valuation . Any amounts credited to a Participant’s account pursuant to the provisions of this Article III shall be deemed to have been invested in Part A of the Fund (Stable Value Fund) under the Profit-Sharing Plan and shall be valued in accordance with the provisions of the Profit-Sharing Plan.

(2) Payment . A Participant shall receive his Supplemental Profit-Sharing Allowance in a Single Sum Payment on the Payment Date, but no later than the Latest Payment Date. If a Participant or former Participant dies before receiving such Supplemental Profit-Sharing Allowance, payment shall be made to his Beneficiary in a Single Sum Payment on the Payment Date, but no later than the Latest Payment Date.

(3) Application . A Participant or former Participant (or Beneficiary) shall make application to the Administrator (or his delegate) for distribution of Supplemental Profit-Sharing Allowance under this Plan. Any such application shall specify the Beneficiary to whom payment of the Single Sum Payment shall be made in the event the Participant dies after his Separation from Service, but prior to his SMERP Benefit Payment Date.

ARTICLE IV

FUNDS FROM WHICH ALLOWANCES ARE PAYABLE

A. E STABLISHMENT AND M AINTENANCE OF I NDIVIDUAL A CCOUNTS ; C ONTRIBUTIONS

(1) Establishment of Accounts . Individual accounts shall be established for the benefit of each Participant (or Beneficiary) under the Plan. Any benefits payable from an individual account shall be payable solely to the Participant (or Beneficiary) for whom such account was established. The Plan shall be unfunded. All benefits intended to be provided under the Plan shall be paid from time to time from the general assets of the Participant’s Participating Company and paid in accordance with the provisions of the Plan; provided , however , that the Participating Companies reserve the right to meet the obligations created under the Plan through one or more trusts or other agreements.

(2) Contributions . The contributions by each Participating Company on behalf of its Participants to the individual accounts established pursuant to the provisions of the Plan, whether in trust or otherwise, shall be in an amount which such Participating Company, with the advice of an actuary, determines to be sufficient to provide for the payment of the benefits under the Plan. No Participant, Spouse or Beneficiary shall, unless the Plan expressly provides otherwise, have any right or claim whatsoever to any specific assets of a Participating Company or of any trust.

B. M AINTENANCE OF B OOK R ESERVES

Each Participating Company shall maintain such reserves on its books with respect to Participants who are employed by such Participating Company as determined by the actuary for the Plan.

ARTICLE V

ADMINISTRATION

A. D UTIES OF THE A DMINISTRATOR

The general administration of the Plan shall be vested in the Administrator. The Administrator may employ and rely on actuaries, legal counsel, accountants and agents as they deem advisable.

B. A PPLICABILITY OF D UTIES OF THE A DMINISTRATOR UNDER THE S ALARIED R ETIREMENT P LAN TO THE P LAN

All powers, rights, duties and responsibilities assigned to the Administrator under the Salaried Retirement Plan applicable to this Plan shall be the powers, rights, duties and responsibilities of the Administrator under the terms of this Plan,

ARTICLE VI

AMENDMENT AND DISCONTINUANCE OF THE PLAN

A. A MENDMENT OF THE P LAN BY THE B OARD OF D IRECTORS OF P HILIP M ORRIS I NTERNATIONAL I NC ., THE C OMMITTEE AND THE A DMINISTRATOR

(1) Authority to Amend . The Board may, from time to time, and at any time, amend the Plan; provided, however, that authority to amend the Plan is delegated to the following committees or individuals where approval of the Plan amendment or amendments by the shareholders of Philip Morris International Inc. is not required:

(a) to the Committee, if the amendment (or amendments) will not increase the annual cost of the Plan by $10,000,000; and

(b) to the Administrator, if the amendment (or amendments) will not increase the annual cost of the Plan by $500,000.

(2) Permitted Amendments . Any amendment to the Plan may effect a substantial change in the Plan and may include (but shall not be limited to) any change deemed by the Company to be necessary or desirable to obtain tax benefits under any existing or future laws or rules or regulations thereunder; provided, however, that no such amendment shall deprive any Participant, Retired Participant, Spouse or Beneficiary of any Allowances accrued at the time of such amendment.

B. T ERMINATION OF THE P LAN

(1) Authority to Terminate . The Board may terminate the Plan for any reason at any time, provided that such termination shall not adversely affect the rights of any Participant, Retired Participant, Spouse or Beneficiary to benefits accrued to the date of termination.

(2) Participant Rights Upon Termination . In the event the Plan is terminated, each Participant, whether or not such Participant is eligible to receive benefits under this Plan, shall be immediately and fully vested in the benefits set forth in Article II of the Plan accrued to the date of termination of the Plan. Payment of any such benefits shall be made or commence to be made at the time such Participant (or his Spouse or Beneficiary) meets, under the terms of the Plan at the time of its termination, the requirement for payment of benefits under the Plan.

C. C HANGE OF C ONTROL P ROVISIONS

Notwithstanding any other provision of the Plan to the contrary, in the event of a Change of Control of Philip Morris International Inc., each Participant shall immediately be fully vested in the benefits set forth in Article II of the Plan which have accrued through the date of the Change of Control and, upon the Change of Control, each Participant (or his Spouse or Beneficiary) shall be entitled to a Single Sum Payment in an amount which is the Actuarial Equivalent of such accrued benefits, which amount shall be paid within 30 days of the Change of Control.

ARTICLE VII

FORMS; COMMUNICATIONS

A. F ORMS ; U SE OF E LECTRONIC M EDIA

The Administrator shall provide such appropriate forms as he may deem expedient in the administration of the Plan and no action to be taken under the Plan for which a form is so provided shall be valid unless upon such form. Any Plan communication may be made by electronic medium to the extent allowed by applicable law. The Administrator may adopt reasonable procedures to enable a Participant or Retired Participant to make an election using electronic medium (including an interactive telephone system and a website on the Intranet).

B. C OMMUNICATIONS C ONCERNING THE P LAN

ARTICLE VIII

INTERPRETATION OF PROVISIONS

A. D ISCRETIONARY A UTHORITY TO I NTERPRET THE P LAN

All power and authority with respect to the discretionary authority of the Administrator to interpret the provisions of the Salaried Retirement Plan shall be the power and authority of the Administrator to interpret the provisions of this Plan, including discretionary authority to determine all matters arising in the administration, interpretation and application of the Plan; discretionary authority to construe Plan terms and provisions and to make factual determinations and to remedy any ambiguities, inconsistencies or omissions of any kind; discretionary authority to determine the eligibility of any employee of a Participating Company to participate in the Plan; and to determine the amount of any benefit to which any person is entitled to under the Plan; provided , however , that the Administrator who makes a request for payment of a Supplemental Retirement Allowance in accordance with a form of distribution authorized under the Salaried Retirement Plan shall excuse himself from any and all deliberations and decisions in connection with such request.

ARTICLE IX

APPLICABILITY OF PROVISIONS OF SALARIED RETIREMENT

PLAN AND SURVIVOR INCOME BENEFIT PLAN

A. A PPLICABILITY OF P ROVISIONS OF S ALARIED R ETIREMENT P LAN AND S URVIVOR I NCOME B ENEFIT P LAN TO THE P LAN

Except as expressly provided to the contrary, all of the provisions, conditions and requirements set forth in the Salaried Retirement Plan and where applicable, the Survivor Income Benefit Plan, with respect to eligibility for and payment of benefits thereunder shall be equally applicable to the granting of Supplemental Retirement Allowances, Supplemental Survivor Income Benefit Allowances and other benefits to Participants and Beneficiaries pursuant to this Plan and the payment thereof pursuant to the provisions of this Plan. Whenever a Participant’s rights under this Plan are to be determined, appropriate reference shall be made to the Salaried Retirement Plan or the Survivor Income Benefit Plan, as applicable.

ARTICLE X

CERTAIN RIGHTS AND LIMITATIONS

A. N ONASSIGNMENT AND N ONALIENATION

No benefit under the Plan shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to do so shall be void; nor shall any benefit be in any manner liable for or subject to the debts, contracts, liabilities, engagements, or torts of the person entitled to such benefit. In the event that the Administrator shall find that any Participant, Retired Participant, Spouse or other beneficiary under the Plan has become bankrupt or that any attempt has been made to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge any of his benefits under the Plan, then such benefits shall cease, and in that event, the Administrator shall hold or apply the same to or for the benefit of such Participant, Retired Participant, Spouse or other beneficiary or apply the same to or for the benefit of such Participant, Retired Participant, Spouse or other beneficiary, in such manner as the Administrator may deem proper.

B. B ENEFITS C ONDITIONED ON M EETING A LL R EQUIREMENTS UNDER THE P LAN

Except as otherwise expressly provided in the Plan, Supplemental Retirement Allowances, Supplemental Profit-Sharing Allowances and Supplemental Survivor Income Benefit Allowances and other benefits shall be payable only if the Participant meets all of the requirements for benefits under the Plan.

EXHIBIT A

ACTUARIAL ASSUMPTIONS USED TO CALCULATE A SINGLE SUM PAYMENT

MORTALITY ASSUMPTION: The applicable mortality table is the table specified in Section 417(e)(3)(A)(ii)(I) of the Code and Section 1.417(e)-1(c)(2) of the Treasury Regulations (currently prescribed in Rev. Rul. 2001-62 as GAR 1994).

APPENDIX 1

G RANDFATHERED S UPPLEMENTAL R ETIREMENT A LLOWANCE

F OR M R . L OUIS C. C AMILLERI

(a) Grandfathered Supplemental Retirement Allowance payable at other than Early Retirement. Mr. Camilleri’s Grandfathered Supplemental Retirement Allowance shall be the amount by which

(i) the retirement benefit to which Mr. Camilleri would have been entitled under the Salaried Retirement Plan based on his Accredited Service and Compensation, but without regard to any applicable statutory or plan limits on such benefit, and without regard to any actuarial reduction for early commencement, if he had voluntarily terminated employment on December 31, 2004, expressed for purposes of this calculation in the form of a 50% Joint and Survivor Allowance, as adjusted for such form of payment based on the then applicable actuarial factors under the Salaried Retirement Plan, exceeds

(ii) the sum of:

(A) the retirement benefit to which Mr. Camilleri would have been entitled under the Salaried Retirement Plan, taking into account all applicable statutory and plan limits on such benefit, but without regard to any actuarial reduction for early commencement, if he had voluntarily terminated employment on December 31, 2004, expressed for purposes of this calculation in the form of a 50% Joint and Survivor Allowance, as adjusted for such form of payment based on the then applicable actuarial factors under the Salaried Retirement Plan;

(B) the retirement benefit to which Mr. Camilleri would have been entitled under the Kraft Retirement Plan, taking into account all applicable statutory and plan limitations on such benefit, but without regard to any actuarial reduction for early commencement, if he had voluntarily terminated employment on December 31, 2004, expressed for purposes of this calculation in the form of a joint and 50% survivor annuity, as adjusted for such form of payment based on the then applicable actuarial factors under the Kraft Retirement Plan; and

(C) the Kraft Supplemental Plan Benefit to which Mr. Camilleri would have been entitled under the Kraft Foods Global, Inc. Supplemental Plan I, but without regard to any actuarial reduction for early commencement, if he had voluntarily terminated employment on December 31, 2004, expressed for purposes of this calculation in the form of

a joint and 50% survivor annuity, as adjusted for such form of payment based on the then applicable actuarial factors under such plan.

For the avoidance of doubt, the amount determined under Section (a)(i) of this Appendix 1 shall be determined based only on Accredited Service and Compensation to which Mr. Camilleri would have been entitled under the terms of the Supplemental Management Employees’ Retirement Plan maintained by Altria Client Services Inc. if he had voluntarily terminated employment on December 31, 2004.

(b) Early Retirement Grandfathered Pension Benefit. If Mr. Camilleri is eligible for an Early Retirement Allowance, whether reduced or unreduced, (but is not eligible to receive a Full or Deferred Retirement Allowance) under the Salaried Retirement Plan as of his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, his Grandfathered Supplemental Retirement Allowance shall be the amount by which

(i) the Grandfathered Supplemental Retirement Allowance determined under Section (a)(i) of this Appendix 1, commencing on the first day of the month coincident with or next following Mr. Camilleri’s Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such early commencement, if applicable, based on the early retirement factors under the Retirement Plan for Salaried Employees maintained by Altria Client Services Inc., exceeds

(ii) the sum of

(A) the retirement benefit payable under the Salaried Retirement Plan determined under Section (a)(ii)(A) of this Appendix 1 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such early commencement, if applicable, based on the early retirement factors under the Altria Retirement Plan;

(B) the Kraft Retirement Plan benefit determined under Section (a)(ii)(B) of this Appendix 1 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such early commencement, if applicable, based on the applicable actuarial factors under the Kraft Retirement Plan; and

(C) the Kraft Supplemental Plan Benefit determined under Section (a)(ii)(C) of this Appendix 2 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such commencement, if applicable, based on the applicable

actuarial factors under the Kraft Foods Global, Inc. Supplemental Benefits Plan I, provided, however, that solely for purposes of determining the early retirement reductions required under this Section (b) of Appendix 1 for the early commencement of benefits, the early retirement or other factors to be used for each benefit shall be the actuarial factors that would have applied under the applicable plan treating the earliest date on which Mr. Camilleri would become entitled to an unreduced benefit as the date that would have applied if he had voluntarily terminated employment on December 31, 2004.

Exhibit 10.29

EXECUTION VERSION

AMENDMENT AND WAIVER TO THE

CREDIT AGREEMENT

THIS AMENDMENT AND WAIVER, dated as of February 6, 2009 (this “ Amendment and Waiver ”), is an amendment to and waiver of certain provisions of that certain Credit Agreement, dated as of 4 December 2007, relating to a 5-Year Revolving Credit Facility and a 3-Year Revolving Credit Facility (the “ Credit Agreement ”), by and among PHILIP MORRIS INTERNATIONAL INC., as borrower (“ PMI ”), the Lenders party thereto, and JPMORGAN EUROPE LIMITED, as facility agent and swingline agent (the “ Facility Agent ”).

W I T N E S S E T H

WHEREAS, PMI has requested certain amendments and waivers to the Credit Agreement to effect the non- pro rata termination of the Revolving Credit Commitments of Lehman Commercial Paper Inc., UK Branch (“ LCPI ”) and

WHEREAS, LCPI and the Revolving Credit Lenders holding at least 50.1% of the aggregate Revolving Credit Commitments have approved the amendment and waiver of certain provisions of the Credit Agreement in accordance with Section 9.1 of the Credit Agreement and the terms hereof and subject to the conditions set forth herein.

NOW, THEREFORE, the parties hereto agree as follows:

SECTION 1. Defined Terms .

For the purposes of this Amendment and Waiver, all capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to such terms in the Credit Agreement.

SECTION 2. Amendments .

It is the intention of the parties hereto that the Revolving Credit Commitments of LCPI under the Credit Agreement be irrevocably terminated in whole on a non- pro rata basis (the “ LCPI Commitment Termination ”), effective as of the Effective Date (defined below). LCPI shall no longer have any obligation to fund any amount of or extend any credit under the Credit Agreement, provided that LCPI shall remain entitled to its rights pursuant to indemnification and other provisions of the Credit Agreement which by their terms would survive the repayment of the Credit Agreement and the LCPI Commitment Termination. In order to reflect the LCPI Commitment Termination, all references to “Lehman Commercial Paper Inc.” contained in the Credit Agreement and the Schedules thereto shall be deleted in their entirety, including, without limitation, the following:

(a) Schedule 4A shall be amended to remove “Lehman Commercial Paper Inc., UK Branch US$307,500,000” from the list of Tranche A Revolving Credit Commitments and to replace “TOTAL US$3,000,000,000” with “TOTAL US$2,692,500,000”; and

(b) Schedule 4B shall be amended to remove “Lehman Commercial Paper Inc., UK Branch US$102,500,000” from the list of Tranche B Revolving Credit Commitments and to replace “TOTAL US$1,000,000,000” with “TOTAL US$897,500,000.”

SECTION 3. Waivers .

In connection with the LCPI Commitment Termination, any provision of the Credit Agreement that may be read to conflict with such termination is hereby waived, in each case solely in relation to the Revolving Credit Commitments of LCPI, including, without limitation, compliance with Section 2.14(a) of the Credit Agreement (Termination or Reduction of the Commitments).

SECTION 4. Representations and Warranties of PMI . PMI represents and warrants to the Lenders party hereto as of the Effective Date (as defined below) that:

(a) The execution, delivery and performance of this Amendment and Waiver are within PMI’s corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) PMI’s charter or by-laws or (ii) in any material respect, any law, rule, regulation or order of any court or governmental agency or any contractual restriction binding on or affecting it.

(b) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by PMI of this Amendment and Waiver.

(c) This Amendment and Waiver is a legal, valid and binding obligation of PMI enforceable against PMI in accordance with its terms, subject to the effect of any applicable bankruptcy, insolvency, fraudulent conveyance, reorganization, moratorium and other laws affecting creditors’ rights generally and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing.

(d) The representations and warranties contained in Section 4.1 of the Credit Agreement (except the representations set forth in the last sentence of subsection (e) and in subsection (f) thereof (other than clause (i) thereof)) are correct as though made on and as of the Effective Date (as defined below).

(e) No Default or Event of Default has occurred and is continuing.

(f) On the date hereof and on the Effective Date, there are no Revolving Credit Advances outstanding under the Credit Agreement.

SECTION 5. Conditions to Effectiveness . In accordance with Section 9.1 of the Credit Agreement, this Amendment and Waiver shall become effective on the date (the “ Effective Date ”) upon which the Facility Agent has received either (i) counterparts of this Amendment and Waiver signed on behalf of PMI, LCPI and Revolving Credit Lenders holding 50.1% of the aggregate Revolving Credit Commitments or (ii) written evidence satisfactory to the Facility Agent (which may include a telecopy transmission of an executed signature page of

this Amendment and Waiver) that such parties have signed counterparts of this Amendment and Waiver.

SECTION 6. Reference to and Effect on the Credit Agreement .

(a) On and after the Effective Date, the Credit Agreement shall be, and be deemed to be, modified and amended in accordance herewith and the respective rights, limitations, obligations, duties, liabilities and immunities of PMI, the Lenders and the Facility Agent shall hereafter be determined, exercised and enforced subject in all respects to such modifications and amendments, and all the terms and conditions of this Amendment and Waiver shall be deemed to be part of the terms and conditions of the Credit Agreement for any and all purposes and shall be binding on each party to the Credit Agreement. Except as expressly modified and expressly amended by this Amendment and Waiver, the Credit Agreement is in all respects ratified and confirmed, and all the terms, provisions and conditions thereof shall be and remain in full force and effect, including, without limitation, the Revolving Credit Commitments of all Revolving Credit Lenders other than LCPI.

(b) On and after the Effective Date, each reference in the Credit Agreement to “this Agreement,” “hereunder,” “hereof” or words of like import referring to the Credit Agreement shall, unless the context otherwise requires, mean and be a reference to the Credit Agreement, as amended by this Amendment and Waiver.

(c) The execution, delivery and effectiveness of this Amendment and Waiver shall not operate as a waiver of any right, power or remedy of any Lender under the Credit Agreement nor constitute a waiver of any provision of the Credit Agreement.

SECTION 7. Governing Law .

This Amendment and Waiver shall be governed by, and construed in accordance with, the laws of the State of New York.

SECTION 8. Execution in Counterparts .

This Amendment and Waiver may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment and Waiver by telecopier or other electronic transmission shall be effective as delivery of a manually executed counterpart of this Amendment and Waiver.

SECTION 9. Headings . The headings of this Amendment and Waiver are for purposes of reference only and shall not limit or otherwise affect the meaning hereof.

[ Signature pages intentionally omitted .]

Exhibit 10.30

Supplemental Equalization Plan

Effective as of January 1, 2008

A RTICLE I

I NTRODUCTION

1.1 Establishment of Plan. PMI Global Services Inc. (“PMIGS”) and its participating affiliates hereby establish the Supplemental Equalization Plan set forth herein (the “Plan”), effective as of January 1, 2008.

1.2 History and Purpose of Plan. Altria Client Services Inc. (“Altria”) and certain of its affiliates established and maintain the Retirement Plan for Salaried Employees and the Deferred Profit-Sharing Plan for Salaried Employees for the benefit of certain employees, including certain employees of Philip Morris International Inc. (“PMI”) and its subsidiaries before the spin off of PMI. Both plans are qualified retirement plans under sections 501(a) and 401(a) of the Internal Revenue Code of 1986, as amended (the “Code”) and, as such, are subject to certain statutory limitations on amounts that can be contributed to and paid from such plans and other nondiscrimination requirements.

Altria and certain of its affiliates also established and maintain the Benefit Equalization Plan (the “Altria BEP”) and the Supplemental Management Employees’ Retirement Plan (the “Altria SERP”) for the benefit of certain employees, including certain employees of PMI and its subsidiaries before the spin off. These supplemental plans are nonqualified retirement plans that provide deferred compensation for Eligible Employees. Specifically, the Altria BEP is intended, in part, to provide benefits that cannot be paid due to certain statutory limitations on the amount of contributions to and payments from Altria’s qualified plans. The Altria SERP is intended to provide certain additional benefits that cannot be provided under Altria’s qualified plans or the Altria BEP.

Effective as of January 1, 2005, certain participants in the Altria BEP and Altria SERP, including certain employees of PMI and its subsidiaries, ceased active participation in those plans. In lieu of accruing additional deferred compensation under those plans, these employees entered into Supplemental Enrollment Agreements and received annual “target payments” as current compensation for the services that they provided to Altria and its affiliates during the year. Altria and its affiliates retained the right to terminate the Supplemental Enrollment Agreements and discontinue making target payments at any time.

Effective as of January 1, 2008, PMIGS established the Philip Morris International Retirement Plan and the Philip Morris International Deferred Profit-Sharing Plan, both of which are qualified retirement plans. Effective as of the same date, PMIGS also established the Philip Morris International Benefit Equalization Plan (the “PMI BEP”) and the Philip Morris International Supplemental Management Employees’ Retirement Plan (the “PMI SERP”). The PMI BEP and the PMI SERP are nonqualified retirement plans that provide deferred compensation for Eligible Employees of PMI and its subsidiaries. In connection with the spin off, the assets and liabilities associated with the employees of PMI and its subsidiaries under Altria’s qualified plans were transferred to the qualified plans of PMIGS, and the liabilities associated with the employees of PMI and its subsidiaries under the Altria BEP and Altria SERP were transferred to PMI and its affiliates under the PMI BEP and the PMI SERP, respectively. Also effective as of January 1, 2008, both Altria and PMI discontinued making target payments with respect to services performed after December 31, 2007.

Under the terms of the PMI BEP and the PMI SERP, employees of PMI and its subsidiaries who received target payments pursuant to a Supplemental Enrollment Agreement are not eligible to participate in those supplemental plans with respect to services provided after December 31, 2004, but, instead, are eligible to accrue future benefits under this Plan, except that an employee who is first designated to participate in the PMI SERP effective after December 31, 2007, may participate in the PMI SERP. It is intended that the benefits provided under the Plan will not duplicate benefits provided under the PMI BEP or the PMI SERP or amounts previously paid as current compensation under the terms of the Supplemental Enrollment Agreements.

The Plan is comprised of three separate plans, programs or arrangements, and each portion of the Plan shall be treated as a separate plan, program or arrangement from the other portions. One portion of the Plan provides benefits to Eligible Employees (or their Spouses or other Beneficiaries) solely in excess of limitations on benefits and contributions under Section 415 of the Code. The second portion of the Plan provides benefits to Eligible Employees attributable solely to the limitation under Section 401(a)(17) of the Code on annual compensation that may be taken into account under qualified plans. All other benefits are provided under the third portion of the Plan.

A RTICLE II

D EFINITIONS

2.1 Actuarial Equivalent. The term “Actuarial Equivalent” shall mean a benefit that is equivalent in value to the benefit otherwise identified under the Plan based on the actuarial principles and assumptions set forth in Exhibit 1 to the PMI Retirement Plan, including, to the extent applicable, the Early Retirement Factors for Altria Transferee’s Assumed Kraft Pension Liability.

2.2 After-Tax SEP Benefit. The term “After-Tax SEP Benefit” shall have the meaning set forth in Section 3.1(d).

2.3 Altria. The term “Altria” shall mean Altria Client Services Inc.

2.4 Altria BEP. The term “Altria BEP” shall mean the Benefit Equalization Plan, maintained by Altria and certain of its affiliates.

2.5 Altria Profit-Sharing Plan. The term “Altria Profit-Sharing Plan” shall mean the Deferred Profit-Sharing Plan for Salaried Employees, maintained by Altria and certain of its affiliates.

2.6 Altria Retirement Plan. The term “Altria Retirement Plan” shall mean the Retirement Plan for Salaried Employees, maintained by Altria and certain of its affiliates.

2.7 Altria SERP. The term “Altria SERP” shall mean the Supplemental Management Employees’ Retirement Plan, maintained by Altria and certain of its affiliates.

2.8 Assumed Trust Account TP. The term “Assumed Trust Account TP” shall mean the assumed trust account established pursuant to an Eligible Employee’s Supplemental Enrollment Agreement.

2.9 Base SEP Pension Benefit. The Term “Base SEP Pension Benefit” shall have the meaning set forth in Section (e) of Appendix 2.

2.10 Beneficiary. The term “Beneficiary” shall mean the person or persons (including a trust created by the Eligible Employee during his lifetime or by will) designated by the Eligible Employee to receive his DPS Beneficiary Benefit in the event of his death, which designation shall be made on a beneficiary designation form filed with the Administrator. If the Eligible Employee is married on the date of the filing of such beneficiary designation form, his Spouse must consent in writing to such designation before a notary public or a duly authorized representative of the Plan. If an Eligible Employee fails to designate a Beneficiary pursuant to the foregoing, the Eligible Employee’s Beneficiary shall be:

(a) if the Eligible Employee is married on the date of his death, the Eligible Employee’s Spouse; and

(b) if the Eligible Employee is not married on the date of his death, the Eligible Employee’s estate.

2.11 Benefit Equalization Retirement Allowance. The term “Benefit Equalization Retirement Allowance” shall have the meaning set forth in the PMI BEP or, if so specified, the Altria BEP.

2.12 Change in Control. The term “Change in Control” shall have the meaning set forth in the PMI BEP with respect to an Eligible Employee’s Benefit Equalization Retirement Allowance that is not a Grandfathered Benefit Equalization Retirement Allowance (as defined in the PMI BEP).

2.13 Code. The term “Code” shall mean the Internal Revenue Code of 1986, as amended.

2.14 Company Account. The term “Company Account” shall mean the Company Account under the PMI Profit-Sharing Plan or the Altria Profit-Sharing Plan, as applicable.

2.15 Designation of Participation. The term “Designation of Participation” shall mean the document or documents that designated an Eligible Employee as a participant in the Altria SERP effective prior to January 1, 2005 and set forth the terms of the Eligible Employee’s benefits under the Altria SERP (and that now apply under the PMI SERP and this Plan).

2.16 DPS Beneficiary Benefit. The term “DPS Beneficiary Benefit” shall have the meaning set forth in Section 3.2.

2.17 Early Retirement Grandfathered Pension Benefit. The term “Early Retirement Grandfathered Pension Benefit” shall have the meaning set forth in Section 3.1(a)(iv) of the Plan or Section (d) of Appendix 2, as applicable.

2.18 Early Retirement Pension Benefit. The term “Early Retirement Pension Benefit” shall have the meaning set forth in Section 3.1(a)(ii) of the Plan or Section (b) of Appendix 2, as applicable.

2.19 Eligible Employee. The term “Eligible Employee” shall mean any of the individuals listed in Appendix 1, as amended from time to time by the Administrator.

2.20 Fund. The term “Fund” shall mean the Fund under the PMI Profit-Sharing Plan or the Altria Profit-Sharing Plan, as applicable.

2.21 Gross After-Tax SEP Benefit. The term “Gross After-Tax SEP Benefit” shall have the meaning set forth in Section 3.1(c).

2.22 Kraft Retirement Plan. The term “Kraft Retirement Plan” shall mean the Kraft Foods Global, Inc. Retirement Plan, maintained by Kraft Foods Global, Inc., or any predecessor, successor or replacement to such plan, as applicable.

2.23 Kraft Supplemental Plan Benefit. The term “Kraft Supplemental Plan Benefit” shall mean the defined benefit portion of the supplemental benefit payable to an Eligible Employee under the Kraft Foods Global, Inc. Supplemental Plan I, maintained by Kraft Foods Global, Inc., or any predecessor, successor or replacement to such plan, as applicable.

2.24 Lump-Sum Equivalent. The term “Lump-Sum Equivalent” shall mean a single-sum amount that is equivalent in value to the benefit otherwise identified under the Plan based on the actuarial principles and assumptions set forth in Exhibit A to the PMI BEP; provided, however, that if an Eligible Employee is a Secular Trust Participant, the term “Lump-Sum Equivalent” shall mean the greater of (i) the amount determined pursuant to the foregoing provisions of this Section and (ii) the amount required to purchase a joint and 50% survivor annuity equal to the benefit otherwise identified under the Plan from a licensed commercial insurance company, as determined in the sole discretion of the Administrator.

2.25 Normal Grandfathered Pension Benefit. The term “Normal Grandfathered Pension Benefit” shall have the meaning set forth in Section 3.1(a)(iii) of the Plan or Section (c) of Appendix 2, as applicable.

2.26 Normal Pension Benefit. The term “Normal Pension Benefit” shall have the meaning set forth in Section 3.1(a)(i) of the Plan or Section (a) of Appendix 2, as applicable.

2.27 Participating Company(ies). The term “Participating Company(ies)” shall have the meaning set forth in the PMI Retirement Plan, and a Participating Company under the PMI Retirement Plan that employs an Eligible Employee shall be a Participating Company under the Plan.

2.28 PMI. The term “PMI” shall mean Philip Morris International Inc.

2.29 PMI BEP. The term “PMI BEP” shall mean the Philip Morris International Benefit Equalization Plan, maintained by PMIGS and certain of its affiliates, in effect as of January 1, 2008 and as thereafter amended from time to time. Provisions in other plans or arrangements that refer to the PMI BEP shall be deemed to apply to this Plan in the manner and to the extent reasonably determined by the Administrator in its sole discretion.

2.30 PMI Profit-Sharing Plan. The term “PMI Profit-Sharing Plan” shall mean the Philip Morris International Deferred Profit-Sharing Plan, maintained by PMIGS and certain of its affiliates, as amended from time to time.

2.31 PMI Retirement Plan. The term “PMI Retirement Plan” shall mean the Philip Morris International Retirement Plan, maintained by PMIGS and certain of its affiliates, as amended from time to time.

2.32 PMI SERP. The term “PMI SERP” shall mean the Philip Morris International Supplemental Management Employees’ Retirement Plan, maintained by PMIGS and certain of its affiliates, in effect as of January 1, 2008 and as thereafter amended from time to time. Provisions in other plans or arrangements that refer to the PMI SERP shall be deemed to apply to this Plan in the manner and to the extent reasonably determined by the Administrator in its sole discretion.

2.33 PMIGS. The term “PMIGS” shall mean PMI Global Services Inc.

2.34 Secular Trust Participant. The term “Secular Trust Participant” shall mean an Eligible Employee who is identified as a Secular Trust Participant in Appendix 1.

2.35 SEP Benefit. The term “SEP Benefit” shall mean the benefit payable to an Eligible Employee under the terms of the Plan, as set forth in Section 3.1(e).

2.36 SEP DPS Benefit. The term “SEP DPS Benefit” shall have the meaning set forth in Section 3.1(b).

2.37 SEP Pension Benefit. The term “SEP Pension Benefit” shall have the meaning set forth in Section 3.1(a) or Appendix 2, as applicable.

2.38 SEP Spousal Survivor Benefit. The term “SEP Spousal Survivor Benefit” shall have the meaning set forth in Section 3.3.

2.39 SERP Compensation. The term “SERP Compensation” shall have the meaning set forth in Section (a) of Appendix 2.

2.40 SERP Service. The term “SERP Service” shall have the meaning set forth in Section (a) of Appendix 2.

2.41 Supplemental Enrollment Agreement. The term “Supplemental Enrollment Agreement” shall mean the most recent of any Supplemental Employee Grantor

Trust Enrollment Agreements and Supplemental Cash Enrollment Agreements between the Eligible Employee and Altria or PMIGS or any of its or their affiliates or predecessors.

2.42 Trust Account TP. The term “Trust Account TP” shall mean the trust subaccount established pursuant to an Eligible Employee’s Supplemental Enrollment Agreement and to which target payments have been credited.

2.43 Trust Account TP Value. The term “Trust Account TP Value” shall mean,

(a) with respect to an Eligible Employee for whom a Trust Account TP has been established, the sum of the amounts credited to the Eligible Employee’s Assumed Trust Account TP and Trust Account TP as of the earlier of the date

(i) on which the Eligible Employee’s Trust Account TP is terminated and distributed in accordance with the procedures established by the Administrator,

(ii) that is 60 days after the Eligible Employee’s Separation from Service, or

(iii) on which a Change in Control occurs, and

(b) with respect to an Eligible Employee for whom a Trust Account TP has not been established, the amounts credited to the Eligible Employee’s Assumed Trust Account TP as of the earlier of the date

(i) of the Eligible Employee’s Separation from Service, or

(ii) on which a Change in Control occurs,

in each case, reduced by the estimated amount of any taxes that would be attributable to income or assumed income from these accounts assuming liquidation of the accounts as of the applicable determination date set out above, but which have not been paid or deducted from these accounts, calculated using the income tax rate assumptions set forth in Appendix 3, and disregarding any withholding for the Eligible Employee’s share of employment taxes.

The following terms, as used herein, shall have the meanings attributed to them in the PMI Retirement Plan: “Accredited Service,” “Assumed Kraft Pension Plan Liability,” “Deferred Retirement Allowance,” “Early Retirement Allowance,” “Full Retirement Allowance,” “Kraft Pension Plans,” “Retained Kraft Pension Plan Liability,” “Retirement Allowance,” “Spouse” and “Vested Retirement Allowance.”

The following terms, as used herein, shall have the meanings attributed to them in the PMI BEP: “Administrator,” “Benefits Committee,” “Latest Payment Date,” “Payment Date,” “Separation from Service,” “Statutory Limitations,” “Survivor Benefit Latest Payment Date” and “Survivor Benefit Payment Date.”

The masculine pronoun shall include the feminine pronoun unless the context clearly requires otherwise.

A RTICLE III

B ENEFITS

3.1 SEP Benefit. An Eligible Employee shall be entitled to a SEP Benefit determined under this Section 3.1.

(a) SEP Pension Benefit. Unless an Eligible Employee’s SEP Pension Benefit is determined under Appendix 2 pursuant to the terms thereof, the SEP Pension Benefit for an Eligible Employee shall be determined under this Section 3.1(a). For purposes of determining the SEP Pension Benefit of an Eligible Employee who is a Secular Trust Participant (and whose SEP Pension Benefit is determined under this Section 3.1(a), rather than Appendix 2), the term “joint and 50% survivor annuity” shall be substituted for the term “single life annuity” in each place that such term appears in this Section 3.1(a).

(i) Normal Pension Benefit. An Eligible Employee’s Normal Pension Benefit shall be the amount by which

(A) the Retirement Allowance determined for the Eligible Employee under the PMI Retirement Plan based on all of the Eligible Employee’s Accredited Service, but without regard to the Statutory Limitations and without regard to any Actuarial Equivalent reduction for early commencement, expressed in the form of a single life annuity, exceeds

(B) the Retirement Allowance determined for the Eligible Employee under the PMI Retirement Plan based on all of the Eligible Employee’s Accredited Service and taking into account any applicable Statutory Limitations, but without regard to any Actuarial Equivalent reduction for early commencement, expressed in the form of a single life annuity.

For the avoidance of doubt, in determining the Normal Pension Benefit, the amount by which the Assumed Kraft Pension Plan Liability exceeds the Retained Kraft Pension Plan Liability shall be taken into account in the manner set forth in the PMI Retirement Plan in calculating the Retirement Allowances described in Sections 3.1(a)(i)(A) and (B) above.

(ii) Early Retirement Pension Benefit. The Early Retirement Pension Benefit of an Eligible Employee who is eligible for an Early Retirement Allowance, whether reduced or unreduced, (but is not eligible to receive a Full or Deferred Retirement Allowance) under the PMI Retirement Plan as of the Eligible Employee’s Separation from Service or, in the discretion of the Administrator, the end of the Eligible Employee’s policy severance shall be the Actuarial Equivalent of the Eligible

Employee’s Normal Pension Benefit, computed as though such benefit were payable under the terms of the PMI Retirement Plan as a single life annuity commencing on the first day of the month coincident with or next following the Eligible Employee’s Separation from Service or, in the discretion of the Administrator, the end of the Eligible Employee’s policy severance.

(iii) Normal Grandfathered Pension Benefit. An Eligible Employee’s Normal Grandfathered Pension Benefit shall equal the Benefit Equalization Retirement Allowance to which the Eligible Employee would have been entitled under the Altria BEP (and which is now payable under the PMI BEP) if the Eligible Employee had voluntarily terminated employment without cause on December 31, 2004 and received payment of such benefit on the earliest permissible date following termination of employment in the form with the greatest value, expressed for purposes of this calculation as a single life annuity commencing at age 65.

(iv) Early Retirement Grandfathered Pension Benefit. The Early Retirement Grandfathered Pension Benefit of an Eligible Employee who is eligible for an Early Retirement Allowance, whether reduced or unreduced, (but is not eligible for a Full or Deferred Retirement Allowance) under the PMI Retirement Plan as of the Eligible Employee’s Separation from Service or, in the discretion of the Administrator, the end of the Eligible Employee’s policy severance shall be the Actuarial Equivalent of the Eligible Employee’s Normal Grandfathered Pension Benefit, computed as though such benefit were payable under the terms of the PMI Retirement Plan in the form of a single life annuity commencing on the first day of the month coincident with or next following the Eligible Employee’s Separation from Service or, in the discretion of the Administrator, the end of the Eligible Employee’s policy severance; provided, however, that solely for purposes of the determining the early retirement factor to be applied in determining the Actuarial Equivalent of such benefit, the earliest date on which the Eligible Employee shall be treated as being entitled to an unreduced benefit under the PMI Retirement Plan for purposes of Exhibit 1 to the PMI Retirement Plan shall be the earliest date on which the Eligible Employee would have been entitled to an unreduced benefit if the Eligible Employee had voluntarily terminated employment on December 31, 2004.

(v) Determination of SEP Pension Benefit. Unless an Eligible Employee’s SEP Pension Benefit is determined under Appendix 2 pursuant to the terms thereof, the Eligible Employee’s “SEP Pension Benefit” shall be,

(A) for an Eligible Employee who is eligible for an Early Retirement Allowance, whether reduced or unreduced, (but is not eligible for a Full or Deferred Retirement Allowance) on the date of his Separation from Service or, in the discretion of the Administrator, at the end of the Eligible Employee’s policy severance, the Lump-Sum Equivalent of the amount by which the Eligible Employee’s Early Retirement Pension Benefit exceeds his Early Retirement Grandfathered Pension Benefit; and

(B) for an Eligible Employee who is eligible to receive a Full, Deferred or Vested Retirement Allowance as of the date of his Separation from Service or, in the discretion of the Administrator, the end of the Eligible Employee’s policy severance, the Lump-Sum Equivalent of the amount by which the Eligible Employee’s Normal Pension Benefit exceeds his Normal Grandfathered Pension Benefit.

(b) SEP DPS Benefit. An Eligible Employee’s SEP DPS Benefit shall equal the amounts that would have been credited to the Eligible Employee’s Company Account after December 31, 2004, but were not credited to his Company Account as a result of the Statutory Limitations. Such amounts shall be deemed to have been invested in Part A of the Fund and valued in accordance with the provisions of the PMI Profit-Sharing Plan or Altria Profit-Sharing Plan, as applicable.

(c) Gross After-Tax SEP Benefit. An Eligible Employee’s Gross After-Tax SEP Benefit shall equal the amount that would remain if income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 3), but disregarding any withholding for the Eligible Employee’s share of employment taxes, were withheld on the sum of the Eligible Employee’s (i) SEP Pension Benefit and (ii) SEP DPS Benefit.

(d) After-Tax SEP Benefit. The Eligible Employee’s After-Tax SEP Benefit shall equal the amount by which (i) the Gross After-Tax SEP Benefit exceeds (ii) the Eligible Employee’s Trust Account TP Value.

(e) SEP Benefit. The Eligible Employee’s SEP Benefit shall equal the After-Tax SEP Benefit converted to a pre-tax amount. Such pre-tax amount shall equal an amount sufficient to cause the amount remaining after withholding of income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 3), but disregarding any withholding for the Eligible Employee’s share of employment taxes, to equal the After-Tax SEP Benefit.

3.2 DPS Beneficiary Benefit. If an Eligible Employee dies before his SEP Benefit has been paid, the Eligible Employee’s Beneficiary shall be eligible to receive a DPS Beneficiary Benefit in an amount calculated as follows:

(a) Determine the amount that would remain if income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 3), but disregarding any withholding for the Eligible Employee’s share of employment taxes, were withheld on the Eligible Employee’s SEP DPS Benefit.

(b) Determine the amount, if any, by which (i) the amount determined under Section 3.2(a) exceeds (ii) the Eligible Employee’s Trust Account TP Value.

(c) The DPS Beneficiary Benefit payable under this Section shall equal an amount sufficient to cause the amount remaining after withholding of income taxes (determined as if withholding for federal, state and local income taxes were effected

at the rates specified in Appendix 3), but disregarding any withholding for the Eligible Employee’s share of employment taxes, to equal the amount, if any, determined under Section 3.2(b).

3.3 SEP Spousal Survivor Benefit. The Spouse of an Eligible Employee who dies before his SEP Benefit is paid shall be eligible to receive a SEP Spousal Survivor Benefit. The SEP Spousal Survivor Benefit shall be the amount calculated as follows:

(a) Determine the amount, if any, by which (i) the Eligible Employee’s Trust Account TP Value exceeds (ii) the amount calculated under Section 3.2(a) above.

(b) If the Eligible Employee dies before terminating employment with PMI and its affiliates, determine one half of the amount that would be the Eligible Employee’s SEP Pension Benefit if (i) the Eligible Employee had survived and had a Separation from Service on his date of death and (ii) the term “Actuarial Equivalent joint and 50% survivor annuity” were substituted for the term “single life annuity” in each place that such term appears in Section 3.1(a).

(c) Determine the amount that would remain if income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 3), but disregarding any withholding for the Eligible Employee’s share of employment taxes, were withheld on the amount determined under Section 3.3(b).

(d) If the Eligible Employee dies after terminating employment with PMI and its affiliates but before his SEP Benefit is paid, determine the amount that would remain if income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 3), but disregarding any withholding for the Eligible Employee’s share of employment taxes, were withheld on the Eligible Employee’s SEP Pension Benefit.

(e) The SEP Spousal Survivor Benefit shall equal an amount sufficient to cause the amount remaining after withholding of income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 3), but disregarding any withholding for the Eligible Employee’s share of employment taxes, to equal

(i) If the Eligible Employee dies before terminating employment with PMI and its affiliate, the amount by which (A) the amount determined under Section 3.3(c) exceeds (ii) the remaining Trust Account TP Value, if any, determined under Section 3.3(a); or

(ii) If the Eligible Employee dies after terminating employment with PMI but before his SEP Benefit is paid, the amount by which (A) the amount determined under Section 3.3(d) exceeds (ii) the remaining Trust Account TP Value, if any, determined under Section 3.3(a).

A RTICLE IV

T IME AND F ORM OF P AYMENT

4.1 Form of Payment. All benefits under the Plan will be paid in one or more lump-sum payments, as determined by the Administrator, subject to any applicable tax withholding.

4.2 Time of Payment.

(a) SEP Benefit. An Eligible Employee’s SEP Benefit shall be paid on the Payment Date, but not later than the Latest Payment Date.

(b) DPS Beneficiary Benefit. An Eligible Employee’s DPS Beneficiary Benefit shall be paid on the Payment Date, but not later than the Latest Payment Date.

(c) SEP Spousal Survivor Benefit. An Eligible Employee’s SEP Spousal Survivor Benefit shall be paid on the Survivor Benefit Payment Date, but not later than the Survivor Benefit Latest Payment Date.

4.3 Allocation of Payments. The Administrator may use any reasonable method, as determined in its sole discretion, to designate amounts paid under the Plan as supplemental defined contribution payments or supplemental defined benefit payments and to allocate benefits among the three plans, programs or arrangements that constitute the Plan as described in Article I.

4.4 Interest and Earnings. If all or any portion of a benefit payable under the Plan is paid later than the Payment Date or Survivor Benefit Payment Date, as applicable, interest (at a reasonable rate determined in the sole discretion of the Administrator based on the short-term applicable federal rates published by the Internal Revenue Service) from the date on which the Eligible Employee’s Trust Account TP Value is determined until the last day of the month preceding the month in which payment is made may, in the sole discretion of the Administrator, be added to such benefit.

A RTICLE V

F UNDS F ROM W HICH SEP B ENEFITS A RE P AYABLE

Individual accounts shall be established for the benefit of each Eligible Employee (or Spouse or Beneficiary) under the Plan. Any benefits payable from an individual account shall be payable solely to the Eligible Employee (or Spouse or Beneficiary) for whom such account was established. The Plan shall be unfunded. All benefits intended to be provided under the Plan shall be paid from time to time from the general assets of the Eligible Employee’s Participating Company and paid in accordance with the provisions of the Plan; provided, however, that the Participating Companies reserve the right to meet the obligations created under the Plan through one or more trusts or other agreements. In no event shall any such trust or trusts be outside of the United States. The contributions or allocations by each Participating Company on behalf of its Eligible Employees to the individual accounts established pursuant to the

provisions of the Plan, whether in trust or otherwise, shall be in an amount which such Participating Company, with the advice of an actuary, determines to be sufficient to provide for the payment of the benefits under the Plan.

A RTICLE VI

T HE A DMINISTRATOR ; C LAIMS P ROCEDURES ; I NTERPRETATION OF P ROVISIONS

The general administration of the Plan shall be vested in the Administrator. The powers, rights, duties and responsibilities of the Administrator shall be the same as the powers, rights, duties and responsibilities of the Administrator under the PMI BEP.

The procedures applicable to claims for benefits made under the Plan shall be the same as the procedures applicable to claims made under the PMI Retirement Plan.

The Plan is intended to comply with the requirements of Section 409A of the Code. Accordingly, where applicable, this Plan shall at all times be construed and administered in a manner consistent with the requirements of Section 409A of the Code and applicable regulations, without any diminution in the value of benefits. If the Internal Revenue Service or a court of competent jurisdiction makes a determination that has become final that the Plan fails to comply with Section 409A of the Code with respect to one or more Eligible Employees and imposes any additional taxes, penalties or interest as a result of such violation that would not otherwise be payable, the Participating Companies shall pay to the Eligible Employee, Spouse or Beneficiary on whom such additional taxes, penalties or interest are imposed an amount sufficient to cause the amount remaining after withholding of income taxes (determined as if withholding for federal, state and local income taxes were effected at the rates specified in Appendix 2), and any withholding for the Eligible Employee’s share of employment taxes, to equal the amount of any such additional taxes, penalties or interest; provided, however, that an Eligible Employee shall be entitled to such payment only if he informs PMIGS of any notice of an intent to impose such additional taxes, penalties or interest within 30 days of his receipt thereof and cooperates fully with the Participating Companies in opposing the imposition of such additional taxes, penalties or interest.

A RTICLE VII

A MENDMENT AND D ISCONTINUANCE OF THE P LAN

The Plan can be amended or discontinued in the same manner as the PMI BEP can be amended or discontinued; provided, however, that the Benefits Committee can amend the Plan at any time to prevent the payment of benefits that duplicate benefits provided under any other plan or program, as reasonably determined in the sole discretion of the Benefits Committee.

A RTICLE VIII

F ORMS ; C OMMUNICATIONS

The Administrator shall provide such appropriate forms as it may deem expedient in the administration of the Plan, and no action to be taken under the Plan for which a form is so

provided shall be valid unless upon such form. Any Plan communication may be made by electronic medium to the extent allowed by applicable law.

A RTICLE IX

C HANGE IN C ONTROL P ROVISIONS

In the event of a Change in Control, each Eligible Employee shall be fully vested in his SEP Benefit and any other benefit accrued under the Plan through the date of the Change in Control. Each Eligible Employee shall be entitled to a lump-sum payment in cash within 30 days of a Change in Control equal to his SEP Benefit, determined as if the date of the Change in Control was the date of Eligible Employee’s Separation from Service.

A RTICLE X

M ISCELLANEOUS

The Plan shall be construed and administered in accordance with the laws of the State of New York to the extent not preempted by federal law.

A PPENDIX 1

E LIGIBLE E MPLOYEES

Philip Morris International


Secular Trust
Data Listing as of December 1, 2008 - Active Participants

Last Name	First Name	Funding Payment Account(s)	Target Payment Account(s)
Camilleri	Louis C.	FP Trust Account / FP Assumed Account	TP Trust Account / TP Assumed Account

Wall	Charles R.	FP Trust Account / FP Assumed Account	TP Trust Account / TP Assumed Account

Total ST Participants: 2

Executive Trust Arrangement

Last Name	First Name	Funding Payment Account(s)	Target Payment Account(s)
Alonso	Hector	FP Trust Account / FP Assumed Account	TP Trust Account / TP Assumed Account

Holsenbeck	G. Penn	FP Trust Account / FP Assumed Account	TP Trust Account / TP Assumed Account

Rivera	Salvador	FP Assumed Account	TP Assumed Account

Roberts	Andrew N.	FP Trust Account	TP Trust Account / TP Assumed Account

Rolli	Nicholas M.	FP Trust Account / FP Assumed Account	TP Trust Account / TP Assumed Account

Lindon	Timothy	FP Trust Account / FP Assumed Account	TP Trust Account / TP Assumed Account

Total ETA Participants: 6

A PPENDIX 2

SEP P ENSION B ENEFIT

F OR M R . L OUIS C. C AMILLERI

SEP Pension Benefit. The SEP Pension Benefit for Louis C. Camilleri (“Mr. Camilleri”) shall be determined under this Appendix 2, rather than under Section 3.1(a), as follows:

(a) Normal Pension Benefit. Mr. Camilleri’s Normal Pension Benefit shall be the amount by which

(i) the Retirement Allowance determined for Mr. Camilleri under the PMI Retirement Plan based on Mr. Camilleri’s SERP Service (as defined below) and SERP Compensation (as defined below), but without regard to the Statutory Limitations and without regard to any Actuarial Equivalent reduction for early commencement, expressed in the form of a joint and 50% survivor annuity that is the Actuarial Equivalent of a single life annuity, exceeds

(ii) the sum of Mr. Camilleri’s:

(A) Retirement Allowance determined under the PMI Retirement Plan based on Mr. Camilleri’s Accredited Service and taking into account any applicable Statutory Limitations, but without regard to any Actuarial Equivalent reduction for early commencement, expressed in the form of a joint and 50% survivor annuity that is the Actuarial Equivalent of a single life annuity;

(B) retirement benefit under the Kraft Retirement Plan payable with respect to service that is also treated as SERP Service and taking into account all applicable statutory and plan limitations on such benefit, but without regard to any actuarial reduction for early commencement, expressed in the form of a joint and 50% survivor annuity, as adjusted for such form of payment based on the applicable actuarial factors under the Kraft Retirement Plan; and

(C) Kraft Supplemental Plan Benefit payable with respect to service that is also treated as SERP Service, but without regard to any Actuarial Equivalent reduction for early commencement, expressed in the form of a joint and 50% survivor annuity, as adjusted for such form of payment based on the applicable actuarial factors under the Kraft Foods Global, Inc. Supplemental Benefits Plan I.

For purposes of this Appendix 2, the term “SERP Service” shall mean Mr. Camilleri’s Accredited Service plus, without duplication, any additional service set forth in his Designation of Participation, without regard to Mr. Camilleri’s eligibility to participate in the PMI SERP or the Altria SERP for any year; provided, however, that such SERP Service shall not exceed thirty-five years.

For purposes of this Appendix 2, the term “SERP Compensation” shall mean (i) for calendar years before 2007, “Compensation” as such term is defined in the PMI Retirement Plan, (ii) for the 2007 calendar year, the lesser of Mr. Camilleri’s (A) base salary plus actual annual incentive compensation and (B) base salary plus annual incentive compensation at a business rating of 100 and individual performance rating of “Exceeds,” and (iii) for calendar years 2008 and thereafter, the lesser of Mr. Camilleri’s (A) base salary plus actual annual incentive compensation, and (B) base salary plus $2,887,500.

(b) Early Retirement Pension Benefit. If Mr. Camilleri is eligible for an Early Retirement Allowance, whether reduced or unreduced, (but is not eligible to receive a Full or Deferred Retirement Allowance) under the PMI Retirement Plan as of his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, his Early Retirement Pension Benefit shall be the amount by which

(i) the Actuarial Equivalent, reflecting any reduction for early commencement, of the Retirement Allowance determined under Section (a)(i) of this Appendix 2 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, exceeds

(ii) the sum of:

(A) the Actuarial Equivalent, reflecting any reduction for early commencement, of the Retirement Allowance determined under Section (a)(ii)(A) of this Appendix 2 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance;

(B) the Kraft Retirement Plan benefit determined under Section (a)(ii)(B) of this Appendix 2 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such early commencement based on the applicable actuarial factors under the Kraft Retirement Plan; and

as reduced for such early commencement based on the applicable actuarial factors under the Kraft Foods Global, Inc. Supplemental Benefits Plan I.

(c) Normal Grandfathered Pension Benefit. Mr. Camilleri’s Normal Grandfathered Pension Benefit shall be the amount by which

(i) the retirement benefit to which Mr. Camilleri would have been entitled under the Altria Retirement Plan based on his SERP Service and SERP Compensation, but without regard to any applicable statutory or plan limits on such benefit, and without regard to any actuarial reduction for early commencement, if he had voluntarily terminated employment on December 31, 2004, expressed for purposes of this calculation in the form of a joint and 50% survivor annuity, as adjusted for such form of payment based on the then applicable actuarial factors under the Altria Retirement Plan, exceeds

(ii) the sum of:

(A) the retirement benefit to which Mr. Camilleri would have been entitled under the Altria Retirement Plan (which is now payable under the PMI Retirement Plan), taking into account all applicable statutory and plan limits on such benefit, but without regard to any actuarial reduction for early commencement, if he had voluntarily terminated employment on December 31, 2004, expressed for purposes of this calculation in the form of a joint and 50% survivor annuity, as adjusted for such form of payment based on the then applicable actuarial factors under the Altria Retirement Plan;

For the avoidance of doubt, the amount determined under Section (c)(i) of this Appendix 2 shall be determined based only on SERP Service and SERP Compensation to which

Mr. Camilleri would have been entitled under the terms of the Altria SERP if he had voluntarily terminated employment on December 31, 2004.

(d) Early Retirement Grandfathered Pension Benefit. If Mr. Camilleri is eligible for an Early Retirement Allowance, whether reduced or unreduced, (but is not eligible to receive a Full or Deferred Retirement Allowance) under the PMI Retirement Plan as of his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, his Early Retirement Grandfathered Pension Benefit shall be the amount by which

(i) the retirement benefit determined under Section (c)(i) of this Appendix 2, commencing on the first day of the month coincident with or next following Mr. Camilleri’s Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such early commencement, if applicable, based on the early retirement factors under the Altria Retirement Plan, exceeds

(ii) the sum of

(A) the retirement benefit payable under the Altria Retirement Plan (and now payable under the PMI Retirement Plan) determined under Section (c)(ii)(A) of this Appendix 2 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such early commencement, if applicable, based on the early retirement factors under the Altria Retirement Plan;

(B) the Kraft Retirement Plan benefit determined under Section (c)(ii)(B) of this Appendix 2 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such early commencement, if applicable, based on the applicable actuarial factors under the Kraft Retirement Plan; and

(C) the Kraft Supplemental Plan Benefit determined under Section (c)(ii)(C) of this Appendix 2 commencing on the first day of the month coincident with or next following his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, as reduced for such commencement, if applicable, based on the applicable actuarial factors under the Kraft Foods Global, Inc. Supplemental Benefits Plan I,

provided, however, that solely for purposes of determining the early retirement reductions required under this Section (d) of Appendix 2 for the early commencement of benefits, the early retirement or other factors to be used for each benefit shall be the actuarial factors that would have applied under the applicable plan treating the earliest date on which Mr. Camilleri would become entitled to an unreduced benefit as the date

that would have applied if he had voluntarily terminated employment on December 31, 2004.

(e) Base SEP Pension Benefit. Mr. Camilleri’s Base SEP Pension Benefit shall be calculated as follows:

(i) If Mr. Camilleri is eligible for an Early Retirement Allowance, whether reduced or unreduced, (but is not eligible for a Full or Deferred Retirement Allowance) on the date of his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, his Base SEP Pension Benefit shall be the Lump-Sum Equivalent of the amount by which his Early Retirement Pension Benefit exceeds his Early Retirement Grandfathered Pension Benefit; and

(ii) If Mr. Camilleri is eligible to receive a Full, Deferred or Vested Retirement Allowance as of the date of his Separation from Service or, in the discretion of the Administrator, the end of his policy severance, his Base SEP Pension Benefit shall be the Lump-Sum Equivalent of the amount by which his Normal Pension Benefit exceeds his Normal Grandfathered Pension Benefit.

(f) SEP Pension Benefit. Mr. Camilleri’s SEP Pension Benefit under this Appendix 2 shall be his Base SEP Pension Benefit plus, if Mr. Camilleri retires as of January 2012, the excess, if any, of

(i) $36,500,000 over

(ii) the present value of the amount determined under Section (a)(i) of this Appendix 2, less the amounts determined under Sections (a)(ii)(B) and (a)(ii)(C) of this Appendix 2 and any amounts determined under Section (a)(ii)(D) of this Appendix 2 that would not be payable by PMI or its affiliates.

A PPENDIX 3

T AX A SSUMPTIONS

Federal income tax rate: The highest marginal Federal income tax rate as adjusted for the Federal deduction of state and local taxes and the phase out of Federal deductions under current law (or as adjusted under any subsequently enacted similar provisions of the Internal Revenue Code).

State income tax rate: Except with respect to additional benefits attributable to the provisions of an Eligible Employee’s Designation of Participation, the highest adjusted marginal state income tax rate based on Eligible Employee’s state of residence on the date of the Eligible Employee’s Separation from Service. With respect to those additional benefits that are attributable to the provisions of an Eligible Employee’s Designation of Participation, the highest marginal state income tax rate based on the state in which the Eligible Employee is or was employed by a Participating Company on the date of his Separation from Service.

Local income tax rate: Except with respect to additional benefits attributable to the provisions of an Eligible Employee’s Designation of Participation, the highest adjusted marginal local income tax rate (taking into account the Eligible Employee’s resident or nonresident status) based on Eligible Employee’s locality of residence on the date of the Eligible Employee’s Separation from Service. With respect to those additional benefits that are attributable to the provisions of an Eligible Employee’s Designation of Participation, the highest marginal state income tax rate (taking into account the Eligible Employee’s resident or nonresident status) based on the locality in which the Eligible Employee is or was employed by a Participating Company on the date of his Separation from Service.

Exception: In the case of an Eligible Employee who is an expatriate, income taxes shall generally be computed as follows: Expatriate taxes will be calculated assuming the highest marginal Federal income tax rate as adjusted for the Federal deduction of state and local taxes and the phase out of Federal deductions under current law (or as adjusted under any subsequently enacted similar provisions of the Code). The applicable state and local tax rates will be adjusted to reflect an Eligible Employee’s expatriate status to the extent appropriate.

Capital Gains: The ordinary income or capital gains character of items of trust investment income or deemed investment income shall be taken into account as relevant.

The above principles shall generally be applied in determining tax-rate assumptions for the relevant purpose, but the Administrator shall have the authority in its discretion to alter the assumptions made as deemed appropriate to take into account particular facts and circumstances.

Exhibit 10.31

P HILIP M ORRIS I NTERNATIONAL

E MPLOYEE G RANTOR T RUST E NROLLMENT A GREEMENT

This agreement (“Agreement”) is made the day of , 2008, between (the “Employee”), the person, if any, to whom the Employee is legally married (the “Employee’s Spouse”), PMI Global Services Inc. (“PMIGS”) and those affiliates of PMIGS that are or become obligated to the Employee under the terms of the PMI Supplemental Plans or the SEP, as defined below (PMIGS and such affiliates collectively referred to hereinafter as the “Company”).

Introduction

The Employee previously entered into one or more Employee Grantor Trust Enrollment Agreements with Altria Group, Inc. or certain of its affiliates (collectively, “Altria”) providing for payments (“Funding Payments”) to or on behalf of the Employee by Altria in satisfaction of its obligations under certain supplemental plans maintained by Altria (the “Altria Supplemental Plans”), such payments to be made to an Employee Grantor Trust established by the Employee (the “Trust”). (The most recent such Employee Grantor Trust Enrollment Agreement referred to above, including any amendments thereto, shall be referred to hereinafter as the “Original Enrollment Agreement.”) Thereafter, pursuant to one or more Supplemental Employee Grantor Trust Enrollment Agreements between the Employee and Altria (the most recent of which, including any amendments thereto, hereinafter referred to as the “Supplemental Enrollment Agreement”), the Employee ceased accruing future benefits under the Altria Supplemental Plans as of January 1, 2005, and Altria made certain additional payments (“Target Payments”) to the Trust as current compensation for services rendered by the Employee.

Trust amounts that are attributable to deposits made pursuant to the terms of the Original Enrollment Agreement and any predecessors thereto are held in a subaccount of the Trust (“Trust

Account FP”), and amounts attributable to Target Payments are held in a separate subaccount (“Trust Account TP”). For certain purposes, Trust Account FP is also deemed to include amounts that have been credited to an assumed trust account (“Assumed Trust Account FP”) reflecting certain withholding amounts with respect to Funding Payments and certain other amounts and the earnings thereon. Likewise, pursuant to the Supplemental Enrollment Agreement, the Employee’s share of federal employment taxes on Target Payments and certain other amounts and the earnings thereon have been credited to a separate assumed trust account (“Assumed Trust Account TP”).

PMIGS subsequently established the Philip Morris International Benefit Equalization Plan and the Philip Morris International Supplemental Management Employees’ Retirement Plan (the “PMI Supplemental Plans”) and the Philip Morris International Supplemental Equalization Plan (the “SEP”). In connection with the spin-off of the Company from Altria, the liabilities attributable to the Employee under the Altria Supplemental Plans were transferred to the Company, and the benefits previously payable to the Employee under the Altria Supplemental Plans became payable to the Employee under the PMI Supplemental Plans.

The parties now wish to enter into this Agreement which (i) supersedes the Original Enrollment Agreement in its entirety and, together with the Employee Grantor Trust Agreement attached hereto as Exhibit A (the “Trust Agreement”), shall govern the application of amounts credited under Trust Account FP and Assumed Trust Account FP to the Company’s obligations under the PMI Supplemental Plans, (ii) supersedes any provision of the Supplemental Enrollment Agreement that is also addressed herein and (iii) provides for the Employee’s participation in the SEP.

In consideration of their mutual undertakings, the Company, the Employee and the Employee’s Spouse agree as follows:

I. Maintenance of Grantor Trust and Assumed Trust Accounts

1.1 The Employee agrees to restate and maintain the Trust in the form attached hereto as Exhibit A for the purpose of holding the deposits previously made pursuant to the Original Enrollment Agreement and the Supplemental Enrollment Agreement and any interest or other earnings on the outstanding balances in the Trust.

1.2 The Employee and the Employee’s Spouse, if any, agree that they will not contribute any additional funds to the Trust. The Employee and the Employee’s Spouse further agree that they will withdraw funds from Trust Account FP only in accordance with the terms of the PMI Supplemental Plans, except to the extent that withdrawals are necessary to pay taxes on Trust Account FP earnings or cash deposits, and will withdraw funds from Trust Account TP only in accordance with the terms of the Trust Agreement.

1.3 The Employee and the Employee’s Spouse, if any, understand that, under the terms of the Trust Agreement, the trustee of the Trust (the “Trustee”) intends to exercise its investment discretion in a manner consistent with the purpose of the Trust specified in Section I.(3) of the Trust Agreement and acknowledge that they have been informed that the Trustee currently intends to invest the assets of the Trust in one or more of the Fidelity Freedom Funds in the manner set forth in Item 3 of Schedule A of the Trust Agreement attached as Exhibit A, but that the Trustee retains discretion to change the assets in which the Trust will be invested.

Assumed Trust Account TP will be (a) adjusted each year by the amount each such assumed account would have earned or lost if the balance credited thereto had been invested in the same manner as the corresponding actual trust account ( i.e. , Trust Account FP or Trust Account TP, as applicable) and (b) reduced each year by the amount of federal, state, local and other applicable income taxes, if any, that the Administrator estimates (using the tax-rate assumptions set forth in Exhibit B) would have been due with respect to such assumed account if it held the actual assets that it is treated as holding pursuant to this Section. If at any time no amounts are held in Trust Account TP, amounts credited under Assumed Trust Account TP shall be adjusted for gains or losses as if the balance credited thereto had been invested in the same manner as Trust Account FP (and reduced for taxes as described above).

II. Distributions from Trust, Benefit Payments

2.1 The Employee and the Employee’s Spouse, if any, agree that any amounts paid from Trust Account FP including any earnings (other than any amounts distributed to pay taxes on the earnings of Trust Account FP or administrative expenses of the Trust) and the amounts credited to Assumed Trust Account FP (adjusted as provided in Section 1.4) shall offset the benefits otherwise payable to them under the PMI Supplemental Plans in such order as shall be determined by the Company. For purposes of calculating this offset, the amount otherwise payable under the PMI Supplemental Plans at the relevant time to the Employee or his beneficiary(ies) under the PMI Supplemental Plans (“Plan Beneficiary(ies)”) will be converted to an after-tax amount (the “After-Tax Benefit”) using the tax assumptions set forth in Exhibit B. The amount of any distribution from Trust Account FP plus the amount credited to Assumed Trust Account FP shall offset the amount of the After-Tax Benefit and shall discharge the Company’s liability to the Employee, the Employee’s Spouse, if any, and his Plan Beneficiary(ies) to the

extent of the corresponding pre-tax benefit otherwise payable under the PMI Supplemental Plans.

2.2 If the amounts distributed from Trust Account FP plus the amounts credited to Assumed Trust Account FP are less than the After-Tax Benefit, the difference between (i) the sum of the amounts distributed from Trust Account FP and the amounts credited to Assumed Trust Account FP and (ii) the After-Tax Benefit shall be converted to a pre-tax amount (the “Additional Pre-Tax Benefit”) based on the tax assumptions set forth in Exhibit B, and the Company shall pay an amount equal to the Additional Pre-Tax Benefit to the Employee, the Employee’s Spouse, if any, or his Plan Beneficiary(ies) from the Company’s general assets in satisfaction of the Company’s remaining obligations under the PMI Supplemental Plans.

2.3 The Employee and the Employee’s Spouse understand and agree that to the extent funds in Trust Account FP are distributed to either of them in amounts greater than, or at times earlier than, those contemplated by the benefit payment provisions of the PMI Supplemental Plans and by Section 2.1 hereof, (a) the offsets against any amounts otherwise payable under the PMI Supplemental Plans will be calculated in the manner set forth in Section 5.1 as if the amounts so distributed had remained in Trust Account FP, accumulated earnings and been distributed at the proper time; and (b) such offsets will discharge the Company’s liability in the same manner as set forth in such Section 5.1.

2.4 Under no circumstances whatsoever shall the Company or the Administrator have any interest in, or be entitled to receive, any of the Trust assets. Notwithstanding any provision of this Agreement, to the extent that any such assets are recovered by the Company (or any trustee, creditor or other representative of the Company or its estate)

(a) from Trust Account FP, the offsets against amounts otherwise payable under the PMI Supplemental Plans will be calculated as if such assets had not been deposited in the Trust; and

(b) from Trust Account TP, the amounts credited to Trust Account TP and Assumed Trust Account TP shall be determined as if such assets had not been deposited in the Trust.

2.5 If a person who is an Employee’s Spouse under this Agreement ceases to be legally married to the Employee, he or she shall cease to be the Employee’s Spouse hereunder and shall cease to have any right to benefits under the PMI Supplemental Plans other than any rights as a designated beneficiary under the Trust Agreement or as provided in a domestic relations order or other court order. Furthermore, if the Employee has at any future date a spouse other than the Employee’s Spouse named in this Agreement, the Employee shall obtain the agreement of such spouse to the terms and provisions of this Agreement, and the new spouse shall become the Employee’s Spouse for purposes of this Agreement.

2.6 If there is outstanding on the date of this Agreement any domestic relations or other court order requiring the Company to make payment of benefits under any PMI Supplemental Plan to a former spouse or dependent of the Employee, the payee of such benefits shall not be an Employee’s Spouse under this Agreement and such benefits shall remain payable in the manner contemplated by such order.

2.7 If the Employee becomes disabled and, as a result, becomes entitled to long term disability benefits that on the Employee’s attaining a prescribed age are reduced by amounts paid under the PMI Supplemental Plans, then the reduction in such long term disability benefits shall be computed by taking into account the annuity value of the pre-tax equivalent of the amounts

credited under Trust Account FP and Assumed Trust Account FP, as well as the annuity value of any remaining amounts payable under the PMI Supplemental Plans after reduction by Trust Account FP and Assumed Trust Account FP, using the actuarial assumptions employed at the attainment of such prescribed age under the relevant PMI Supplemental Plans to convert between single sum amounts and their annuity value equivalents.

2.8 If the Employee dies and as a result the Employee’s Spouse becomes entitled to benefit payments under the Philip Morris International Survivor Income Benefit Equalization Plan (“SIB Payments”) that would be reduced by amounts payable under the PMI Supplemental Plans, then the reduction in such SIB Payments shall be computed by taking into account the annuity value of the pre-tax equivalent of Trust Account FP and Assumed Trust Account FP as well as the annuity value of any remaining amounts payable under the PMI Supplemental Plans after reduction by Trust Account FP and Assumed Trust Account FP, using the actuarial assumptions employed under the relevant PMI Supplemental Plan at the date the SIB Payments would first be reduced by benefit payments otherwise payable under such PMI Supplemental Plans to convert between single sum amounts and their annuity value equivalents.

III. Tax Payments With Respect to Trust Earnings

Each year, assets will be distributed from Trust Account FP and Trust Account TP to the Employee (or the Employee’s Spouse or beneficiary(ies) under the Trust, if applicable) to provide the Employee (or the Employee’s Spouse or beneficiary(ies) under the Trust) with the amounts estimated by the Administrator, using the tax-rate assumptions set forth in Exhibit B, to be sufficient to pay federal, state, local and other applicable income taxes with respect to any earnings of Trust Account FP and Trust Account TP.

IV. Appointment of PMIGS as Agent

4.1 The Employee appoints PMIGS and such persons as may be designated to act on behalf of PMIGS, and removes Altria or any of its affiliates, as applicable, as his or her duly authorized agent for the following purposes: (a) providing, in accordance with the duties of the “Administrator” as set forth in the form of Trust Agreement attached as Exhibit A, information and direction to the Trustee; (b) removing the Trustee and appointing a successor trustee; (c) examining the books and records of the Trust; (d) amending the Trust as to ministerial matters (and as to other matters, with the consent of the Employee); and (e) terminating the Trust.

4.2 The Employee’s appointment of PMIGS as his or her agent is based on the Employee’s special trust and confidence in PMIGS, its management and its parent corporation, Philip Morris International Inc. In the event of a Change of Control (as defined in Section 8.6) of PMIGS or Philip Morris International Inc., the Employee (or, if applicable, the Employee’s Spouse, Plan Beneficiary(ies) or beneficiary(ies) under the Trust Agreement) may remove PMIGS (or its successor) and any designee of PMIGS as the duly authorized agent for purposes of carrying out the actions set forth in Section 4.1 by delivering to both PMIGS (or its successor) and the Trustee, within any period of two days, written notice of such removal. The Trustee shall not be required to verify that there has been a Change of Control and shall be entitled to rely upon the Employee’s notice of removal unless PMIGS provides to the Trustee (within 10 days following the Trustee’s receipt of the notice of removal from the Employee) written notice certifying that no Change of Control has occurred.

4.3 PMIGS shall cease to be the Employee’s agent upon termination of the Trust for any reason or upon removal of PMIGS as Administrator following a Change of Control as provided in Section 4.2 above.

4.4 From and after the date on which PMIGS (or its successor) ceases to serve as the duly authorized agent,

(a) the offsets against the Company’s obligations to the Employee and the Employee’s Spouse or Plan Beneficiary(ies) shall be determined by assuming (i) that the value of Trust Account FP assets (including amounts credited to Assumed Trust Account FP) last reported by the Trustee to PMIGS (or its successor) prior to such date is accumulated with earnings in the manner specified in Section 5.1 for assets that have been attached or alienated and (ii) that all subsequent distributions from Trust Account FP (including amounts credited to Assumed Trust Account FP) occur at the proper times and in the proper amounts; and

(b) the amount held in Trust Account TP immediately prior to such Change of Control shall be credited to Assumed Trust Account TP, the balance in Trust Account TP shall thereafter be deemed to be zero, and the balance of Assumed Trust Account TP shall thereafter be credited with earnings in the manner specified in Section 5.1 for assets that have been attached or alienated.

V. Attachment of Trust Assets

5.1 The Employee understands and agrees that in the event all or a portion of the funds in Trust Account FP are attached by court order or other legal process or are otherwise alienated, the offset against any amounts otherwise payable under the PMI Supplemental Plans will be calculated as if the amount so alienated remained in the Trust, had accumulated earnings as determined below, was distributed at the proper time, and was or is to be offset against benefits otherwise payable from the PMI Supplemental Plans before any remaining assets in Trust Account FP were or are distributed. For purposes of determining the earnings on amounts so attached or alienated, it shall be assumed that such amounts continued to be invested by the Trustee in the same manner in which the Trustee invests the assets held in a Trust subaccount

established by a similarly situated employee of the Company (a “Similarly Situated Trust”), and if at any time the Trustee reinvests the assets of such a Similarly Situated Trust, it shall be assumed that the assets attributable to the Employee have been reinvested in the same manner. If at any time there is no Similarly Situated Trust but the Trustee is investing the assets of other Trusts or Trust subaccounts in the manner set forth in Item 3 of Schedule A of the Employee Grantor Trust Agreement attached as Exhibit A (or in any other manner permitting objective determination how the Trustee would invest the assets of a Similarly Situated Trust), it shall be assumed for this purpose that the assets attributable to the Employee have been invested in the same manner. For any year (or portion thereof) during which there is no Similarly Situated Trust and the manner in which such assets would be invested cannot be determined by reference to Item 3 of Schedule A of Exhibit A or as otherwise provided above, then the amounts so alienated shall be deemed to earn interest at the of the first segment rate under Internal Revenue Code Section 417(e)(3) for the month of December of the preceding year. Any such deemed earnings shall be reduced by federal, state and local income taxes as determined using the tax assumptions set forth in Exhibit B. The Employee agrees that the value of any amounts so alienated, and the earnings that would have accumulated thereon, shall be offset against a like amount of After-Tax Benefit, and shall discharge the Company’s liability to the Employee to the extent of the corresponding pre-tax benefit otherwise payable to the Employee or his Spouse or Plan Beneficiary(ies).

5.2 The Employee’s Spouse, if any, understands and agrees that should any amounts under Trust Account FP be assigned to her under a domestic relations order or otherwise, the offset against any amounts otherwise payable under the PMI Supplemental Plans will be calculated in the manner set forth in Section 5.1 as if the amount so alienated had remained in the

Trust, accumulated earnings, and been distributed at the proper time. The Employee’s Spouse agrees that if she also claims entitlement to benefits under the PMI Supplemental Plans, the value of the amount alienated under Trust Account FP, and the earnings that would have accumulated thereon absent such alienation, shall be offset against a like amount of After-Tax Benefit, and shall discharge the Company’s liability to the Employee and the Employee’s Spouse to the extent of the corresponding pre-tax benefit otherwise payable to the Employee or the Employee’s Spouse under the Supplemental Plans.

5.3 In the event that all or a portion of the funds in Trust Account TP are attached by court order or other legal process or are otherwise alienated to third parties, the amount so attached will be credited to Assumed Trust Account TP as of the date such amounts are removed from the Trust Account TP. The Employee and the Employee’s Spouse further understand and agree that should any amount under Trust Account TP be assigned to the Employee’s Spouse or any other person under any domestic relations order or otherwise, the Employee’s Spouse agrees that such amounts shall not be payable under such order until the benefit of the Employee or the Employee’s Spouse or beneficiary(ies) is payable under the SEP.

VI. Philip Morris International Supplemental Equalization Plan

6.1 The Employee agrees to participate in the SEP with respect to service performed after December 31, 2007 and acknowledges that the Company will make no Target Payments with respect to service performed after such date. The Employee further acknowledges and agrees that the Employee will accrue no benefits under the PMI Supplemental Plans or the Altria Supplemental Plans with respect to service performed after December 31, 2004.

payable under the SEP (and such amounts are not otherwise credited to Assumed Trust Account TP pursuant to this Agreement), the amounts so paid shall be credited to Assumed Trust Account TP at the time paid.

VII. Termination

7.1 This Enrollment Agreement shall terminate 30 days after the date the Trust terminates and all amounts are paid under PMI Supplemental Plans and the SEP.

7.2 Notwithstanding the above, during the lifetime of the Employee, this Agreement may be terminated at any time by the Company upon providing 30 days written notice to the Employee, or by the Employee providing 30 days written notice (or such lesser period as PMIGS may prescribe) to PMIGS . Any such termination shall operate on a prospective basis only and shall not operate to release the funds already in the Trust or to otherwise alter the application of the terms of this Agreement to such funds.

VIII. Miscellaneous

8.1 The Employee and the Employee’s Spouse agree that this Agreement shall supersede the Original Enrollment Agreement in its entirety and shall supersede any provision of the Supplemental Enrollment Agreement that is also addressed herein. The Employee and the Employee’s Spouse further agree that because all liabilities under the Altria Supplemental Plans have been transferred to the Company, Altria shall have no further obligations to them under the Altria Supplemental Plans, the Original Enrollment Agreement, the Supplemental Enrollment Agreement or any predecessors thereto.

8.2 Nothing in this Agreement shall be construed to confer upon the Employee the right to continue in the employment of the Company, or to require the Company to continue the employment of the Employee.

8.3 This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns and the Employee, the Employee’s Spouse, if any, the Employee’s Plan Beneficiary(ies) and beneficiary(ies) under the Trust Agreement and the SEP and their heirs, executors, other successors in interest, administrators, and legal representatives.

8.4 The validity and interpretation of this Agreement shall be governed by the laws of the State of New York.

8.5 The Employee’s Plan Beneficiary shall be the person or persons the Employee has designated to receive benefits following the Employee’s death under any defined contribution portion of a PMI Supplemental Plan, and the Employee’s beneficiary(ies) with respect to the Trust shall be determined in accordance with the terms of the Trust Agreement pursuant to which the Trust is maintained.

8.6 Change of Control . For the purpose of this Agreement, a “Change of Control” shall mean:

(a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Philip Morris International Inc. (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of Philip Morris International Inc. entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from Philip Morris International Inc. or any corporation or other entity controlled by Philip Morris International Inc. (the “Affiliated Group”) (ii) any

acquisition by a member of the Affiliated Group, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by a member of the Affiliated Group or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 8.6; or

(b) Individuals who, as of the date hereof, constitute the Board of Directors of Philip Morris International Inc. (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Philip Morris International Inc.’s shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(c) A reorganization, merger, share exchange or consolidation (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns such

shares and voting power through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of any member of the Affiliated Group or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or at the time of the action of the Board providing for such Business Combination or were elected, appointed or nominated by the Board; or

the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) less than 40% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of any member of the Affiliated Group or such corporation), except to the extent that such Person owned 40% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or at the time of the action of the Board providing for such sale or other disposition of assets of Philip Morris International Inc. or were elected, appointed or nominated by the Board; or

(e) the entry of an order for relief against Philip Morris International Inc. as debtor in a case under the United States Bankruptcy Code, as amended; or Members of the Affiliated Group cease to own, directly or indirectly, more than 60% of the combined voting power of the then outstanding voting securities of PMIGS entitled to vote generally in the election of directors of PMIGS, unless all of the services to be provided by PMIGS as Administrator hereunder are provided by another member of the Affiliated Group.

8.7 If no Employee’s Spouse signs this Agreement, the Employee hereby certifies that he or she has no spouse as of the date of this Agreement and further agrees to obtain the signature of any spouse to whom he or she may become married in the future as a party to this Agreement.

8.8 It is understood and agreed that all rights and obligations arising out of this Agreement relating to any spouse, Plan Beneficiary, beneficiary(ies) under the Trust Agreement, beneficiary(ies) under the SEP or any other third parties are derived from the rights of the Employee under this Agreement and that all provisions of this Agreement relating to any such third parties are to be construed as binding on such third parties as if they had expressly agreed in writing to such provisions.

8.9 This Agreement shall not be construed to enlarge the obligations of any participating employer under the terms of the PMI Supplemental Plans or the SEP.

IN WITNESS WHEREOF, the Employee, the Employee’s Spouse and PMIGS have caused this Agreement to be executed as of the day and year first above written.


Attest:


		Signature of Employee
Attest:


		Signature of Employee’s Spouse
This Agreement is executed on behalf of the Company.
Attest:
		PMI Global Services Inc.

		By:

Attachments:

Exhibit A: Amended and Restated Employee Grantor Trust Agreement

Exhibit B: Tax Assumptions

E XHIBIT A

P HILIP M ORRIS I NTERNATIONAL

A MENDED AND R ESTATED E MPLOYEE G RANTOR T RUST A GREEMENT

T HIS T RUST A GREEMENT made the day of , 2008, between (hereinafter called the “Grantor”) and F IDELITY M ANAGEMENT T RUST C OMPANY (hereinafter called the “Trustee”),

W I T N E S S E T H T H A T :

W HEREAS , the Grantor previously established a trust (hereinafter referred to as the “Trust Fund”) pursuant to one or more trust agreements to hold (i) certain cash payments (“Funding Payments”) received by the Grantor, or by the Trustee on behalf of the Grantor, in lieu of certain future payments the Grantor would otherwise be entitled to receive from Altria Group, Inc. or its subsidiaries (“Altria”) pursuant to the terms of certain nonqualified supplemental benefit plans maintained by Altria (the “Altria Supplemental Plans”), (ii) certain other cash payments (“Target Payments”) of current compensation made by Altria and (iii) the earnings on such amounts; and

W HEREAS , Altria’s liability with respect to the Grantor under the Altria Supplemental Plans has been transferred to Philip Morris International Inc. (“PMI”) and certain of its subsidiaries (collectively, the “Company”) in connection with the spin-off of PMI from Altria and the benefits previously payable to the Grantor under the Altria Supplemental Plans will be payable to the Grantor under the Philip Morris International Benefit Equalization Plan and, if applicable, the Philip Morris International Supplemental Management Employees’ Retirement Plan (hereinafter referred to as the “PMI Supplemental Plans”); and

W HEREAS , the Grantor has entered into an agreement with the Company appointing PMI Global Services Inc. (“PMIGS”), rather than Altria or any of its subsidiaries, to act as the Grantor’s agent in connection with certain matters pertaining to the administration of the Trust Fund and specifying (i) the manner and extent to which amounts attributable to Funding Payments paid from the Trust Fund will reduce the payments the Grantor would otherwise be entitled to receive pursuant to the terms of the PMI Supplemental Plans or from other arrangements with the Company and otherwise modifying the application of the PMI Supplemental Plans with respect to the Grantor, and (ii) certain terms concerning the distribution of amounts attributable to Target Payments held in the Trust Fund; and

W HEREAS , the Grantor and the Trustee desire to restate the terms and conditions under which the Trust Fund is held;

N OW , T HEREFORE , in consideration of the premises and covenants herein contained, the Grantor hereby directs the Trustee to maintain the Trust Fund pursuant to the provisions of this Agreement and to have and to hold the Trust Fund together with any additions thereto upon the following express trust and with the powers, authorities and discretions hereinafter conferred:

A RTICLE I

Introduction

I. (1). Name . This agreement and the trust hereby evidenced may be referred to as the Grantor’s “Employee Grantor Trust.”

I. (2). The Trust Fund . The “Trust Fund” as at any date means all property then held by the Trustee under this agreement. The Trust Fund includes two subaccounts: (i) “Trust Account FP,” which holds amounts designated by the Administrator as Funding Payments and the earnings thereon, and (ii) “Trust Account TP,” which holds amounts designated by the Administrator as Target Payments and the earnings thereon.

I. (3). Purpose of the Trust . In entering into this agreement, the Grantor intends for the Trust Fund to be invested solely to augment the savings of the Grantor that will be fully and immediately available at Grantor’s expected retirement age. To that end, in determining the appropriate investment strategy for the Trust Fund, the Grantor expressly authorizes the Trustee to take into consideration only the Grantor’s age and the Grantor’s expected age of retirement and agrees that, for this purpose, the Grantor’s expected age of retirement shall be assumed to be the age determined under the table set forth as Item 3 of Schedule A annexed hereto. The Trustee shall have no duty to inquire into or to consider any other needs of the Grantor in determining the appropriate investment strategy for the Trust Fund, including, but not limited to, any other resources available to the Grantor; any other assets the Grantor may own or have an interest in; the Grantor’s risk tolerance; the Grantor’s investment experience and attitudes; and the Grantor’s needs for liquidity, regularity of income, and preservation or appreciation of capital prior to the termination of the Trust. Neither shall the Trustee have a duty to inquire into or consider any other needs (including but not limited to those referred to in the immediately preceding sentence) of the Grantor’s Beneficiary(ies). The Trustee may rely on the Grantor’s age and the Grantor’s expected age of retirement as set forth or determined under such Schedule A, and shall have no duty to inquire into the validity of such information. The Trustee shall incur no liability to the Grantor or any other person interested in the Trust Fund for reliance upon the express terms of this paragraph, or for any action or omission in reliance upon information provided on Schedule A or by the Administrator (as defined in Section I.(5) below).

I. (4). Status of the Trust . The trust shall be irrevocable until such time as the Grantor (or, in the event of the Grantor’s death, the Grantor’s Beneficiary(ies), as defined in Section I.(8) below) and the Administrator jointly provide written certification to the Trustee that all obligations of the Company to the Grantor and the Grantor’s Beneficiaries have been satisfied. The written certification of the Administrator shall specify the date as of which the trust shall terminate in accordance with Section I.(7) hereof. The trust is intended to constitute a grantor trust under which the Grantor is treated as grantor and owner pursuant to Sections 671- 678 of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. Neither the Company nor any person other than the Grantor and, in the event of the Grantor’s death, the Grantor’s Beneficiary(ies), and the Trustee acting as such, have any right, title or interest in the assets of the Trust Fund.

I. (5). The Administrator . PMIGS shall be the “Administrator” for purposes of this trust and shall have certain powers, rights and duties under this agreement as described below; provided that, PMIGS may from time to time designate a person or persons, who may but need not be employees of PMIGS, to act as the Administrator on its behalf or to carry out certain duties of the Administrator. PMIGS will certify to the Trustee from time to time the person or persons authorized to act on behalf of PMIGS as the Administrator or as the designees of the Administrator. The Trustee may rely on the latest certificate received without further inquiry or verification. After delivery to the Trustee of the written certification of PMIGS acting as Administrator referred to in the first sentence of Section I.(4) above, and as of the scheduled termination date of the trust referred to in Section I.(7) below or at such later date as the distribution of all assets of the Trust Fund pursuant to the termination of this trust is completed, PMIGS and its designees, if any, shall cease to serve as Administrator. Notwithstanding any provision herein, however, in the event of a Change of Control (as defined in Schedule B annexed hereto or in the most recent replacement for such Schedule delivered by the Administrator to the Trustee at least ten business days prior to the occurrence of a Change of Control), the Grantor may remove PMIGS (or its successor) and any designee of PMIGS as Administrator by delivering to both PMIGS (or its successor) and the Trustee within any period of two days written notice of such removal. The Trustee may rely upon any notice of removal received from the Grantor without further inquiry or verification, unless PMIGS (or its successor) provides to the Trustee (within 10 days following the Trustee’s receipt of the notice of removal from the Grantor) written notice certifying that no Change of Control has occurred. In the event the Grantor removes PMIGS as Administrator, the Grantor shall appoint a successor Administrator, who may be the Grantor, a committee of persons including the Grantor, or such other person or persons as shall be reasonably acceptable to the Trustee, and shall notify the Trustee of the appointment. In such event, the Grantor shall also have the authority to, from time to time, remove the person or persons so appointed and appoint such other person or persons as shall be reasonably acceptable to the Trustee.

I. (6). Acceptance . The Trustee accepts the duties and obligations of the “Trustee” hereunder, agrees to accept funds delivered to it on behalf of the Grantor, and agrees to hold such funds (and any proceeds from the investment of such funds) in trust in accordance with this agreement; provided that the Trustee reserves the right to determine whether to accept the transfer of any property other than cash proposed to be transferred to it.

I. (7). Termination . In conjunction with any written certification provided to the Trustee pursuant to the first sentence of Section I.(4) above, the Administrator shall also specify a future date at the close of which the fair market value of the Trust Fund shall be determined; on the next succeeding business day of the Trustee, the Trust assets shall be distributable and this Trust shall be scheduled to terminate. On or as soon as practicable after such scheduled termination date, the Trustee shall transfer and pay over (in the form of the assets held in the Trust Fund to the extent feasible, or alternatively in cash), the principal and any undistributed income of the Trust Fund, as then constituted, to the Grantor, if living, or the Beneficiary(ies) of the Grantor, in the event of the Grantor’s death, and upon the completion of all such distributions this trust shall terminate. The Grantor (or, if the Grantor has died, the Grantor’s Beneficiary(ies)) and the Trustee may, however, enter into a new trust agreement for holding any assets of the Trust Fund on new terms and conditions provided by the Grantor (or the Grantor’s Beneficiary(ies)), though neither shall be obligated to enter into such an agreement. Notwithstanding any other provision

of this Employee Grantor Trust, this Trust shall terminate upon the distribution of all assets held in the Trust Fund pursuant to Article II without any further action by the Administrator, the Trustee, the Grantor or the Beneficiary(ies) of the Grantor.

I. (8). Death Beneficiary(ies) . In the event of the Grantor’s death, the Trust Fund shall be distributed in accordance with the following provisions:

(a) With respect to the assets in Trust Account FP, in general, a Grantor’s Beneficiary(ies) under this Trust Agreement shall be the beneficiary(ies) designated by the Grantor under the terms of the PMI Supplemental Plans or otherwise determined under the terms of the PMI Supplemental Plans, and in the event of the Grantor’s death amounts held in Trust Account FP shall be distributed in lieu of the amounts that would otherwise be payable under the PMI Supplemental Plans to such Beneficiary(ies) in accordance with information and instructions provided to the Trustee by the Administrator. If the survivors’ benefits or other death benefits payable on behalf of the Grantor under the PMI Supplemental Plans do not exhaust the assets of Trust Account FP, the assets of Trust Account FP may be applied to make payments to any person to whom a survivor benefit or death benefit in respect of the Grantor is payable under any other plan or arrangement of the Company to the extent so instructed by the Administrator. The Trustee shall be under no duty to inquire into the terms of the PMI Supplemental Plans or other plans or arrangements, the identity of or amounts payable to the Beneficiary(ies) under such PMI Supplemental Plans, and shall be entitled to rely on the information received from the Administrator with respect to such matters. Any balance remaining in Trust Account FP following all such payments (the “Residual Assets”) shall be paid in one lump sum, in kind to the extent practicable, to the Beneficiary(ies) designated by the Grantor on the beneficiary designation form attached as Schedule C hereto or on any subsequent replacement for such designation form (“Trust Account FP Beneficiary Designation”) to receive any Residual Assets under this Trust Agreement.

(b) With respect to Trust Account TP, the balance in Trust Account TP shall be paid in one lump sum, in kind to the extent practicable, to the Beneficiary(ies) designated by the Grantor in the beneficiary designation form attached as Schedule D hereto or any subsequent replacement for such designation form (the “Trust Account TP Beneficiary Designation”) to receive the assets held in Subaccount TP.

(c) Any Trust Account FP Beneficiary Designation or Trust Account TP Beneficiary Designation under this Trust Agreement shall be made in writing by the Grantor in such manner and on such form(s) as shall be specified by the Administrator, and a designation shall not be effective until it has been received by the Administrator (or if the Grantor has become the Administrator, by the Trustee) and acceptance has been indicated by the signature of the Trustee. In the absence of a Trust Account FP Beneficiary Designation or a Trust Account TP Beneficiary Designation hereunder, or if the failure of a Beneficiary designated on a Trust Account FP Beneficiary Designation or Trust Account TP Beneficiary Designation under this Trust Agreement to survive, results in the absence of an effective designation with respect to some or all of the assets of the Trust Fund, the Beneficiary of such assets shall be the Grantor’s spouse, if any, and, if none, the Grantor’s estate. Under no circumstances whatsoever shall the Company have any interest in, or be entitled to receive, any of the Trust assets.

A RTICLE II

Accumulation and Distribution of the Trust Fund

II. (1). The Trustee shall hold, manage, invest and reinvest the Trust Fund, shall collect the income therefrom and, after deducting all proper charges, shall pay or apply to or for the benefit of the Grantor (or, in the event of the Grantor’s death, the Grantor’s Beneficiary(ies)) so much, including all, of the net income and principal of the Trust Fund as is set forth in instructions provided to the Trustee by the Administrator. The Administrator shall be solely responsible for providing the Trustee with all necessary information as to the Grantor’s current address, beneficiary designations, and the amounts in which, the time at which, to whom, and (except to the extent otherwise provided in Section I.(7) above) the form in which payments are to be made. The Trustee shall incur no liability to the Grantor or any other person interested in the Trust Fund for any action or any omission in reliance upon information provided by the Administrator, or for the failure or omission of the Administrator to provide such information. Any information provided by the Administrator to the Trustee shall be provided in a form and manner acceptable to the Trustee.

II. (2). The Trustee shall also distribute to or for the benefit of the Grantor at least annually such amount(s), if any, as the Administrator may certify to the Trustee is (are) necessary to pay tax obligations of the Grantor resulting from earnings on the Trust Fund.

II. (3). All income not so paid or applied shall be accumulated and added to principal of the Trust Fund.

A RTICLE III

The Trustee

III. (1). Fidelity Management Trust Company may resign at any time as Trustee and appoint any affiliated entity of Fidelity Management Trust Company to serve as successor Trustee, without the execution or filing of any instrument or the performance of any further act, including court order, with the same powers, authorities and discretions as though originally named; provided that such affiliated entity is authorized to act in such capacity under applicable law. Any corporation resulting from any merger, conversion, reorganization or consolidation to which any corporation acting as Trustee hereunder shall be a party, or any corporation to which shall be transferred all or substantially all of any such corporation’s trust business, shall be the successor of such corporation as Trustee hereunder, without the execution or filing of any instrument or the performance of any further act and shall have the same powers, authorities and discretions as though originally named in this Trust Agreement.

III. (2). The Trustee may resign by giving ninety (90) days advance written notice to the Grantor and the Administrator. The Administrator, as agent for the Grantor, may remove a Trustee by giving ninety (90) days advance written notice to the Trustee and the Grantor. The Administrator shall appoint a successor Trustee by written notice signed by the Administrator and delivered to the Trustee and the Grantor (or, in the event of the Grantor’s death, the

Grantor’s Beneficiary(ies)). If a successor Trustee is not appointed within ninety (90) days of the Trustee’s resignation, the Trustee may apply to a court of competent jurisdiction for the appointment of a successor.

III. (3). The Trustee shall be entitled to such compensation for its services in any fiduciary capacity hereunder as the Administrator, as agent for the Grantor, and the Trustee may from time to time agree, including minimum fees and additional compensation for special investments and services, notwithstanding that such stipulated compensation shall be greater than that now in effect or than that provided from time to time under applicable law, and such compensation and reimbursement for reasonable expenses may be paid at any time without court approval. Such compensation shall be paid from the Trust Fund to the extent that it is not paid by the Administrator or the Grantor within 60 days of becoming due.

III. (4). No bond or other security shall be required of any trustee in any jurisdiction, whether for the faithful performance of duties, to secure payment of commissions in advance or otherwise, and if, notwithstanding this express direction, any such bond or security shall be required by any law, statute or rule of court, no surety shall be required thereon.

III. (5). To assure compliance with regulatory and corporate disclosure requirements, the Trustee, Fidelity Management Trust Company, advises as follows:

(a) Relationship . FMR Corp. (“FMR”) is the parent corporation of the Trustee.

(b) Affiliated Entities . The Trustee may engage any corporation or other entity to which it is affiliated (“Affiliated Entity”) or any other entity or person to provide services to an account held by the Trustee, including, without limitation, as investment manager or adviser, custodian, transfer agent, registrar, sponsor, underwriter and/or distributor, and may pay or receive compensation for any such services without reduction in the compensation paid to the Trustee for its services as trustee or investment manager. FMR will derive earnings directly or indirectly through FMR’s management of funds in which the Trust Fund may be invested as well as from fees paid to the Trustee.

(c) Mutual Funds . The Trustee may invest primarily or exclusively in shares of one or more open-end investment companies (so-called mutual funds or money market funds), including investment companies for which an Affiliated Entity serves as investment manager or adviser, custodian, transfer agent, registrar, sponsor, underwriter, distributor and/or other service provider, and from which the Trustee or an Affiliated Entity receives reasonable compensation for such services. The Affiliated Entity may receive such compensation in addition to the Trustee or investment management fee paid to the Trustee.

(d) Compensation . The Trustee may receive compensation for its services, without reduction in any other fees or compensation paid to the Trustee or any Affiliated Entity. In addition, the Trustee may share a portion of any compensation received by an Affiliated Entity.

A RTICLE IV

Trustee Reporting

IV. (1). The Trustee shall furnish the Administrator with statements of transactions in the trust and statements of the market value of the Trust Fund at least monthly, and the Administrator and the Grantor with a statement of trust investments including the market value thereof at least quarterly. The failure of both the Grantor and the Administrator to object to any matter contained in such statements by written notice signed by either the Grantor or the Administrator within ninety (90) days after receipt of the same shall constitute the Grantor’s assent to such statements and shall be final and binding as to all matters contained in such statements upon the Grantor, the Administrator as agent for the Grantor, and all persons, whether or not in being, interested in the Trust Fund. In addition, the Grantor may execute a release, with or without an account, approving the administration of the trust. A release shall discharge the Trustee from any accountability and liability to the Grantor, the Grantor’s legal representatives, or any persons, whether or not in being, interested in the Trust Fund, with the same effect as if the account of the Trustee were judicially settled and allowed.

IV. (2). The Trustee shall also furnish the Administrator or the Grantor with such other information relating to the actual or estimated income of the Trust Fund, including the character of such income, and to estimated taxes resulting from such income as the Trustee and the Administrator may from time to time agree is necessary or desirable to assure appropriate reporting and payment of taxes by or on behalf of the Grantor.

IV. (3). The Grantor and the Administrator, or such persons as may be designated by them, shall at any time upon five days’ advance written notice to the Trustee have the right to examine, during the normal business hours of the Trustee, all books and records of the Trustee pertaining to the Trust Fund.

A RTICLE V

Investment and Administrative Authority

V. (1). In addition to any powers conferred by law, the Trustee shall have the following powers, authorities and discretions with respect to any property, real or personal, at any time held under any provision hereof and may exercise the same with sole and absolute discretion and without the order or approval of any court, and the Grantor intends that such powers, authorities and discretions (including the following) be construed in the broadest possible manner:

(a) To retain any such property without regard to the proportion any such property or similar property held may bear to the entire amount held and without any obligation to diversify the same, whether or not the same is of the kind in which fiduciaries are authorized by law or any rule of court to invest funds;

security, without obligation to “test the market” by soliciting offers from a third party or to obtain an appraisal to establish the value thereof; and the purchaser of such property shall have no obligation to inquire as to the use or application of the proceeds of sale; to exchange any property held hereunder upon such terms and conditions as may be deemed advisable; and to grant warranties, guaranties, indemnities or options with respect to any of the foregoing without regard to the duration of any trust or any time limitation imposed by law;

(c) To invest and reinvest in and to acquire by purchase, exchange or otherwise property of any character whatsoever, foreign or domestic, or interests or participations therein, including by way of illustration and not of limitation: real property, mortgages, bonds, notes, debentures, certificates of deposit, options, puts, calls, warrants, partnerships, common and preferred stocks, annuity contracts, futures contracts, forward contracts, short sales and swap contracts, in each case whether foreign or domestic and with respect to financial instruments and any group or index of securities (or any interest therein based upon the value thereof) and in connection therewith to deposit any property as collateral with any agent and to grant security interests in such collateral and shares or interests in investment trusts, mutual funds or common trust funds (including without limitation common trust funds maintained by a corporate fiduciary and other trusts or funds with respect to which the Trustee or its affiliates acts as investment advisor or custodian or provides other services), without regard to the proportion any such property or similar property held may bear to the entire amount held and without any obligation to diversify, whether or not the same is of the kind in which fiduciaries are authorized by law or any rule of court to invest funds;

(d) To participate in and to consent to any plan of reorganization, recapitalization, consolidation, merger, combination, dissolution, liquidation or similar plan and any action thereunder, including by way of illustration and not of limitation to receive and retain property under any such plan whether or not the same is of the kind in which fiduciaries are authorized by law or any rule of court to invest funds;

(e) To exercise all conversion, subscription, voting and other rights of whatsoever nature pertaining to any such property and to grant proxies, discretionary or otherwise, with respect thereto; to appoint voting trustees under voting trust agreements and to delegate to such voting trustees the power to vote and all other powers, authorities and discretions usually conferred upon trustees under voting trust agreements;

(f) To borrow such sums of money at any time and from time to time for such periods of time upon such terms and conditions from such persons or corporations (including any fiduciary hereunder) for such purposes as may be deemed advisable, and to secure such loans by the pledge or hypothecation of any property held hereunder; and the lender shall have no obligation to inquire as to the application of the sums loaned or as to the necessity, expediency or propriety of the loan;

(g) To register and hold any property of any kind, whether real or personal, at any time held hereunder in the name of a nominee or nominees and to hold any such

personal property in any State; and to receive and keep any stocks, bonds or other securities unregistered or in such condition that title thereto will pass by delivery;

(h) To distribute (including in satisfaction of any pecuniary disposition) any property in kind at market value unless otherwise directed herein or in cash, or partly in kind and partly in cash, and, without the consent of any beneficiary, to allocate among the recipients the property distributed in kind (including in satisfaction of any pecuniary disposition) in divided or undivided interests and without any obligation to make proportionate distributions or any obligation to distribute to all recipients property having an equivalent Federal income tax cost;

(i) To allocate to principal all dividends and distributions payable in property or in stocks, bonds or other securities whether of the disbursing company or another company;

(j) After the termination of the trust hereunder to exercise all the powers, authorities and discretions herein conferred until the complete distribution of the property held hereunder;

(k) To accept additional property transferred on behalf of the Grantor;

(l) To remove all or any part of the assets of or the situs of administration of the trust hereunder from one jurisdiction to another jurisdiction, either within or without the United States of America, at any time or from time to time;

(m) To employ investment counsel, accountants, depositories, custodians, brokers, consultants, agents, attorneys and other employees, irrespective of whether any person or entity so employed shall be a fiduciary hereunder or shall be a corporate affiliate of a fiduciary hereunder and irrespective of whether any entity so employed shall be one in which a fiduciary hereunder shall be a partner, stockholder, director, officer or corporate affiliate or shall have any interest, and to pay the usual compensation for such services out of principal or income as may be deemed advisable; and such compensation may be paid without diminution of or charging the same against the commissions or compensation of any fiduciary hereunder; and any fiduciary who shall be a partner, stockholder, director, officer or corporate affiliate in any such entity shall nevertheless be entitled as partner, stockholder, director, officer or corporate affiliate to receive such fiduciary’s share of the compensation paid to such entity;

(n) To exercise any and all of the powers, authorities and discretions conferred hereunder in respect of any securities of any corporate fiduciary acting hereunder, or in respect of any securities of any holding company or corporation owning securities of any corporate fiduciary acting hereunder; and

negotiate and determine the compensation to be paid to such ancillary fiduciary whether or not any compensation would otherwise be authorized by law, and to pay such compensation out of principal or income or both; and such ancillary fiduciary shall have with respect to any and all property subject to the ancillary administration all powers, authorities and discretions granted in this Article; provided, however, that any action which may require the investment of additional funds or the assumption of additional obligations shall not be undertaken without prior written consent of the fiduciary or fiduciaries acting hereunder; and if by reason of the law of any jurisdiction in which it may be necessary to perform any act any fiduciary hereunder may be disqualified from acting, then all of the acts required to be performed in such jurisdiction may be performed by such fiduciary’s qualified co-fiduciary or co-fiduciaries then acting hereunder.

V. (2). Notwithstanding the provisions of Section V. (1). hereof,

(a) During the period that Fidelity Management Trust Company or any affiliated entity of Fidelity Management Trust Company serves as Trustee, such Trustee shall have and exercise sole investment authority with respect to the Trust Fund; and at any termination of such period the Administrator, as agent for the Grantor, shall have the authority to and may establish and deliver to any successor Trustee from time to time written investment guidelines setting forth the parameters within which such Trustee shall exercise its discretionary authority with respect to the investment of the Trust Fund subject to the restrictions on investments set forth above, and such Trustee shall have no liability to the Administrator, the Company, the Grantor or any other person interested in the Trust Fund for any action or any omission in reliance upon such guidelines;

(b) The Grantor acknowledges that she or he has been informed of the mutual funds in which the Trustee proposes to make the investment of Trust Fund assets and that a copy of the prospectus for each such mutual fund has been made available to the Grantor.

(c) The Administrator, as agent for the Grantor, is authorized to receive any disclosures or other notices delivered by the Trustee with respect to the investment of the Trust Fund in shares or interests in investment trusts or mutual funds with respect to which the Trustee or any of its affiliates acts as investment advisor or custodian or provides other services;

(d) In no event may the Trust Fund be invested in securities (including stock or rights to acquire stock) or obligations issued by the Company, other than a de minimis amount (with any amount not in excess of five percent of market value deemed for this purpose to be de minimis) held in common investment vehicles in which the Trustee invests; and

distributions pursuant to Article II hereunder, and paying the reasonable expenses of administering the trust.

A RTICLE VI

General Provisions

VI. (1). This Trust Agreement and the trust created hereunder shall be construed, regulated and governed in all respects, not only as to administration but also as to validity and effect, by the laws of the State of New York in effect from time to time.

VI. (2). The references in this Trust Agreement to the Internal Revenue Code shall mean the Internal Revenue Code of 1986, as amended, and shall include corresponding provisions of all subsequently enacted Federal tax laws.

VI. (3). Any provision of the Trust Agreement prohibited by law, or which would cause the trust to any extent to fail or cease to be a grantor trust as described in Section I.(4). hereof, shall be to such extent ineffective, without invalidating the remaining provisions hereof.

VI. (4). Amounts held in the Trust Fund may not be anticipated, assigned, alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process, except to the extent specifically permitted herein or as otherwise required by law.

VI. (5). Any notice required under this Trust Agreement shall be delivered (a) personally, (b) by next day courier service ( e.g ., Federal Express or UPS), or (c) by certified or registered mail, return receipt requested, addressed as follows (or to such other address as any party may so notify the other party):

If to the Trustee:

Chief Fiduciary Officer

Fidelity Personal Trust Services

82 Devonshire Street, ZW2C

Boston, MA 02109-3614

If to the Grantor:

To the address specified in Item 2 of Schedule A of this Agreement.

If to the Administrator:

PMI Global Services Inc.

Attention: Milagros S. Vega, Manager, Benefits

120 Park Avenue

New York, New York 10017-5592

Any notice required under this Trust Agreement may be waived by the person entitled to such notice. Any notice to or from the Grantor under this Trust Agreement shall, in the event of the Grantor’s death, be provided to or by the Beneficiary(ies) designated by the Grantor under this Trust Agreement. If more than one Beneficiary has been designated, the Grantor shall designate one Beneficiary who shall be entitled to provide any notice required to the Administrator or Trustee.

VI. (6). This Agreement shall be binding on all persons entitled to payments from the Trust Fund and their respective heirs and legal representatives, and on the Trustee and its successors.

VI. (7). The Administrator, acting on behalf of the Grantor (and with the consent of the Grantor for any amendment other than as to ministerial matters), may from time to time amend this Trust Agreement in any respect, provided, however, that no such amendment shall change the duties, responsibilities, or compensation of the Trustee without its written consent or shall cause any amount held in the Trust Fund to be payable to the Company or to any person other than the Grantor, the Grantor’s Beneficiary(ies) or estate, or to the Trustee as compensation for services, or reimbursement for payment to its agents.

IN WITNESS WHEREOF, the Grantor has hereunto set his hand and seal and the undersigned corporate party has caused this Trust Agreement to be executed and its seal affixed hereunto by its officers duly authorized and directed all as of the day and year first above written.


		(L.S.)
	Grantor
	(please print name below signature line)

	Fidelity Management Trust Company,
	Trustee

	By:
Attest:

Attachments:

Notarization Page for Grantor’s Signature – Page 13

Notarization Page for Trustee’s Signature – Page 14

Schedule A – Information Concerning Grantor and List of Plans

Schedule B – Change of Control Definition

Schedule C – Trust Account FP Beneficiary Designation

Schedule D – Trust Account TP Beneficiary Designation


STATE OF		)
		)SS.:
COUNTY OF		)

On this day of , , before me personally came , to me known and known to me to be the same person described in and who executed the foregoing instrument, and acknowledged to me that such person executed the same.


COMMONWEALTH OF MASSACHUSETTS		)
		) SS .:
COUNTY OF		)

On this day of , before me personally came , to me known, who, being by me duly sworn, did depose and say that such person resides at in the City of , County of , Commonwealth of , that such person is a of FIDELITY MANAGEMENT TRUST COMPANY, the corporation described in and which executed the foregoing instrument; that such person knows the seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by order of the Board of Directors of said corporation, and that such person signed such person’s name thereto by like order.

Schedule A

Page 1 of 2

Grantor’s Name ___________________________________________________________

Grantor’s SSN ____________________________________________________________

Grantor’s Current Address __________________________________________________

Grantor’s Daytime Telephone ________________________________________________

Item 1 : PMI Supplemental Plans

Philip Morris International Benefit Equalization Plan

Philip Morris International Supplemental Management Employees’ Retirement Plan

Item 2 : Grantor’s Notice Address (if different than current address)

Schedule A

Page 2 of 2

Item 3 : Grantor’s Date of Birth: , 19 .

For purposes of applying Article I, Section I.(3) and Article V of the Employee Grantor Trust Agreement, Grantor’s age shall be based on Grantor’s date of birth set forth above, and Grantor’s expected age of retirement and the mutual funds in which the Trustee proposes currently to invest the Trust Fund assets shall be determined as follows:


Assumed Retirement Age

Current Age		Expected Retirement Age*
Under age 55 Age 55 or over		Age 55 (earliest retirement age) Current Age (retirement eligible)

Current Investment

Year of Birth		Fidelity Freedom Fund Investment
1975 1965 through 1974 1955 through 1964 1945 through 1954 1944 or earlier		Freedom 2030 Freedom 2020 Freedom 2010 Freedom 2000 Freedom Income

*	This reflects a conservative investment assumption that the Grantor may wish to take early retirement at age 55 or, if already age 55, may wish to retire at any time.

Schedule B

For the purpose of this Agreement, a “Change of Control” shall mean the occurrence of any of the following events:

be, (ii) no Person (excluding any employee benefit plan (or related trust) of any member of the Affiliated Group or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or at the time of the action of the Board providing for such Business Combination or were elected, appointed or nominated by the Board; or

(d) A (i) complete liquidation or dissolution of Philip Morris International Inc. or (ii) sale or other disposition of all or substantially all of the assets of Philip Morris International Inc., other than to a corporation, with respect to which following such sale or other disposition, (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) less than 40% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of any member of the Affiliated Group or such corporation), except to the extent that such Person owned 40% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or at the time of the action of the Board providing for such sale or other disposition of assets of Philip Morris International Inc. or were elected, appointed or nominated by the Board; or

(e) the entry of an order for relief against Philip Morris International Inc. as debtor in a case under the United States Bankruptcy Code, as amended; or

(f) Members of the Affiliated Group cease to own, directly or indirectly, more than 60% of the combined voting power of the then outstanding voting securities of PMIGS entitled to vote generally in the election of directors of PMIGS, unless all of the services to be provided by PMIGS as Administrator hereunder are provided by another member of the Affiliated Group.

Schedule C

Page 1 of 4

T RUST A CCOUNT FP B ENEFICIARY D ESIGNATION

E MPLOYEE G RANTOR T RUST

I understand that certain assets of my employee grantor trust (“Grantor Trust”), established with Fidelity Management Trust Company as Trustee, are attributable to certain Funding Payments made to me (or to the Trustee on my behalf) and that these assets are held in a subaccount of my Grantor Trust known as “Trust Account FP.” I further understand that the assets held in Trust Account FP will be applied to pay benefits to me or on my behalf under nonqualified supplemental benefit plans, including one or more of those specified in Item 1 of Schedule A attached to the Grantor Trust (the “PMI Supplemental Plans”). Generally, the beneficiary(ies) entitled to receive benefits under Trust Account FP in the event of my death shall be the beneficiary(ies) designated or otherwise determined under the terms of the PMI Supplemental Plans, including any modification of such terms as applied to me or my Beneficiary(ies) under agreements I have entered into or may enter into with the Company. If any assets remain in Trust Account FP after my death and after all survivor and death benefit payments due under the PMI Supplemental Plans and any other plans of or arrangements with the Company have been made to my beneficiary(ies), if any, under the PMI Supplemental Plans and such other plans or arrangements, those residual assets (the “Residual Assets”) shall be paid to the beneficiary(ies) designated on this Beneficiary Designation form.

Thus, for example, if I die prior to termination of my Grantor Trust and am not married at the time of my death, it is likely that there will be Residual Assets in my Trust Account FP. This Beneficiary Designation will govern the disposition of such Residual Assets.

I understand (1) that this Beneficiary Designation relates only to any Residual Assets as described above that may be held in Trust Account FP of my Grantor Trust and does not determine who is my beneficiary under the PMI Supplemental Plans, (2) that, if I am married at the time of my death, my then spouse will automatically be the beneficiary of all amounts held in Trust Account FP, except to the extent that I have designated (in accordance with the terms of the relevant Plan) someone other than my spouse as the beneficiary who is to receive any defined contribution benefits provided under such Plan, (3) that my current spouse, if any, must consent to the designation on this form of any Primary Beneficiary other than my spouse, and (4) that if any Primary Beneficiary I designate on this form does not survive until payment is made, then any remaining assets of Trust Account FP that would otherwise have been paid to such beneficiary will be paid in the following order: first, to the Contingent Beneficiary(ies), if any, designated below; second, if there is no surviving Contingent Beneficiary, to my spouse (if I was married at my date of death); or, third, if there is no surviving Contingent Beneficiary and either I am not married at the date of my death or my spouse is not living at the time the Residual Assets become payable, then to my estate.

Schedule C

Page 2 of 4

BENEFICIARIES

I hereby designate the following person(s) as those to whom the Trustee shall pay any Residual Assets Trust Account FP of my Grantor Trust, as described above:

Primary Beneficiary or Beneficiaries


1.
	Name	Relationship	Social Security Number	Portion (%)

2.
	Name	Relationship	Social Security Number	Portion (%)

3.
	Name	Relationship	Social Security Number	Portion (%)

Note: You may, if you wish, designate either another trust created by you or by you and your spouse or your estate as the Primary Beneficiary to receive any Residual Assets of Trust Account FP. If you choose to do so, you should not complete the Contingent Beneficiary section of this form set forth below.

Contingent Beneficiary or Beneficiaries

If a Primary Beneficiary designated above does not survive until payment of his or her portion of any Residual Assets of Trust Account FP, the Trustee shall make payment as follows:

(Select only one of the alternatives and initial the one selected.)


Alternative 1 :		To my estate.
		initials
Alternative 2 :		To the deceased Primary Beneficiary’s estate.
		initials
Alternative 3 :		Divided equally among the surviving Primary Beneficiaries.
		initials
Alternative 4 :		To the persons described below.
		initials

Schedule C

Page 3 of 4

(If you select Alternative 4, describe in the space provided below the manner in which you wish any Primary Beneficiary’s portion of Residual Assets paid if that Primary Beneficiary is no longer alive when they become payable. Your description may be one that applies to all Primary Beneficiaries, e.g. , “to the deceased Primary Beneficiary’s children,” or may be specific, e.g. , “in the event of the death of Primary Beneficiary 1 above, to . . . .” For named individuals, please include the individual’s social security number and relationship to you.)

ADDITIONAL INSTRUCTIONS

Addresses and Additional Space : Please attach a sheet giving the current permanent addresses of individuals named as Primary or Contingent Beneficiaries. To designate more than three Primary Beneficiaries or if more space is needed to describe Contingent Beneficiaries, please attach additional sheet(s) with names, SSNs, and percentage shares for any individuals named.

Notices : If more than one beneficiary may become entitled to share in Residual Assets, please designate in the space below which one of such beneficiaries shall be entitled to give any notice to the Administrator or the Trustee that may be called for under your Grantor Trust Agreement.



Beneficiary Designated to Give Notice:

Schedule C

Page 4 of 4

Estate Planning : You should coordinate with your estate planning attorney to be sure your beneficiary designation qualifies for the marital deduction (if the beneficiary is your spouse). Give the attorney a copy of the trust and this form. Be sure your will is consistent with the beneficiary designation.

I hereby revoke all previous beneficiary designations made by me with respect to the payment of Residual Assets of Trust Account FP of my Grantor Trust described above. I understand that I may revoke this Beneficiary Designation and execute a new one at any time before my death. I also understand that this form does not govern the determination of my beneficiaries under the PMI Supplemental Plans.



Date				Signature of Employee

Witness



Acknowledged and accepted by Fidelity Management Trust Company by

,
Name						Date

CONSENT OF SPOUSE

[To be completed if Primary Beneficiary is someone other than the Employee’s Spouse.]

I understand that I am entitled to be designated as the 100% primary beneficiary of the assets held in Trust Account FP of the Grantor Trust. I give my consent to the designation of the above-named beneficiary or beneficiaries. I am aware that in the event of my spouse’s death, I will not receive 100% of any Residual Assets of Trust Account FP of the Grantor Trust, and I may not receive any such assets. [Spouse’s consent must be witnessed by a Notary Public.]



Date				Signature of Employee’s Spouse

Notary Public

Schedule D

Page 1 of 4

T RUST A CCOUNT TP

B ENEFICIARY D ESIGNATION

E MPLOYEE G RANTOR T RUST

I understand that certain assets of my employee grantor trust (“Grantor Trust”), established with Fidelity Management Trust Company as Trustee, are attributable to payments of current compensation made for my services and that such assets are held in a subaccount of my Grantor Trust known as “Trust Account TP.” This Trust Account TP Beneficiary Designation applies only to the assets held in Trust Account TP of my Grantor Trust (the “TP Assets”).

I understand that if any Primary Beneficiary I designate on this form does not survive until payment is made, then any TP Assets that would otherwise have been paid to such beneficiary will be paid in the following order: first, to the Contingent Beneficiary(ies), if any, designated below; second, if there is no surviving Contingent Beneficiary, to my spouse (if I was married at my date of death); or, third, if there is no surviving Contingent Beneficiary and either I am not married at the date of my death or my spouse is not living at the time the TP Assets become payable, then to my estate.

Schedule D

Page 2 of 4

BENEFICIARIES

I hereby designate the following person(s) as those to whom the Trustee shall pay any TP Assets, as described above:

Primary Beneficiary or Beneficiaries


1.
	Name	Relationship	Social Security Number	Portion (%)

2.
	Name	Relationship	Social Security Number	Portion (%)

3.
	Name	Relationship	Social Security Number	Portion (%)

Note: You may, if you wish, designate either another trust created by you or by you and your spouse or your estate as the Primary Beneficiary to receive any TP Assets. If you choose to do so, you should not complete the Contingent Beneficiary section of this form set forth below.

Contingent Beneficiary or Beneficiaries

If a Primary Beneficiary designated above does not survive until payment of his or her portion of any TP Assets, the Trustee shall make payment as follows:

(Select only one of the alternatives and initial the one selected.)


Alternative 1 :		To my estate.
		Initials
Alternative 2 :		To the deceased Primary Beneficiary’s estate.
		initials
Alternative 3 :		Divided equally among the surviving Primary Beneficiaries.
		Initials
Alternative 4 :		To the persons described below.
		initials

Schedule D

Page 3 of 4

(If you select Alternative 4, describe in the space provided below the manner in which you wish any Primary Beneficiary’s portion of TP Assets paid if that Primary Beneficiary is no longer alive when they become payable. Your description may be one that applies to all Primary Beneficiaries, e.g. , “to the deceased Primary Beneficiary’s children,” or may be specific, e.g. , “in the event of the death of Primary Beneficiary 1 above, to . . . .” For named individuals, please include the individual’s social security number and relationship to you.)

ADDITIONAL INSTRUCTIONS

Notices : If more than one beneficiary may become entitled to share in TP Assets, please designate in the space below which one of such beneficiaries shall be entitled to give any notice to the Administrator or the Trustee that may be called for under your Grantor Trust Agreement.



Beneficiary Designated to Give Notice:

Schedule D

Page 4 of 4

Estate Planning : You should coordinate with your estate planning attorney to be sure your beneficiary designation qualifies for the marital deduction (if the beneficiary is your spouse). Give the attorney a copy of the Trust Agreement and this form. Be sure your will is consistent with the beneficiary designation.

I hereby revoke all previous beneficiary designations made by me with respect to the payment of TP Assets from Trust Account TP of my Grantor Trust. I understand that I may revoke this Beneficiary Designation and execute a new one at any time before my death. I also understand that this form does not govern the determination of my beneficiaries under the PMI Supplemental Plans.



Date				Signature of Employee

Witness



Acknowledged and accepted by Fidelity Management Trust Company by

,
Name						Date

E XHIBIT B

Tax Assumptions

Federal income tax rate: the highest marginal Federal income tax rate as adjusted for the Federal deduction of state and local taxes and the phase out of Federal deductions under current law (or as adjusted under any subsequently enacted similar provisions of the Internal Revenue Code).

State income tax rate: the highest adjusted marginal state income tax rate based on the Employee’s or Beneficiary’s state of residence.

Local income tax rate: the highest adjusted marginal local income tax rate based on the Employee’s or Beneficiary’s locality of residence.

Exceptions: In the case of an Employee who is an expatriate, income taxes shall generally be computed as follows: Expatriate taxes will be calculated assuming the highest marginal Federal income tax rate as adjusted for the Federal deduction of state and local taxes and the phase out of Federal deductions under current law (or as adjusted under any subsequently enacted similar provisions of the Internal Revenue Code). The applicable state and local tax rates will be adjusted to reflect an Eligible Employee’s expatriate status to the extent appropriate.

Capital gains: the ordinary income or capital gains character of items of Trust investment income or deemed investment income shall be taken into account where relevant.

The above principles shall generally be applied in determining tax assumptions for the relevant purpose, but the Company shall have the authority in its discretion to alter the assumptions made where deemed appropriate to take into account particular facts and circumstances.

Exhibit 10.32

P HILIP M ORRIS I NTERNATIONAL

E MPLOYEE G RANTOR T RUST E NROLLMENT A GREEMENT

This agreement (“Agreement”) is made this day of , 2008, between (the “Employee”), the person, if any, to whom the Employee is legally married (the “Employee’s Spouse”), PMI Global Services Inc. (“PMIGS”) and those affiliates of PMIGS that are or become obligated to the Employee under the terms of the PMI Supplemental Plans or the SEP, as defined below (PMIGS and such affiliates collectively referred to hereinafter as the “Company”).

Introduction

The Employee previously entered into one or more Employee Grantor Trust Enrollment Agreements with Altria Group, Inc. or certain of its affiliates (collectively, “Altria”) providing for payments (“Funding Payment”) to or on behalf of the Employee by Altria in satisfaction of its obligations under certain supplemental plans maintained by Altria (the “Altria Supplemental Plans”), such payments to be made to an Employee Grantor Trust established by the Employee (the “Trust”). (The most recent such Employee Grantor Trust Enrollment Agreement referred to above, including any amendments thereto, shall be referred to hereinafter as the “Original Enrollment Agreement.”) Thereafter, pursuant to one or more Supplemental Employee Grantor Trust Enrollment Agreements between the Employee and Altria (the most recent of which, including any amendments thereto, hereinafter referred to as the “Supplemental Enrollment Agreement”), the Employee ceased accruing future benefits under the Altria Supplemental Plans as of January 1, 2005, and Altria made certain additional payments (“Target Payments”) to the Trust as current compensation for services rendered by the Employee.

Trust amounts that are attributable to deposits made pursuant to the terms of the Original Enrollment Agreement and any predecessors thereto are held in a subaccount of the Trust (“Trust Account FP”), and amounts attributable to Target Payments are held in a separate subaccount (“Trust Account TP”). For certain purposes, Trust Account FP is also deemed to include amounts that have been credited to an assumed trust account (“Assumed Trust Account FP”) reflecting certain withholding amounts with respect to Funding Payments and certain other amounts and the earnings thereon. Likewise, pursuant to the Supplemental Enrollment Agreement, the Employee’s share of federal employment taxes on Target Payments and certain other amounts and the earnings thereon have been credited to a separate assumed trust account (“Assumed Trust Account TP”).

The parties now wish to enter into this Agreement which (i) supersedes the Original

Enrollment Agreement in its entirety and, together with the Employee Grantor Trust Agreement attached hereto as Exhibit A (the “Trust Agreement”), shall govern the application of amounts credited under Trust Account FP and Assumed Trust Account FP to the Company’s obligations under the PMI Supplemental Plans, (ii) supersedes any provision of the Supplemental Enrollment Agreement that is also addressed herein and (iii) provides for the Employee’s participation in the SEP.

In consideration of their mutual undertakings, the Company, the Employee and the Employee’s Spouse, if any, agree as follows:

I. Maintenance of Grantor Trust And Assumed Trust Accounts

1.2 The Employee and the Employee’s Spouse, if any, agree that they will not directly contribute any additional funds to the Trust. The Employee and the Employee’s Spouse also understand that assets held in the Trust will be available for distribution or withdrawal only (a) after the Employee’s retirement, death or other termination of employment with the Company, which may include termination by reason of long-term disability, (b) in certain circumstances where there has been a transfer of the Employee’s employment with the Company to a foreign jurisdiction resulting in a termination of the Trust, (c) in other limited circumstances permitted under the Trust Agreement, and (d) to the extent that Trust withdrawals are necessary to pay taxes on Trust earnings or cash deposits.

1.3 The Employee and the Employee’s Spouse, if any, understand that, under the terms of the Trust Agreement, the trustee of the Trust (the “Trustee”) intends to exercise its investment discretion in a manner consistent with the purpose of the Trust specified in Section I.(3) of the Trust Agreement and acknowledge that they have been informed that the Trustee currently intends to invest the Trust assets in one or more of the Fidelity Freedom Funds in the manner set forth in Item 3 of Schedule A of the Trust Agreement attached as Exhibit A, but that the Trustee retains discretion to change the assets in which the Trust will be invested.

1.4 The Employee and the Employee’s Spouse, if any, agree that Assumed Trust Account FP and Assumed Trust Account TP previously maintained by Altria or its designee pursuant to the Original Enrollment Agreement and the Supplemental Enrollment Agreement will be maintained by PMIGS. The amounts credited under Assumed Trust Account FP and Assumed Trust Account TP will be (a) adjusted each year by the amount each such assumed account would have earned or lost if the balance credited thereto had been invested in the same manner as the corresponding actual trust account ( i.e. , Trust Account FP or Trust Account TP, as applicable) and (b) reduced each year by the amount of federal, state, local and other applicable income taxes, if any, that the Administrator estimates (using the tax-rate assumptions set forth in Exhibit B) would have been due with respect to such assumed account if it held the actual assets that it is treated as holding pursuant to this Section. If at any time no amounts are held in Trust

Account TP, amounts credited under Assumed Trust Account TP shall be adjusted for gains or losses as if the balance credited thereto had been invested in the same manner as Trust Account FP (and reduced for taxes as described above).

II. Distributions from Trust, Benefit Payments

2.1 The Employee and the Employee’s Spouse, if any, agree that any amounts made available from Trust Account FP, adjusted as provided below to account for time elapsed between the date assets are made available from Trust Account FP and the date benefits are payable from the PMI Supplemental Plans and adjusted for amounts distributed to pay taxes on Trust Account FP earnings or administrative expenses of the Trust, shall offset the benefits otherwise payable to either of them or to any Plan Beneficiary, as defined below, under the PMI Supplemental Plans.

For purposes of this offset and the calculations and determinations made pursuant to this Section 2.1, Trust Account FP will be deemed to include the amounts credited to Assumed Trust Account FP as provided below. To effect the implementation of this provision, the Employee and the Employee’s Spouse, if any, agree specifically as follows:

(a)

Notwithstanding any provision of the PMI Supplemental Plans, or of any agreement with the Company or Altria made prior to the date of this Agreement, allowing or requiring payment of benefits in another form, and except as otherwise provided in Section 2.1(k), all benefits payable to the Employee or the Employee’s Spouse or Plan Beneficiary under each of the PMI Supplemental Plans shall be paid only in the form of a single lump sum payment (calculated using the actuarial assumptions employed under the relevant PMI Supplemental Plan), and such payment shall be made at the time benefits otherwise become payable to the Employee, the Employee’s Spouse or Plan Beneficiary under the provisions of the PMI Supplemental Plans (the “Distribution Date”). The foregoing provisions of this Section 2.1(a) shall apply to all benefits payable under the PMI Supplemental Plans, including those benefits that become payable under the provisions of the PMI Supplemental Plans before amendment by this Agreement.

(b)

All benefits that would otherwise be payable with respect to a PMI Supplemental Plan on the Distribution Date shall be offset by an amount determined with reference to the fair market value of the assets made available for distribution from Trust Account FP (including the amounts credited to Assumed Trust Account FP) on the date the assets are made available following retirement, death, other termination of employment or any other event described in Section 1.2 of this Agreement or in the Trust Agreement resulting in making such funds available for distribution (the “Availability Date”). For this purpose, (1) assets in Trust Account FP (including the amounts credited to Assumed Trust Account FP) shall be treated as made available as of the earlier of (i) the actual date on which

the Trust terminates as determined under Section I.(7) of the Employee Grantor Trust Agreement attached as Exhibit A hereto or (ii) the date on which PMIGS and its designees cease to serve as Administrator of the Trust and (2) fair market value shall be determined as of the close of the business day of the Trustee immediately preceding the Availability Date. In any case where the Availability Date occurs after the Distribution Date or is coincident with or precedes the Distribution Date of PMI Supplemental Plan benefits by less than 30 days, the offset will occur as of the Distribution Date, without any further adjustment, based on the fair market value of the assets in Trust Account FP (including the amounts credited to Assumed Trust Account FP) made available as of the Availability Date. However, where the Availability Date precedes the relevant Distribution Date by 30 or more calendar days the offset will not occur until the relevant Distribution Date and the Trust Account FP assets (including the amounts credited to Assumed Trust Account FP) available as of the Availability Date will be adjusted as provided in subsection (d) to reflect their assumed fair market value as of the Distribution Date. The actual or assumed fair market value of the assets on the relevant date is hereinafter referred to as the “Offset Amount.”

(c)

For purposes of calculating the PMI Supplemental Plan benefits to be offset, the amount otherwise payable under the PMI Supplemental Plans at the relevant Distribution Date to the Employee, the Employee’s Spouse or Plan Beneficiary will be converted to an after-tax amount (the “After-Tax Benefit”) using the tax assumptions set forth in Exhibit B; and the Offset Amount, as determined herein, shall offset the amount of the After-Tax Benefit and shall discharge the Company’s liability to the Employee, the Employee’s Spouse or Plan Beneficiary to the extent of the corresponding pre-tax benefit otherwise payable under the PMI Supplemental Plans.

(d)

If the Employee terminates employment for any reason or any other event occurs which makes the funds in Trust Account FP available for distribution on an Availability Date, or if PMIGS ceases to serve as “Administrator” under Article IV below, 30 or more calendar days before the Distribution Date on which a lump sum distribution is to be made under the PMI Supplemental Plans and this Agreement, then the Offset Amount on such Distribution Date shall be determined as follows:

(1)

It shall be assumed that the fair market value of the assets of Trust Account FP (including the amounts credited to Assumed Trust Account FP) on the Availability Date resulting from such event (or on the date PMIGS ceases to serve as Administrator, if earlier) continued to be invested by the Trustee until the Distribution Date in the same manner in which the Trustee invests the assets held in such a Trust subaccount established by a similarly situated employee of the Company (a “Similarly Situated Trust”), and if at

any time the Trustee reinvests the assets of such a Similarly Situated Trust it shall be assumed that the assets attributable to the Employee have been reinvested in the same manner. If at any time there is no Similarly Situated Trust but the Trustee is investing the assets of other Trusts or Trust subaccounts in the manner set forth in Item 3 of Schedule A of the Employee Grantor Trust Agreement attached as Exhibit A (or in any other manner permitting objective determination how the Trustee would invest the assets of a Similarly Situated Trust), it shall be assumed for this purpose that the assets attributable to the Employee have been invested in the same manner.

(2)

It shall be further assumed that federal, state and local income taxes on the resulting deemed investment income (calculated using the tax assumptions set forth in Exhibit B and including any investment income realized on deemed liquidation of Assumed Trust Account FP assets) have been paid from the assets of the deemed Trust Account FP and Assumed Trust Account FP.

(3)

The amount so determined as the fair market value of the deemed Trust Account FP assets (including the amounts credited to Assumed Trust Account FP) as of the Distribution Date, as determined using the assumptions in this subsection (d), shall be the Offset Amount, which shall be offset against the benefits otherwise payable under the PMI Supplemental Plans on the Distribution Date, in the manner provided in subsection (c) above.

(4)

For any year (or portion thereof) during which there is no Similarly Situated Trust and the manner in which such assets would be invested cannot be determined by reference to Item 3 of Schedule A of Exhibit A or as otherwise provided in paragraph (1) of this subsection (d), then paragraph (1) shall be applied by crediting interest at the first segment rate under Internal Revenue Code Section 417(e)(3) for the month of December of the preceding year.

(e)

All amounts held in Trust Account FP (including the amounts credited to Assumed Trust Account FP) as of the Availability Date (and any adjustments to such amounts) shall be applied in the manner provided above to offset the lump sum payment due from the PMI Supplemental Plans on a Distribution Date, whether or not the Employee or the Employee’s Spouse or Plan Beneficiary chooses to take an actual distribution of such amounts from Trust Account FP on such date or enters into a new trust agreement with Fidelity Management Trust Company or any other trustee with regard to some or all of the Trust Account FP assets.

(f)

If lump sum benefit payments become due under the provisions of the PMI Supplemental Plans and this Agreement on Distribution Dates occurring at different times, the assets in Trust Account FP (including the amounts credited to Assumed Trust Account FP) available or deemed available shall be fully applied, to the extent of the Offset Amount at the relevant Distribution Date, to offset the benefit payments that would otherwise be due in the order determined by the Company.

(g)

Notwithstanding any provisions of the PMI Supplemental Plans or of any agreement with the Company or Altria made prior to the date of this Agreement to the contrary, the Employee will not be entitled to designate any beneficiary to receive benefits under the PMI Supplemental Plans following the death of the Employee other than the surviving spouse of the Employee, except that (i) the Employee, whether or not married, may designate a beneficiary to receive his or her benefits attributable to any portion of a PMI Supplemental Plan which provides a profit-sharing, thrift or other defined contribution benefit if the provisions of that plan allow such a designation (any such beneficiary being referred to herein as the “Plan Beneficiary”) and (ii) certain persons may become a Plan Beneficiary pursuant to Section 5.1. If a person who is an Employee’s Spouse under this Section 2.1(g) ceases to be legally married to the Employee, he or she shall cease to be the Employee’s Spouse hereunder and shall cease to have any right to benefits under the PMI Supplemental Plans other than any rights as a designated Plan Beneficiary under the defined contribution portion of a PMI Supplemental Plan or as provided in Section 5.1. Furthermore, if the Employee has at any future date a spouse other than the Employee’s Spouse named in this Agreement, the Employee shall obtain the agreement of such spouse to the terms and provisions of this Agreement, and the new spouse shall in any event become the Employee’s Spouse for purposes of this Agreement.

(h)

All amounts in Trust Account FP at an Availability Date that result from the death of the Employee shall be paid to the Employee’s Spouse, except to the extent that the Employee has designated another Plan Beneficiary to receive the benefits provided under any defined contribution portion of a PMI Supplemental Plan and except to the extent amounts in Trust Account FP are otherwise payable under any court order binding on the PMI Supplemental Plans or on the Trustee to a person other than the Employee’s Spouse. In the case of an Employee who has no spouse on the Availability Date resulting from the Employee’s death, and subject to the same exceptions as are noted in the immediately preceding sentence, all amounts then held in Trust Account FP as well as any additional benefits that become payable under the PMI Supplemental Plans on a contemporaneous or subsequent Distribution Date shall be paid to the persons named as beneficiaries of “Residual Assets” of Trust Account FP in the “Trust Account FP Beneficiary Designation” executed by the

Employee in connection with his or her Employee Grantor Trust Agreement or, in the absence of effective designations, to the Employee’s estate.

(i)

If the Employee becomes disabled and, as a result, becomes entitled to long term disability benefits that on the Employee’s attaining a prescribed age are reduced by amounts paid under the PMI Supplemental Plans, then the reduction in such long term disability benefits shall be computed by taking into account the annuity value of the pre-tax equivalent of the Offset Amount, as well as the annuity value of any remaining amounts payable under the PMI Supplemental Plans after reduction by the Offset Amount, using the actuarial assumptions employed at the attainment of such prescribed age under the relevant PMI Supplemental Plans to convert between single sum amounts and their annuity value equivalents.

(j)

If the Employee dies and as a result the Employee’s Spouse becomes entitled to benefit payments under the Philip Morris International Survivor Income Benefit Equalization Plan (“SIB Payments”) that would be reduced by amounts payable under the PMI Supplemental Plans, then the reduction in such SIB Payments shall be computed by taking into account the annuity value of the pre-tax equivalent of the Offset Amount, as well as the annuity value of any remaining amounts payable under the PMI Supplemental Plans after reduction by the Offset Amount, using the actuarial assumptions employed under the relevant PMI Supplemental Plan at the date the SIB Payments would first be reduced by benefit payments otherwise payable under such PMI Supplemental Plans to convert between single sum amounts and their annuity value equivalents.

(k)

If there is outstanding at the date of this Agreement any domestic relations or other court order requiring the Company to make payment of benefits under any PMI Supplemental Plan to a former spouse or dependent of the Employee, the payee of such benefits shall not be an Employee’s Spouse or Plan Beneficiary under this Agreement and such benefits shall remain payable in the manner contemplated by such order. No portion of the Offset Amount shall reduce or otherwise affect the payment of benefits pursuant to such order.

2.2 If the Offset Amount at the Distribution Date, determined as provided in Section 2.1 above and as otherwise provided below for purposes of this Section 2.2, is less than the After-Tax Benefit, the difference between the After-Tax Benefit and the Offset Amount shall be converted to a pre-tax amount (the “Additional Pre-Tax Benefit”) based on the tax assumptions set forth in Exhibit B, and the Company shall pay in the form of a lump sum payment an amount equal to the Additional Pre-Tax Benefit to the Employee, the Employee’s Spouse or Plan Beneficiary from the general assets of the relevant participating employer in satisfaction of any remaining obligations of the Company under the PMI Supplemental Plans. The recipient will be responsible for taxes on any Additional Pre-Tax Benefit payable under this Section 2.2.

2.3 If at any time permitted under Section 1.2 the Employee (or in the event of the Employee’s death, the Employee’s Spouse, Plan Beneficiary or beneficiary under the Trust, as applicable) wishes to withdraw Trust assets, he or she may direct the Trustee in writing to liquidate the Trust assets and distribute the proceeds in cash or to take such other actions with respect to the assets as he or she may agree upon in writing with the Trustee.

(a)

from Trust Account FP, the Offset Amount will be calculated as if such assets had not been deposited in the Trust; and

(b)

from Trust Account TP, the amounts credited to Trust Account TP and Assumed Trust Account TP will be determined as if such assets had not been deposited in the Trust.

III. Tax Payments With Respect to Trust Earnings

Each year, assets will be distributed from Trust Account FP and Trust Account TP to the Employee (or the Employee’s Spouse, Plan Beneficiary(ies) or beneficiary(ies) under the Trust), if applicable) to provide the Employee (or the Employee’s Spouse, Plan Beneficiary(ies) or beneficiary(ies) under the Trust) with the amounts estimated by the Administrator, using the tax-rate assumptions set forth in Exhibit B, to be sufficient to pay federal, state, local and other applicable income taxes with respect to any earnings of Trust Account FP and Trust Account TP.

IV. Appointment of PMIGS as Agent

4.1 The Employee appoints PMIGS and such persons as may be designated to act on behalf of PMIGS, and removes Altria or any of its affiliates, as applicable, as his or her duly authorized agent for the following purposes: (a) providing, in accordance with the duties of the “Administrator” as set forth in the form of Trust Agreement attached as Exhibit A, information and direction to the Trustee; (b) removing the Trustee and appointing a successor trustee of the Trust; (c) examining the books and records of the Trust; (d) amending the Trust as to ministerial matters (and as to other matters, with the consent of the Employee); and (e) terminating the Trust.

and the Trustee, within any period of two days, written notice of such removal. The Trustee shall not be required to verify that there has been a Change of Control and shall be entitled to rely upon the Employee’s notice of removal unless PMIGS provides to the Trustee (within 10 days following the Trustee’s receipt of the notice of removal from the Employee) written notice certifying that no Change of Control has occurred.

4.3 PMIGS shall cease to be the Employee’s agent upon termination of the Trust for any reason provided in the Trust Agreement set forth in Exhibit A or upon removal of PMIGS as Administrator following a Change of Control as provided in Section 4.2 above.

4.4 From and after the date on which PMIGS (or its successor) ceases to serve as the duly authorized agent,

(a)

the offsets against the Company’s obligations to the Employee and the Employee’s Spouse under the PMI Supplemental Plans shall be determined in the manner set forth in Section 2.1(d) and by assuming that amounts are available for distribution from Trust Account FP (including amounts credited to Assumed Trust Account FP) at the proper times and in the proper amounts; and

(b)

the amount held in Trust Account TP immediately prior to such Change of Control shall be credited to Assumed Trust Account TP, the balance in Trust Account TP shall thereafter be deemed to be zero, and the balance of Assumed Trust Account TP shall thereafter be determined in the same manner as the fair market value of the deemed Trust Account FP assets pursuant to Section 2.1(d) and shall be debited for assumed taxes as provided in Section 1.4 and the SEP.

V. Assignment and Attachment of Trust Assets

5.1 The Employee and the Employee’s Spouse understand and agree that, except for any distributions from the Trust to pay taxes as provided in Article III, neither they nor the Employee’s Plan Beneficiary(ies) or beneficiaries under the SEP or the Trust, may receive any amounts from the Trust at any time earlier than the times set forth in Section 1.2. Thus, should any amounts under the Trust be assigned to the Employee’s Spouse or any other party pursuant to a domestic relations order or otherwise, the Employee’s Spouse agrees that such amounts shall not be payable under such order until the times set forth in Section 1.2.

5.2 The Employee and the Employee’s Spouse understand and agree that should any amount under Trust Account FP be assigned to the Employee’s Spouse or any other person under any domestic relations order or otherwise, an Offset Amount shall be calculated with respect to such amount in the manner set forth in Section 2.1(d) as if the amount so assigned had remained in the Trust, accumulated earnings, and been distributed at the proper time. The Employee and the Employee’s Spouse agree that the Offset Amount so calculated shall be offset against a like amount of After-Tax Benefit payable under the PMI Supplemental Plans at the Distribution Date and shall discharge the Company’s liability to the Employee, the Employee’s Spouse and Plan

Beneficiary to the extent of the corresponding pre-tax benefit otherwise payable to the Employee, the Employee’s Spouse or Plan Beneficiary under the PMI Supplemental Plans, as provided in Section 2.1. If any domestic relations or other order issued on or after the date of this Agreement requires payment of benefits under the PMI Supplemental Plans to a person by virtue of such person having been the Employee’s spouse or to any dependent of such person, the person to whom such benefits are required to be paid shall be a Plan Beneficiary within the meaning of Sections 2.1(g) and (h). If the Employee or the Employee’s Spouse resides in a community property state, the Employee and the Employee’s Spouse understand and agree that all amounts held in the Trust shall be treated as the Employee’s separate property to the extent permitted by applicable law.

5.3 The Employee and the Employee’s Spouse understand and agree that in the event all or a portion of the funds in Trust Account FP are attached by court order or other legal process or are otherwise alienated to third parties, or if amounts are otherwise distributed from Trust Account FP for any reason (other than for the payment of administrative expenses of the Trust) not described in Section 2.1 or Article III, the Offset Amount will be calculated as if the amount so alienated or distributed remained in the Trust, had been invested in the same manner as amounts that actually remain in Trust Account FP, was available for distribution at the proper time, and was or is to be offset against benefits otherwise payable from the PMI Supplemental Plans at the appropriate Distribution Date, in the manner specified in Section 2.1. To the extent that for any calendar year or portion thereof no assets remain in the Trust, the amounts so alienated or distributed shall be deemed to have been invested as provided in Section 2.1(d). The Employee and the Employee’s Spouse agree that the Offset Amount shall be offset against a corresponding amount of After-Tax Benefit, and shall discharge the Company’s liability to the Employee, the Employee’s Spouse or Plan Beneficiary to the extent of the corresponding pre-tax benefit otherwise payable under the PMI Supplemental Plans.

5.4 In the event that all or a portion of the funds in Trust Account TP are attached by court order or other legal process or are otherwise alienated to third parties (other than the Company or any trustee, creditor or representative of the Company or its estate), the amount so attached or alienated will be credited to Assumed Trust Account TP as of the date such amounts are removed from Trust Account TP. The Employee and the Employee’s Spouse further understand and agree that should any amount under Trust Account TP be assigned to the Employee’s Spouse or any other person under any domestic relations order or otherwise, the Employee’s Spouse agrees that such amounts shall not be payable under such order until the benefit of the Employee or the Employee’s Spouse or beneficiary(ies) is payable under the SEP.

VI. Philip Morris International Supplemental Equalization Plan

6.2 The Employee and the Employee’s Spouse agree that if any amounts are paid from Trust Account TP (other than for the payment of taxes or administrative expenses) before the value of Trust Account TP is taken into account for purposes of determining the benefits payable under the SEP (and such amounts are not otherwise credited to Assumed Trust Account TP pursuant to this Agreement), the amounts so paid shall be credited to Assumed Trust Account TP at the time paid.

VII. Termination

7.1 This Agreement shall terminate 30 days after the date all benefits are paid from the PMI Supplemental Plans and the SEP.

VIII. Miscellaneous

8.3 This Agreement shall be binding upon and inure to the benefit of the Company, its successors and assigns, the Employee, the Employee’s Spouse, the Employee’s Plan Beneficiary and the Employee’s beneficiary(ies) under the Trust Agreement and the SEP, and their heirs, executors, other successors in interest, administrators, and legal representatives.

8.4 The validity and interpretation of this Agreement shall be governed by the laws of the State of New York.

8.5 The Employee’s Plan Beneficiary shall be the person or persons the Employee has designated to receive benefits following the Employee’s death under any defined contribution portion of a PMI Supplemental Plan or as otherwise provided in Sections 2.1(g) or 5.1, and the Employee’s beneficiary(ies) with respect to the Trust shall be determined in accordance with the terms of the trust agreement pursuant to which the Trust is maintained.

8.6 Change of Control . For the purpose of this Agreement, a “Change of Control” shall mean:

(a)

The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of Philip Morris International Inc. (the “Outstanding Company Common Stock”) or (ii) the combined voting power of the then outstanding voting securities of Philip Morris International Inc. entitled to vote generally in the election of directors (the “Outstanding Company Voting Securities”); provided, however, that the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from Philip Morris International Inc. or any corporation or other entity controlled by Philip Morris International Inc. (the “Affiliated Group”) (ii) any acquisition by a member of the Affiliated Group, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by a member of the Affiliated Group or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 8.6; or

(b)

Individuals who, as of the date hereof, constitute the Board of Directors of Philip Morris International Inc. (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by Philip Morris International Inc.’s shareholders was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or

(c)

A reorganization, merger, share exchange or consolidation (a “Business

Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns such shares and voting power through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of any member of the Affiliated Group or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or at the time of the action of the Board providing for such Business Combination or were elected, appointed or nominated by the Board; or

(d)

A (i) complete liquidation or dissolution of Philip Morris International Inc. or (ii) sale or other disposition of all or substantially all of the assets of Philip Morris International Inc., other than to a corporation, with respect to which following such sale or other disposition, (A) more than 60% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly, by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such sale or other disposition in substantially the same proportion as their ownership, immediately prior to such sale or other disposition, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) less than 40% of, respectively, the then outstanding shares of common stock of such corporation and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned,

directly or indirectly, by any Person (excluding any employee benefit plan (or related trust) of any member of the Affiliated Group or such corporation), except to the extent that such Person owned 40% or more of the Outstanding Company Common Stock or Outstanding Company Voting Securities prior to the sale or disposition and (C) at least a majority of the members of the board of directors of such corporation were members of the Incumbent Board at the time of the execution of the initial agreement or at the time of the action of the Board providing for such sale or other disposition of assets of Philip Morris International Inc. or were elected, appointed or nominated by the Board; or

(e)

the entry of an order for relief against Philip Morris International Inc. as debtor in a case under the United States Bankruptcy Code, as amended; or

(f)

Members of the Affiliated Group cease to own, directly or indirectly, more than 60% of the combined voting power of the then outstanding voting securities of PMIGS entitled to vote generally in the election of directors of PMIGS, unless all of the services to be provided by PMIGS as Administrator hereunder are provided by another member of the Affiliated Group.

8.9 This Agreement shall not be construed to enlarge the obligations of any participating employer under the terms of the PMI Supplemental Plans or the SEP.

IN WITNESS WHEREOF, the Employee, the Employee’s Spouse and PMIGS have caused this Agreement to be executed as of the day and year first above written.

Attest:




				Signature of Employee

Attest:




				Signature of Employee’s Spouse

This Agreement is executed on behalf of the Company.


Attest:				PMI Global Services Inc.



				By:

Attachments:

Exhibit A: Amended and Restated Employee Grantor Trust Agreement

Exhibit B: Tax Assumptions

E XHIBIT A

P HILIP M ORRIS I NTERNATIONAL

A MENDED AND R ESTATED E MPLOYEE G RANTOR T RUST A GREEMENT

T HIS T RUST A GREEMENT made the day of , 2008, between (hereinafter called the “Grantor”) and F IDELITY M ANAGEMENT T RUST C OMPANY (hereinafter called the “Trustee”),

W I T N E S S E T H T H A T :

W HEREAS , the Grantor and the Trustee desire to restate the terms and conditions under which the Trust Fund is held;

following express trust and with the powers, authorities and discretions hereinafter conferred:

A RTICLE I

Introduction

I. (1). Name . This agreement and the trust hereby evidenced may be referred to as the Grantor’s “Employee Grantor Trust.”

I. (3) Purpose of the Trust . In entering into this agreement, the Grantor intends for the Trust Fund to be invested solely to augment the savings of the Grantor that will be fully and immediately available at Grantor’s expected retirement age. To that end, in determining the appropriate investment strategy for the Trust Fund, the Grantor expressly authorizes the Trustee to take into consideration only the Grantor’s age and the Grantor’s expected age of retirement and agrees that, for this purpose, the Grantor’s expected age of retirement shall be assumed to be the age determined under the table set forth as Item 3 of Schedule A annexed hereto. The Trustee shall have no duty to inquire into or to consider any other needs of the Grantor in determining the appropriate investment strategy for the Trust Fund, including, but not limited to, any other resources available to the Grantor; any other assets the Grantor may own or have an interest in; the Grantor’s risk tolerance; the Grantor’s investment experience and attitudes; and the Grantor’s needs for liquidity, regularity of income, and preservation or appreciation of capital prior to the termination of the Trust. Neither shall the Trustee have a duty to inquire into or consider any other needs (including but not limited to those referred to in the immediately preceding sentence) of the Grantor’s Beneficiary(ies). The Trustee may rely on the Grantor’s age and the Grantor’s expected age of retirement as set forth or determined under such Schedule A, and shall have no duty to inquire into the validity of such information. The Trustee shall incur no liability to the Grantor or any other person interested in the Trust Fund for reliance upon the express terms of this paragraph, or for any action or omission in reliance upon information provided on Schedule A or by the Administrator (as defined in Section I.(5) below).

I. (4). Status of the Trust . The trust shall be irrevocable until such time as the Grantor (or, in the event of the Grantor’s death, the Grantor’s Beneficiary(ies), as defined in Section I.(8) below) and the Administrator jointly provide written certification to the Trustee that (a) the Grantor has retired, died or otherwise terminated employment (which may include termination by reason of long-term disability) with the Company, (b) the Grantor is a citizen or lawful permanent resident of the United States who by virtue of a transfer of employment with the Company to a foreign jurisdiction has become subject to laws, rules, regulations or taxes that make the continued maintenance of the trust undesirable, or (c) the Grantor is a person who is not a citizen or lawful permanent resident of the United States who has transferred employment with

the Company to a foreign jurisdiction. The written certification of the Administrator shall specify the date as of which the trust shall terminate in accordance with Section I.(7) hereof. The trust is intended to constitute a grantor trust under which the Grantor is treated as grantor and owner pursuant to Sections 671 - 678 of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. Neither the Company nor any person other than the Grantor and, in the event of the Grantor’s death, the Grantor’s Beneficiary(ies), and the Trustee acting as such, have any right, title or interest in the assets of the Trust Fund.

I. (5) The Administrator . PMIGS shall be the “Administrator” for purposes of this trust and shall have certain powers, rights and duties under this agreement as described below; provided that, PMIGS may from time to time designate a person or persons, who may but need not be employees of PMIGS, to act as the Administrator on its behalf or to carry out certain duties of the Administrator. PMIGS will certify to the Trustee from time to time the person or persons authorized to act on behalf of PMIGS as the Administrator or as the designees of the Administrator. The Trustee may rely on the latest certificate received without further inquiry or verification. After delivery to the Trustee of the written certification of PMIGS acting as Administrator referred to in the first sentence of Section I.(4) above, and as of the scheduled termination date of the trust referred to in Section I.(7) below or at such later date as the distribution of all assets of the Trust Fund pursuant to the termination of this trust is completed, PMIGS and its designees, if any, shall cease to serve as Administrator. Notwithstanding any provision herein, however, in the event of a Change of Control (as defined in Schedule B annexed hereto or in the most recent replacement for such Schedule delivered by the Administrator to the Trustee at least ten business days prior to the occurrence of a Change of Control), the Grantor may remove PMIGS (or its successor) and any designee of PMIGS as Administrator by delivering to both PMIGS (or its successor) and the Trustee within any period of two days written notice of such removal. The Trustee may rely upon any notice of removal received from the Grantor without further inquiry or verification, unless PMIGS (or its successor) provides to the Trustee (within 10 days following the Trustee’s receipt of the notice of removal from the Grantor) written notice certifying that no Change of Control has occurred. In the event the Grantor removes PMIGS as Administrator, the Grantor shall appoint a successor Administrator, who may be the Grantor, a committee of persons including the Grantor, or such other person or persons as shall be reasonably acceptable to the Trustee, and shall notify the Trustee of the appointment. In such event, the Grantor shall also have the authority to, from time to time, remove the person or persons so appointed and appoint such other person or persons as shall be reasonably acceptable to the Trustee.

I. (7). Termination . In conjunction with any written certification provided to the Trustee pursuant to the first sentence of Section I.(4) above, the Administrator shall also specify a future

date at the close of which the fair market value of the Trust Fund shall be determined; on the next succeeding business day of the Trustee, the Trust assets shall be distributable and this Trust shall be scheduled to terminate. On or as soon as practicable after such scheduled termination date, the Trustee shall transfer and pay over (in the form of the assets held in the Trust Fund to the extent feasible, or alternatively in cash), the principal and any undistributed income of the Trust Fund, as then constituted, to the Grantor, if living, or the Beneficiary(ies) of the Grantor, in the event of the Grantor’s death, and upon the completion of all such distributions this trust shall terminate. The Grantor (or, if the Grantor has died, the Grantor’s Beneficiary(ies)) and the Trustee may, however, enter into a new trust agreement for holding any assets of the Trust Fund on new terms and conditions provided by the Grantor (or the Grantor’s Beneficiary(ies)), though neither shall be obligated to enter into such an agreement. Notwithstanding any other provision of this Employee Grantor Trust, this Trust shall terminate upon the distribution of all assets held in the Trust Fund pursuant to Article II without any further action by the Administrator, the Trustee, the Grantor or the Beneficiary(ies) of the Grantor.

I. (8). Death Beneficiary(ies) . In the event of the Grantor’s death, the Trust Fund shall be distributed in accordance with the following provisions:

A RTICLE II

Accumulation and Distribution of the Trust Fund

II. (3). All income not so paid or applied shall be accumulated and added to principal of the Trust Fund.

A RTICLE III

The Trustee

including court order, with the same powers, authorities and discretions as though originally named; provided that such affiliated entity is authorized to act in such capacity under applicable law. Any corporation resulting from any merger, conversion, reorganization or consolidation to which any corporation acting as Trustee hereunder shall be a party, or any corporation to which shall be transferred all or substantially all of any such corporation’s trust business, shall be the successor of such corporation as Trustee hereunder, without the execution or filing of any instrument or the performance of any further act and shall have the same powers, authorities and discretions as though originally named in this Trust Agreement.

III. (2). The Trustee may resign by giving ninety (90) days’ advance written notice to the Grantor and the Administrator. The Administrator, as agent for the Grantor, may remove a Trustee by giving ninety (90) days’ advance written notice to the Trustee and the Grantor. The Administrator shall appoint a successor Trustee by written notice signed by the Administrator and delivered to the Trustee and the Grantor (or, in the event of the Grantor’s death, the Grantor’s Beneficiary(ies)). If a successor Trustee is not appointed within ninety (90) days of the Trustee’s resignation, the Trustee may apply to a court of competent jurisdiction for the appointment of a successor.

III. (5). To assure compliance with regulatory and corporate disclosure requirements, the Trustee, Fidelity Management Trust Company, advises as follows:

(a) Relationship . FMR Corp. (“FMR”) is the parent corporation of the Trustee.

FMR will derive earnings directly or indirectly through FMR’s management of funds in which the Trust Fund may be invested as well as from fees paid to the Trustee.

A RTICLE IV

Trustee Reporting

A RTICLE V

Investment and Administrative Authority

(b) To sell any such property upon such terms and conditions as may be deemed advisable, at public or private sale, for cash or on credit for such period of time as may be deemed advisable, or partly for cash and partly on credit, and with or without security, without obligation to “test the market” by soliciting offers from a third party or to obtain an appraisal to establish the value thereof; and the purchaser of such property shall have no obligation to inquire as to the use or application of the proceeds of sale; to exchange any property held hereunder upon such terms and conditions as may be deemed advisable; and to grant warranties, guaranties, indemnities or options with respect to any of the foregoing without regard to the duration of any trust or any time limitation imposed by law;

(g) To register and hold any property of any kind, whether real or personal, at any time held hereunder in the name of a nominee or nominees and to hold any such personal property in any State; and to receive and keep any stocks, bonds or other securities unregistered or in such condition that title thereto will pass by delivery;

(i) To allocate to principal all dividends and distributions payable in property or in stocks, bonds or other securities whether of the disbursing company or another company;

(j) After the termination of the trust hereunder to exercise all the powers, authorities and discretions herein conferred until the complete distribution of the property held hereunder;

(k) To accept additional property transferred on behalf of the Grantor;

(o) To act in any jurisdiction where permitted by law, or to designate one or more persons or a corporation to be ancillary fiduciary who shall serve without bond or security in any jurisdiction in which ancillary administration may be necessary; and to negotiate and determine the compensation to be paid to such ancillary fiduciary whether or not any compensation would otherwise be authorized by law, and to pay such compensation out of principal or income or both; and such ancillary fiduciary shall have with respect to any and all property subject to the ancillary administration all powers, authorities and discretions granted in this Article; provided, however, that any action which may require the investment of additional funds or the assumption of additional obligations shall not be undertaken without prior written consent of the fiduciary or fiduciaries acting hereunder; and if by reason of the law of any jurisdiction in which it may be necessary to perform any act any fiduciary hereunder may be disqualified from acting, then all of the acts required to be performed in such jurisdiction may be performed by such fiduciary’s qualified co-fiduciary or co-fiduciaries then acting hereunder.

V. (2). Notwithstanding the provisions of Section V. (1). hereof,

written investment guidelines setting forth the parameters within which such Trustee shall exercise its discretionary authority with respect to the investment of the Trust Fund subject to the restrictions on investments set forth above, and such Trustee shall have no liability to the Administrator, the Company, the Grantor or any other person interested in the Trust Fund for any action or any omission in reliance upon such guidelines;

(e) The Trustee and its affiliates shall discharge their duties with respect to the Trust Fund solely in the interest of the Grantor and the Grantor’s Beneficiary(ies), for the exclusive purpose of accumulating assets as provided in Section I.(3), making distributions pursuant to Article II hereunder, and paying the reasonable expenses of administering the trust.

A RTICLE VI

General Provisions

VI. (3). Any provision of the Trust Agreement prohibited by law, or which would cause the trust to any extent to fail or cease to be a grantor trust as described in Section I. (4). hereof, shall be to such extent ineffective, without invalidating the remaining provisions hereof.

VI. (5). Any notice required under this Trust Agreement shall be delivered (a) personally, (b) by next day courier service ( e.g. , Federal Express or UPS), or (c) by certified or registered mail, return receipt requested, addressed as follows (or to such other address as any party may so notify the other party):

If to the Trustee:

Chief Fiduciary Officer

Fidelity Personal Trust Services

82 Devonshire Street, ZW2C

Boston, MA 02109-3614

If to the Grantor:

To the address specified in Item 2 of Schedule A of this Agreement.

If to the Administrator:

PMI Global Services Inc.

Attention: Milagros S. Vega,

Manager, Benefits

120 Park Avenue

New York, New York 10017-5592

VI. (6). This Agreement shall be binding on all persons entitled to payments from the Trust Fund and their respective heirs and legal representatives, and on the Trustee and its successors.

cause any amount held in the Trust Fund to be payable to the Company or to any person other than the Grantor, the Grantor’s Beneficiary(ies) or estate, or to the Trustee as compensation for services, or reimbursement for payment to its agents.


		(L.S.)
	Grantor
	(please print name below signature line)

	Fidelity Management Trust Company,
	Trustee

	By:
Attest:

Attachments:

Notarization Page for Grantor’s Signature – Page 14

Notarization Page for Trustee’s Signature – Page 15

Schedule A – Information Concerning Grantor and List of Plans

Schedule B – Change of Control Definition

Schedule C – Trust Account FP Beneficiary Designation

Schedule D – Trust Account TP Beneficiary Designation


STATE OF		)
		)SS.:
COUNTY OF		)


COMMONWEALTH OF MASSACHUSETTS		)
		) SS .:
COUNTY OF		)

Schedule A

Page 1 of 2

Grantor’s Name _______________________________________________

Grantor’s SSN ________________________________________________

Grantor’s Current Address _______________________________________

Grantor’s Daytime Telephone _____________________________________

Item 1 : PMI Supplemental Plans

Philip Morris International Benefit Equalization Plan

Philip Morris International Supplemental Management Employees’ Retirement Plan

Item 2 : Grantor’s Notice Address (if different than current address)

Schedule A

Page 2 of 2

Item 3 : Grantor’s Date of Birth: , 19 .


Assumed Retirement Age
Current Age		Expected Retirement Age*
Under age 55 Age 55 or over		Age 55 (earliest retirement age) Current Age (retirement eligible)

Current Investment
Year of Birth		Fidelity Freedom Fund Investment
1975 1965 through 1974 1955 through 1964 1945 through 1954 1944 or earlier		Freedom 2030 Freedom 2020 Freedom 2010 Freedom 2000 Freedom Income

*	This reflects a conservative investment assumption that the Grantor may wish to take early retirement at age 55 or, if already age 55, may wish to retire at any time.

Schedule B

For the purpose of this Agreement, a “Change of Control” shall mean the occurrence of any of the following events:

ownership, immediately prior to such Business Combination, of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any employee benefit plan (or related trust) of any member of the Affiliated Group or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 40% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement or at the time of the action of the Board providing for such Business Combination or were elected, appointed or nominated by the Board; or

(e) the entry of an order for relief against Philip Morris International Inc. as debtor in a case under the United States Bankruptcy Code, as amended; or

(f) Members of the Affiliated Group cease to own, directly or indirectly, more than 60% of the combined voting power of the then outstanding voting securities of

PMIGS entitled to vote generally in the election of directors of PMIGS, unless all of the services to be provided by PMIGS as Administrator hereunder are provided by another member of the Affiliated Group.

Schedule C

Page 1 of 4

T RUST A CCOUNT FP B ENEFICIARY D ESIGNATION

E MPLOYEE G RANTOR T RUST

Schedule C

Page 2 of 4

BENEFICIARIES

I hereby designate the following person(s) as those to whom the Trustee shall pay any Residual Assets of Trust Account FP of my Grantor Trust, as described above:

Primary Beneficiary or Beneficiaries


1.
	Name	Relationship	Social Security Number	Portion (%)

2.
	Name	Relationship	Social Security Number	Portion (%)

3.
	Name	Relationship	Social Security Number	Portion (%)

Contingent Beneficiary or Beneficiaries

If a Primary Beneficiary designated above does not survive until payment of his or her portion of any Residual Assets of Trust Account FP, the Trustee shall make payment as follows:

(Select only one of the alternatives and initial the one selected.)


Alternative 1 :		To my estate.
		initials

Alternative 2 :		To the deceased Primary Beneficiary’s estate.
		initials

Alternative 3 :		Divided equally among the surviving Primary Beneficiaries.
		initials

Alternative 4 :		To the persons described below.
		initials

Schedule C

Page 3 of 4

ADDITIONAL INSTRUCTIONS



Beneficiary Designated to Give Notice:

Schedule C

Page 4 of 4



Date				Signature of Employee

Witness



Acknowledged and accepted by Fidelity Management Trust Company by

,
Name						Date

CONSENT OF SPOUSE

[To be completed if Primary Beneficiary is someone other than the Employee’s Spouse.]



Date				Signature of Employee’s Spouse

Notary Public

Schedule D

Page 1 of 4

T RUST A CCOUNT TP B ENEFICIARY D ESIGNATION

E MPLOYEE G RANTOR T RUST

Schedule D

Page 2 of 4

BENEFICIARIES

I hereby designate the following person(s) as those to whom the Trustee shall pay any TP Assets, as described above:

Primary Beneficiary or Beneficiaries


1.
	Name	Relationship	Social Security Number	Portion (%)

2.
	Name	Relationship	Social Security Number	Portion (%)

3.
	Name	Relationship	Social Security Number	Portion (%)

Contingent Beneficiary or Beneficiaries

If a Primary Beneficiary designated above does not survive until payment of his or her portion of any TP Assets, the Trustee shall make payment as follows:

(Select only one of the alternatives and initial the one selected.)


Alternative 1 :		To my estate.
		Initials

Alternative 2 :		To the deceased Primary Beneficiary’s estate.
		initials

Alternative 3 :		Divided equally among the surviving Primary Beneficiaries.
		Initials

Alternative 4 :		To the persons described below.
		initials

Schedule D

Page 3 of 4

ADDITIONAL INSTRUCTIONS


Beneficiary Designated to Give Notice:

Schedule D

Page 4 of 4

Estate Planning : You should coordinate with your estate planning attorney to be sure your beneficiary designation qualifies for the marital deduction (if the beneficiary is your spouse). Give the attorney a copy of the Trust Agreement and this form. Be sure your will is consistent with the beneficiary designation.



Date				Signature of Employee

Witness



Acknowledged and accepted by Fidelity Management Trust Company by

,
Name						Date

E XHIBIT B

Tax Assumptions

State income tax rate: the highest adjusted marginal state income tax rate based on the Employee’s, Employee’s Spouse’s, Plan Beneficiary’s, or Trust beneficiary’s state of residence.

Local income tax rate: the highest adjusted marginal local income tax rate based on the Employee’s, Employee’s Spouse’s, Plan Beneficiary’s or Trust beneficiary’s locality of residence.

Exceptions:

(1)

In the case of an Employee who is an expatriate, income taxes shall generally be computed as follows: Expatriate taxes will be calculated assuming the highest marginal Federal income tax rate as adjusted for the Federal deduction of state and local taxes and the phase out of Federal deductions under current law (or as adjusted under any subsequently enacted similar provisions of the Internal Revenue Code). The applicable state and local tax rates will be adjusted to reflect an Eligible Employee’s expatriate status to the extent appropriate.

(2)

For all periods on and after the Availability Date and before the Distribution Date, state and local tax rate assumptions with respect to amounts credited under Trust Account FP and Assumed Trust Account FP will generally be based on the Employee’s, Employee Spouse’s or Plan Beneficiary’s state and locality of residence at the Availability Date. At the Distribution Date, state and local tax rate assumptions used in computing the After-Tax Benefit and the Additional Pre-Tax Benefit, if any, will generally be based on actual residence at the Distribution Date.

Capital gains: the ordinary income or capital gains character of items of Trust investment income or deemed investment income shall be taken into account where relevant.

Exhibit 12

PHILIP MORRIS INTERNATIONAL INC. AND SUBSIDIARIES

Computation of Ratios of Earnings to Fixed Charges

(in millions of dollars)


	For the Years Ended December 31,
	2008			2007 ⁽¹⁾			2006 ⁽¹⁾			2005 ⁽¹⁾			2004 ⁽¹⁾
Earnings before income taxes and minority interest	$	9,937		$	8,884		$	8,208		$	7,636		$	6,505

Add (deduct):

Equity in net loss (earnings) of less than 50% owned affiliates		64			(100	)		(163	)		(176	)		(111	)

Dividends from less than 50% owned affiliates		12			100			154			127			92

Fixed charges		618			359			446			407			254

Interest capitalized, net of amortization		(11	)		(8	)		(4	)		(12	)		(5	)


Earnings available for fixed charges	$	10,620		$	9,235		$	8,641		$	7,982		$	6,735


Fixed charges:

Interest incurred	$	543		$	280		$	378		$	340		$	198

Portion of rent expense deemed to represent interest factor		75			79			68			67			56


Fixed charges	$	618		$	359		$	446		$	407		$	254


Ratio of earnings to fixed charges		17.2			25.7			19.4			19.6			26.5

⁽¹⁾

Amounts for 2007, 2006, 2005 and 2004 have been revised to reflect the movement of certain subsidiaries to a December 31 closing date. The effect of this change for the years ended December 31, 2007, 2006, 2005 and 2004 was not material to our consolidated financial position, results of operations or cash flows.

Exhibit 13

FINANCIAL REVIEW

Financial Contents


page 21		Management’s Discussion and Analysis of Financial Condition and Results of Operations

page 47		Selected Financial Data — Five-Year Review

page 48		Consolidated Balance Sheets

page 50		Consolidated Statements of Earnings

page 51		Consolidated Statements of Stockholders’ Equity

page 52		Consolidated Statements of Cash Flows

page 54		Notes to Consolidated Financial Statements

page 83		Report of Independent Registered Public Accounting Firm

page 84		Report of Management on Internal Control Over Financial Reporting

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of Our Company

We are a holding company whose subsidiaries and affiliates, and their licensees, are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside the United States of America. We manage our business in four segments:

•

European Union;

•

Eastern Europe, Middle East and Africa (“EEMA”);

•

Asia; and

•

Latin America & Canada.

Our products are sold in approximately 160 countries and, in many of these countries, they hold the number one or number two market share position. We have a wide range of premium, mid-price and low-price brands. Our portfolio comprises international and local brands.

We use the term net revenues to refer to our operating revenues from the sale of our products, net of sales and promotion incentives. Our net revenues and operating income are affected by various factors, including the volume of products we sell, the price of our products, changes in currency exchange rates and the mix of products we sell. Mix is a term used to refer to the proportionate value of premium price brands to mid-price or low price brands in any given market (product mix). Mix can also refer to the proportion of volume in more profitable markets versus volume in less profitable markets (geographic mix). We are often required to collect excise taxes from our customers and then remit them to local governments, and, in those circumstances, we include excise taxes as a component of net revenues and as part of our cost of sales. Aside from excise taxes, our cost of sales consists principally of tobacco leaf, non-tobacco raw materials, labor and manufacturing costs.

As further discussed in Note 5 to the consolidated financial statements, in 2008, we purchased Rothmans Inc., which is located in Canada. As a result, we changed the name of the Latin America segment to the Latin America & Canada segment.

Prior to 2008, certain of our subsidiaries reported their results up to ten days before the end of December, rather than on December 31. In 2008, these subsidiaries moved to a December 31 closing date. As a result, certain prior years’ amounts have been revised to reflect this change, which resulted in an adjustment to retained earnings of $198 million as of January 1, 2006. The effect of this change was not material to our consolidated financial position, results of operations or operating cash flows in any of the periods presented.

Separation from Altria Group, Inc.

Prior to March 28, 2008, we were a wholly-owned subsidiary of Altria Group, Inc. (“Altria”). On January 30, 2008, the Altria Board of Directors announced Altria’s plans to spin off all of its interest in PMI to Altria’s stockholders in a tax-free distribution pursuant to Section 355 of the U.S. Internal Revenue Code. The distribution of all of the PMI shares owned by Altria (the “Spin-off”) was made on March 28, 2008 (the “Distribution Date”) to stockholders of record as of the close of business on March 19, 2008 (the “Record Date”). Altria distributed one share of our common stock for each share of Altria common stock outstanding on the Record Date.

•

a new PMI option (issued by us) to acquire that number of shares of our common stock equal to the number of Altria options held by such person on the Distribution Date; and

•

an adjusted Altria option for the same number of shares of Altria common stock with a reduced exercise price.

As stipulated by the Employee Matters Agreement, the exercise price of each option was set to reflect the relative market values of PMI and Altria shares by allocating the price of Altria common stock before the distribution ($73.83) to PMI shares ($51.44) and Altria shares ($22.39), and then multiplying each of these allocated values by the Option Conversion Ratio. The Option Conversion Ratio is equal to the exercise price of the Altria option, prior to any adjustment for the distribution, divided by $73.83. As a result, the new PMI option and the adjusted Altria option have an aggregate intrinsic value equal to the intrinsic value of the pre-split Altria option.

Holders of Altria restricted stock or deferred stock awarded prior to January 30, 2008, retained their existing awards and received the same number of shares of our restricted or deferred stock. The restricted stock and deferred stock will not vest until the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria’s deferred stock awarded on January 30, 2008, who were employed by Altria after the Distribution Date, received additional shares of deferred stock of Altria to preserve the intrinsic value of the award. Recipients of Altria’s deferred stock awarded on January 30, 2008, who were employed by us after the Distribution Date, received substitute shares of our deferred stock to preserve the intrinsic value of the award.

To the extent that employees of Altria and its remaining subsidiaries received our stock options, Altria reimbursed us in cash for the Black-Scholes fair value of the stock options received. To the extent that our employees held Altria stock options, we reimbursed Altria in cash for the Black-Scholes fair value of the stock options. To the extent that employees of Altria and its remaining subsidiaries received PMI deferred stock, Altria paid to us the fair value of the PMI deferred stock less the value of projected forfeitures. To the extent that our employees held Altria restricted stock or deferred stock, we reimbursed Altria in cash for the fair value of the restricted or deferred stock less the value of projected forfeitures and any amounts previously charged to us for the restricted or deferred stock. Based upon the number of Altria stock awards outstanding at the Distribution Date, the net amount of these reimbursements resulted in a payment of $449 million from Altria to us. This reimbursement from Altria is reflected as an increase to our additional paid-in capital on the December 31, 2008 consolidated balance sheet.

Prior to the Spin-off, we were included in Altria’s consolidated federal income tax return, and federal income tax contingencies were recorded as liabilities on Altria’s balance sheet. In April 2008, Altria reimbursed us in cash for these liabilities, which were $97 million.

Prior to the Spin-off, certain of our employees participated in the U.S. benefit plans offered by Altria. After the Distribution Date, we began to provide the benefits previously provided by Altria. As a result, we established new plans, and the related plan assets (to the extent that the benefit plans were previously funded) and liabilities have been transferred to the new plans. The transfer of these benefits resulted in our recording additional liabilities of $103 million in our consolidated balance sheet, partially offset by the related deferred tax assets ($22 million) and an adjustment to stockholders’ equity ($26 million). During 2008, we received cash of $55 million from Altria related to the transfer of these plans.

A subsidiary of Altria provided us with certain corporate services at cost plus a management fee. After the distribution, we undertook these activities, and services provided to us ceased in 2008. All intercompany accounts with Altria were settled in cash. As shown in the table below, the settlement of the intercompany accounts (including the amounts discussed above related to stock awards, tax contingencies and benefit plan liabilities) resulted in a net payment from Altria to us of $275 million.


(in millions)
Modifications to Altria Group, Inc. stock awards	$	449
Transfer of federal income tax contingencies		97
Transfer of employee benefit plan liabilities		55
Settlement of intercompany account (primarily taxes)		(326	)

Net amount received from Altria Group, Inc. and affiliates	$	275

For additional information regarding our transactions with Altria Group, Inc. and affiliates after the Spin-off, see Note 3 to our consolidated financial statements.

As part of the Spin-off, we paid to Altria $4.0 billion in special dividends in addition to our normal dividends to Altria. We paid $3.1 billion of these special dividends in 2007 and the remaining $900 million in the first quarter of 2008.

The shares issued as of the Distribution Date equal the number of shares of Altria stock outstanding on the Record Date. As a result, on the Distribution Date, we had 2,108,901,789 shares of common stock outstanding. The same number of shares is being used for both diluted earnings per share and basic earnings per share for all periods prior to the Distribution Date as no PMI equity awards were outstanding prior to the Distribution Date.

Executive Summary

The following executive summary is intended to provide you with the significant highlights from the Discussion and Analysis that follows.

• Consolidated Operating Results — The changes in our reported net earnings and diluted earnings per share (“Diluted EPS”) for the year ended December 31, 2008, from the comparable 2007 amounts, were as follows:


(in millions, except per share data)	Net Earnings			Diluted EPS
For the year ended December 31, 2007	$	6,038		$	2.86

2007 Asset impairment and exit costs		152			0.07
2007 Tax items		(68	)		(0.03	)
2007 Gain on sale of a business		(14	)		(0.01	)

Subtotal of 2007 items		70			0.03


2008 Asset impairment and exit costs		(54	)		(0.02	)
2008 Equity loss from RBH legal settlement		(124	)		(0.06	)
2008 Tax items		175			0.08

Subtotal of 2008 items		(3	)		—


Currency		306			0.15
Interest		(204	)		(0.09	)
Lower shares outstanding					0.05
Change in tax rate		(11	)		(0.01	)
Operations		694			0.33

For the year ended December 31, 2008	$	6,890		$	3.32

See the discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.

• Asset Impairment and Exit Costs — We recorded pre-tax asset impairment and exit costs primarily related to the streamlining of various administrative functions and operations. During 2008, we recorded pre-tax asset impairment and exit costs of $84 million ($54 million after-tax). During 2007, we recorded pre-tax asset impairment and exit costs of $208 million ($152 million after-tax). For further details on the asset impairment and exit costs, see Note 4 to our consolidated financial statements.

• Equity Loss From RBH Legal Settlement — In the second quarter of 2008, we recorded a $124 million charge related to the Rothmans, Benson & Hedges Inc. (“RBH”) legal settlement with the Government of Canada and all ten provinces. This charge was included in the operating companies income of the Latin America & Canada segment. For further details on the equity loss from RBH legal settlement, see Note 16 to our consolidated financial statements.

• Gain on Sale of a Business — During 2007, we sold our leasing business, which was managed by Philip Morris Capital Corporation (“PMCC”), Altria’s financial services subsidiary, for a pre-tax gain of $52 million ($14 million after-tax).

• Currency — The favorable currency impact is due primarily to the weakness of the U.S. dollar versus the Euro, Japanese yen, Russian ruble and Turkish lira. In the fourth quarter of 2008, there was an appreciation of the U.S. dollar against the Euro and many emerging market currencies, in particular the Russian ruble, the Turkish lira, the Indonesian rupiah, the Mexican peso and the Ukrainian hryvnia. The appreciation of the U.S. dollar had an adverse impact on our earnings during the fourth quarter of 2008.

• Interest — The unfavorable impact of interest was due primarily to higher average debt levels.

• Lower Shares Outstanding — The favorable impact of lower shares outstanding was due primarily to repurchases of our common stock pursuant to the $13.0 billion two-year share repurchase program (106.8 million shares repurchased at a cost of $5.4 billion), partially offset by share issuances to satisfy stock awards (5.6 million shares).

• Income Taxes — Our effective income tax rate for 2008 decreased 0.8 percentage points to 28.1%. The 2008 tax rate included the adoption of U.S. income tax regulations proposed in 2008 ($154 million) and the enacted reduction of future corporate income tax rates in Indonesia ($67 million), partially offset by the current non-deductibility of the $124 million charge related to the RBH legal settlement with the Government of Canada and all ten provinces, and the tax cost of a legal entity restructuring ($45 million). In 2007, we recorded tax benefits of $27 million related to the reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany. Based upon tax regulations in existence at December 31, 2008, we estimate that our ongoing effective tax rate will be approximately 29% to 30%.

• Operations — The increase in reported earnings from our operations was due primarily to the following:

•

Eastern Europe, Middle East and Africa. Higher income due primarily to higher pricing and higher volume/mix, partially offset by higher marketing, administration and research costs;

•

Asia. Higher income due primarily to higher pricing and higher volume/mix, partially offset by higher marketing, administration and research costs;

•

European Union. Higher income due primarily to higher pricing and the favorable impact of an acquisition, partially offset by lower volume/mix; and

•

Latin America & Canada. Higher income due primarily to higher pricing, the favorable impact of acquisitions and higher volume/mix, partially offset by higher marketing, administration and research costs (including the $61 million charge related to a previous distribution agreement in Canada).

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

• 2009 Forecasted Results — On February 4, 2009, we announced our forecast for 2009 full-year diluted EPS, to be in a range of $2.85 to $3.00 versus $3.32 in 2008. This forecast was based on prevailing exchange rates at the beginning of February 2009. The 2009 forecasted diluted EPS includes a negative currency impact of $0.80 per share compared to 2008. On a constant currency basis, the 2009 guidance is projected to increase by 10% to 14% over the full-year diluted EPS for 2008. This guidance excludes the impact of any potential future acquisition, asset impairment and exit cost charges, and any other unusual events. The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast.

Discussion and Analysis

Critical Accounting Policies and Estimates

Note 2 to our consolidated financial statements includes a summary of the significant accounting policies and methods used in the preparation of our consolidated financial statements. In most instances, we must use a particular accounting policy or method because it is the only one that is permitted under accounting principles generally accepted in the United States of America (“U.S. GAAP”).

The preparation of financial statements requires that we use estimates and assumptions that affect the reported amounts of our assets, liabilities, net revenues and expenses, as well as our disclosure of contingencies. If actual amounts differ from previous estimates, we include the revisions in our consolidated results of operations in the period during which we know the actual amounts. Historically, aggregate differences, if any, between our estimates and actual amounts in any year have not had a significant impact on our consolidated financial statements.

The selection and disclosure of our critical accounting policies and estimates have been discussed with our Audit Committee. The following is a discussion of the more significant assumptions, estimates, accounting policies and methods used in the preparation of our consolidated financial statements:

• Revenue Recognition — As required by U.S. GAAP, we recognize revenues, net of sales and promotion incentives. Our net revenues include excise taxes and shipping and handling charges billed to our customers. Our net revenues are recognized upon shipment or delivery of goods when title and risk of loss pass to our customers. We record excise taxes and shipping and handling costs paid to third parties as part of cost of sales.

• Depreciation, Amortization and Goodwill Valuation — We depreciate our property, plant and equipment and amortize our definite life intangible assets on a straight-line basis over their estimated useful lives.

We are required to conduct an annual review of goodwill and indefinite lived intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between the fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. These calculations may be affected by interest rates, general economic conditions and projected growth rates. In 2008, 2007 and 2006, we did not have to record a charge to earnings for an impairment of goodwill or other intangible assets as a result of our annual review.

• Marketing and Advertising Costs — As required by U.S. GAAP, we record marketing costs as an expense in the year to which costs relate. We do not defer amounts on our balance sheet. We expense advertising costs during the year in which the costs are incurred. We record consumer incentives and trade promotion costs as a reduction of revenues during the year in which these programs are offered, relying on estimates of utilization and redemption rates that have been developed from historical information. Such programs include, but are not limited to, discounts, rebates, in-store display incentives and volume-based incentives. For interim reporting purposes, advertising and certain consumer incentives are charged to earnings as a percentage of sales, based on estimated sales and related expenses for the full year.

• Employee Benefit Plans — As discussed in Note 12 to our consolidated financial statements, we provide a range of benefits to our employees and retired employees, including pensions, postretirement health care and postemployment benefits (primarily severance). We record annual amounts relating to these plans based on calculations specified by U.S. GAAP. These calculations include various actuarial assumptions, such as discount rates, assumed rates of return on plan assets, compensation increases and turnover rates. We review actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. As permitted by U.S. GAAP, any effect of the modifications is generally amortized over future periods. We believe that the assumptions utilized in recording our obligations under these plans are reasonable based upon advice from our actuaries.

At December 31, 2008, we adopted the measurement date change provision of Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This provision of SFAS No. 158 requires us to measure plan assets and benefit obligations as of the date of our fiscal year-end statement of financial position. In accordance with SFAS No. 158, the change of measurement date resulted in a net charge to stockholders’ equity of $9 million.

At December 31, 2008, our discount rate was 6.10% for our U.S. pension and postretirement plans. Our weighted average discount rate assumption for our non-U.S. pension plans slightly increased to 4.68%, from 4.66% at December 31, 2007. Our weighted average discount rate assumption for our non-U.S. postretirement plans was 5.82% at December 31, 2008. We presently anticipate that assumption changes, coupled with the amortization of deferred gains and losses, will result in an increase for 2009 in pre-tax U.S. and non-U.S. pension and postretirement expense of approximately $60 million as compared with 2008, excluding amounts in 2008 related to early retirement programs. A fifty basis point decrease in our discount rate would increase our 2009 pension and postretirement expense by approximately $27 million, whereas a fifty basis point increase in our discount rate would decrease our 2009 pension and postretirement expense by approximately $26 million. Similarly, a fifty basis point decrease (increase) in the expected return on plan assets would increase (decrease) our 2009 pension expense by approximately $18 million.

See Note 12 to our consolidated financial statements for a sensitivity discussion of the assumed health care cost trend rates.

• Income Taxes — We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Prior to the Distribution Date, we were a wholly-owned subsidiary of Altria. We participated in a tax-sharing agreement with Altria for U.S. tax liabilities, and our accounts were included with those of Altria for purposes of its U.S. federal income tax return. Under the terms of the agreement, taxes were computed on a separate company basis. To the extent that we generated foreign tax credits, capital losses and other credits that could not be utilized on a separate company basis, but were utilized in Altria’s consolidated U.S. federal income tax return, we would recognize the resulting benefit in the calculation of our provision for income taxes. There were no such benefits for the years ended December 31, 2007 and 2006. We made payments to, or were reimbursed by, Altria for the tax effects resulting from our inclusion in Altria’s consolidated United States federal income tax return. On March 28, 2008 (the Distribution Date), we entered into a Tax Sharing Agreement with Altria. The Tax Sharing Agreement generally governs Altria’s and our respective rights, responsibilities and obligations for pre-distribution periods and for potential taxes on the Spin-off. With respect to any potential tax resulting from the Spin-off, responsibility for the tax will be allocated to the party that acted (or failed to act) in a manner which resulted in the tax. Beginning March 31, 2008, we are no longer a member of the Altria consolidated tax return group, and we will file our own federal income tax return.

Income tax provisions for jurisdictions outside the United States, as well as state and local income tax provisions, are determined on a separate company basis and the related assets and liabilities are recorded in our consolidated balance sheets.

The tax rates are based on our full-year geographic earnings mix projections and cash repatriation plans. Changes in earnings mix or in cash repatriation plans could have an impact on the effective tax rates which we monitor each quarter. Significant judgment is required in determining income tax provisions and in evaluating tax positions.

• Hedging — As discussed below in “Market Risk,” we use derivative financial instruments principally to reduce exposures to market risks resulting from fluctuations in foreign currency exchange rates by creating offsetting exposures. For derivatives that we have elected to apply hedge accounting to, we meet the requirements of U.S. GAAP. As a result, gains and losses on these derivatives are deferred in accumulated other comprehensive earnings (losses) and recognized in the consolidated statement of earnings in the periods when the related hedged transaction is also recognized in operating results. If we had elected not to use and comply with the hedge accounting provisions permitted under U.S. GAAP, gains (losses) deferred in stockholders’ equity as of December 31, 2008, 2007 and 2006, would have been recorded in our net earnings.

• Impairment of Long-Lived Assets — We review long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. We perform undiscounted operating cash flow analyses to determine if an impairment exists. These analyses are affected by interest rates, general economic conditions and projected growth rates. For purposes of recognition and measurement of an impairment of assets held for use, we group assets and liabilities at the lowest level for which cash flows are separately identifiable. 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.

• Contingencies — As discussed in Note 18 to our consolidated financial statements, legal proceedings covering a wide range of matters are pending or threatened against us and/or our subsidiaries, and indemnitees of our subsidiaries in various jurisdictions. We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. The variability in pleadings in multiple jurisdictions, together with the actual experience of management in litigating claims, demonstrate that the monetary relief that may be specified in a lawsuit bears little relevance to the ultimate outcome. Much of the litigation is in its early stages and litigation is subject to uncertainty. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, (i) management has concluded that it is not probable

that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any. Legal defense costs are expensed as incurred.

Consolidated Operating Results

See pages 44 to 46 for a discussion of Cautionary Factors That May Affect Future Results. Our cigarette volume, net revenues, excise taxes on products and operating companies income by segment were as follows:


(in millions)	2008			2007			2006
Cigarette Volume
European Union		243,451			257,541			258,145
Eastern Europe, Middle East and Africa		303,205			290,310			288,285
Asia		223,724			211,480			193,380
Latin America & Canada		99,377			89,307			89,490

Total cigarette volume		869,757			848,638			829,300


(in millions)	2008			2007			2006
Net Revenues
European Union	$	30,265		$	26,829		$	23,745
Eastern Europe, Middle East and Africa		14,817			12,166			10,012
Asia		12,222			11,097			10,139
Latin America & Canada		6,336			5,151			4,406

Net revenues	$	63,640		$	55,243		$	48,302


(in millions)	2008			2007			2006
Excise Taxes on Products
European Union	$	20,577		$	17,994		$	15,869
Eastern Europe, Middle East and Africa		7,313			5,820			4,387
Asia		6,037			5,449			4,634
Latin America & Canada		4,008			3,170			2,643

Excise taxes on products	$	37,935		$	32,433		$	27,533


(in millions)	2008			2007			2006
Operating Income
Operating companies income:
European Union	$	4,738		$	4,195		$	3,500
Eastern Europe, Middle East and Africa		3,119			2,431			2,080
Asia		2,057			1,803			1,847
Latin America & Canada		520			514			1,013
Amortization of intangibles		(44	)		(28	)		(23	)
General corporate expenses		(142	)		(73	)		(67	)
Gain on sale of leasing business					52

Operating income	$	10,248		$	8,894		$	8,350

As discussed in Note 11 to our consolidated financial statements, we evaluate segment performance and allocate resources based on operating companies income, which we define as operating income before general corporate expenses and amortization of intangibles. We believe it is appropriate to disclose this measure to help investors analyze the business performance and trends of our various business segments.

The following events that occurred during 2008, 2007 and 2006 affected the comparability of our statement of earnings amounts:

• Asset Impairment and Exit Costs — For the years ended December 31, 2008, 2007 and 2006, pre-tax asset impairment and exit costs by segment were as follows:


(in millions)	2008		2007		2006
Separation programs:
European Union	$	66	$	137	$	99
Eastern Europe, Middle East and Africa				12		2
Asia				28		19
Latin America & Canada		3		18		1

Total separation programs		69		195		121

Asset impairment:
European Union						5

Contract termination charges:
Eastern Europe, Middle East and Africa		1
Asia		14

Total contract termination charges		15		—		—

General corporate				13

Asset impairment and exit costs	$	84	$	208	$	126

For further details on asset impairment and exit costs, see Note 4 to our consolidated financial statements.

• Equity Loss from RBH Legal Settlement — As discussed in Note 16 to our consolidated financial statements, the operating companies income of the Latin America & Canada segment in 2008 includes a $124 million charge related to the RBH legal settlement with the Government of Canada and all ten provinces.

• Charge Related to Previous Distribution Agreement in Canada — During the third quarter of 2008, we recorded a pre-tax charge of $61 million related to a previous distribution agreement in Canada. This charge was recorded in the operating companies income of the Latin America & Canada segment.

• Gains on Sales of Businesses — During 2007, we sold our leasing business, managed by PMCC, for a pre-tax gain of $52 million. During 2006, operating companies income of the Latin America & Canada segment included a pre-tax gain of $488 million related to the exchange of our interest in a beer business in the Dominican Republic in return for cash proceeds of $427 million and 100% ownership of the Dominican Republic cigarette business.

• Italian Antitrust Charge — During the first quarter of 2006, we recorded a $61 million charge related to an Italian antitrust action. This charge was included in the operating companies income of the European Union segment.

• Acquisitions — For details on acquisitions, see Note 5 to our consolidated financial statements.

2008 compared with 2007

The following discussion compares our consolidated operating results for the year ended December 31, 2008, with the year ended December 31, 2007.

Cigarette volume of 869.8 billion units increased 21.1 billion units or 2.5%. This increase was due in part to acquisitions in Pakistan, Mexico and Canada. Excluding acquisitions, our shipment volume was up 1.0%, benefiting from strong performances in EEMA, Asia and Latin America & Canada, partially offset by decreases in the European Union. The performance in the European Union was adversely affected by a decline in the total market, the build-up of trade inventories in the Czech Republic in the fourth quarter of 2007 in anticipation of the January 2008 excise tax increase, and the impact of tax-driven pricing in Poland. Absent the distortions in the Czech Republic and Poland, PMI cigarette shipment volume in the European Union declined by 2.9%.

We achieved market share gains in a number of markets, including Algeria, Argentina, Australia, Belgium, Brazil, Bulgaria, Canada, the Czech Republic, the Dominican Republic, Egypt, Germany, Greece, Hungary, Indonesia, Korea, Mexico, the Netherlands, Romania, Russia, Turkey, Ukraine and the United Kingdom.

Total cigarette shipments of Marlboro of 310.7 billion units were up 0.2%, with a combined growth in EEMA, Asia, and Latin America & Canada of 4.3%, partially offset by the European Union, down 6.0%, primarily reflecting cigarette consumption declines. Total cigarette shipments of L&M of 92.4 billion units were down 4.6%, mainly due to a decline in EEMA, partially offset by growth in the European Union. Led by double-digit growth in EEMA and an increase in the European Union, total cigarette shipments of Chesterfield grew 13.7%. Total cigarette shipments of Parliament recorded strong growth, up 20.0%, led by gains in EEMA and Asia. Virginia Slims grew 8.2%, driven by gains across all business segments. Shipment volume of other tobacco products (in cigarette equivalent units) increased 30.9%, driven by strong growth in France, Germany and Poland. Excluding acquisitions, shipment volume of other tobacco products was up 18.1%. Total shipment volume for cigarettes and other tobacco products was up 2.8%, or up 1.2% excluding acquisitions.

Net revenues, which include excise taxes billed to customers, increased $8.4 billion or 15.2%. Excluding excise taxes, net revenues increased $2.9 billion or 12.7% to $25.7 billion. This increase was due to favorable currency ($1.4 billion), net price increases ($1.2 billion), the impact of acquisitions ($229 million) and higher volume/mix ($61 million).

Excise taxes on products increased $5.5 billion (17.0%), due primarily to currency movements ($2.6 billion), higher excise tax rates ($2.3 billion), higher volume/mix ($0.4 billion) and acquisitions. As discussed under the caption “Business Environment,” governments have consistently increased excise taxes in the markets in which we operate. We expect excise taxes to continue to increase.

Cost of sales increased $617 million (7.1%), due primarily to currency movements ($445 million) and higher material costs, primarily leaf.

Marketing, administration and research costs increased $980 million (19.5%), due primarily to currency ($456 million), higher marketing expenses ($277 million), the 2008 charge related to the RBH legal settlement ($124 million), acquisitions ($82 million), the 2008 charge related to a previous distribution agreement in Canada ($61 million) and higher general and administrative expenses ($34 million), partially offset by the absence of the 2007 charges related to the termination of a distributor relationship in Indonesia ($30 million).

Operating income increased $1.4 billion or 15.2%. This increase was due primarily to net price increases ($1.1 billion), favorable currency ($481 million), the impact of acquisitions ($125 million) and lower asset impairment and exit costs ($124 million), partially offset by higher marketing expenses ($277 million) and the 2008 charge related to the RBH legal settlement ($124 million).

Currency movements increased net revenues by $3.9 billion ($1.4 billion, after excluding the impact of currency movements on excise taxes) and operating income by $481 million. These increases were due primarily to the weakness versus prior year of the U.S. dollar against the Euro, Japanese yen, Russian ruble and Turkish lira. In the fourth quarter of 2008, there was an appreciation of the U.S. dollar against the Euro and many emerging market currencies, in particular the Russian ruble, the Turkish lira, the Indonesian rupiah, the Mexican peso and the Ukrainian hryvnia.

Interest expense, net, of $311 million increased $301 million, due primarily to higher average debt levels.

Our effective income tax rate decreased 0.8 percentage points to 28.1%. The 2008 effective tax rate was favorably impacted by the previously mentioned adoption of U.S. income tax regulations proposed in 2008 ($154 million) and the enacted reduction of future corporate income tax rates in Indonesia ($67 million), partially offset by the current non-deductibility of the $124 million charge related to the RBH legal settlement with the Government of Canada and all ten provinces, and the tax cost of a legal entity restructuring ($45 million). The 2007 effective tax rate included a favorable tax adjustment of $27 million due to a reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany. The tax rate is based on our full-year geographic earnings mix projections and cash repatriation plans. Changes in our earnings mix or in cash repatriation plans could have an impact on the effective tax rate. Significant judgment is required in determining income tax provisions and in evaluating tax positions.

Net earnings of $6.9 billion increased $852 million or 14.1%. This increase was due primarily to higher operating income, partially offset by higher interest expense, net. Diluted and basic EPS of $3.32 and $3.33, respectively, increased by 16.1% and 16.4%, respectively.

2007 compared with 2006

The following discussion compares our consolidated operating results for the year ended December 31, 2007, with the year ended December 31, 2006.

Cigarette volume of 848.6 billion units increased 19.3 billion units or 2.3%. This increase was due primarily to higher volume in Asia as a result of the acquisition in Pakistan in March 2007. Excluding acquisitions, cigarette shipment volume was down 0.6%, due mainly to lower shipments in Germany and Poland, and the unfavorable impact of timing and trade inventory movements primarily in Japan and Mexico. Partially offsetting the decline were gains in Argentina, Egypt, Indonesia, Korea and Ukraine, as well as the favorable timing of shipments in Italy.

We achieved market share gains in many markets, including Argentina, Australia, Austria, Brazil, Egypt, Finland, Greece, Hungary, Israel, Italy, Korea, Mexico, the Netherlands, the Philippines, Portugal, Singapore, Sweden and Ukraine.

Volume for Marlboro cigarettes decreased 1.5%. This decrease was due primarily to the timing of shipments in Mexico and unfavorable distributor inventory movements in Japan, partially offset by gains in Argentina, Bulgaria, Indonesia, Korea and Russia. Marlboro market share increased in many markets, including Argentina, Brazil, Egypt, Greece, Hungary, Indonesia, Israel, Korea, the Philippines, Poland, Russia and Ukraine.

Net revenues, which include excise taxes billed to customers, increased $6.9 billion or 14.4%. Excluding excise taxes, net revenues increased $2.0 billion or 9.8% to $22.8 billion. This increase was due primarily to favorable currency ($1.2 billion), net price increases ($911 million) and the impact of acquisitions ($155 million). These increases were partially offset by lower volume/mix ($222 million).

Excise taxes on products increased $4.9 billion (17.8%), due primarily to higher excise tax rates ($2.9 billion), currency movements ($2.4 billion) and acquisitions.

Cost of sales increased $565 million (6.9%), due primarily to currency movements ($453 million) and acquisitions ($79 million).

Marketing, administration and research costs increased $470 million (10.3%), due primarily to currency ($258 million), acquisitions and divestitures ($132 million), higher research and development costs ($40 million) and expenses related to the termination of a distributor relationship in Indonesia ($30 million).

Operating income increased $544 million or 6.5%. This increase was due primarily to price increases and cost savings ($940 million), favorable currency ($486 million), the Italian antitrust charge in 2006 ($61 million) and the gain on sale of our leasing business in 2007 ($52 million). These increases were partially offset by the 2006 pre-tax gain related to the exchange of our interest in a beer business in the Dominican Republic ($488 million), lower volume/mix ($280 million), higher marketing, administration and research costs, higher pre-tax charges for asset impairment and exit costs ($69 million) and the impact of divestitures ($51 million).

Currency movements increased net revenues by $3.6 billion ($1.2 billion, after excluding the impact of currency movements on excise taxes) and operating income by $486 million. These increases were due primarily to the weakness versus prior year of the U.S. dollar against the Euro, Russian ruble and the Turkish lira, partially offset by the strength of the U.S. dollar against the Japanese yen.

Interest expense, net, of $10 million decreased $132 million or 93.0%, due primarily to lower average debt levels throughout most of 2007.

Our effective tax rate increased 6.7 percentage points to 28.9%. The 2007 effective tax rate includes a tax benefit of $27 million related to the reduction of deferred tax liabilities resulting from future lower enacted tax rates in Germany. The 2007 effective tax rate also includes the reversal of tax accruals of $41 million no longer required. The 2006 effective tax rate reflects a reimbursement from Altria in cash for unrequired federal tax reserves of $450 million. We also recognized net state tax reversals of $35 million, resulting in a total net earnings benefit of $485 million for the year ended December 31, 2006. Also included in the 2006 effective tax rate is the reversal of $105 million of tax reserves that were no longer required due to foreign tax events that were resolved within the 2006 fiscal year.

Net earnings of $6.0 billion decreased $92 million or 1.5%. This decrease was due primarily to a higher 2007 effective tax rate, partially offset by higher operating income and lower interest expense, net. Diluted and basic EPS of $2.86, decreased by 1.7%.

Operating Results by Business Segment

Business Environment

Taxes, Legislation, Regulation and Other Matters Regarding the Manufacture, Marketing, Sale and Use of Tobacco Products

The tobacco industry faces a number of challenges that may adversely affect our business, volume, results of operations, cash flows and financial position. These challenges, which are discussed below and in “ Cautionary Factors That May Affect Future Results,” include:

•

actual and proposed tobacco legislation and regulation;

•

actual and proposed excise tax increases as well as changes in excise tax structures;

•

price gaps and changes in price gaps between premium and lower price brands;

•

the diminishing prevalence of smoking;

•

increased efforts by tobacco control advocates to further restrict smoking;

•

pending and threatened litigation as discussed in Note 18. Contingencies, and as amended in Part I, Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2008;

•

actual and proposed requirements for the disclosure of cigarette ingredients and other proprietary information without adequate trade secret protection, as well as testing requirements and performance standards;

•

actual and proposed restrictions on imports in certain jurisdictions;

•

actual and proposed restrictions affecting tobacco manufacturing, packaging, marketing, advertising, product display and sales;

•

governmental and private bans and restrictions on smoking;

•

the sale of counterfeit cigarettes by third parties;

•

the sale of cigarettes by third parties over the Internet and by other means designed to avoid the collection of applicable taxes;

•

diversion into one market of cigarettes intended for sale in another;

•

the outcome of proceedings and investigations, and the potential assertion of claims, and proposed regulation relating to contraband shipments of cigarettes; and

•

governmental investigations.

In the ordinary course of business, many factors can affect the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.

• Excise Taxes: Cigarettes are subject to substantial excise taxes and to other taxation worldwide. Significant increases in cigarette-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted. In addition, in certain jurisdictions, our products are subject to tax structures that discriminate against premium price products and manufactured cigarettes.

Tax increases and discriminatory tax structures are expected to continue to have an adverse impact on our sales of cigarettes, due to lower consumption levels and to a shift in consumer purchases from the premium to non-premium or discount segments or other low price or low-taxed tobacco products such as fine-cut tobacco products and/or counterfeit and contraband products.

• Minimum Retail Selling Price Laws: Several EU Member States (Austria, France, Ireland, and Italy) have enacted laws establishing a minimum retail selling price for cigarettes and, in some cases, other tobacco products. The European Commission filed actions against Austria, France and Ireland in May 2008, and against Italy in December 2008, in the European Court of Justice claiming that these countries’ minimum retail selling price systems infringed EU law. Although it is not possible to predict when the court will issue a final ruling, based on prior proceedings in similar actions, a ruling could be expected by the end of 2009. Should the European Commission prevail in the European Court of Justice, excise tax levels and/or price gaps in those markets could be adversely affected.

• Framework Convention on Tobacco Control: The World Health Organization’s Framework Convention for Tobacco Control (“FCTC”) entered into force on February 27, 2005. As of February 2009, 161 countries, as well as the European Community, have become Parties to the FCTC. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and, in certain instances, requires) Parties to have in place or enact legislation that would:

•

establish specific actions to prevent youth smoking;

•

restrict and/or eliminate all tobacco product advertising, marketing, promotions and sponsorships;

•

initiate public education campaigns to inform the public about the health consequences of smoking and the benefits of quitting;

•

implement regulations imposing product testing, disclosure and performance standards;

•

impose health warning requirements on packaging;

•

adopt measures that would eliminate cigarette smuggling and counterfeit cigarettes;

•

restrict smoking in public places;

•

implement public health-based fiscal policies (tax and price increases);

•

adopt and implement measures that ensure that packaging and labeling, including descriptive terms, do not create the false impression that one brand of cigarettes is safer than another;

•

phase out or restrict duty-free tobacco sales; and

•

encourage litigation against tobacco product manufacturers.

We view the FCTC as a catalyst for comprehensive regulation, and the speed at which tobacco regulation is being adopted in our markets has increased as a result of the treaty. In many respects, the areas of regulation we support mirror provisions of the FCTC. However, we disagree with the provisions requiring a total ban on marketing, a total ban on public smoking, a ban on the sale of duty-free cigarettes, and the use of litigation against the tobacco industry. We also believe that excessive taxation can have significant adverse unintended consequences.

In November 2008, the Conference of the Parties, the governing body of the FCTC, adopted Guidelines that provide non-binding recommendations to the Parties supplementing specific Articles of the Treaty, including, details on tobacco packaging, labeling and marketing. Several of the recommendations in the Guidelines, such as limiting tobacco industry involvement in the development of tobacco policy and regulations, generic packaging, point of sale display bans, a ban on the use of colors in packaging, and a ban on all forms of communications to adult smokers, reflect extreme applications of the provisions of the Treaty, many of which are punitive measures against the tobacco industry and are untethered to public health objectives. If governments choose to implement these recommendations, they may adversely affect our business, volume, results of operations, cash flows and financial position. It is not possible to predict whether or to what extent the Guidelines will be adopted by governments.

• Tar and Nicotine Test Methods and Brand Descriptors: A number of public health organizations throughout the world, including WHO, have determined that the existing International Standards Organization (“ISO”) machine-based methods for measuring tar and nicotine yields provide misleading information about tar and nicotine deliveries, and that the ISO-based numbers should not be displayed. We have expressed the view that ISO numbers do not accurately reflect human smoking, and we therefore supported WHO’s initial recommendation to supplement the ISO test method with the more intensive Health Canada method. The Health Canada method blocks ventilation holes, increases the puffs taken per minute and the volume of smoke in each puff. We believe that a combination of the two methods would better illustrate the wide variability in the delivery of tar, nicotine and carbon monoxide, depending upon how an individual smokes a cigarette. Recently, WHO technical experts stated that no machine-smoking regime can permit regulators or consumers to compare exposure to harmful constituents in the smoke of commercial cigarettes and deferred its position pending a decision by the Conference of the Parties.

In light of public health concerns about the limitations of current machine measurement methodologies, governments and public health organizations have increasingly prohibited the use of descriptors such as “light,” “mild” and “low tar.” Many countries, including the entire EU, prohibit or are in the process of prohibiting descriptors such as “lights.” The FCTC requires the Parties to adopt and implement measures to ensure that tobacco product packaging and labeling, including descriptive terms, do not create “the false impression that a particular tobacco product is less harmful than other tobacco products.” In most countries where descriptors are banned, tar, nicotine and carbon monoxide yields are still required to be printed on packs of cigarettes. We agree with public health advocates who have argued that where descriptors are banned, governments should also prohibit the printing of tar, nicotine and carbon monoxide yields on packs of cigarettes or, consistent with our support of testing for both ISO and Health Canada yields, we would support requiring the printing of both yields which would reflect a range of smoke intake. Some public health advocates and governments have also called for a ban or restriction on the use of colors which they claim are also used to signify that some brands provide lower yields of tar, nicotine and other smoke constituents. Others have banned or sought to ban any descriptive terms or package variations arguing that they are inherently misleading. We strongly disagree with these proposals.

For example, the Uruguayan Ministry of Health issued a regulatory ordinance permitting manufacturers to market only “a single presentation” per brand, i.e., allowing only one packaging variant per brand. The ordinance establishes an irrebuttable presumption that any difference in packaging within a brand family misleads consumers on the matter of relative safety. We and other manufacturers have filed litigation seeking to overturn the ordinance on the grounds that it exceeds the scope and intent of the original legislation (which prohibited manufacturers from using packaging and labeling that misleads consumers into falsely believing one brand is less harmful than another), unduly restricts our intellectual property rights, and violates the Uruguayan constitution and international trade commitments. The administrative court has not ruled on our case and a judicial court has rejected our request for a preliminary injunction. We are appealing the ruling on the injunction and proceeding with the action in the administrative court. It is not possible to predict the outcome of these actions. In the meantime, the regulation has taken effect, and we are complying with it.

• Testing and Reporting of Other Smoke Constituents: Brazil, Canada, Taiwan and Venezuela require manufacturers to test and report to regulators by-brand yields of other smoke constituents, 45 to 80 of which have been identified as potential causes of tobacco-related diseases. Testing and reporting these smoke constituents is being considered by the FCTC’s Conference of the Parties, the WHO’s Study Group on Tobacco Regulation (“TobReg”), national regulators and the public health community. We measure most of these constituents for our product research and development purposes, and support efforts to develop reasonable regulation in this area. However, there is no international consensus on which smoke constituents to test, and no validated analytical methods to measure the levels of those constituents in smoke. Moreover, there is extremely limited capacity to conduct by-brand testing on a global basis. In its 2008 progress report on these issues, the Conference of the Parties Working Group proposed nine smoke constituents for which methods for testing and measuring should be validated as a priority, and estimated that validation of the applicable methods for these constituents (and for certain ingredients) would take five and a half years. It is not certain when such requirements will be recommended by the Conference of the Parties and whether individual countries will adopt them, although bills to require testing of a wide range of smoke constituents

are pending in some countries. The cost of by-brand testing could be significant, and public health groups, including the Conference of the Parties Working Group, have recommended that the industry will be required to bear the burden of testing expenses.

• Ceilings on Tar, Nicotine, Carbon Monoxide and Other Smoke Constituents: A number of countries and the EU have established maximum yields of tar, nicotine and/or carbon monoxide, as measured by the ISO standard test method. Despite the fact that public health authorities have questioned the significance of ISO-measured tar, nicotine and carbon monoxide yields, no country has yet suggested that existing ISO-based ceilings be eliminated. No country has to date proposed ceilings for other smoke constituents. However, in February 2009, TobReg published a report in which it recommended that governments establish ceilings for nine specific smoke constituents, including tobacco-specific nitrosamines (“TSNAs”). The TobReg proposal would set ceilings based on the median yield for each constituent in the market determined through by-brand testing of all brands sold in the market. TobReg has stated that its proposal may have a substantial impact on some or all cigarette markets. Although the concept of selective constituent reduction is supported by some public health officials, several public health advocates and scientists have criticized the proposal on the grounds that selectively reducing constituents in conventional cigarettes will not lead to a meaningful reduction in disease and thus will not benefit public health and/or will mislead consumers into believing that conventional cigarettes with regulated levels of these constituents are safer. In fact, TobReg recognizes that it cannot establish that the ceilings will result in reduced harm or risk of disease, but argues that its proposal is appropriate because it is based on the precautionary principle.

• Ingredient Disclosure Laws: Many countries have enacted or proposed legislation or regulations that require cigarette manufacturers to disclose publicly the ingredients used in the manufacture of cigarettes and, in certain cases, to provide toxicological information. While we believe the public health objectives of these requests can be met without providing exact by-brand formulae, we have made and will continue to make full disclosures where adequate assurances of trade secret protection are provided. For example, under an EU Tobacco Product Directive, tobacco companies are required to disclose ingredients and toxicological information to each Member State. In May 2007, the Commission published guidelines for full by-brand reporting requirements. We have made ingredient disclosures in compliance with the laws of all EU Member States, and have followed the guidelines in most Member States, making full by-brand disclosures in a manner that protects trade secrets in those Member States. In some jurisdictions, however, appropriate assurances of trade secret protection may be impossible to obtain. In such circumstances, we will seek to resolve the matter with governments through alternative options.

• Restrictions and Bans on the Use of Ingredients: Some governments have prohibited the use of certain ingredients, and public health authorities, including the European Commission, are considering further prohibitions. For example, the Conference of the Parties is developing guidelines that will provide detailed product regulation requirements, which could eventually include standards for the use of tobacco product ingredients, including flavorings. However, in 2007, the Conference of the Parties Working Group stated that “testing and measuring of toxicity of cigarette [ingredients]...is an emerging field” and refrained from recommending a course of action pending “more work to develop a better understanding of these issues.” Similarly, TobReg stated in 2008 that “the existing science is currently not sufficient” to establish standards for regulating ingredients and other product design characteristics. We support regulations requiring all manufacturers to determine whether their ingredients increase the overall toxicity of tobacco smoke and, if internationally accepted test methods become available, whether ingredients increase the addictiveness of smoke. We do not support bans of ingredients based on palatability or consumer appeal — a recommendation made by TobReg and other public health advocates — as these are inherently subjective standards and not appropriate bases for regulation.

• Bans and Restrictions on Advertising, Marketing, Promotions and Sponsorships: For many years, countries have imposed partial or total bans on tobacco advertising, marketing and promotion. The FCTC calls for a “comprehensive ban on advertising, promotion and sponsorship” and requires governments that have no constitutional constraints to ban all forms of advertising. Where constitutional constraints exist, the FCTC requires governments to restrict or ban radio, television, print media, other media, including the Internet, and sponsorships of international events within five years. We oppose complete bans on advertising but support limitations on marketing, provided that manufacturers retain the ability to communicate directly to adult smokers. The FCTC also requires disclosure of expenditures on advertising, promotion and sponsorship that is not prohibited. Some governments and public health groups have called for bans of product displays, which some countries have adopted. We oppose product display bans, which are unsupported by evidence as having any material impact on public health, and which will lead to increased price competition, unnecessarily restrict non-price competition, and encourage illicit trade — all of which undermine public health objectives.

• Generic Packaging: In a consultation paper in June 2008, the UK Department of Health raised for comment the possibility of mandating generic or plain packaging to reduce youth smoking, arguing that generic packaging, which would eliminate the ability of manufacturers to use any distinctive trademarks, trade dress, logos, or pack designs, would decrease smoking initiation, increase cessation and contribute to the de-normalization of tobacco use. We strongly

oppose generic packaging. We believe that there is no sound evidentiary basis to conclude that generic packaging would lead to any public health benefit and that it is likely to encourage illicit trade and price competition, both of which will undermine the government’s public health and revenue objectives. We also believe that generic packaging disproportionately infringes on free speech, amounts to expropriation of manufacturers’ intellectual property rights, and unduly limits competition. As noted above, the Conference of the Parties adopted Guidelines recommending generic packaging. However, in December 2008, the UK Department of Health stated that it would not pursue its efforts to require generic packaging at this time due in part to the lack of evidentiary support of the public health benefit of such a measure. The Australian National Preventative Health Taskforce and the Finnish Ministry of Health have also raised for public consideration regulation requiring generic packaging. The outcome of these recommendations is still pending.

• Health Warning Requirements: Many countries require substantial health warnings on cigarette packs. In the EU, for example, health warnings must cover 30% of the front and 40% of the back of cigarette packs. The FCTC requires health warnings that cover, at a minimum, 30% of the front and back of the pack, and recommends warnings covering 50% or more of the front and back of the pack. We support health warning requirements and defer to the governments on the content of the warnings, including graphic warnings, except for images that vilify tobacco companies and their employees or do not accurately represent the health effects of tobacco use. While we believe that textual warnings are sufficient, we do not oppose graphic warnings. In countries where health warnings are not required, we place them on packaging voluntarily in the official language or languages of the country. For example, we are voluntarily placing health warnings in many African countries in official local languages occupying 30% of the front and back of the pack. We do not support warning sizes that deprive us of our ability to use our distinctive trademarks and pack designs which differentiate our products from those of our competitors.

We support government initiatives to educate the public on the serious health effects of smoking. We have established a website that includes, among other things, the views of public health authorities on smoking, disease causation in smokers, addiction and exposure to environmental tobacco smoke (“ETS”). The site reflects our agreement with the medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. The website advises the public to rely on the messages of public health authorities in making all smoking-related decisions. The website’s address is www.pmintl.com. The information on our website is not, and shall not be deemed to be, a part of this document or incorporated into any filings we make with the SEC.

• Restrictions on Public Smoking: Reports with respect to the health effects of exposure to ETS have been publicized for many years, and many countries have restricted smoking in public places. The pace and scope of public smoking restrictions have increased significantly in most of our markets, particularly in the EU, where Italy, Ireland, the UK, the Netherlands, France, Finland and Sweden have banned virtually all indoor public smoking. Other countries around the world have adopted or are likely to adopt substantial public smoking restrictions. Some public health groups have called for, and some municipalities have adopted or proposed, bans on smoking in outdoor places, and some tobacco control groups have advocated banning smoking in cars with minors in them. The FCTC requires Parties to the treaty to adopt restrictions on public smoking, and the Conference of the Parties adopted guidelines on public smoking based on the premise that any exposure to ETS is harmful; the Guidelines call for total bans in all indoor public places, defining “indoor” broadly, and reject any exemptions based on type of venue (e.g., nightclubs). On private place smoking, such as in cars and homes, the Guidelines recommend increased education on the risk of exposure to ETS.

We support a single, consistent public health message on the health effects of exposure to ETS. Our website states that “the conclusions of public health authorities on secondhand smoke warrant public health measures that regulate smoking in public places” and that “outright bans are appropriate in many places.” For example, we support banning smoking in schools, playgrounds and other facilities for youth and in indoor public places where general public services are provided such as public transportation vehicles, supermarkets, public spaces in indoor shopping centers, cinemas, banks and post offices.

• Reduced Cigarette Ignition Propensity Legislation: Reduced ignition propensity standards have been adopted in Canada and Australia, and are being considered in several other countries, notably New Zealand and the EU. On March 25, 2008, the European Commission formally adopted a decision to mandate the development, through the General Product Safety Directive, of reduced cigarette ignition propensity standards such as those implemented in New York, other American states and Canada. Several individual Member States, most notably Finland, which has adopted legislation requiring all cigarettes to be compliant by April 2010, have initiated their own proceedings to implement ignition propensity standards as well. We believe that reduced ignition propensity standards should be the same as those applied in New York and other jurisdictions to ensure that they are uniform and technically feasible, and that they are applied equally to all manufacturers and all tobacco products.

• Illicit Trade: Regulatory measures and related governmental actions to prevent the illicit manufacture and trade of tobacco products are being considered by a number of jurisdictions. Article 15 of the FCTC requires Parties to the treaty to take steps to eliminate all forms of illicit trade, including counterfeiting, and states that national, regional and global agreements on this issue are “essential components of tobacco control.” The Conference of the Parties established an Intergovernmental Negotiating Body (“INB”) to negotiate a protocol on the illicit trade in tobacco products pursuant to Article 15 of the FCTC. The INB’s Chairperson has drafted a text for the protocol, which includes the following main topics:

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licensing schemes for participants in the tobacco business;

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“know your customer” requirements; measures to eliminate money laundering and the development of an international system for the tracking and tracing of tobacco products and tobacco manufacturing equipment;

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the implementation of laws governing record-keeping, security and preventive measures, and Internet sales of tobacco products;

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enforcement mechanisms, including the criminalization of participation in illicit trade in various forms and measures to strengthen the abilities of law enforcement agencies to fight illicit trade;

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obligations for tobacco manufacturers to control their supply chain with penalties for those that fail to do so; and

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programs to increase cooperation and technical assistance with respect to investigation and prosecutions and the sharing of information.

We support strict regulations and enforcement measures to prevent all forms of illicit trade in tobacco products, including tracking, tracing, labeling and record-keeping requirements, which could be best implemented through strict licensing systems. We agree that manufacturers should implement state-of-the-art monitoring systems of their sales and distribution practices, and we agree that where appropriately confirmed, manufacturers should stop supplying vendors who are shown to be knowingly engaged in illicit trade. However, we disagree with the draft protocol’s provision that would impose payments on tobacco product manufacturers in an amount of lost taxes and duties from seized contraband tobacco products regardless of any fault on the manufacturers’ part. We are also working with a number of governments around the world on specific agreements and memoranda of understanding to address the illegal trade in cigarettes, including, as described below, our agreement with the EU.

• Cooperation Agreements to Combat Illicit Trade of Cigarettes: In July 2004, we entered into an agreement with the European Commission (acting on behalf of the European Community) and 10 Member States of the EU that provides for broad cooperation with European law enforcement agencies on anti-contraband and anti-counterfeit efforts. To date, 26 of the 27 Member States have signed the agreement. The agreement resolves all disputes between the European Community and the Member States that signed the agreement, on the one hand, and us and certain affiliates, on the other hand, relating to these issues. Under the terms of the agreement, we will make 13 payments over 12 years. In the second quarter of 2004, we recorded a pre-tax charge of $250 million for the initial payment. The agreement calls for payments of approximately $150 million on the first anniversary of the agreement (this payment was made in July 2005), approximately $100 million on the second anniversary (this payment was made in July 2006), and approximately $75 million each year thereafter for 10 years, each of which is to be adjusted based on certain variables, including our market share in the EU in the year preceding payment. We will record these payments as an expense in cost of sales when product is shipped. We are also required to pay the excise taxes, VAT and customs duties on qualifying product seizures of up to 90 million cigarettes and are subject to payments of five times the applicable taxes and duties if product seizures exceed 90 million cigarettes in a given year. To date, our annual payments related to product seizures have been immaterial. Total charges of $80 million, $100 million and $95 million were recorded in cost of sales in 2008, 2007 and 2006, respectively.

• Other Legislation or Governmental Initiatives: It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented relating to the manufacturing, advertising, sale or use of cigarettes, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented that might materially affect our business, volume, results of operations and cash flows.

• Governmental Investigations: From time to time, we are subject to governmental investigations on a range of matters. We have previously reported our belief that Canadian authorities were contemplating a legal proceeding based on a Royal Canadian Mounted Police investigation relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s. That investigation has now been closed as a result of the July 31, 2008 settlement between RBH, RBH’s parent company Rothmans Inc. (“Rothmans”), the Government of Canada and all ten provinces. See Note 16 to our consolidated financial statements for additional information related to the Rothmans settlement with the Government of Canada and all ten provinces.

Manufacturing Optimization Program

In 2008, we terminated our contract manufacturing arrangement with Philip Morris USA Inc. (“PM USA”). We completed the process of shifting all of our PM USA contract manufactured production, which approximated 57 billion cigarettes annually in 2007, to our facilities in Europe during the fourth quarter of 2008. During the first quarter of 2008, we recorded exit costs of $15 million related to the termination of our manufacturing contract with PM USA. The program generated pre-tax savings of $71 million in 2008 and is expected to provide total estimated pre-tax annual savings of $179 million by 2009.

Asset Impairment and Exit Costs

In 2007, asset impairment and exit costs also included general corporate pre-tax charges of $13 million related to fees associated with the Spin-off.

Cash payments related to exit costs were $99 million in 2008, $131 million in 2007 and $44 million in 2006. Future cash payments for exit costs incurred to date are expected to be approximately $115 million. As of December 31, 2008, the streamlining of these various functions and operations resulted in the elimination of approximately 3,600 positions. These actions generated pre-tax cost savings beginning in 2005, with cumulative estimated annual cost savings of approximately $295 million through the end of 2008, of which $110 million were incremental savings in 2008.

Acquisitions

In February 2009, we entered into an agreement with Swedish Match AB (“SWMA”) to establish an exclusive joint venture to commercialize Swedish style snus and other smoke-free tobacco products worldwide, outside of Scandinavia and the United States. We and SWMA will license exclusively to the joint venture an agreed list of trademarks and intellectual property. The effect of this agreement is not expected to be material to our consolidated financial position, results of operations or operating cash flows.

In February 2009, we purchased the fine cut tobacco trademark Petterøes worldwide and other cigarette trademarks sold primarily in Norway and Sweden. The transaction is projected to be modestly accretive to net earnings in 2009. The effect of this acquisition is not expected to be material to our consolidated financial position, results of operations or operating cash flows.

On July 31, 2008, we announced that we had entered into an agreement with Rothmans, which is located in Canada, to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans for CAD $30 per share in cash, or CAD $2.0 billion ($1.9 billion based on the exchange rate prevailing at the time of the acquisition). Prior to this agreement, Rothmans’ sole holding was a 60% interest in RBH. The remaining 40% interest in RBH was owned by us. In October 2008, we completed the acquisition of all the Rothmans shares. From January 2008 to September 2008, we recorded equity earnings on our equity interest in RBH. After the completion of the acquisition, Rothmans became our consolidated subsidiary and, as a result, we recorded all of Rothmans’ earnings during the fourth quarter of 2008. Rothmans contributed $50 million of incremental operating income and $22 million of incremental net earnings during the fourth quarter of 2008.

In June 2008, we acquired the fine cut trademark Interval and certain other trademarks in the other tobacco products category from Imperial Tobacco Group PLC for $407 million.

In November 2006, we exchanged our 47.5% interest in E. León Jimenes, C. por. A. (“ELJ”), which included a 40% indirect interest in ELJ’s beer subsidiary, for 100% ownership of ELJ’s cigarette subsidiary, Industria de Tabaco León Jimenes, S.A. (“ITLJ”), and $427 million of cash, which was contributed to ITLJ prior to the transaction. As a result of this transaction, we now own 100% of the cigarette business and no longer hold an interest in ELJ’s beer business. The exchange of our interest in ELJ’s beer subsidiary resulted in a pre-tax gain on sale of $488 million.

Trade Policy

It is our policy to comply with applicable laws of the United States and the laws of the countries in which we do business that prohibit trade with certain countries, organizations or individuals. We do not sell products or have a current intent to sell products in Cuba or North Korea. Certain of our subsidiaries have established commercial arrangements involving Syria, Iran, Myanmar and Sudan, in each case in compliance with our trade policy and applicable U.S. law.

A subsidiary sells products that are exported to Syria for sale in the domestic market in compliance with exemptions under applicable U.S. laws and regulations. Such sales are quantitatively not material, amounting to well below 0.5% of our consolidated annual volume and operating companies income in each of the past three years. We have no employees, operations or assets in Syria. Duty free sales to Syria have been suspended since a Managing Director and shareholder of the sole Syrian duty free customer of our subsidiary’s distributor was placed on the Office of Foreign Assets Control’s Specially Designated Nationals (“SDN”) list in February 2008. The distributor’s customer itself was placed on the SDN list in July 2008.

In January 2007, a subsidiary received a license from the U.S. Office of Foreign Assets Control to export cigarettes to Iran. We did not record any sales to Iran in 2007. Our subsidiary received a new license for 2008; however, we did not make any sales to Iran in 2008. We have no employees, operations or assets in Iran.

A subsidiary sells products to duty free customers that resell those products to their respective customers, some of which have duty free operations in Myanmar and another of our subsidiaries has sold cut filler to a customer that resold those raw materials to its customer in Myanmar. Another duty free subsidiary sells products to duty free customers that supply U.N. peacekeeping forces around the world, including those in Sudan. All such sales are in compliance with exemptions under applicable U.S. laws and regulations and are de minimis in volume and value. We have no employees, operations or assets in Myanmar or Sudan.

We do not believe that exempt or licensed sales of our products, which are agricultural products under U.S. law, and are not technological or strategic in nature, for ultimate resale in Syria, Iran, Myanmar or Sudan in compliance with U.S. laws, will present a material risk to our stockholders, our reputation or the value of our shares. To our knowledge, none of the governments of Syria, Iran, Myanmar or Sudan, nor entities controlled by those governments, receive cash or act as intermediaries in connection with these transactions, except that in Syria, the state tobacco monopoly, which is the only entity permitted to import tobacco products, purchases products from our customer for resale in the domestic market.

Certain states have enacted legislation permitting state pension funds to divest or abstain from future investment in stocks of companies that do business with countries that are sanctioned by the U.S. We do not believe such legislation has had a material effect on the price of our shares.

2008 compared with 2007

The following discussion compares operating results within each of our reportable segments for 2008 with 2007.

• European Union: Net revenues, which include excise taxes billed to customers, increased $3.4 billion or 12.8%. Excluding excise taxes, net revenues increased $853 million or 9.7% to $9.7 billion. This increase was due primarily to favorable currency ($899 million) and net price increases ($382 million), partially offset by lower volume/mix ($454 million).

Operating companies income increased $543 million or 12.9%. This increase was due primarily to favorable currency ($432 million), net price increases ($350 million) and lower pre-tax charges for asset impairment and exit costs ($71 million), partially offset by lower volume/mix ($358 million).

Our cigarette shipment volume declined 5.5%, reflecting a lower European Union market, the build-up of trade inventories in the Czech Republic in the fourth quarter of 2007 in anticipation of the January 2008 excise tax increase, and the impact of tax-driven pricing in Poland. Absent the distortions in the Czech Republic and the total market decline in Poland, our cigarette shipment volume in the European Union declined 2.9%. The total cigarette market in the European Union declined by 4.8%. Adjusted for the Czech Republic inventory distortion and excluding the tax-driven pricing impact in Poland, the total cigarette market in the European Union was down 1.8%. Our market share in the European Union was down 0.2 share points to 39.2%.

In France, the total cigarette market was down 2.5%, reflecting the impact of the August 2007, 0.30 Euros per pack price increase as well as the expansion of public smoking restrictions in January 2008. Our shipments were down 6.2% and market share decreased 1.7 share points to 40.8%. Marlboro share in 2008 was down 2.9 share points to 27.3%, reflecting in part the impact of crossing the 5.00 Euros per pack threshold.

In Germany, the total cigarette market was down 2.7%, primarily reflecting the impact of public smoking restrictions that came into force during the year. While our shipments were down 1.7%, our market share was up 0.4 share points to 36.9%, reflecting the continued strong momentum of L&M, up 1.9 share points versus 2007.

In Italy, the total market was down 0.9%, reflecting the impact of 2008 price increases. Our shipments declined 2.9%, reflecting distributor inventory adjustments, and market share declined 0.2 share points to 54.4%. Marlboro’s share was down 0.3 share points.

In Poland, the total cigarette market was down 9.7%, reflecting the impact of the 2007 and 2008 price increases driven by European Union tax harmonization. Our shipments declined 12.8% and market share declined 1.3 share points to 37.6%, reflecting the loss incurred by our low priced brands. Following the closure of price gaps with competitive brands that had widened as a result of the tax-driven price increases during the third quarter of 2008, our market share is showing early signs of recovery, as evidenced by total share and Marlboro share in December 2008, up 0.7 and 0.2 share points, respectively, versus the same period in 2007.

In Spain, the total market was up by 1.2%. Our shipments increased 0.4% and our market share was essentially flat at 31.9%, benefiting from the October 2008 launch of Marlboro Pocket Pack, which captured a 0.7% share in the fourth quarter.

• Eastern Europe, Middle East and Africa: Net revenues, which include excise taxes billed to customers, increased $2.7 billion or 21.8%. Excluding excise taxes, net revenues increased $1.2 billion or 18.2% to $7.5 billion. This increase was due to net price increases ($500 million), higher volume/mix ($362 million) and favorable currency ($296 million).

Operating companies income increased $688 million or 28.3%. This increase was due primarily to net price increases ($490 million), higher volume/mix ($240 million) and favorable currency ($21 million), partially offset by higher marketing, administration and research cost ($69 million).

Our cigarette shipment volume increased 4.4%, driven by gains in Algeria, Egypt, Russia, Turkey and Ukraine, as well as favorable trade inventory movements in Bulgaria.

In Algeria, our shipments increased 47.8%, driven by L&M and Marlboro.

In Bulgaria, our shipments increased significantly due primarily to trade inventory movements in anticipation of the January 2009 tax-driven price increase.

In Egypt, our shipments increased 22.6%, reflecting the strong performance of L&M, Marlboro and Next. Our market share was up 2.6 share points to 14.5%, with Marlboro and L&M up 0.5 and 1.5 share points, respectively.

In Russia, our shipment volume was up 7.9%, benefiting from up-trading to our higher-priced brands. Our market share was up 0.2 share points, with the premium brands Marlboro and Parliament, and the medium-priced brand Chesterfield, all registering share gains. Our premium brand portfolio increased market share by 0.5 share points for the full year 2008.

In Turkey, our shipment volume was up 4.9%, fueled by improved product mix, with double-digit growth of the premium brand portfolio, consisting of Parliament, Marlboro and Virginia Slims, launched in the first quarter of 2008, partially offset by the decline of lower-margin brands. Total market share in 2008 of 40.5% was up 0.2 share points. Our share has recovered strongly in 2008 and gained 1.5 share points to reach 41.4% in the fourth quarter.

In Ukraine, our shipment volume was up 6.6% and our market share rose 1.3 share points versus 2007 to 35.2%, reflecting share gains by our higher-margin brands Marlboro, Parliament and Chesterfield.

• Asia: Net revenues, which include excise taxes billed to customers, increased $1.1 billion or 10.1%. Excluding excise taxes, net revenues increased $537 million or 9.5% to $6.2 billion. This increase was due to net price increases ($203 million), higher volume/mix ($148 million), favorable currency ($140 million) and the Lakson Tobacco acquisition ($46 million).

Operating companies income increased $254 million or 14.1%. This increase was due primarily to net price increases ($147 million), higher volume/mix ($106 million) and favorable currency ($32 million), partially offset by higher marketing, administration and research costs ($55 million).

Our cigarette shipment volume increased 5.8%, due to acquisition volume in Pakistan and gains in Indonesia, Korea and the Philippines, partially offset by Japan. Excluding this acquisition, our volume in Asia was up 3.4%.

In Indonesia, our shipment volume rose 9.7%, reflecting overall industry growth and portfolio share gains, notably by Marlboro, up 0.4 share points to 4.8%, and A Mild, up 0.4 share points to 10.0%. The A Mild brand family continued to perform strongly, helped by the successful launch of A Volution, the first super slims kretek in the Indonesian market.

In Japan, the total cigarette market declined 4.4%. However, adjusting for the impact of the completed implementation of vending machine age verification and resultant trade inventory movements, the total market is estimated to have declined 3.8%. Our shipments were down 5.0%, primarily reflecting the lower total market. Although our market share in 2008 declined 0.4 share points to 23.9%, share in the fourth quarter of 2008 was stable compared to the previous quarter and versus prior year. Marlboro’s share for the full year was up 0.1 share point to 10.1%. Marlboro share was up 0.6 share points to 10.4% in the fourth quarter of 2008 versus the prior year, driven by the August launch of Marlboro Black Menthol, an innovative product in the growing menthol segment, which captured 1.0% share of market in the fourth quarter, and the November launch of Marlboro Filter Plus One, which achieved a 0.3% share of market in the fourth quarter. Share of Lark in 2008 was 6.6%, down 0.2 share points versus 2007.

In Korea, the total market was up 3.6% and our shipment volume increased 24.9%, driven by market share increases. Our market share reached 11.8%, up 2.0 share points, due mainly to the continued strong performance of Parliament, up 1.4 share points, Marlboro, up 0.6 share points, and Virginia Slims, up 0.2 share points.

In the Philippines, the total cigarette market increased 5.1%. Our shipment volume increased 4.9%, due mainly to the continued strong performance of Marlboro.

• Latin America & Canada: Net revenues, which include excise taxes billed to customers, increased $1.2 billion or 23.0%. Excluding excise taxes, net revenues increased $347 million or 17.5% to $2.3 billion. This increase was due

primarily to the impact of acquisitions ($157 million), net price increases ($138 million) and favorable currency ($47 million).

Operating companies income increased $6 million or 1.2%. This increase was due primarily to net price increases ($102 million), the impact of acquisitions ($100 million), higher volume/mix ($30 million) and lower pre-tax charges for asset impairment and exit costs ($15 million), partially offset by the 2008 charge related to the RBH legal settlement ($124 million), the 2008 charge related to a previous distribution agreement in Canada ($61 million) and higher marketing expenses.

Cigarette shipment volume increased 11.3%, primarily reflecting gains in Argentina and Mexico and the inclusion of acquisition volume in Canada and Mexico. Excluding acquisitions, shipments increased 2.7%.

In Argentina, the total cigarette market grew 5.7%. Our cigarette shipment volume increased 8.8% and share increased 2.0 share points to 71.0%, driven by Marlboro, up 1.3 share points and the Philip Morris brand, up 1.9 share points.

In Canada, the total cigarette market declined 2.3% in 2008. We recorded cigarette shipment volume of 2.8 billion units following the acquisition.

In Mexico, the total cigarette market was down 1.3% in 2008, reflecting the impact of price increases in October 2007 and related trade inventory movements, and tax-driven price increases in January and December 2008. However, our cigarette shipment volume rose by 22.6% and share increased 3.4 share points to 67.7%, led by Benson & Hedges, up 0.6 share points and Delicados, up 1.3 share points. The share of Marlboro, the market leader, was 48.7%, up 0.9 share points.

2007 compared with 2006

The following discussion compares operating results within each of our reportable segments for 2007 with 2006.

• European Union: Net revenues, which include excise taxes billed to customers, increased $3.1 billion or 13.0%. Excluding excise taxes, net revenues increased $959 million or 12.2% to $8.8 billion. This increase was due to favorable currency ($757 million) and net price increases ($387 million). These increases were partially offset by lower volume/mix ($185 million).

Operating companies income increased $695 million or 19.9%. This increase was due primarily to favorable currency ($424 million), net price increases ($388 million), lower marketing, administration and research costs ($73 million) and the Italian antitrust charge in 2006 ($61 million). These increases were partially offset by lower volume/mix ($190 million), higher pre-tax charges for asset impairment and exit costs ($33 million) and higher fixed manufacturing costs ($24 million).

Our cigarette shipment volume decreased 0.2%. This decrease was due to declines in Germany and Poland, and unfavorable distributor inventory movements in France. These decreases were partially offset by gains in Hungary, the Baltic States, and the impact of favorable trade inventory movements in Italy. Our cigarette market share in the European Union was 39.3%, down 0.1 share point from 2006, due primarily to trade inventory distortions in the Czech Republic. Absent these distortions, market share in the European Union was flat.

In France, our shipment volume decreased 4.8%, due primarily to a lower market due to higher pricing. Our market share decreased 0.3 share points to 42.4%, due primarily to declines in Marlboro, reflecting the temporary adverse impact of crossing the Euro 5.00 per pack threshold. In the mid-price segment, the Philip Morris brand grew market share.

In Germany, our cigarette shipment volume declined 4.6%. The total cigarette market in Germany declined 4.0%, due mainly to the tax-driven price increase in October 2006. Our cigarette market share declined 0.4 share points to 36.5%, due to lower Marlboro share, partially offset by share gains for L&M.

In Italy, the total cigarette market was down 1.1%. Our cigarette shipment volume increased 2.9%, due primarily to the favorable timing of shipments, and our market share in Italy increased 0.8 share points to 54.6%, driven by Chesterfield and Merit.

In Poland, the total cigarette market declined 3.5%, due to consumer price sensitivity within the low price segment following significant tax-driven price increases, as consumers switched to other tobacco products. Our shipment volume was down 6.0% and our market share decreased 1.0 share point to 39.0%, primarily reflecting share declines for our low price and local 70mm brands. However, Marlboro market share rose 0.4 share points to 8.5%.

In Spain, the total cigarette market declined 1.2%. Our shipment volume increased 0.7%, due mainly to the favorable timing of shipments. Our market share declined 0.2 share points to 32.1%, primarily reflecting declines in Marlboro, partially offset by gains for Chesterfield, L&M and the Philip Morris brand.

• Eastern Europe, Middle East and Africa: Net revenues, which include excise taxes billed to customers, increased $2.2 billion or 21.5%. Excluding excise taxes, net revenues increased $721 million or 12.8% to $6.3 billion. This increase was due primarily to favorable currency ($330 million), net price increases ($241 million) and higher volume/mix ($151 million).

Operating companies income increased $351 million or 16.9%. This increase was due primarily to net price increases ($284 million), favorable currency ($98 million) and higher volume/mix ($79 million). These increases were partially offset by higher marketing, administration and research costs ($81 million), higher fixed manufacturing costs ($18 million) and higher pre-tax charges for asset impairment and exit costs ($10 million).

Our shipment volume increased 0.7%, driven by gains in Algeria, Bulgaria, Egypt and Ukraine. These increases were partially offset by declines in Romania, Russia, Serbia and Turkey.

In Egypt, improved economic conditions and increased tourism continued to fuel the growth of the total cigarette industry and premium brands. Our shipments rose 25.6% and our share advanced 1.9 points to 12.0%, driven by Marlboro, L&M and Merit.

In Russia, our shipments were down 2.0%, due largely to L&M. This decline was partially offset by continued growth of higher-margin brands, including Marlboro, Parliament, Chesterfield and Muratti. Our market share was unchanged at 26.6%.

In Turkey, our shipments declined 1.6% and our market share declined 2.1 share points to 40.4%, due primarily to a volume decline of the lower-margin brands in our portfolio.

In Ukraine, our shipments grew 4.7% and our share rose 0.8 share points to 33.9%, driven by consumer up-trading to premium brands, particularly Marlboro, Parliament and Chesterfield.

In Algeria, our shipments increased, driven by an expanded distribution network.

In Bulgaria, our shipments increased, driven by our market entry in July 2006 as well as higher sales of Marlboro following price repositioning, and portfolio expansion following the lifting of import duties in January 2007.

In Romania, our shipments were down 9.6%, due primarily to a lower total market and lower market share. Our volume decline was driven by declines in L&M , partially offset by gains in Marlboro and Parliament .

• Asia: Net revenues, which include excise taxes billed to customers, increased $958 million or 9.4%. Excluding excise taxes, net revenues increased $143 million or 2.6% to $5.6 billion. This increase was due to net price increases ($154 million), the Lakson Tobacco acquisition ($118 million) and favorable currency ($76 million). These increases were partially offset by lower volume/mix ($205 million).

Operating companies income decreased $44 million or 2.4%. This decrease was due to lower volume/mix ($164 million), higher marketing, administration and research costs ($69 million, including $30 million for a distributor termination in Indonesia), unfavorable currency ($36 million) and higher pre-tax charges for asset impairment and exit costs ($9 million). These decreases were partially offset by net price increases ($177 million), lower fixed manufacturing costs ($46 million) and the Lakson Tobacco acquisition ($11 million).

Our shipment volume increased 9.4%. This increase reflects the Lakson Tobacco acquisition in Pakistan. Excluding this acquisition, our volume in Asia was down 2.7%, due primarily to the negative impact of trade inventory movements and lower shipments in Japan, partially offset by gains in Indonesia and Korea.

In Japan, the total cigarette market declined 4.8%, driven by the July 1, 2006 tax-driven price increase. Our market share in Japan decreased 0.4 share points to 24.3%, due mainly to Lark. Our shipments were down 12.6%, reflecting lower in-market sales and a reduction in distributor inventory durations at the end of 2007.

In Indonesia, the total cigarette market increased 3.9%. Our market share decreased 0.3 share points to 28.0%, reflecting the share decline of A Mild and Dji Sam Soe, due to a temporary stick-price disadvantage versus competitors’ brands, partially offset by the growth of Marlboro, which gained 0.4 share points to 4.0%. Our shipment volume rose 2.8%, driven by the July 2007 launch of Marlboro kretek.

In Korea, the total market increased 4.6%. Our shipments increased 20.3%, due primarily to the performance of Marlboro, Parliament and Virginia Slims, driven by new line extensions, including Marlboro Filter Plus. Our market share in Korea increased 1.3 share points to 9.9% with Marlboro market share up 0.8 share points to 4.2%.

• Latin America & Canada: Net revenues, which include excise taxes billed to customers, increased $745 million or 16.9%. Excluding excise taxes, net revenues increased $218 million or 12.4% to $2.0 billion. This increase was due to net price increases ($129 million), the impact of acquisitions ($37 million), favorable currency ($34 million) and favorable volume/mix ($18 million).

Operating companies income decreased $499 million or 49.3%. This decrease was due primarily to the gain in 2006 from the exchange of our interest in the Dominican Republic beer business ($488 million), the impact of divestitures ($51 million), higher marketing, administration and research costs ($10 million) and higher pre-tax charges for asset impairment and exit costs ($17 million). These decreases were partially offset by net price increases ($91 million).

Our shipment volume decreased 0.2%. This decrease was driven by Colombia, Mexico and the Dominican Republic, partially offset by gains in Argentina.

In Argentina, the total cigarette market was up 3.0%, while our shipments grew 7.1% and our share was up 2.6 share points to 68.9%, driven by Marlboro and the Philip Morris brand.

In Mexico, the total market declined 6.3%, due to lower consumption following the price increases in January and October 2007, as well as an unfavorable comparison with the prior year, which included trade purchases in advance of the January 2007 tax-driven price increase. Our shipments declined 2.1%, reflecting the decline in the overall market. However, our market share rose 0.8 share points to 64.3%, driven by Benson & Hedges and Delicados.

In the Dominican Republic, our shipment volume declined 20.2%, reflecting a lower total market following price increases in January and February 2007 to partially compensate for a very significant excise tax increase imposed on cigarettes in January 2007.

Financial Review

• Net Cash Provided by Operating Activities: Net cash provided by operating activities of $7.9 billion for the year ended December 31, 2008, increased $2.4 billion over 2007. The increase was due primarily to a lower use of cash to fund working capital ($1.5 billion) and higher net earnings. The change in working capital was due primarily to a lower use of cash for receivables (due primarily to a cash collections in 2008 following high trade purchases in anticipation of January 2008 excise-tax driven price changes) and inventories, as well as higher accrued liabilities (primarily higher excise taxes payable), partially offset by a lower source of cash from accounts payable (primarily associated with payments in 2008 for 2007 leaf purchases).

Net cash provided by operating activities of $5.6 billion for the year ended December 31, 2007, decreased $740 million from 2006. The decrease was due primarily to higher cash used to fund working capital during 2007 as compared with 2006 ($941 million), partially offset by higher net earnings ($146 million, excluding the change in non-cash income and expense amounts) and lower pension plan contributions ($40 million). The change in working capital was due primarily to higher receivables from additional trade purchases in anticipation of 2008 tax-driven price increases in many markets, as well as higher inventories. The increase in inventories reflects higher leaf tobacco to support production that we re-sourced from PM USA in 2008 and higher finished goods inventories in anticipation of further trade purchases prior to excise tax increases.

• Net Cash Used in Investing Activities: One element of our growth strategy is to strengthen our brand portfolio and/or expand our geographic reach through an active program of selective acquisitions. We are constantly evaluating potential acquisition opportunities. From time to time we may engage in confidential acquisition negotiations that are not publicly announced unless and until those negotiations result in a definitive agreement.

Net cash used in investing activities of $3.2 billion for the year ended December 31, 2008, increased $575 million over 2007, primarily reflecting the higher use of cash for acquisitions and the purchase of trademarks. Net cash used in investing activities of $2.6 billion for the year ended December 31, 2007, increased $2.1 billion over 2006. This increase was due primarily to a higher use of cash for acquisitions in 2007, lower proceeds from sales of businesses in 2007 and higher capital expenditures.

As further discussed in Note 5 to our consolidated financial statements, on July 31, 2008, we announced that we had entered an agreement with Rothmans to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans for CAD $30 per share in cash, or CAD $2.0 billion ($1.9 billion based on the exchange rate prevailing at the time of the acquisition). In October 2008, we completed the acquisition of all the Rothmans shares. In June 2008, we purchased the fine cut trademark Interval and certain other trademarks in the other tobacco products category from Imperial Tobacco Group PLC for $407 million. The cost of this purchase is reflected in other investing activities in the consolidated statement of cash flows for the year ended December 31, 2008.

In November 2007, we acquired an additional 30% interest in our Mexican tobacco business from Grupo Carso, which increased our ownership interest to 80%, for $1.1 billion. During the first quarter of 2007, we acquired an additional 58.2% interest in a Pakistan cigarette manufacturer, Lakson Tobacco, which increased our total ownership interest in Lakson Tobacco from 40% to approximately 98%, for $388 million.

In November 2006, we exchanged our 47.5% interest in ELJ, which included a 40% indirect interest in ELJ’s beer subsidiary, for 100% ownership of ELJ’s cigarette subsidiary, ITLJ, and $427 million of cash. As a result of this transaction, we now own 100% of the cigarette business and no longer hold an interest in ELJ’s beer business.

Our capital expenditures were $1,099 million in 2008, $1,072 million in 2007 and $886 million in 2006. The expenditures were primarily for the modernization and consolidation of manufacturing facilities, expansion of research and development facilities, and expansion of production capacity. We expect capital expenditures in 2009, of approximately $1.0 billion, to be funded by operating cash flows.

• Net Cash Used in Financing Activities: During 2008, we used $4.2 billion in our financing activities primarily to repurchase our common stock, pay dividends to Altria and our public shareholders, and repay debt. These uses of cash were partially offset by proceeds from our debt offerings in 2008. During 2007, we used $3.6 billion in our financing activities primarily to pay dividends to Altria, partially offset by increased borrowings. During 2006, we used $5.4 billion in our financing activities primarily for the repayment of debt and for dividends paid to Altria.

In May 2008, we issued $6.0 billion of senior unsecured notes under our shelf registration statement, with net proceeds from the sale of the securities of $5,950 million. In August 2008, we issued Euro 1.75 billion of senior unsecured notes under our shelf registration statement. The net proceeds were Euro 1.74 billion ($2,520 million) from this offering. In November 2008, we issued $1.25 billion of senior unsecured notes under our shelf registration statement. The net proceeds from the sale of the securities were $1,240 million. In addition, in September 2008, we issued CHF 500 million (approximately $465 million) of 4.0% bonds, due in September 2012. For further details on these debt offerings, see Note 6 to our consolidated financial statements.

On May 1, 2008, we began a $13.0 billion two-year share repurchase program. Since May 2008, we have repurchased 106.8 million shares of our common stock at a cost of $5.4 billion ($50.57 per share).

The increased level of dividends paid to Altria in 2007 reflects special dividends paid of $3.1 billion in anticipation of the Spin-off. In the first quarter of 2008, we paid an additional $900 million in special dividends to Altria in anticipation of the Spin-off.

The increase in amounts received from Altria in 2008 was due primarily to cash received in 2008 for employee related costs and the transfer of pension, postretirement and other liabilities associated with the Spin-off.

• Debt and Liquidity:

We define Cash and Cash equivalents as short-term, highly liquid investments, readily convertible to known amounts of cash which mature within three months and have an insignificant risk of change in value due to interest rate or credit risk changes. As a policy, we do not hold any investments in structured or equity-linked products. Our Cash and Cash equivalents are predominantly held in short-term bank deposits with institutions having a long-term rating of A or better and a short-term rating of A-1/P-1.

Credit Ratings: At December 31, 2008, our debt ratings and outlook by major credit rating agencies were as follows:


	Short-term	Long-term	Outlook
Moody’s	P-1	A2	Stable
Standard & Poor’s	A-1	A	Stable
Fitch	F1	A+	Negative

We do not expect the Fitch negative outlook to have a significant impact on our borrowing costs or our ability to access the global capital markets.

Credit Lines: At December 31, 2008, our committed credit lines were as follows:


Type (in billions of dollars)	Committed Credit Lines		Commercial Paper
$1.0 billion, 3-year revolving credit, expiring December 4, 2010	$	0.9
$3.0 billion, 5-year revolving credit, expiring December 4, 2012		2.7
Euro 2.0 billion, 5-year revolving credit, expiring May 12, 2010		2.8

Total facilities	$	6.4

Commercial paper outstanding			$	1.0

At December 31, 2008, there were no borrowings under these credit lines.

Certain subsidiaries of Lehman Brothers Holdings Inc. (“Lehman”) were credit providers under the December 4, 2010, December 4, 2012 and May 12, 2010 revolving credit facilities in the total amount of $0.5 billion. Lehman filed for bankruptcy protection on September 15, 2008. The figures shown in the table above exclude all amounts related to Lehman.

All banks participating in our committed revolving credit facilities are highly rated by the credit rating agencies. We are monitoring the credit quality of our banking group and at this time we are not aware of any other potential non-performing credit provider.

These facilities require us to maintain a ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest of not less than 3.5 to 1.0 on a rolling twelve month basis. At December 31, 2008, our ratio calculated in accordance with the agreements was 21.9 to 1.0. These facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require us to post collateral. We expect to continue to meet our covenants.

These facilities can be used to support the issuance of commercial paper in Europe and the United States. The multi-year facilities enable us to reclassify short-term debt to long-term debt. At December 31, 2008, $1,020 million of short-term borrowings that we expect to remain outstanding through December 31, 2009 were reclassified as long-term debt. At December 31, 2007, $2,205 million of short-term borrowings that we expected to remain outstanding through December 31, 2008 were reclassified as long-term debt.

In addition to the above, certain of our subsidiaries maintain credit lines to meet their respective local working capital needs. These credit lines, which amounted to approximately $2.2 billion at December 31, 2008, are for the sole use of these businesses. Borrowings on these lines amounted to $375 million and $400 million at December 31, 2008 and 2007, respectively.

Commercial Paper Facilities: We have two $6 billion commercial paper programs in place, with one in the U.S. and one in Europe. Our recent issuances have shown that our A-1/P-1/F1 ratings have allowed us to maintain full access to the Tier-1 commercial paper market at competitive rates despite the current market turmoil.

The $6.4 billion of committed revolving credit facilities, which excludes amounts provided by Lehman, are more than adequate to back our commercial paper issuance needs. In addition, we expect to be eligible for the issuance of up to $2.5 billion in commercial paper under the Commercial Paper Funding Facility provided through the Federal Reserve Bank of New York. The existence of these facilities, coupled with our operating cash flows, will enable us to meet our liquidity requirements.

Debt: Our total debt was $12.0 billion at December 31, 2008 and $6.1 billion at December 31, 2007. The ratio of total debt to equity was 1.59 at December 31, 2008 and 0.39 at December 31, 2007. Fixed-rate debt constituted approximately 88% and 7% of our total debt at December 31, 2008 and 2007, respectively. The weighted-average interest rate on our total debt was 5.5% at December 31, 2008 and 5.3% at December 31, 2007. See Note 15 to our consolidated financial statements for a discussion of our adoption of SFAS No. 157, “Fair Value Measurements” and disclosures related to the fair value of debt.

On April 25, 2008, we filed a shelf registration statement with the Securities and Exchange Commission, under which we may from time to time sell debt securities and/or warrants to purchase debt securities over a three year period. The total debt that can be issued under this registration statement is subject to approval by our Board of Directors.

As previously noted, during 2008, we issued approximately $10.1 billion in new debt.

In February 2009, we launched and priced a bond offering in the amount of CHF 500 million. These bonds will have a fixed interest rate of 3.250% and a maturity date of March 2013. The transaction is scheduled to close in March 2009.

• Off-Balance Sheet Arrangements and Aggregate Contractual Obligations: We have no off-balance sheet arrangements, including special purpose entities, other than guarantees and contractual obligations that are discussed below.

Guarantees: As discussed in Note 18 to our consolidated financial statements, at December 31, 2008, our third-party guarantees, which are primarily related to excise taxes, were $49 million, of which $44 million have no specific expiration dates. The remainder ($5 million) expires through 2012, with no guarantees expiring during 2009. We are required to perform under these guarantees in the event that a third party fails to make contractual payments. We do not have a liability on our consolidated balance sheet at December 31, 2008, as the fair value of these guarantees is insignificant due to the fact that the probability of future payment under these guarantees is remote.

At December 31, 2008, we are also contingently liable for $3.4 billion of guarantees related to our own performance, consisting of the following:

•

$3.2 billion of guarantees of excise tax and import duties related primarily to the shipment of our products. In these agreements, a financial institution provides a guarantee of tax payments to the respective government agency. We then issue guarantees to the respective financial institution for the payment of the taxes. These are revolving facilities that are integral to the shipment of our products, and the underlying taxes payable are recorded on our consolidated balance sheet.

•

$0.2 billion of other guarantees, consisting principally of guarantees of lines of credit for certain of our subsidiaries.

Although these guarantees of our own performance are frequently short-term in nature, they are expected to be replaced, upon expiration, with similar guarantees of similar amounts. These items have not had, and are not expected to have, a significant impact on our liquidity.

Aggregate Contractual Obligations: The following table summarizes our contractual obligations at December 31, 2008:


	Payments Due
(in millions)	Total		2009		2010- 2011		2012- 2013		2014 and Thereafter
Long-term debt ⁽¹⁾	$	10,640	$	209	$	1,568	$	2,541	$	6,322
RBH Legal Settlement ⁽²⁾		207		15		44		42		106
Interest on borrowings ⁽³⁾		5,771		601		1,154		926		3,090
Operating leases ⁽⁴⁾		650		164		163		78		245
Purchase obligations ⁽⁵⁾ :
Inventory and production costs		1,434		1,134		235		56		9
Other		1,797		959		634		118		86

		3,231		2,093		869		174		95
Other long-term liabilities ⁽⁶⁾		234		22		38		31		143

	$	20,733	$	3,104	$	3,836	$	3,792	$	10,001

(1)

Amounts represent the expected cash payments of our long-term debt, excluding short-term borrowings reclassified as long-term debt. Amounts include capital lease obligations, primarily associated with vending machines in Japan.

(2)

Amounts represent the estimated discounted future payments due under the terms of the settlement agreement. See Note 16 to our consolidated financial statements for more details regarding this settlement.

(3)

Amounts represent the expected cash payments of our interest expense on our long-term debt, including the current portion of long-term debt. Interest on our fixed-rate debt is presented using the stated interest rate. Interest on our variable rate debt is estimated using the rate in effect at December 31, 2008. Amounts exclude the amortization of debt discounts, the amortization of loan fees and fees for lines of credit that would be included in interest expense in the consolidated statements of earnings.

(4)

Amounts represent the minimum rental commitments under non-cancelable operating leases.

(5)

Purchase obligations for inventory and production costs (such as raw materials, indirect materials and supplies, packaging, co-manufacturing arrangements, storage and distribution) are commitments for projected needs to be utilized in the normal course of business. Other purchase obligations include commitments for marketing, advertising, capital expenditures, information technology and professional services. Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure and approximate timing of the transaction. Most arrangements are cancelable without a significant penalty, and with short notice (usually 30 days). Any amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.

(6)

Other long-term liabilities consist primarily of postretirement health care costs. The following long-term liabilities included on the consolidated balance sheet are excluded from the table above: accrued pension and postemployment costs, income taxes and tax contingencies, minority interest, insurance accruals and other accruals. We are unable to estimate the timing of payments (or contributions in the case of accrued pension costs) for these items. Currently, we anticipate making pension contributions between $500 million and $550 million in 2009, based on current tax and benefit laws (as discussed in Note 12 to our consolidated financial statements).

The E.C. agreement payments discussed below are excluded from the table above, as the payments are subject to adjustment based on certain variables including our market share in the EU.

E.C. Agreement: In July 2004, we entered into an agreement with the European Commission (“E.C.”) and 10 member states of the European Union that provides for broad cooperation with European law enforcement agencies on anti-contraband and anti-counterfeit efforts. To date, this agreement has been signed by 26 of the 27 member states. This agreement calls for payments that are to be adjusted based on certain variables, including our market share in the European Union in the year preceding payment. Because future additional payments are subject to these variables, we record these payments as an expense in cost of sales when product is shipped. In addition, we are also responsible to pay the excise taxes, VAT and customs duties on qualifying product seizures of up to 90 million cigarettes and are subject to payments of five times the applicable taxes and duties if qualifying product seizures exceed 90 million cigarettes in a given year. To date, our annual payments related to product seizures have been immaterial. Total charges related to the E.C. Agreement of $80 million, $100 million and $95 million were recorded in cost of sales in 2008, 2007 and 2006, respectively.

• Equity and Dividends: As discussed in Note 1 to our consolidated financial statements, on March 28, 2008, Altria distributed all of its remaining interest in our company to Altria stockholders of record as of the close of business on March 19, 2008 in a tax-free transaction pursuant to Section 355 of the U.S. Internal Revenue Code. The distribution resulted in a net increase to our stockholders’ equity of $449 million during 2008, reflecting payments to us under the terms of the Employee Matters Agreement with Altria.

As discussed in Note 8 to our consolidated financial statements, based upon the number of Altria stock awards outstanding on the Distribution Date, we issued stock options for 28.3 million shares of PMI common stock. In addition, we issued 5.9 million shares of restricted and deferred stock. The restricted stock and deferred stock will not vest until the completion of the original restriction period (typically, three years from the date of the original grant).

On May 1, 2008, we began a $13.0 billion two-year share repurchase program. Since May 2008, we have repurchased 106.8 million shares of our common stock at a cost of $5.4 billion ($50.57 per share).

As part of the Spin-off, we paid Altria $4.0 billion in special dividends in addition to our normal dividends to Altria. We paid $3.1 billion of these special dividends in 2007 and the remaining $900 million in the first quarter of 2008.

Dividends paid to public shareholders in 2008 were $2.1 billion. During the third quarter of 2008, our Board of Directors approved a 17.4% increase in the quarterly dividend to $0.54 per common share. As a result, the present annualized dividend rate is $2.16 per common share.

Market Risk

• Counterparty Risk: We predominantly work with financial institutions with strong short and long-term credit ratings as assigned by Standard & Poor’s and Moody’s. These banks are also part of a defined group of relationship banks. Non-investment grade institutions are only used in certain emerging markets to the extent required by local business. We have a conservative approach when it comes to choosing financial counterparties and financial instruments. As such we do not invest or hold our investment in any structured or equity-linked products. The majority of our cash and cash equivalents are currently invested in bank deposits maturing within less than 30 days.

We continuously monitor and assess the credit worthiness of all our counterparties.

• Derivative Financial Instruments: We operate in markets outside of the United States, with manufacturing and sales facilities in various locations throughout the world. Consequently, we use certain financial instruments to manage our foreign currency exposure. We use derivative financial instruments principally to reduce our exposure to market risks resulting from fluctuations in foreign exchange rates by creating offsetting exposures. We are not a party to leveraged derivatives and, by policy, do not use derivative financial instruments for speculative purposes.

Hedging activity affected our accumulated other comprehensive earnings (losses), net of income taxes, during the years ended December 31, 2008, 2007 and 2006, as follows:


(in millions)	2008			2007			2006
(Loss) gain as of January 1	$	(10	)	$	—		$	8
Derivative losses (gains) transferred to earnings		89			11			(24	)
Change in fair value		(147	)		(21	)		16

(Loss) gain as of December 31	$	(68	)	$	(10	)	$	—

See Note 14 and Note 15 to our consolidated financial statements for a discussion on our adoption of SFAS No. 157, “Fair Value Measurements” and disclosures related to the fair value of derivative financial instruments.

• Foreign Currency Exchange Rates: We use forward foreign exchange contracts, foreign currency swaps and foreign currency options to mitigate our exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which we are exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Russian ruble, Swiss franc and Turkish lira. At December 31, 2008 and 2007, we had contracts with aggregate notional amounts of $17.8 billion and $6.9 billion, respectively. The effective portion of unrealized gains and losses associated with qualifying cash flow hedge contracts is deferred as a component of accumulated other comprehensive earnings (losses) until the underlying hedged transactions are reported on our consolidated statements of

earnings. Unrealized gains (losses) associated with qualifying fair value hedges are recorded in our consolidated statements of earnings and were ($52) million, $14 million and $12 million for the years ended December 31, 2008, 2007 and 2006. A portion of our foreign currency swaps, forwards and options, while effective as economic hedges, do not qualify for hedge accounting and, therefore, the unrealized gains (losses) relating to these contracts are reported in our consolidated statements of earnings. For the years ended December 31, 2008, 2007 and 2006, the unrealized losses from contracts that do not qualify for hedge accounting were $333 million, $23 million and $8 million, respectively. Generally, unrealized gains and losses reported through the consolidated statements of earnings are offset by gains and losses generated by the underlying assets or liabilities being hedged.

We designate certain foreign currency denominated debt and forward exchange contracts as net investment hedges of foreign operations. During the years ended December 31, 2008 and 2007, these hedges of net investments resulted in gains, net of income taxes, of $124 million and $19 million, respectively. These gains were reported as a component of accumulated other comprehensive earnings (losses) within currency translation adjustments.

• Value at Risk: We use a value at risk computation to estimate the potential one-day loss in the fair value of our interest rate-sensitive financial instruments and to estimate the potential one-day loss in pre-tax earnings of our foreign currency price-sensitive derivative financial instruments. This computation includes our debt, short-term investments, and foreign currency forwards, swaps 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 computation estimates were made assuming normal market conditions, using a 95% confidence interval. We use 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 determining value at risk at December 31, 2008 and 2007, and over each of the four preceding quarters for the calculation of average value at risk amounts during each year. The values of foreign currency options do not change on a one-to-one basis with the underlying currency and were valued accordingly in the computation.

The estimated potential one-day loss in fair value of our interest rate-sensitive instruments, primarily debt, under normal market conditions and the estimated potential one-day loss in pre-tax earnings from foreign currency instruments under normal market conditions, as calculated in the value at risk model, were as follows:


	Pre-Tax Earnings Impact
(in millions)	At 12/31/08		Average		High		Low
Instruments sensitive to:
Foreign currency rates	$	130	$	87	$	130	$	64

	Fair Value Impact
(in millions)	At 12/31/08		Average		High		Low
Instruments sensitive to:
Interest rates	$	86	$	53	$	86	$	2

	Pre-Tax Earnings Impact
(in millions)	At 12/31/07		Average		High		Low
Instruments sensitive to:
Foreign currency rates	$	32	$	17	$	32	$	5

	Fair Value Impact
(in millions)	At 12/31/07		Average		High		Low
Instruments sensitive to:
Interest rates	$	1	$	1	$	1	$	—

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

New Accounting Standards

See Note 2 to our consolidated financial statements for a discussion of new accounting standards.

Contingencies

See Note 18 to our consolidated financial statements for a discussion of contingencies.

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

Risks Related to Our Business and Industry

• Cigarettes are subject to substantial taxes. Significant increases in cigarette-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions. These tax increases may affect our profitability disproportionately and make us less competitive versus certain of our competitors.

Increases in cigarette taxes are expected to continue to have an adverse impact on our sales of cigarettes, due to resulting lower consumption levels, a shift in sales from manufactured cigarettes to other tobacco products and from the premium price to the mid-price or low price cigarette categories where we may be under-represented, from local sales to legal cross-border purchases of lower price products or to illicit products such as contraband and counterfeit.

• The European Commission is seeking to alter minimum retail selling price systems.

• Our business faces significant governmental action aimed at increasing regulatory requirements with the goal of preventing the use of tobacco products.

•

the levying of substantial and increasing tax and duty charges;

•

restrictions or bans on advertising, marketing and sponsorship;

•

the display of larger health warnings, graphic health warnings and other labeling requirements;

•

restrictions on packaging design, including the use of colors and generic packaging;

•

restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;

•

requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;

•

requirements regarding testing, disclosure and use of tobacco product ingredients;

•

increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;

•

elimination of duty free allowances for travelers; and

•

encouraging litigation against tobacco companies.

• Litigation related to cigarette smoking and exposure to ETS could substantially reduce our profitability and could severely impair our liquidity.

There is litigation related to tobacco products pending in certain jurisdictions. Damages claimed in some of the tobacco-related litigation are significant and, in certain cases in Brazil, Israel, Nigeria and Canada, range into the billions of dollars. We anticipate that new cases will continue to be filed. The FCTC encourages litigation against tobacco product manufacturers. It is possible that our consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Please see Note 18. Contingencies to our consolidated financial statements, and as amended in Part I, Item 3. Legal Proceedings of our Annual Report on Form 10-K for the year ended December 31, 2008 for a discussion of tobacco-related litigation.

• We face intense competition and our failure to compete effectively could have a material adverse effect on our profitability and results of operations.

We compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low price products or innovative products, higher cigarette taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products. Competitors include three large international tobacco companies and several regional and local tobacco companies and, in some instances, government-owned tobacco enterprises, principally in China, Egypt, Thailand, Taiwan, Vietnam and Algeria. Industry consolidation and privatizations of governmental enterprises have led to an overall increase in competitive pressures. Some competitors have different profit and volume objectives and some international competitors are less susceptible to changes in currency exchange rates.

• Because we have operations in numerous countries, our results may be influenced by economic, regulatory and political developments in many countries.

• We may be unable to anticipate changes in consumer preferences or to respond to consumer behavior influenced by economic downturns.

Our tobacco business is subject to changes in consumer preferences, which may be influenced by local economic conditions. To be successful, we must:

•

promote brand equity successfully;

•

anticipate and respond to new consumer trends;

•

develop new products and markets and broaden brand portfolios;

•

improve productivity; and

•

be able to protect or enhance margins through price increases.

• We lose revenue as a result of counterfeiting, contraband and cross-border purchases.

• From time to time, we are subject to governmental investigations on a range of matters.

Investigations include allegations of contraband shipments of cigarettes, allegations of unlawful pricing activities within certain markets and allegations of false and misleading

usage of descriptors such as “lights” and “ultra lights.” We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our business could be materially affected by an unfavorable outcome of pending or future investigations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Environment — Governmental Investigations” for a description of governmental investigations to which we are subject.

• We may be unsuccessful in our attempts to produce cigarettes with the potential to reduce the risk of smoking-related diseases.

• Our reported results could be adversely affected by currency exchange rates and currency devaluations could impair our competitiveness.

• The repatriation of our foreign earnings and change in the earnings mix may increase our effective tax rate.

• Our ability to grow may be limited by our inability to introduce new products, enter new markets or to improve our margins through higher pricing and improvements in our brand and geographic mix.

• We may be unable to expand our portfolio through successful acquisitions.

One element of our growth strategy is to strengthen our brand portfolio and market positions through selective acquisitions. Acquisition opportunities are limited and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There is no assurance that we will be able to acquire attractive businesses on favorable terms or that future acquisitions will be accretive to earnings.

• Government mandated prices, production control programs, shifts in crops driven by economic conditions and adverse weather patterns may increase the cost or reduce the quality of the tobacco and other agricultural products used to manufacture our products.

As with other agricultural commodities, the price of tobacco leaf and cloves can be influenced by imbalances in supply and demand and crop quality can be influenced by variations in weather patterns. Tobacco production in certain countries is subject to a variety of controls, including government mandated prices and production control programs. Changes in the patterns of demand for agricultural products could cause farmers to plant less tobacco. Any significant change in tobacco leaf and clove prices, quality and quantity could affect our profitability and our business.

• Our ability to implement our strategy of attracting and retaining the best global talent may be impaired by the decreasing social acceptance of cigarette smoking.

The tobacco industry competes for talent with consumer products and other companies that enjoy greater societal acceptance. As a result, we may be unable to attract and retain the best global talent.

• We could incur significant indemnity obligations if our action or failure to act causes the Distribution to be taxable.

Under the tax sharing agreement between Altria and us, we have agreed to indemnify Altria and its affiliates if we take, or fail to take, any action where such action, or failure to act, precludes the Spin-off from qualifying as a tax-free transaction. For a discussion of these restrictions, please see “The Distribution — U.S. Federal Income Tax Consequences of the Distribution,” which is included in our Registration Statement on Form 10.

• Your percentage ownership of our common shares may be diluted by future acquisitions.

Selected Financial Data–Five-Year Review

(in millions of dollars, except per share data)


	2008			2007 ⁽²⁾			2006 ⁽²⁾			2005 ⁽²⁾			2004 ⁽²⁾
Summary of Operations:
Net revenues	$	63,640		$	55,243		$	48,302		$	45,316		$	39,637
Cost of sales		9,328			8,711			8,146			7,654			6,716
Excise taxes on products		37,935			32,433			27,533			25,299			22,032
Gross profit		16,377			14,099			12,623			12,363			10,889
Operating income		10,248			8,894			8,350			7,730			6,509
Interest expense, net		311			10			142			94			4
Earnings before income taxes and minority interest		9,937			8,884			8,208			7,636			6,505
Pre-tax profit margin		15.6	%		16.1	%		17.0	%		16.9	%		16.4	%
Provision for income taxes		2,787			2,570			1,825			1,833			1,762
Earnings before minority interest		7,150			6,314			6,383			5,803			4,743
Minority interest in earnings, net of income taxes		260			276			253			187			146
Net earnings		6,890			6,038			6,130			5,616			4,597
Basic earnings per share		3.33			2.86			2.91			2.66			2.18
Diluted earnings per share		3.32			2.86			2.91			2.66			2.18
Dividends declared per share to public shareholders		1.54			—			—			—			—
Weighted average shares (millions) — Basic ⁽¹⁾		2,068			2,109			2,109			2,109			2,109
Weighted average shares (millions) — Diluted ⁽¹⁾		2,078			2,109			2,109			2,109			2,109
Capital expenditures		1,099			1,072			886			736			711
Depreciation and amortization		842			748			658			527			459
Property, plant and equipment, net		6,348			6,435			5,238			4,603			4,042
Inventories		9,664			9,371			7,101			5,420			4,882
Total assets		32,972			31,777			26,143			23,233			21,381
Total long-term debt		11,377			5,578			2,222			4,141			—
Total debt		11,961			6,069			2,773			4,921			807
Stockholders’ equity		7,500			15,595			14,449			10,505			13,231
Common dividends declared to public shareholders as a % of Diluted EPS		46.4	%		—			—			—			—
Book value per common share outstanding		3.74			7.39			6.85			4.98			6.27
Market price per common share — high/low		56.26 - 33.30			—			—			—			—
Closing price of common share at year end		43.51			—			—			—			—
Price/earnings ratio at year end — Diluted		13			—			—			—			—
Number of common shares outstanding at year end (millions) ⁽¹⁾		2,007			2,109			2,109			2,109			2,109
Number of employees		75,600			75,500			74,200			94,700			45,500

(1)	For the years ended 2007, 2006, 2005 and 2004, share amounts are based on the number of shares distributed by Altria on the Distribution Date.

(2)

Results for the years ended 2007, 2006, 2005 and 2004 have been revised to reflect the movement of certain subsidiaries to a December 31 closing date. As a result of this change, PMI recorded an adjustment to stockholders’ equity (specifically earnings reinvested in the business) of $175 million on January 1, 2004.

This Selected Financial Data should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1. Background and Basis of Presentation to the consolidated financial statements.

Consolidated Balance Sheets

(in millions of dollars, except share and per share data)


at December 31,	2008		2007
Assets
Cash and cash equivalents	$	1,531	$	1,501
Receivables (less allowances of $14 in 2008 and $15 in 2007)		2,848		3,099
Inventories:
Leaf tobacco		3,924		4,018
Other raw materials		1,137		1,205
Finished product		4,603		4,148

		9,664		9,371
Deferred income taxes		322		302
Due from Altria Group, Inc. and affiliates				257
Other current assets		574		256

Total current assets		14,939		14,786
Property, plant and equipment, at cost:
Land and land improvements		547		590
Buildings and building equipment		3,351		3,345
Machinery and equipment		7,170		6,952
Construction in progress		632		798

		11,700		11,685
Less accumulated depreciation		5,352		5,250

		6,348		6,435
Goodwill		8,015		7,925
Other intangible assets, net		3,084		1,906
Other assets		586		725

Total Assets	$	32,972	$	31,777

See notes to consolidated financial statements.


at December 31,	2008			2007
Liabilities
Short-term borrowings	$	375		$	400
Current portion of long-term debt		209			91
Accounts payable		1,013			819
Accrued liabilities:
Marketing		457			453
Taxes, except income taxes		4,502			4,504
Employment costs		665			562
Dividends payable to public shareholders		1,090
Other		1,167			610
Income taxes		488			478
Deferred income taxes		178			174

Total current liabilities		10,144			8,091
Long-term debt		11,377			5,578
Deferred income taxes		1,401			1,240
Employment costs		1,682			566
Other liabilities		868			707

Total liabilities		25,472			16,182
Contingencies (Note 18)
Stockholders’ Equity
Common stock, no par value (2,109,316,331 and 2,108,901,789 shares issued in 2008 and 2007, respectively)
Additional paid-in capital		1,581			1,265
Earnings reinvested in the business		13,354			12,642
Accumulated other comprehensive (losses) earnings		(2,281	)		1,688

		12,654			15,595
Less: treasury stock, at cost (102,053,271 shares in 2008)		5,154

Total stockholders’ equity		7,500			15,595

Total Liabilities and Stockholders’ Equity	$	32,972		$	31,777

Consolidated Statements of Earnings

(in millions of dollars, except per share data)


for the years ended December 31,	2008		2007			2006
Net revenues	$	63,640	$	55,243		$	48,302
Cost of sales		9,328		8,711			8,146
Excise taxes on products		37,935		32,433			27,533

Gross profit		16,377		14,099			12,623
Marketing, administration and research costs		6,001		5,021			4,551
Italian antitrust charge							61
Asset impairment and exit costs		84		208			126
Gains on sales of businesses				(52	)		(488	)
Amortization of intangibles		44		28			23

Operating income		10,248		8,894			8,350
Interest expense, net		311		10			142

Earnings before income taxes and minority interest		9,937		8,884			8,208
Provision for income taxes		2,787		2,570			1,825

Earnings before minority interest		7,150		6,314			6,383
Minority interest in earnings, net of income taxes		260		276			253

Net earnings	$	6,890	$	6,038		$	6,130

Per share data (Note 9):
Basic earnings per share	$	3.33	$	2.86		$	2.91

Diluted earnings per share	$	3.32	$	2.86		$	2.91

See notes to consolidated financial statements.

Consolidated Statements of Stockholders’ Equity

(in millions of dollars, except per share data)


						Earnings Reinvested in the Business			Accumulated Other Comprehensive Earnings (Losses)
	Common Stock		Additional Paid-in Capital			Earnings Reinvested in the Business			Currency Translation Adjustments			Other			Total			Treasury Stock			Total Stockholders’ Equity
Balances, December 31, 2005	$	—	$	1,265		$	9,160		$	55		$	(173	)	$	(118	)	$	—		$	10,307
Impact of closing date change for certain PMI subsidiaries (Note 1)							198															198

Balances, January 1, 2006		—		1,265			9,358			55			(173	)		(118	)		—			10,505
Comprehensive earnings:
Net earnings							6,130															6,130
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments										934						934						934
Additional minimum pension liability, net of income taxes of $61													192			192						192
Change in fair value of derivatives accounted for as hedges, net of income taxes of $3													(8	)		(8	)					(8	)
Change in fair value of debt and equity securities, net of income taxes of $1													(11	)		(11	)					(11	)

Total other comprehensive earnings																						1,107

Total comprehensive earnings																						7,237

Initial adoption of FASB Statement No. 158, net of income taxes (Note 12)													(513	)		(513	)					(513	)
Dividends declared to Altria Group, Inc. ($1.32 per share)							(2,780	)														(2,780	)

Balances, December 31, 2006		—		1,265			12,708			989			(513	)		476			—			14,449
Comprehensive earnings:
Net earnings							6,038															6,038
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments										809						809						809
Change in net loss and prior service cost, net of income taxes of $75													413			413						413
Change in fair value of derivatives accounted for as hedges, net of income taxes of $1													(10	)		(10	)					(10	)

Total other comprehensive earnings																						1,212

Total comprehensive earnings																						7,250

Adoption of FIN 48							471															471
Dividends declared to Altria Group, Inc. ($3.12 per share)							(6,575	)														(6,575	)

Balances, December 31, 2007		—		1,265			12,642			1,798			(110	)		1,688			—			15,595
Comprehensive earnings:
Net earnings							6,890															6,890
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments										(2,566	)					(2,566	)					(2,566	)
Change in net loss and prior service cost, net of income taxes of $257													(1,344	)		(1,344	)					(1,344	)
Change in fair value of derivatives accounted for as hedges, net of income taxes of $6													(58	)		(58	)					(58	)
Change in fair value of debt and equity securities													(1	)		(1	)					(1	)

Total other comprehensive earnings																						(3,969	)

Total comprehensive earnings																						2,921

Exercise of stock options and issuance of other stock awards ⁽¹⁾				395															245			640
FASB 158 measurement date change for non-U.S. plans, net of income taxes							(9	)														(9	)
Dividends declared to Altria Group, Inc. ($1.43 per share)							(3,019	)														(3,019	)
Dividends declared to public shareholders ($1.54 per share)							(3,150	)														(3,150	)
Common stock repurchased																			(5,399	)		(5,399	)
Other				(79	)																	(79	)

Balances, December 31, 2008	$	—	$	1,581		$	13,354		$	(768	)	$	(1,513	)	$	(2,281	)	$	(5,154	)	$	7,500

(1)	Includes an increase to additional paid-in capital for the reimbursement to PMI caused by modifications to Altria Group, Inc. stock awards. See Note 1.

See notes to consolidated financial statements.

Consolidated Statements of Cash Flows

(in millions of dollars)


for the years ended December 31,	2008			2007			2006
Cash Provided by (Used in) Operating Activities
Net earnings	$	6,890		$	6,038		$	6,130
Adjustments to reconcile net earnings to operating cash flows:
Depreciation and amortization		842			748			658
Deferred income tax provision (benefit)		5			(22	)		223
Minority interest in earnings, net		260			276			253
Equity loss from RBH legal settlement		124
Italian antitrust charge								61
Gains on sales of businesses					(52	)		(488	)
Asset impairment and exit costs, net of cash paid		(15	)		77			82
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net		(25	)		(828	)		45
Inventories		(914	)		(1,277	)		(1,103	)
Accounts payable		(90	)		47			(91	)
Income taxes		39			219			(1	)
Accrued liabilities and other current assets		857			239			491
Pension plan contributions		(262	)		(95	)		(135	)
Changes in amounts due from Altria Group, Inc. and affiliates		37			(27	)		30
Other		187			207			135

Net cash provided by operating activities		7,935			5,550			6,290

Cash Provided by (Used in) Investing Activities
Capital expenditures		(1,099	)		(1,072	)		(886	)
Proceeds from sales of businesses					87			520
Purchase of businesses, net of acquired cash		(1,663	)		(1,519	)		(4	)
Other		(399	)		(82	)		(69	)

Net cash used in investing activities		(3,161	)		(2,586	)		(439	)

See notes to consolidated financial statements.


for the years ended December 31,		2008			2007			2006
Cash Provided by (Used in) Financing Activities
Net (repayment) issuance of short-term borrowings		$	(449	)	$	2,162		$	(317	)
Long-term debt proceeds			11,892			4,160
Long-term debt repaid			(5,736	)		(3,381	)		(2,194	)
Repurchases of common stock			(5,256	)
Issuance of common stock			118
Changes in amounts due from Altria Group, Inc. and affiliates			664			370			104
Dividends paid to Altria Group, Inc.			(3,019	)		(6,560	)		(2,780	)
Dividends paid to public shareholders			(2,060	)
Other			(332	)		(345	)		(255	)

Net cash used in financing activities			(4,178	)		(3,594	)		(5,442	)

Effect of exchange rate changes on cash and cash equivalents			(566	)		346			87
Cash and cash equivalents:
Increase (Decrease)			30			(284	)		496
Balance at beginning of year			1,501			1,785			1,289

Balance at end of year		$	1,531		$	1,501		$	1,785

Cash paid:	Interest	$	499		$	301		$	371

	Income taxes	$	2,998		$	2,215		$	1,537

Notes to Consolidated Financial Statements

Note 1.

Background and Basis of Presentation:

• Background: Philip Morris International Inc. is a holding company incorporated in Virginia, U.S.A., whose subsidiaries and affiliates and their licensees are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States of America. Throughout these financial statements, the term “PMI” refers to Philip Morris International Inc. and its subsidiaries.

Prior to March 28, 2008, PMI was a wholly-owned subsidiary of Altria Group, Inc. (“Altria”). On March 28, 2008, Altria distributed all of its interest in PMI to Altria’s stockholders in a tax-free transaction pursuant to Section 355 of the U.S. Internal Revenue Code.

As further discussed in Note 5. Acquisitions , in 2008, PMI purchased Rothmans Inc., which is located in Canada. As a result, PMI changed the name of the Latin America segment to the Latin America & Canada segment.

Separation from Altria Group, Inc.

On January 30, 2008, the Altria Board of Directors announced Altria’s plans to spin off all of its interest in PMI to Altria’s stockholders in a tax-free transaction pursuant to Section 355 of the U.S. Internal Revenue Code (the “Spin-off”). The distribution of all of the PMI shares owned by Altria was made on March 28, 2008 (the “Distribution Date”) to stockholders of record as of the close of business on March 19, 2008 (the “Record Date”). Altria distributed one share of PMI common stock for each share of Altria common stock outstanding as of the Record Date.

•

a new PMI option to acquire the same number of shares of PMI common stock as the number of Altria options held by such person on the Distribution Date; and

•

an adjusted Altria option for the same number of shares of Altria common stock with a reduced exercise price.

As stipulated by the Employee Matters Agreement between PMI and Altria, the exercise price of each option was developed to reflect the relative market values of PMI and Altria shares by allocating the price of Altria common stock before the distribution ($73.83) to PMI shares ($51.44) and Altria shares ($22.39), and then multiplying each of these allocated values by the Option Conversion Ratio. The Option Conversion Ratio is equal to the exercise price of the Altria option, prior to any adjustment for the distribution, divided by $73.83. As a result, the new PMI option and the adjusted Altria option have an aggregate intrinsic value equal to the intrinsic value of the pre-split Altria option.

Holders of Altria restricted stock or deferred stock awarded prior to January 30, 2008, retained their existing awards and received the same number of shares of restricted or deferred stock of PMI. The restricted stock and deferred stock will not vest until the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria deferred stock awarded on January 30, 2008, who were employed by Altria after the Distribution Date, received additional shares of deferred stock of Altria to preserve the intrinsic value of the award. Recipients of Altria deferred stock awarded on January 30, 2008, who were employed by PMI after the Distribution Date, received substitute shares of PMI deferred stock to preserve the intrinsic value of the award.

To the extent that employees of Altria and its remaining subsidiaries received PMI stock options, Altria reimbursed PMI in cash for the Black-Scholes fair value of the stock options received. To the extent that employees of PMI or its subsidiaries held Altria stock options, PMI reimbursed Altria in cash for the Black-Scholes fair value of the stock options. To the extent that employees of Altria and its remaining subsidiaries received PMI deferred stock, Altria paid PMI the fair value of the PMI deferred stock less the value of projected forfeitures. To the extent that employees of PMI or its subsidiaries held Altria restricted stock or deferred stock, PMI reimbursed Altria in cash for the fair value of the restricted or deferred stock less the value of projected forfeitures and any amounts previously charged to PMI for the restricted or deferred stock. Based upon the number of Altria stock awards outstanding at the Distribution Date, the net amount of these reimbursements resulted in a payment of $449 million from Altria to PMI ($427 million of which was paid in March 2008, with the remainder paid in April 2008). This reimbursement from Altria is reflected as an increase to the additional paid-in capital of PMI on the December 31, 2008 consolidated balance sheet.

Prior to the Spin-off, PMI was included in the Altria consolidated federal income tax return, and federal income tax contingencies were recorded as liabilities on the balance sheet of Altria. In April 2008, Altria reimbursed PMI in cash for these liabilities, which were $97 million.

Prior to the Spin-off, certain employees of PMI participated in the U.S. benefit plans offered by Altria. After the Distribution Date, the benefits previously provided by Altria are now provided by PMI. As a result, new plans have been established by PMI, and the related plan assets (to the extent that the benefit plans were previously funded) and liabilities have been transferred to the new plans. The transfer of these

benefits resulted in PMI recording additional liabilities of $103 million in its consolidated balance sheet, partially offset by the related deferred tax assets ($22 million) and an adjustment to stockholders’ equity ($26 million). In April 2008, Altria paid PMI $112 million in cash based on an estimate of the value of these benefits net of the related tax benefit. In December 2008, PMI paid Altria $57 million in cash upon receipt of final actuarial valuations related to the qualified pension plan.

A subsidiary of Altria provided PMI with certain corporate services at cost plus a management fee. After the Distribution Date, PMI undertook these activities, and services provided to PMI ceased in 2008. All intercompany accounts with Altria were settled in cash. As shown in the table below, the settlement of the intercompany accounts (including the amounts discussed above related to stock awards, tax contingencies and benefit plan liabilities) resulted in a net payment from Altria to PMI of $275 million.


(in millions)
Modifications to Altria Group, Inc. stock awards	$	449
Transfer of federal income tax contingencies		97
Transfer of employee benefit plan liabilities		55
Settlement of intercompany account (primarily taxes)		(326	)

Net amount received from Altria Group, Inc. and affiliates	$	275

For additional information regarding PMI’s transactions with Altria Group, Inc. and its affiliates after the Spin-off, see Note 3. Transactions with Altria Group, Inc .

As part of the Spin-off, PMI paid $4.0 billion in special dividends in addition to its normal dividends to Altria. PMI paid $3.1 billion of these special dividends in 2007 and the remaining $900 million in the first quarter of 2008.

• Basis of presentation: 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 liabilities at the dates of the financial statements and the reported amounts of net revenues and expenses during the reporting periods. Significant estimates and assumptions include, among other things, pension and benefit plan assumptions, useful lives and valuation assumptions of goodwill and other intangible assets, marketing programs and income taxes. Actual results could differ from those estimates.

The consolidated financial statements include PMI, as well as its wholly-owned and majority-owned subsidiaries. Investments in which PMI exercises significant influence (20%-50% ownership interest), are accounted for under the equity method of accounting. Investments in which PMI has an ownership interest of less than 20%, or does not exercise significant influence, are accounted for with the cost method of accounting. All intercompany transactions and balances have been eliminated. Transactions between PMI and Altria are included in these consolidated financial statements.

Prior to 2008, certain subsidiaries of PMI reported their results up to ten days before the end of December, rather than on December 31. During 2008, these subsidiaries moved to a December 31, 2008 closing date. As a result, certain prior years’ amounts have been revised to reflect this change, which resulted in an adjustment to retained earnings of $198 million on January 1, 2006. The effect of this change was not material to PMI’s consolidated financial position, results of operations or operating cash flows in any of the periods presented.

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.

• Depreciation, amortization and goodwill valuation: Property, plant and equipment are stated at historical cost and depreciated by the straight-line method over the estimated useful lives of the assets. Machinery and equipment are depreciated over periods ranging from 3 to 15 years, and buildings and building improvements over periods up to 40 years. Depreciation expense for 2008, 2007 and 2006 was $798 million, $720 million and $635 million, respectively.

Definite life intangible assets are amortized over their estimated useful lives. PMI is required to conduct an annual review of goodwill and intangible assets for potential impairment. Goodwill impairment testing requires a comparison between the carrying value and fair value of each reporting unit. If the carrying value exceeds the fair value, the goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and implied fair value of goodwill, which is determined using discounted cash flows. Impairment testing for non-amortizable intangible assets requires a comparison between the fair value and carrying value of the intangible asset. If the carrying value exceeds fair value, the intangible asset is considered impaired and is reduced to fair value. In 2008, 2007 and 2006, PMI did not have to record a charge to earnings for an impairment of goodwill or intangible assets as a result of its annual reviews.

Goodwill and other intangible assets, net, by segment were as follows:


	Goodwill				Other Intangible Assets, net
(in millions)	December 31, 2008		December 31, 2007		December 31, 2008		December 31, 2007
European Union	$	1,456	$	1,510	$	469	$	69
Eastern Europe, Middle East and Africa		648		714		200		205
Asia		3,387		4,033		1,188		1,457
Latin America & Canada		2,524		1,668		1,227		175

Total	$	8,015	$	7,925	$	3,084	$	1,906

Goodwill is due primarily to PMI’s acquisitions in Indonesia, Canada, Mexico, Greece, Serbia, Colombia and Pakistan. The movements in goodwill and the gross carrying amount of intangible assets are as follows:


(in millions)	Goodwill			Gross Intangible Assets
Balance at January 1, 2007	$	6,197		$	1,673
Changes due to:
Acquisitions		1,558			202
Currency		183			8
Other		(13	)		103

Balance at December 31, 2007		7,925			1,986
Changes due to:
Acquisitions		1,314			1,298
Currency		(1,228	)		(491	)
Other		4			407

Balance at December 31, 2008	$	8,015		$	3,200

The increase in goodwill from acquisitions during 2008 was due primarily to the preliminary allocation of purchase price for PMI’s September 2008 acquisition in Canada, as well as the final allocation of purchase price for PMI’s 2007 acquisitions in Mexico and Pakistan. The increase in intangible assets from acquisitions during 2008 was due primarily to the final allocation of purchase price for PMI’s 2007 acquisition in Mexico ($875 million), as well as the preliminary purchase price allocation for PMI’s acquisition in Canada ($430 million). The preliminary purchase price allocation for Canada is based upon estimates and assumptions and is subject to revision when appraisals of fixed assets and brand names are finalized in 2009. The 2008 increase in other primarily relates to the purchase of the fine cut trademark Interval and certain other trademarks. For further details on these acquisitions, see Note 5. Acquisitions .

The increase in goodwill and intangible assets from acquisitions during 2007 was primarily related to the preliminary allocation of purchase price for PMI’s acquisitions in Mexico and Pakistan.

Additional details of intangible assets were as follows:


	December 31, 2008				December 31, 2007
(in millions)	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Non-amortizable intangible assets	$	1,878			$	1,339
Amortizable intangible assets		1,322	$	116		647	$	80

Total intangible assets	$	3,200	$	116	$	1,986	$	80

Non-amortizable intangible assets substantially consist of brand names from PMI’s acquisitions in Indonesia in 2005 and Mexico in 2007. Amortizable intangible assets consist primarily of certain trademarks and non-compete agreements associated with acquisitions. Pre-tax amortization expense for intangible assets during the years ended December 31, 2008, 2007 and 2006 was $44 million, $28 million and $23 million, respectively. Amortization expense for each of the next five years is estimated to be $70 million or less, assuming no additional transactions occur that require the amortization of intangible assets.

• Foreign currency translation: PMI translates the results of operations of its subsidiaries and affiliates 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. In addition, some of PMI’s subsidiaries have assets and liabilities denominated in currencies other than their functional currencies, and to the extent those are not designated as net investment hedges, these assets and liabilities generate transaction gains and losses when translated into their respective functional currencies. PMI reported its net transaction losses of $54 million for the year ended December 31, 2008 and its net transaction gains of $117 million and $62 million for the years ended December 31, 2007 and 2006, respectively, in marketing, administration and research costs on the consolidated statements of earnings.

• Guarantees: PMI accounts for guarantees in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 requires the disclosure of certain guarantees and requires the recognition of a liability for the fair value of the obligation of qualifying guarantee activities. See Note 18. Contingencies for a further discussion of guarantees.

• Hedging instruments: Derivative financial instruments are recorded at fair value on the consolidated balance sheets as either assets or liabilities. Changes in the fair value of derivatives are recorded each period either in accumulated other comprehensive earnings (losses) or in earnings, 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 earnings (losses) are reclassified to the consolidated statements of earnings in the periods in which operating results are affected by the hedged item. Cash flows from hedging instruments are classified in the same manner as the affected hedged item in the consolidated statements of cash flows.

• Impairment of long-lived assets: PMI reviews long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. PMI performs undiscounted operating cash flow analyses to determine if an impairment exists. For purposes of recognition and measurement of an impairment for assets held for use, PMI groups assets and liabilities at the lowest level for which cash flows are separately identifiable. 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.

• Income taxes: PMI accounts for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes.” Prior to the Distribution Date, the accounts of PMI were included in Altria’s consolidated United States federal income tax return, and federal income taxes were computed on a separate company basis. PMI made payments to, or was reimbursed by, Altria for the tax effects resulting from its inclusion in Altria’s consolidated United States federal income tax return. Beginning March 31, 2008, PMI is no longer a member of the Altria consolidated tax return group, and PMI will file its own federal consolidated income tax return.

Prior to the Distribution Date, federal tax contingencies relating to PMI were recorded as liabilities on the balance sheet of Altria. In April 2008, Altria reimbursed PMI in cash for these liabilities, which were $97 million.

Income tax provisions for jurisdictions outside the United States, as well as state and local income tax provisions, were determined on a separate company basis and the related assets and liabilities were recorded in PMI’s consolidated balance sheets. Significant judgment is required in determining income tax provisions and in evaluating tax positions.

On January 1, 2007, PMI adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). The Interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As a result of the January 1, 2007 adoption of FIN 48, PMI recognized a $472 million decrease in unrecognized tax benefits, which resulted in an increase to stockholders’ equity as of January 1, 2007 of $471 million and a reduction of federal deferred tax benefits of $1 million.

• Inventories: Inventories are stated at the lower of cost or market. The first-in, first-out and average cost methods are used to cost substantially all inventories. 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.

• Marketing costs: PMI promotes its products with advertising, consumer incentives and trade promotions. Such programs include, but are not limited to, discounts, rebates, in-store display incentives and volume-based incentives. Advertising costs are expensed as incurred. Consumer incentive and trade promotion activities are recorded as a reduction of revenues based on amounts estimated as being due to customers and consumers at the end of a period, based principally on historical utilization. For interim reporting purposes, advertising and certain consumer incentive expenses are charged to earnings as a percentage of sales, based on estimated sales and related expenses for the full year.

• Revenue recognition: PMI recognizes revenues, net of sales incentives and including shipping and handling charges billed to customers, either upon shipment or delivery of goods when title and risk of loss pass to customers. PMI includes excise taxes billed to customers in revenues. Shipping and handling costs are classified as part of cost of sales and were $639 million, $577 million and $504 million for the years ended December 31, 2008, 2007 and 2006, respectively.

• Software costs: PMI capitalizes certain computer software and software development costs incurred in connection with developing or obtaining computer software for internal use. Capitalized software costs are included in property, plant and equipment on PMI’s consolidated balance sheets and are amortized on a straight-line basis over the estimated useful lives of the software, which do not exceed five years.

• Stock-based compensation: PMI uses the modified prospective method, which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation over the service periods for awards expected to vest. The fair value of restricted stock and deferred stock is determined based on the number of shares granted and the market value at date of grant. The fair value of stock options is determined using a modified Black-Scholes methodology.

Prior to the Distribution Date, all employee incentive awards were granted by Altria. In connection with the Distribution, employee stock awards were modified in the manner described in Note 1. Background and Basis of Presentation . See Note 8. Stock Plans for further discussion.

Excess tax benefits occur when the tax deduction claimed at vesting exceeds the tax benefit from the fair value of compensation expense accrued under SFAS No. 123(R). Excess tax benefits of $16 million were recognized in other comprehensive earnings for the year ended December 31, 2008 and were presented as financing cash flows.

• New Accounting Standards: In December 2007, the FASB issued SFAS No. 141 (Revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) is effective for business combinations that close on or after January 1, 2009. SFAS 141(R) requires that assets acquired, liabilities assumed and any noncontrolling interest in the acquiree be measured at fair value as of the acquisition date. Additionally, costs incurred to effect the acquisition are to be recognized separately from the acquisition and expensed as incurred.

On March 19, 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. SFAS 161 requires disclosures about how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008, at which time PMI will amend its disclosures accordingly.

In June 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP 03-6-1”). FSP 03-6-1 states that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and therefore shall be included in the earnings per share calculation pursuant to the two class method described in SFAS No. 128, “Earnings Per Share.” FSP 03-6-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and requires all prior-period earnings per share data to be adjusted retrospectively.

The adoption of these new standards will not have a material impact on PMI’s consolidated results of operations, financial position or cash flows.

Additionally, in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 changes the reporting for minority interests by reporting these as noncontrolling interests within equity. Moreover, SFAS 160 requires that any transactions between an entity and a noncontrolling interest are to be accounted for as equity transactions. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. SFAS 160 is to be applied prospectively, except for the presentation and disclosure requirements, which shall be applied retrospectively for all periods presented. As a result of applying SFAS 160 at January 1, 2009, noncontrolling interests of $404 million and $418 million for the years ended December 31, 2008 and 2007, respectively will be reclassified from other long-term liabilities to a component of stockholders’ equity.

Note 3.

Transactions with Altria Group, Inc.:

• Corporate services: Through March 28, 2008, Altria’s subsidiary, Altria Corporate Services, Inc. (“ALCS”), provided PMI with various services, including certain planning, legal, treasury, accounting, auditing, risk management, human resources, office of the secretary, corporate affairs, information technology and tax services. Billings for these services, which were based on the estimated cost to ALCS to provide such services and a management fee, were $13 million, $127 million and $158 million for the years ended December 31, 2008, 2007 and 2006, respectively. PMI believes that the billings were reasonable based on the level of support provided by ALCS and that they reflect all services provided. These costs were paid monthly to ALCS. The effects of these transactions were included in operating cash flows in PMI’s consolidated statements of cash flows.

On March 28, 2008, PMI entered into a Transition Services Agreement (the “Transition Services Agreement”) with ALCS pursuant to which ALCS provided select services to PMI for certain transition periods not to exceed twenty-four months to ensure continuity of activity following the Spin-off. The transition services included, among others, consulting services related to risk management, benefit administration and information technology as well as the transfer of transaction processing (accounts payable and expense reports) for certain Latin American markets.

On March 28, 2008, PMI entered into an Employee Matters Agreement (the “Employee Matters Agreement”) with Altria. The Employee Matters Agreement governs PMI’s and Altria’s respective obligations with respect to employees, compensation and benefit plans, treatment of holders of Altria stock options, restricted stock and deferred stock with respect to PMI, and cooperation between the companies

in the sharing of employee information and maintenance of confidentiality.

On March 28, 2008, PMI entered into a Tax Sharing Agreement (the “Tax Sharing Agreement”) with Altria. The Tax Sharing Agreement generally governs PMI’s and Altria’s respective rights, responsibilities and obligations for pre-distribution periods and for potential taxes on the Spin-off. With respect to any potential tax resulting from the Spin-off, responsibility for the tax will be allocated to the party that acted (or failed to act) in a manner which resulted in the tax.

On March 28, 2008, PMI Global Services Inc. (“PMIGS”) purchased from ALCS, at a fair market value of $108 million, a subsidiary of ALCS, the principal assets of which are two Gulfstream airplanes. Given that the purchase was from an entity under common control, the planes were recorded at book value ($89 million) and a portion of the purchase price ($19 million) was treated as a dividend to Altria.

• Operations: PMI had contracts with Philip Morris USA Inc. (“PM USA”), a U.S. tobacco subsidiary of Altria, for the purchase of U.S.-grown tobacco leaf, the contract manufacture of cigarettes for export from the United States and certain research and development activities. Billings for services were generally based upon PM USA’s cost to provide such services, plus a service fee. The cost of leaf purchases was the market price of the leaf plus a service fee. Fees paid have been included in operating cash flows on PMI’s consolidated statements of cash flows.

In 2008, PMI terminated its contract manufacturing arrangement with PM USA. PMI shifted all of its PM USA contract manufactured production, which approximated 57 billion cigarettes annually in 2007, to PMI facilities in Europe during the fourth quarter of 2008. During the first quarter of 2008, PMI recorded exit costs of $15 million related to the termination of its manufacturing contract with PM USA.

During 2008, 2007 and 2006, the goods and services purchased from PM USA were as follows:


	For the Years Ended December 31,
(in millions)	2008			2007		2006
Contract manufacturing, cigarette volume		24,692			57,293		78,659

Contract manufacturing expense	$	431		$	792	$	1,171
Research and development, net of billings to PM USA		(2	)		75		54

Total pre-tax expense	$	429		$	867	$	1,225

Leaf purchases	$	88		$	458	$	299

Contract manufacturing expense includes the cost of cigarettes manufactured for PMI, as well as the cost of PMI’s purchases of reconstituted tobacco and production materials. The expenses shown above also included total service fees of $20 million, $52 million and $60 million for the years ended December 31, 2008, 2007 and 2006. Service fees from PM USA are not expected to be incurred in the future.

Effective as of January 1, 2008, PMI entered into an Intellectual Property Agreement (the “Intellectual Property Agreement”) with PM USA. The Intellectual Property Agreement governs the ownership of intellectual property between PMI and PM USA. Ownership of the jointly funded intellectual property has been allocated as follows:

•

PMI owns all rights to the jointly funded intellectual property outside the United States, its territories and possessions; and

•

PM USA owns all rights to the jointly funded intellectual property in the United States, its territories and possessions.

Ownership of intellectual property related to patent applications and resulting patents based solely on the jointly funded intellectual property, regardless of when filed or issued, will be exclusive to PM USA in the United States, its territories and possessions and exclusive to PMI everywhere else in the world. Additionally, the Intellectual Property Agreement contains provisions concerning intellectual property that is independently developed by PMI and PM USA following the Spin-off.

Net amounts due from/to Altria Group, Inc. and affiliates related to ongoing operations were comprised of the following at December 31, 2008 and 2007:


	At December 31,
(in millions)	2008			2007
Net receivables from Altria Group, Inc. and affiliates	$	69		$	111
(Payable) prepaid expense for services from PM USA		(53	)		146

Due from Altria Group, Inc. and affiliates	$	16		$	257

The $69 million due from Altria Group, Inc. and affiliates at December 31, 2008 is reflected in receivables on the consolidated balance sheet. The $53 million payable for services from PM USA is reflected in accounts payable on the consolidated balance sheet.

• Leasing activities: A German subsidiary of PMI had several leveraged lease agreements related principally to transportation assets in Europe. These leveraged lease agreements were managed by Philip Morris Capital Corporation (“PMCC”), Altria’s financial services subsidiary. During December 2007, these lease agreements were sold and PMI recorded a pre-tax gain of $52 million ($14 million after taxes) in the 2007 consolidated statement of earnings. As a result of this transaction, PMI no longer has and does not plan to make any future lease investments.

Note 4.

Asset Impairment and Exit Costs:

During 2008, 2007 and 2006, pre-tax asset impairment and exit costs consisted of the following:


(in millions)	2008		2007		2006
Separation programs:
European Union	$	66	$	137	$	99
Eastern Europe, Middle East and Africa				12		2
Asia				28		19
Latin America & Canada		3		18		1

Total separation programs		69		195		121

Asset impairment:
European Union						5

Total asset impairment		—		—		5

Contract termination charges:
Eastern Europe, Middle East and Africa		1
Asia		14

Total contract termination charges		15		—		—

General corporate		—		13		—

Asset impairment and exit costs	$	84	$	208	$	126

• Manufacturing Optimization Program: As previously discussed in Note 3. Transactions with Altria Group, Inc. , in 2008, PMI terminated its contract manufacturing arrangement with PM USA and shifted all of its PM USA contract manufactured production to PMI facilities in Europe during the fourth quarter of 2008. During the first quarter of 2008, PMI recorded exit costs of $15 million related to the termination of its manufacturing contract with PM USA.

• Asset Impairment and Exit Costs: Since 2005, PMI has announced plans to streamline various administrative functions and operations. These plans resulted in the announced closure or partial closure of nine production facilities through December 31, 2008, the largest of which is the closure of a factory in Munich, Germany announced in 2006. As a result of these announcements and the Manufacturing Optimization Program discussed above, PMI recorded pre-tax charges of $84 million, $195 million and $126 million for the years ended December 31, 2008, 2007 and 2006, respectively. The pre-tax charges primarily related to severance costs. The 2006 pre-tax charges included $57 million of costs related to the Munich, Germany factory closure.

In 2007, general corporate pre-tax charges of $13 million were related to fees associated with the Spin-off, as discussed more fully in Note 1. Background and Basis of Presentation .

Cash payments related to exit costs at PMI were $99 million, $131 million and $44 million for the years ended December 31, 2008, 2007 and 2006, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $115 million.

As of December 31, 2008, the streamlining of these various functions and operations resulted in the elimination of approximately 3,600 positions.

The movement in the exit cost liabilities for PMI was as follows:


(in millions)
Liability balance, January 1, 2007	$	110
Charges		208
Cash spent		(131	)
Currency/other		15

Liability balance, December 31, 2007	$	202
Charges		84
Cash spent		(99	)
Currency/other		(72	)

Liability balance, December 31, 2008	$	115

Note 5.

Acquisitions:

• Rothmans: On July 31, 2008, PMI announced that it had entered into an agreement with Rothmans Inc. (“Rothmans”), which is located in Canada, to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans for CAD $30 per share in cash, or CAD $2.0 billion ($1.9 billion based on exchange rates at the time of acquisition). Prior to this agreement, Rothmans’ sole holding was a 60% interest in Rothmans, Benson & Hedges Inc. (“RBH”). The remaining 40% interest in RBH was owned by PMI. In October 2008, PMI completed the acquisition of all the Rothmans shares. From January 2008 to September 2008, PMI recorded equity earnings on its equity interest in RBH. After the completion of the acquisition, Rothmans became a consolidated subsidiary of PMI and, as a result, PMI recorded all of Rothmans’ earnings during the fourth quarter of 2008. Rothmans contributed $50 million of incremental operating income and $22 million of incremental net earnings during the fourth quarter of 2008.

The preliminary allocation of purchase price to Rothmans assets and liabilities at December 31, 2008 was principally as follows:


(in billions)
Goodwill	$	1.8
Acquired cash		0.3
Inventories		0.2
Definite-lived brand names		0.4
Fixed assets		0.1
Other assets		0.1

Total assets		2.9

Short-term debt		0.2
Accrued settlement costs		0.5
Other liabilities		0.3

Total liabilities		1.0

Cash paid for Rothmans	$	1.9

Liabilities assumed in the acquisition consist principally of settlement accruals (as discussed in Note 16. RBH Legal Settlement ), short-term debt and other liabilities. The amounts shown above represent the preliminary allocation of purchase price and are subject to revision when fixed asset and brand name appraisals have been finalized.

• Mexico: In November 2007, PMI acquired an additional 30% interest in its Mexican tobacco business from Grupo Carso, S.A.B. de C.V. (“Grupo Carso”), which increased PMI’s ownership interest to 80%, for $1.1 billion. After this transaction was completed, Grupo Carso retained a 20% interest in the business. A director of PMI has an affiliation with Grupo Carso. PMI also entered into an agreement with Grupo Carso which provides the basis for PMI to potentially acquire, or for Grupo Carso to potentially sell to PMI, Grupo Carso’s remaining 20% in the future. During 2008, the allocation of purchase price was completed.

• Holdings in the Dominican Republic: In November 2006, a subsidiary of PMI exchanged its 47.5% interest in E. León Jimenes, C. por. A. (“ELJ”), which included a 40% indirect interest in ELJ’s beer subsidiary, Cerveceria Nacional Dominicana, C. por. A., for 100% ownership of ELJ’s cigarette subsidiary, Industria de Tabaco León Jimenes, S.A. (“ITLJ”) and $427 million of cash, which was contributed to ITLJ prior to the transaction. As a result of the transaction, PMI now owns 100% of the cigarette business and no longer holds an interest in ELJ’s beer business. The exchange of PMI’s interest in ELJ’s beer subsidiary resulted in a pre-tax gain on the sale of $488 million.

• Other: In June 2008, PMI purchased the fine cut trademark Interval and certain other trademarks in the other tobacco products category from Imperial Tobacco Group PLC for $407 million. The cost of this purchase is reflected in other investing activities in the consolidated statement of cash flows for the year ended December 31, 2008.

During the first quarter of 2007, PMI acquired an additional 58.2% interest in a Pakistan cigarette manufacturer, Lakson Tobacco Company Limited (“Lakson Tobacco”), which increased PMI’s total ownership interest in Lakson Tobacco from 40% to approximately 98%, for $388 million.

In the fourth quarter of 2006, PMI purchased from British American Tobacco the Muratti and Ambassador trademarks in certain markets, as well as the rights to L&M and Chesterfield in Hong Kong, in exchange for the rights to Benson & Hedges in certain African markets and a payment of $115 million.

The effects of these other acquisitions, in the aggregate, were not material to PMI’s consolidated financial position, results of operations or operating cash flows in any of the periods presented.

Note 6.

Indebtedness:

• Short-Term Borrowings: At December 31, 2008 and 2007, PMI’s short-term borrowings and related average interest rates consisted of the following:


	2008					2007
(in millions)	Amount Outstanding			Average Year-End Rate		Amount Outstanding			Average Year-End Rate
364-day term loan facility	$	—		—	%	$	2,205		5.1	%
Commercial paper		1,020		1.3			—		—
Bank loans		375		12.0			400		7.1
Amount reclassified as long-term debt		(1,020	)				(2,205	)

	$	375				$	400

Given the mix of subsidiaries and their respective local economic environments, the average interest rate for bank loans above can vary significantly from day to day and country to country.

The fair values of PMI’s short-term borrowings at December 31, 2008 and 2007, based upon current market interest rates, approximate the amounts disclosed above.

•

Long-Term Debt: At December 31, 2008 and 2007, PMI’s long-term debt consisted of the following:


(in millions)	2008			2007
Short-term borrowings, reclassified as long-term debt	$	1,020		$	2,205
Notes, 4.875% to 6.875% (average interest rate 5.80%), due through 2038		7,193			1,360
Foreign currency obligations:
Euro notes payable (average interest rate 5.73%), due through 2015		2,484			1,698
Swiss Franc notes payable (average interest rate 4.00%), due 2012		473
Other (average interest rate 4.37%), due through 2014		416			406

		11,586			5,669
Less current portion of long-term debt		(209	)		(91	)

	$	11,377		$	5,578

Public debt offerings

In May 2008, PMI issued $6.0 billion of senior unsecured notes under its shelf registration statement, with net proceeds from the sale of the securities of $5,950 million. The notes bear the following general terms:

•

$2.0 billion total principal due May 16, 2013 at a fixed, annual interest rate of 4.875%. Interest is payable semiannually beginning November 16, 2008.

•

$2.5 billion total principal due May 16, 2018 at a fixed, annual interest rate of 5.650%. Interest is payable semiannually beginning November 16, 2008.

•

$1.5 billion total principal due May 16, 2038 at a fixed, annual interest rate of 6.375%. Interest is payable semiannually beginning November 16, 2008.

In August 2008, PMI issued Euro 1.75 billion of senior unsecured notes under its shelf registration statement. The net proceeds were Euro 1.74 billion ($2,520 million) from this offering. The notes bear the following general terms:

•

Euro 1.0 billion total principal due September 6, 2011 at a fixed, annual interest rate of 5.625%. Interest is payable annually beginning September 6, 2009.

•

Euro 750 million total principal due September 4, 2015 at a fixed, annual interest rate of 5.875%. Interest is payable annually beginning September 4, 2009.

In November 2008, PMI issued $1.25 billion of senior unsecured notes under its shelf registration statement. The net proceeds from the sale of the securities were $1,240 million. The notes bear the following general terms:

•

$1.25 billion total principal due March 17, 2014 at a fixed, annual rate of 6.875%. Interest is payable semiannually beginning March 17, 2009.

Other debt

In September 2008, PMI issued CHF 500 million (approximately $465 million) of 4.0% bonds, due in September 2012. The outstanding borrowings are included in other foreign currency obligations in the table above.

Other foreign debt above also includes $306 million and $278 million at December 31, 2008 and 2007, respectively, of capital lease obligations associated with PMI’s vending machine distribution network in Japan.

Aggregate maturities of long-term debt, excluding short-term borrowings reclassified as long-term debt, are as follows:


(in millions)
2009	$	209
2010		83
2011		1,485
2012		520
2013		2,021
2014-2018		4,822
2019-2023		—
Thereafter		1,500

		10,640
Debt premiums		(74	)

Total long-term debt, excluding short-term borrowings reclassified as long-term debt	$	10,566

See Note 15. Fair Value Measurements for additional disclosures related to the fair value of PMI’s debt.

•

Credit Lines: At December 31, 2008, PMI’s committed credit lines and the related activities were as follows:


Type (in billions of dollars)	Committed Credit Lines
$1.0 billion, 3-year revolving credit, expiring December 4, 2010	$	0.9
$3.0 billion, 5-year revolving credit, expiring December 4, 2012		2.7
Euro 2.0 billion, 5-year revolving credit, expiring May 12, 2010		2.8

Total facilities	$	6.4

Commercial paper outstanding	$	1.0

Lehman Brothers Holdings Inc. (“Lehman”) and certain of its subsidiaries were credit providers under the December 4, 2010, December 4, 2012 and May 12, 2010 revolving credit facilities in the total amount of $0.5 billion. Lehman filed for bankruptcy protection on September 15, 2008. The figures shown in the table above exclude all amounts related to Lehman.

These facilities require PMI to maintain a ratio of earnings before interest, taxes, depreciation and amortization, or EBITDA, to interest of not less than 3.5 to 1.0 on a rolling twelve-month basis. At December 31, 2008, PMI’s ratio calculated in accordance with the agreements was 21.9 to 1.0. These facilities do not include any credit rating triggers, material adverse change clauses or any provisions that could require PMI to post collateral.

These facilities can be used to support the issuance of commercial paper in Europe and the United States. The multi-year facilities enable PMI to reclassify short-term debt to long-term debt. At December 31, 2008, $1,020 million of short-term borrowings that PMI expects to remain outstanding through December 31, 2009 were reclassified as long-term debt. At December 31, 2007, $2,205 million of short-term borrowings that PMI expected to remain outstanding through December 31, 2008 were reclassified as long-term debt.

In addition to the above, certain PMI subsidiaries maintain credit lines to meet their respective local working capital needs. These credit lines, which amounted to approximately $2.2 billion at December 31, 2008, are for the sole use of these businesses. Borrowings on these lines amounted to $375 million and $400 million at December 31, 2008 and 2007, respectively.

Note 7.

Capital Stock:

As discussed in Note 1. Background and Basis of Presentation , on March 28, 2008, Altria completed the distribution of one share of PMI common stock for each share of Altria common stock outstanding as of the Record Date. As a result, PMI had 2,108,901,789 shares of common stock outstanding immediately following the distribution. PMI commenced a $13.0 billion two-year share repurchase program on May 1, 2008. The total repurchases under this program in 2008 were 106.8 million shares for $5.4 billion ($50.57 per share).

Shares of authorized common stock are 6.0 billion; issued, repurchased and outstanding shares after the distribution by Altria were as follows:


	Shares Issued	Shares Repurchased		Shares Outstanding
Balances, March 28, 2008	2,108,901,789	—		2,108,901,789
Repurchase of shares		(106,775,475	)	(106,775,475	)
Exercise of stock options and issuance of other stock awards	414,542	4,722,204		5,136,746

Balances, December 31, 2008	2,109,316,331	(102,053,271	)	2,007,263,060

At December 31, 2008, 64,656,010 shares of common stock were reserved for stock options and other stock awards under PMI’s stock plans, and 250 million shares of preferred stock, without par value, were authorized but unissued. PMI currently has no plans to issue any shares of preferred stock.

Note 8.

Stock Plans:

Performance Incentive Plan and Stock Compensation Plan for Non-Employee Directors: Under the Philip Morris International Inc. 2008 Performance Incentive Plan (the “Plan”), PMI may grant to certain eligible employees stock options, stock appreciation rights, restricted stock, restricted stock units and deferred stock units and other stock-based awards based on PMI’s common stock, as well as performance-based incentive awards. Up to 70 million shares of PMI’s common stock may be issued under the Plan. At March 31, 2008, approximately 34.1 million shares were granted under the Plan to reflect PMI’s Spin-off from Altria. At December 31, 2008, shares available for grant under the plan were 36,030,220.

PMI has also adopted the Philip Morris International Inc. 2008 Stock Compensation Plan for Non-Employee Directors (the “Non-Employee Directors Plan”). A non-employee director is defined as each member of the PMI Board of Directors who is not a full-time employee of PMI or of any corporation in which PMI owns, directly or indirectly, stock possessing at least 50% of the total combined voting power of all classes of stock entitled to vote in the election of directors in such corporation. Up to 1,000,000 shares of PMI common stock may be awarded under the Non-Employee Directors Plan. As of December 31, 2008, shares available for grant under the plan were 896,182.

Stock Option Plan

In connection with the PMI Spin-off, Altria employee stock options were modified through the issuance of PMI employee stock options and the adjustment of the stock option exercise prices for the Altria awards. As a result of these modifications, the aggregate intrinsic value of the PMI and Altria stock options immediately after the Spin-off was not greater than the aggregate intrinsic value of the Altria stock options before the Spin-off. Since the Black-Scholes fair values of the awards immediately before and immediately after the Spin-off were equivalent, as measured in accordance with the provisions of SFAS No. 123(R), no incremental compensation expense was recorded as a result of the modification of the Altria awards.

On March 31, 2008, upon the completion of the conversion of existing Altria stock options, PMI issued 28,336,348 shares subject to option at a weighted average exercise price of $22.90. At December 31, 2008, the number of PMI shares subject to option were as follows:


	Shares Subject to Option		Weighted Average Exercise Price		Average Remaining Contractual Term	Aggregate Intrinsic Value
Balances at March 28, 2008	—		$	—
Options issued	28,653,559			22.92
Options exercised	(5,312,838	)		22.62
Options cancelled	(42,372	)		21.38

Balances/Exercisable at December 31, 2008	23,298,349			22.99	2 years	$	478 million

After the Spin-off, the total intrinsic value of PMI options exercised for the year ended December 31, 2008 was $147 million. The total intrinsic value of Altria options exercised by PMI employees during the years ended December 31, 2007 and 2006 was $80 million and $85 million, respectively.

Prior to the Spin-off, PMI employees solely held Altria stock options. Altria has not granted stock options to employees of PMI since 2002. Under certain circumstances, senior executives who exercised outstanding stock options, using shares to pay the option exercise price and taxes, received Executive Ownership Stock Options (“EOSOs”) equal to the number of shares tendered. This feature ceased in March 2007. During the years ended December 31, 2007 and 2006, Altria granted 35,278 and 40,544 EOSOs, respectively, to PMI employees. EOSOs were granted at an exercise price of not less than fair market value on the date of the grant. The weighted average grant date fair value of Altria EOSOs granted during the years ended December 31, 2007 and 2006 was $16.46 and $12.42, respectively. PMI recorded pre-tax compensation cost related to these Altria stock options totaling $1 million for each of the years ended December 31, 2007 and 2006. The fair value of the awards was determined using a modified Black-Scholes methodology using the following weighted average assumptions:


	Risk-Free Interest Rate		Expected Life	Expected Volatility		Expected Dividend Yield
2007	4.49	%	4 years	27.94	%	4.07	%
2006	4.74		4	25.49		4.35

Restricted and Deferred Stock Awards

PMI may grant shares of restricted stock and deferred stock awards 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. Such shares are subject to forfeiture if certain employment conditions are not met. Restricted stock and deferred stock awards generally vest on the third anniversary of the grant date.

Upon the conversion of existing Altria awards on March 31, 2008, PMI issued 5,867,974 shares of restricted stock and deferred stock awards. During 2008, the activity for restricted stock and deferred stock awards was as follows:


	Number of Shares		Weighted Average Grant Date Fair Value Per Share
Balances at March 28, 2008	—		$	—
Granted	5,876,554			61.41
Vested	(270,995	)		48.53
Forfeited	(276,360	)		67.88
Balances at December 31, 2008	5,329,199			61.77

The grant price information for restricted stock and deferred stock awarded prior to January 30, 2008 reflects historical market prices of Altria stock at date of grant and is not adjusted to reflect the Spin-off.

The weighted average grant date fair value of the restricted stock and deferred stock awards granted to PMI employees during the years ended December 31, 2008, 2007 and 2006 was $102 million, $70 million and $66 million, or $51.44, $65.59 and $74.02 per restricted or deferred share, respectively. The fair value of the restricted stock and deferred stock awards at the date of grant is amortized to expense ratably over the restriction period. PMI recorded compensation expense for these restricted stock and deferred stock awards of $55 million for each of the years ended December 31, 2007 and 2006. For the year ended December 31, 2008, PMI recorded compensation expense for restricted stock and deferred stock awards of $68 million. The unamortized compensation expense related to restricted stock and deferred stock awards was $105 million at December 31, 2008 and is expected to be recognized over a weighted average period of 2 years.

Since the Spin-off from Altria, 0.3 million shares of PMI restricted stock and deferred stock awards vested. The total fair value of restricted stock and deferred stock awards vested in 2008 was $14 million. Prior to the Spin-off from Altria, the total fair value of vested Altria (and Kraft Foods Inc.) restricted and deferred stock awards held by PMI employees during the years ended December 31, 2008, 2007 and 2006 was $69 million, $76 million and $91 million, respectively.

Note 9.

Earnings per Share:

Basic and diluted earnings per share (“EPS”) were calculated using the following:


	For the Years Ended December 31,
(in millions)	2008		2007		2006
Net earnings	$	6,890	$	6,038	$	6,130

Weighted average shares for basic EPS		2,068		2,109		2,109
Plus incremental shares from assumed conversions:
Restricted stock and stock rights		2
Stock options		8

Weighted average shares for diluted EPS		2,078		2,109		2,109

As discussed in Note 1. Background and Basis of Presentation on March 28, 2008, Altria completed the distribution of one share of PMI common stock for each share of Altria common stock outstanding as of the Record Date. As a result, PMI had 2,108,901,789 shares of common stock outstanding immediately following the distribution.

In prior periods, PMI had 150 shares of common stock outstanding. As a result of the distribution, all prior period EPS amounts were adjusted to reflect the new capital structure of PMI. The same number of shares is being used for both diluted EPS and basic EPS for all periods prior to the Distribution Date as no PMI equity awards were outstanding prior to the Distribution Date.

Note 10.

Income Taxes:

Earnings before income taxes and minority interest, and provision for income taxes consisted of the following for the years ended December 31, 2008, 2007 and 2006:


(in millions)	2008			2007			2006
Earnings before income taxes and minority interest	$	9,937		$	8,884		$	8,208

Provision for income taxes:
United States federal:
Current	$	470		$	560		$	16
Deferred		52			72			202

		522			632			218
State and local		(23	)		7			(53	)

Total United States		499			639			165

Outside United States:
Current		2,335			2,025			1,639
Deferred		(47	)		(94	)		21

Total outside United States		2,288			1,931			1,660

Total provision for income taxes	$	2,787		$	2,570		$	1,825

United States income tax is primarily attributable to repatriation costs.

At December 31, 2008, applicable United States federal income taxes and foreign withholding taxes have not been provided on approximately $13 billion of accumulated earnings of foreign subsidiaries that are expected to be permanently reinvested. The determination of the amount of deferred tax related to these earnings is not practicable.

The United States Internal Revenue Service (“IRS”) concluded its examination of Altria’s consolidated tax returns for the years 1996 through 1999, and issued a final Revenue Agent’s Report (“RAR”) on March 15, 2006. Consequently, Altria reimbursed PMI in cash for unrequired federal tax reserves of $450 million. PMI also recognized net state tax reversals of $35 million, resulting in a total net earnings benefit of $485 million for the year ended December 31, 2006.

The U.S. federal statute of limitations remains open for the year 2000 and onward with years 2000 to 2003 currently under examination by the IRS. Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Germany (2002 onward), Indonesia (2007 onward), Russia (2005 onward) and Switzerland (2005 onward). PMI is currently under examination in various foreign jurisdictions.

As previously discussed in Note 2. Summary of Significant Accounting Policies , on January 1, 2007, PMI adopted the provisions of FIN 48. As a result, PMI recognized a $472 million decrease in unrecognized tax benefits, which resulted in an increase to stockholders’ equity as of January 1, 2007 of $471 million and a reduction of federal deferred tax benefits of $1 million.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:


(in millions)	2008			2007
Balance at January 1,	$	163		$	165
Additions based on tax positions related to the current year		35			25
Additions for tax positions of previous years		14
Reductions for tax positions of prior years		(33	)		(17	)
Reductions due to lapse of statute of limitations		(2	)
Settlements		(13	)		(10	)
Other		(4	)

Balance at December 31,	$	160		$	163

Unrecognized tax benefits and PMI’s liability for contingent income taxes, interest and penalties were as follows:


(in millions)	December 31, 2008			December 31, 2007
Unrecognized tax benefits	$	160		$	163
Accrued interest and penalties		47			53
Tax credits and other indirect benefits		(34	)		(36	)

Liability for tax contingencies	$	173		$	180

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $133 million and $129 million at December 31, 2008 and 2007, respectively. The remainder, if recognized, would principally affect deferred taxes.

PMI recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of December 31, 2007, PMI had $53 million of accrued interest and penalties. The accrued interest and penalties decreased to $47 million at December 31, 2008. For the year ended December 31, 2008, PMI recognized in its consolidated statement of earnings $1 million of interest and penalties.

It is reasonably possible that within the next 12 months certain foreign examinations will be resolved, which could result in a decrease in unrecognized tax benefits, and interest and penalties of approximately $20 million and $11 million, respectively.

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, 2008, 2007 and 2006:


	2008		2007		2006
U.S. federal statutory rate	35.0	%	35.0	%	35.0	%
Increase (decrease) resulting from:
Benefit principally related to reversal of federal and state reserves on conclusion of IRS audit					(5.9	)
Foreign rate differences	(9.5	)	(9.4	)	(7.6	)
Reversal of tax reserves no longer required					(1.3	)
Dividend repatriation cost	2.5		2.8		1.1
Other	0.1		0.5		0.9

Effective tax rate	28.1	%	28.9	%	22.2	%

The 2008 effective tax rate included the adoption of U.S. income tax regulations proposed in 2008 ($154 million) and the enacted reduction of future corporate income tax rates in Indonesia ($67 million), partially offset by the current non-deductibility of a $124 million charge related to the RBH settlement with the Government of Canada and all ten provinces, and the tax cost of a legal entity restructuring ($45 million). In 2007, PMI recorded tax benefits of $27 million related to the reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany. In 2006, the tax provision included the reversal of $105 million of tax reserves that were no longer required due to foreign tax events that were resolved within that fiscal year.

The tax effects of temporary differences that gave rise to deferred income tax assets and liabilities consisted of the following:


	At December 31,
(in millions)	2008			2007
Deferred income tax assets:
Accrued postretirement and postemployment benefits	$	181		$	49
Accrued pension costs		152			43
Inventory		46			48
Other		219			123

Total deferred income tax assets		598			263

Deferred income tax liabilities:
Trade names		(639	)		(451	)
Property, plant and equipment		(276	)		(308	)
Unremitted earnings		(554	)		(462	)

Total deferred income tax liabilities		(1,469	)		(1,221	)

Net deferred income tax liabilities	$	(871	)	$	(958	)

Note 11.

Segment Reporting:

PMI’s subsidiaries and affiliates are engaged in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States of America. Reportable segments for PMI are organized and managed by geographic region. PMI’s reportable segments are European Union; Eastern Europe, Middle East and Africa; Asia; and Latin America & Canada. PMI records net revenues and operating companies income to its segments based upon the geographic area in which the customer resides.

PMI’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 intangibles. Interest expense, net, and provision for income taxes are centrally managed and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by management. Information about total assets by segment is not disclosed because such information is not reported to or used by PMI’s chief operating decision maker. Segment goodwill and intangible assets, net, are disclosed in Note 2. Summary of Significant Accounting Policies . The accounting policies of the segments are the same as those described in Note 2.

Segment data were as follows:


	For the Years Ended December 31,
(in millions)	2008			2007			2006
Net revenues:
European Union	$	30,265		$	26,829		$	23,745
Eastern Europe, Middle East and Africa		14,817			12,166			10,012
Asia		12,222			11,097			10,139
Latin America & Canada		6,336			5,151			4,406

Net revenues ⁽¹⁾	$	63,640		$	55,243		$	48,302

Earnings before income taxes and minority interest:
Operating companies income:
European Union	$	4,738		$	4,195		$	3,500
Eastern Europe, Middle East and Africa		3,119			2,431			2,080
Asia		2,057			1,803			1,847
Latin America & Canada		520			514			1,013
Amortization of intangibles		(44	)		(28	)		(23	)
General corporate expenses		(142	)		(73	)		(67	)
Gain on sale of leasing business					52

Operating income		10,248			8,894			8,350
Interest expense, net		(311	)		(10	)		(142	)

Earnings before income taxes and minority interest	$	9,937		$	8,884		$	8,208

(1)	Total net revenues attributable to customers located in Germany, PMI’s largest market in terms of net revenues, were $8.6 billion, $7.9 billion and $7.7 billion for the years ended December 31, 2008, 2007 and 2006, respectively.


	For the Years Ended December 31,
(in millions)	2008		2007		2006
Depreciation expense:
European Union	$	259	$	263	$	217
Eastern Europe, Middle East and Africa		228		202		185
Asia		244		194		193
Latin America & Canada		62		47		39

		793		706		634
Other		5		14		1

Total depreciation expense	$	798	$	720	$	635

Capital expenditures:
European Union	$	558	$	573	$	497
Eastern Europe, Middle East and Africa		172		202		166
Asia		173		236		181
Latin America & Canada		65		58		39

		968		1,069		883
Other		131		3		3

Total capital expenditures	$	1,099	$	1,072	$	886


	At December 31,
(in millions)	2008		2007		2006
Long-lived assets:
European Union	$	3,180	$	3,440	$	2,825
Eastern Europe, Middle East and Africa		1,307		1,569		1,397
Asia		1,458		1,494		1,274
Latin America & Canada		466		485		605

		6,411		6,988		6,101
Other		137		18		17

Total long-lived assets	$	6,548	$	7,006	$	6,118

Long-lived assets consist of non-current assets other than goodwill, other intangible assets, net, and deferred tax assets.

Items affecting the comparability of results from operations were as follows:

•

Asset Impairment and Exit Costs — See Note 4. Asset Impairment and Exit Costs , for a breakdown of asset impairment and exit costs by segment.

•

Equity Loss from RBH Legal Settlement — During the second quarter of 2008, PMI recorded a $124 million charge related to the RBH settlement with the Government of Canada and all ten provinces. This charge was included in the operating companies income of the Latin America & Canada segment. See Note 16. RBH Legal Settlement for additional information.

•

Charge related to previous distribution agreement in Canada — During the third quarter of 2008, PMI recorded a pre-tax charge of $61 million related to a previous distribution agreement in Canada. This charge was recorded in the operating companies income of the Latin America & Canada segment.

•

Gains on Sales of Businesses — During 2007, PMI sold its leasing business, managed by PMCC, Altria’s financial services subsidiary, for a pre-tax gain of $52 million. During 2006, operating companies income of the Latin America & Canada segment included a pre-tax gain of $488 million related to the exchange of PMI’s interest in a beer business in the Dominican Republic. See Note 5. Acquisitions for additional information.

•

Italian Antitrust Charge — During the first quarter of 2006, PMI recorded a $61 million charge related to an Italian antitrust action. This charge was included in the operating companies income of the European Union segment.

•

Acquisitions — See Note 5 regarding acquisitions.

Note 12.

Benefit Plans:

Pension coverage for employees of PMI’s non-U.S. subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. As discussed in Note 1. Background and Basis of Presentation , prior to the Spin-off, certain employees of PMI participated in the U.S. benefit plans offered by Altria. After the Distribution Date, the benefits previously provided by Altria are now provided by PMI. As a result, new postretirement and pension plans have been established by PMI, and the related plan assets (to the extent that the benefit plans were previously funded) and liabilities have been transferred to the new plans. The transfer of these benefits resulted in PMI recording additional liabilities of $103 million in its consolidated balance sheet, partially offset by the related deferred tax assets ($22 million) and an adjustment to stockholders’ equity ($26 million). In April 2008, Altria paid PMI $112 million in cash based on an estimate of the value of these benefits net of the related tax benefit. In December 2008, PMI paid Altria $57 million in cash upon receipt of final actuarial valuations related to the qualified pension plan.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“SFAS No. 158”). SFAS No. 158 requires that employers recognize the funded status of their defined benefit pension and other postretirement plans on the consolidated balance sheet and record as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that have not been recognized as components of net periodic benefit cost. PMI adopted the recognition and related disclosure provisions of SFAS No. 158, prospectively, on December 31, 2006.

SFAS No. 158 also requires an entity to measure plan assets and benefit obligations as of the date of its fiscal year-end statement of financial position for fiscal years ending after December 15, 2008. PMI historically used September 30 to measure its non-U.S. pension plans. PMI adopted this SFAS No. 158 requirement as of December 31, 2008. As a result, the change of measurement date resulted in a net charge to stockholders’ equity of $9 million.

The amounts recorded in accumulated other comprehensive earnings/losses at December 31, 2008 consisted of the following:


(in millions)	Pension			Post- retirement			Post- employment			Total
Net losses	$	(1,385	)	$	(23	)	$	(306	)	$	(1,714	)
Prior service cost		(30	)		6						(24	)
Net transition obligation		(9	)								(9	)
Deferred income taxes		190			7			106			303

Amounts to be amortized	$	(1,234	)	$	(10	)	$	(200	)	$	(1,444	)

The amounts recorded in accumulated other comprehensive earnings/losses at December 31, 2007 consisted of the following:


(in millions)	Pension			Post- employment			Total
Net losses	$	(24	)	$	(78	)	$	(102	)
Prior service cost		(31	)					(31	)
Net transition obligation		(11	)					(11	)
Deferred income taxes		17			27			44

Amounts to be amortized	$	(49	)	$	(51	)	$	(100	)

The amounts recorded in accumulated other comprehensive earnings/losses at December 31, 2006 consisted of the following:


(in millions)	Pension			Post- employment			Total
Net losses	$	(533	)	$	(61	)	$	(594	)
Prior service cost		(37	)					(37	)
Net transition obligation		(2	)					(2	)
Deferred income taxes		98			22			120

Initial adoption of SFAS No. 158	$	(474	)	$	(39	)	$	(513	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2008 were as follows:


(in millions)	Pension			Post- retirement			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	7		$	1		$	7		$	15
Prior service cost		6			(1	)					5
Other income/expense:
Net losses		24									24
Deferred income taxes		(9	)					(2	)		(11	)

		28			—			5			33

Other movements during the year:
Net losses		(1,392	)		(24	)		(235	)		(1,651	)
Prior service cost		(5	)		7						2
Net transition obligation		2									2
Deferred income taxes		182			7			81			270

		(1,213	)		(10	)		(154	)		(1,377	)

Total movements in other comprehensive earnings/losses	$	(1,185	)	$	(10	)	$	(149	)	$	(1,344	)

The movements in other comprehensive earnings/losses during the year ended December 31, 2007 were as follows:


(in millions)	Pension			Post- employment			Total
Amounts transferred to earnings as components of net periodic benefit cost:
Amortization:
Net losses	$	25		$	7		$	32
Prior service cost		5						5
Other income/expense:
Net losses		5						5
Deferred income taxes		(6	)		(2	)		(8	)

		29			5			34

Other movements during the year:
Net losses		479			(24	)		455
Prior service cost		1						1
Net transition obligation		(9	)					(9	)
Deferred income taxes		(75	)		7			(68	)

		396			(17	)		379

Total movements in other comprehensive earnings/losses	$	425		$	(12	)	$	413

•

Pension Plans

Obligations and Funded Status

The benefit obligations, plan assets and funded status of PMI’s pension plans at December 31, 2008 and 2007, were as follows:


	U.S. Plans			Non-U.S. Plans
(in millions)	2008			2008			2007
Benefit obligation at January 1	$	—		$	3,477		$	3,323
Service cost		10			136			136
Interest cost		16			169			131
Benefits paid		(10	)		(181	)		(135	)
Termination, settlement and curtailment		2			(31	)		22
Assumption changes		7			9			(406	)
Measurement date change					63
Actuarial losses (gains)		7			(14	)		20
Transfer from Altria		221
Currency					18			338
Acquisition					227
Other		29			106			48

Benefit obligation at December 31		282			3,979			3,477

Fair value of plan assets at January 1		—			3,687			3,066
Actual return on plan assets		(38	)		(1,003	)		238
Employer contributions		2			260			95
Employee contributions					43			30
Benefits paid		(10	)		(181	)		(138	)
Termination, settlement and curtailment					(51	)		(15	)
Transfer from Altria		209
Currency					33			320
Acquisition					231
Other					34			91

Fair value of plan assets at December 31		163			3,053			3,687

Net pension (liability) asset recognized at December 31	$	(119	)	$	(926	)	$	210

At December 31, 2008, the combined U.S. and non-U.S. pension plans resulted in a net pension liability of $1,045 million. At December 31, 2007, the non-U.S. pension plans resulted in a net pension asset of $210 million. These amounts were recognized in PMI’s consolidated balance sheets at December 31, 2008 and 2007, as follows:


(in millions)	2008			2007
Other assets	$	47		$	408
Accrued liabilities — employment costs		(8	)		(8	)
Long-term employment costs		(1,084	)		(190	)

	$	(1,045	)	$	210

The accumulated benefit obligation, which represents benefits earned to date, for the U.S. pension plans was $244 million at December 31, 2008. The accumulated benefit obligation for non-U.S. pension plans was $3,468 million and $2,974 million at December 31, 2008 and 2007, respectively.

For U.S. pension plans with accumulated benefit obligations in excess of plan assets, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets were $282 million, $244 million and $163 million, respectively, as of December 31, 2008. The underfunding relates to plans for salaried employees that cannot be funded under IRS regulations. 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 $2,671 million, $2,294 million and $1,749 million, respectively, as of December 31, 2008, and $217 million, $200 million and $45 million, respectively, as of December 31, 2007.

The following weighted-average assumptions were used to determine PMI’s benefit obligations at December 31:


	U.S. Plans		Non-U.S. Plans
	2008		2008		2007
Discount rate	6.10	%	4.68	%	4.66	%
Rate of compensation increase	4.50		3.34		3.26

The discount rate for PMI’s U.S. plans was developed from a model portfolio of high-quality, fixed-income corporate debt instruments with durations that match the expected future cash flows of the benefit obligations. The discount rate for PMI’s non-U.S. plans was developed from local bond indices that match local benefit obligations as closely as possible.

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following for the years ended December 31, 2008, 2007 and 2006:


	U.S. Plans			Non-U.S. Plans
(in millions)	2008			2008			2007			2006
Service cost	$	10		$	136		$	136		$	139
Interest cost		16			169			131			112
Expected return on plan assets		(14	)		(260	)		(219	)		(190	)
Amortization:
Net losses		2			5			25			37
Prior service cost		1			5			5			5
Termination, settlement and curtailment		2			44			42			2

Net periodic pension cost	$	17		$	99		$	120		$	105

Termination, settlement and curtailment charges were due primarily to early retirement programs.

The amounts included in termination, settlement and curtailment in the table above for the year ended December 31, 2008 were comprised of the following changes:


(in millions)	U.S. Plans		Non-U.S. Plans
Benefit obligation	$	2	$	(31	)
Fair value of plan assets				51
Other comprehensive earnings/losses:
Net losses				24

	$	2	$	44

For the combined U.S. and non-U.S. pension plans, the estimated net loss and prior service cost that are expected to be amortized from accumulated other comprehensive earnings into net periodic benefit cost during 2009 are $40 million and $6 million, respectively.

The following weighted-average assumptions were used to determine PMI’s net pension cost:


	U.S. Plans		Non-U.S. Plans
	2008		2008		2007		2006
Discount rate	6.28	%	4.66	%	3.88	%	3.56	%
Expected rate of return on plan assets	7.40		7.01		7.05		7.26
Rate of compensation increase	4.50		3.26		3.21		3.17

PMI’s expected rate of return on plan assets is determined by the plan assets’ historical long-term investment performance, current asset allocation and estimates of future long-term returns by asset class.

PMI and certain of its subsidiaries sponsor defined contribution plans. Amounts charged to expense for defined contribution plans totaled $36 million, $20 million and $23 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Plan Assets

The percentage of fair value of pension plan assets at December 31, 2008 and 2007, was as follows:


	U.S. Plans		Non-U.S. Plans
	2008		2008		2007
Asset Category:
Equity securities	54	%	50	%	59	%
Debt securities	45		42		37
Real estate			3		3
Other	1		5		1

Total	100	%	100	%	100	%

PMI’s investment strategy is based on an expectation that equity securities will outperform debt securities over the long term. Accordingly, the composition of PMI’s U.S. plan assets is broadly characterized as 55%/45% between equity and debt securities. The strategy utilizes indexed U.S. equity securities, actively managed international equity securities and actively managed investment grade debt securities (which constitute 80% or more of debt securities) with lesser allocations to high-yield and international debt securities.

PMI’s investment strategy for non-U.S. plans is subject to local regulations and the asset/liability profiles of the plans in each individual country. In aggregate, the actual asset allocations of the plans are virtually identical to their respective asset policy targets.

PMI attempts to mitigate investment risk by rebalancing between equity and debt asset classes as PMI’s contributions and monthly benefit payments are made.

PMI presently makes, and plans to make, contributions, to the extent that they are tax deductible, in order to maintain plan assets in excess of the accumulated benefit obligation of its funded U.S. and non-U.S. plans. Currently, PMI anticipates making contributions between $500 million and $550 million in 2009 to its pension plans, based on current tax and benefit laws. However, this estimate is subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.

The estimated future benefit payments from PMI pension plans at December 31, 2008, were as follows:


(in millions)	U.S. Plans		Non-U.S. Plans
2009	$	13	$	150
2010		14		152
2011		13		156
2012		52		162
2013		14		168
2014 – 2018		84		1,007

•

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following for the year ended December 31, 2008:


(in millions)	U.S. Plans			Non-U.S. Plans
Service cost	$	2		$	1
Interest cost		5			2
Amortization:
Net losses		1
Prior service cost		(1	)
Other					(1	)

Net postretirement health care costs	$	7		$	2

The following weighted-average assumptions were used to determine PMI’s net postretirement costs for the year ended December 31, 2008:


(in millions)	U.S. Plans		Non-U.S. Plans
Discount rate	6.28	%	5.57	%
Health care cost trend rate	8.00		6.97

PMI’s postretirement health care plans are not funded. The changes in the accumulated benefit obligation and net amount accrued at December 31, 2008 were as follows:


(in millions)	U.S. Plans			Non-U.S. Plans
Accumulated postretirement benefit obligation at January 1, 2008	$	—		$	34
Service cost		2			1
Interest cost		5			2
Benefits paid		(3	)		(2	)
Assumption changes		6			(3	)
Actuarial losses (gains)		10			(3	)
Transfer from Altria		70
Currency					(5	)
Acquisition					33
Other					11

Accumulated postretirement benefit obligation at December 31, 2008	$	90		$	68

The current portion of PMI’s accrued postretirement health care costs of $6 million at December 31, 2008 is included in accrued employment costs on the consolidated balance sheet.

The following weighted-average assumptions were used to determine PMI’s postretirement benefit obligations at December 31, 2008:


(in millions)	U.S. Plans		Non-U.S. Plans
Discount rate	6.10	%	5.82	%
Health care cost trend rate assumed for next year	8.00		7.09
Ultimate trend rate	5.00		5.00
Year that rate reaches the ultimate trend rate	2015		2016

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care trend rates would have the following effects as of December 31, 2008:


	One-Percentage- Point Increase		One-Percentage- Point Decrease
Effect on total service and interest cost	18.8	%	(14.5	)%
Effect on postretirement benefit obligation	15.5		(11.8	)

PMI’s estimated future benefit payments for its post-retirement health care plans at December 31, 2008, were as follows:


(in millions)	U.S. Plans		Non-U.S. Plans
2009	$	3	$	3
2010		4		3
2011		4		3
2012		4		3
2013		4		3
2014 – 2018		23		17

•

Postemployment Benefit Plans

PMI and certain of its subsidiaries 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,
(in millions)	2008		2007		2006
Service cost	$	7	$	7	$	8
Interest cost		9		9		8
Amortization of net loss		7		7		7
Other expense		151		226		142

Net postemployment costs	$	174	$	249	$	165

During 2008, 2007 and 2006, certain salaried employees left PMI under separation programs. These programs resulted in incremental postemployment costs, which are included in other expense, above.

The estimated net loss for the postemployment benefit plans that will be amortized from accumulated other comprehensive earnings into net postemployment costs during 2009 is approximately $23 million.

The changes in the benefit obligations of the plans at December 31, 2008 and 2007 were as follows:


(in millions)	2008			2007
Accrued postemployment costs at January 1	$	418		$	331
Service cost		7			7
Interest cost		9			9
Benefits paid		(205	)		(180	)
Actuarial losses		235			25
Other		75			226

Accrued postemployment costs at December 31	$	539		$	418

The accrued postemployment costs were determined using a discount rate of 9.6% and 8.3% in 2008 and 2007, respectively, an assumed ultimate annual turnover rate of 4.0% and 2.4% in 2008 and 2007, respectively, assumed compensation cost increases of 4.5% in 2008 and 2007, and assumed benefits as defined in the respective plans. Post-employment costs arising from actions that offer employees benefits in excess of those specified in the respective plans are charged to expense when incurred.

Note 13.

Additional Information:


	For the Years Ended December 31,
(in millions)	2008			2007			2006
Research and development expense	$	334		$	362		$	304

Advertising expense	$	436		$	429		$	421

Interest expense	$	528		$	268		$	371
Interest income		(217	)		(258	)		(229	)

Interest expense, net	$	311		$	10		$	142

Rent expense	$	226		$	237		$	205

Minimum rental commitments under non-cancelable operating leases in effect at December 31, 2008, were as follows:


(in millions)
2009	$	164
2010		101
2011		62
2012		45
2013		33
Thereafter		245

	$	650

Note 14.

Financial Instruments:

• Derivative financial instruments: PMI operates in markets outside of the United States, with manufacturing and sales facilities in various locations around the world. PMI utilizes certain financial instruments to manage its foreign currency exposure. Derivative financial instruments are used by PMI, principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates by creating offsetting exposures. PMI is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes. 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. PMI 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. If it were deemed probable that the forecasted transaction would not occur, the gain or loss would be recognized in earnings currently.

PMI uses forward foreign exchange contracts, foreign currency swaps and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which PMI is exposed include the Euro, Indonesian rupiah, Japanese yen, Mexican peso, Russian ruble, Swiss franc and Turkish lira. At December 31, 2008 and 2007, PMI had contracts with aggregate notional amounts of $17.8 billion and $6.9 billion, respectively. The effective portion of unrealized gains and losses associated with qualifying cash flow hedge contracts is deferred as a component of accumulated other comprehensive earnings (losses) until the underlying hedged transactions are reported on PMI’s consolidated statements of earnings. Unrealized gains (losses) associated with qualifying fair value hedges are recorded in the consolidated statements of earnings and were ($52) million, $14 million and $12 million for the years ended December 31, 2008, 2007 and 2006. A portion of PMI’s foreign currency swaps, forwards and options, while effective as economic hedges, do not qualify for hedge accounting and, therefore, the unrealized gains (losses) relating to these contracts are reported in PMI’s consolidated statements of earnings. For the years ended December 31, 2008, 2007 and 2006, the unrealized losses from contracts that do not qualify for hedge accounting were $333 million, $23 million and $8 million, respectively. Generally, unrealized gains and losses reported through the consolidated statements of earnings are offset by gains and losses generated by the underlying assets or liabilities being hedged.

During the years ended December 31, 2008, 2007 and 2006, ineffectiveness related to fair value hedges and cash flow hedges was not material. PMI is hedging forecasted transactions for periods not exceeding the next twelve months. At December 31, 2008, PMI expects $53 million of derivative losses reported in accumulated other comprehensive earnings (losses) to be reclassified to the consolidated statement of earnings within the next twelve months. These losses are expected to be offset by gains on the respective forecasted transactions.

PMI designates certain foreign currency denominated debt and forward exchange contracts as net investment hedges of foreign operations. During the years ended December 31, 2008 and 2007, these hedges of net investments resulted in gains, net of income taxes, of $124 million and $19 million, respectively. These gains were reported as a component of accumulated other comprehensive earnings (losses) within currency translation adjustments.

Derivative gains or losses reported in accumulated other comprehensive earnings (losses) are a result of qualifying hedging activity. Transfers of these gains or losses to earnings are offset by the corresponding gains or losses on the underlying hedged item. Hedging activity affected accumulated other comprehensive earnings (losses), net of income taxes, during the years ended December 31, 2008, 2007 and 2006, as follows:


(in millions)	2008			2007			2006
(Loss) gain as of January 1	$	(10	)	$	—		$	8
Derivative losses (gains) transferred to earnings		89			11			(24	)
Change in fair value		(147	)		(21	)		16

(Loss) gain as of December 31	$	(68	)	$	(10	)	$	—

• Credit exposure and credit risk: PMI is exposed to credit loss in the event of non-performance by counterparties. While PMI does not anticipate non-performance, its risk is limited to the fair value of the financial instruments. PMI actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties.

• Fair value: See Note 15. Fair Value Measurements for additional disclosures related to the fair value of PMI’s derivative financial instruments.

Note 15.

Fair Value Measurements:

On January 1, 2008, PMI adopted SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS No. 157 also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:


Level 1 —		Quoted prices in active markets for identical assets or liabilities.

Level 2 —		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 —		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

• Debt: The fair value of PMI’s outstanding debt, as utilized solely for annual disclosure purposes, is determined by using readily available quoted market prices. See Note 6. Indebtedness for additional discussion on PMI’s debt.

• Derivative Financial Instruments: PMI assesses the fair value of its derivative financial instruments using internally developed models that use, as their basis, readily observable future amounts, such as cash flows, earnings, and the current market expectations of those future amounts. These derivatives include forward foreign exchange contracts, foreign currency swaps and foreign currency options. Derivative financial instruments have been classified within Level 2. See Note 14. Financial Instruments for additional discussion on derivative financial instruments.

The aggregate fair value of PMI’s debt and derivative financial instruments as of December 31, 2008, was as follows:

(in millions)

For the
Year Ended
December 31,
2008

Quoted
Prices
in Active
Markets for
Identical
Assets/
Liabilities
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Derivatives — Assets

243

—

243

—

Debt

11,682

—

Derivatives — Liabilities

512

—

512

—

On February 12, 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP No. 157-2”), which delays, until 2009, the effective date of SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis. PMI adopted FSP No. 157-2 beginning January 1, 2008 and deferred the application of SFAS No. 157 to goodwill and intangible assets, net, until January 1, 2009.

Note 16.

RBH Legal Settlement:

On July 31, 2008, Rothmans announced the finalization of a CAD $550 million (or $450 million) settlement between itself; RBH; and the Government of Canada and all ten provinces. The settlement resolves the Royal Canadian Mounted Police’s investigation relating to products exported from Canada by RBH during the 1989-1996 period. Rothmans’ sole holding was a 60% interest in RBH. The remaining 40% interest in RBH was owned by PMI.

The terms of the settlement require the following payments to be made:

•

CAD $100 million (or $83 million) fine payable by RBH, which was paid in October 2008;

•

CAD $50 million (or $41 million) towards a new government Contraband Tobacco Enforcement Strategy , which was paid by RBH in December 2008;

•

CAD $200 million (or $164 million) payable by Rothmans over 10 years at a rate of CAD $20 million (or $16 million) per year with the first payment to be made by December 31, 2009;

•

an estimated CAD $200 million (or $164 million) payable by RBH. The first payment of CAD $50 million (or $41 million) was made in December 2008 and the remaining payments are scheduled to be paid over a 10-year period based on a formula related to the revenue of RBH set out in the comprehensive agreement.

PMI translated the future obligations denominated in Canadian dollars using the prevailing exchange rate on December 31, 2008. Obligations already paid have been translated with the prevailing exchange rate at the time of the payment. Actual future payments as reported in U.S. dollars will fluctuate with changes in the Canadian and U.S. dollar exchange rate.

As a result of the finalization of the settlement, PMI recorded a charge of $124 million in the operating results of the Latin America & Canada segment during the second quarter of 2008. The charge represented the present value of PMI’s 40% equity interest in RBH’s portion of the settlement.

Subsequent to the finalization of the settlement, PMI announced on July 31, 2008 that it had entered into an agreement with Rothmans to purchase, by way of a tender offer, all of the outstanding common shares of Rothmans. See Note 5. Acquisitions , for more details regarding this acquisition.

At December 31, 2008, PMI had $207 million of discounted accrued settlement charges associated with the RBH legal settlement. These accrued settlement charges are reflected in other accrued liabilities ($15 million) and other long-term liabilities ($192 million) on the consolidated balance sheet.

Note 17.

E.C. Agreement:

In 2004, PMI entered into an agreement with the European Commission (“E.C.”) and 10 member states of the European Union that provides for broad cooperation with European law enforcement agencies on anti-contraband and anti-counterfeit efforts. To date, this agreement has been signed by 26 of the 27 member states. The agreement resolves all disputes between the parties relating to these issues. Under the terms of the agreement, PMI will make 13 payments over 12 years, including an initial payment of $250 million, which was recorded as a pre-tax charge against its earnings in 2004. The agreement calls for additional payments of approximately $150 million on the first anniversary of the agreement (this payment was made in July 2005), approximately $100 million on the second anniversary (this payment was made in July 2006) and approximately $75 million each year thereafter for 10 years, each of which is to be adjusted based on certain variables, including PMI’s market share in the European Union in the year preceding payment. Because future additional payments are subject to these variables, PMI records charges for them as an expense in cost of sales when product is shipped. In addition, PMI is also responsible to pay the excise taxes, VAT and customs duties on qualifying product seizures of up to 90 million cigarettes and is subject to payments of five times the applicable taxes and duties if qualifying product seizures exceed 90 million cigarettes in a given year. To date, PMI’s annual payments related to product seizures have been immaterial. Total charges related to the E.C. Agreement of $80 million, $100 million and $95 million were recorded in cost of sales in 2008, 2007 and 2006, respectively.

Note 18.

Contingencies:

We and our subsidiaries record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes in these cases, if any. Legal defense costs are expensed as incurred.

The table below lists the number of tobacco-related cases pending against us and/or our subsidiaries or indemnitees as of December 31, 2008, 2007 and 2006:


Type of Case	Number of Cases Pending as of December 31, 2008	Number of Cases Pending as of December 31, 2007	Number of Cases Pending as of December 31, 2006
Individual Smoking and Health Cases	123	136	137
Smoking and Health Class Actions	5	3	2
Health Care Cost Recovery Actions	11	8	3
Lights Class Actions	3	2	2
Individual Lights Cases (small claims court) ⁽¹⁾	2,010	2,026	23
Public civil actions	11	9	5

(1)	The 2,010 cases are all pending in small claims courts in Italy where the maximum damage award claimed is approximately one thousand Euros per case.

Since 1995, when the first tobacco-related litigation was filed against a PMI entity, approximately 293 Smoking and Health, Lights and Health Care Cost Recovery cases in which we and/or one of our subsidiaries and indemnitees was a defendant have been dismissed. In addition, eight cases have been decided in favor of plaintiffs. Five of these cases have subsequently reached final resolution in our favor, one has been annulled and returned to the trial court for further proceedings, and two remain on appeal. To date, we have paid total judgments including costs of approximately six thousand Euros. These payments were made in order to appeal three Italian small claims cases, two of which were subsequently reversed on appeal and one of which remains on appeal. To date, no tobacco-related case has been finally resolved in favor of a plaintiff against us, our subsidiaries or indemnitees.

The table below lists the verdicts and post-trial developments in the two pending cases (excluding one individual case on appeal from an Italian small claims court) in which verdicts were returned in favor of plaintiffs:


Date	Location of Court/Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
February 2004	Brazil/ ADESF	Class Action	The Civil Court of Sao Paulo found defendants liable without hearing evidence. The court did not assess moral or actual damages, which were to be assessed in a second phase of the case. The size of the class was not defined in the ruling.	In April 2004, the trial court clarified its ruling, awarding “moral damages” of R$1,000 (approximately $420) per smoker per full year of smoking plus interest at the rate of 1% per month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case. The size of the class still was not estimated. Defendants appealed to the Sao Paulo Court of Appeals, and the case, including the execution of the judgment was stayed pending appeal. On November 12, 2008, the Sao Paulo Court of Appeals annulled the ruling finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In addition, the defendants have filed a constitutional appeal to the Federal Supreme Court on the basis that the plaintiff did not have standing to bring the lawsuit. This appeal is still pending.

October 2003	Brazil/ Da Silva	Individual Smoking and Health	The Court of Appeal of Rio Grande do Sul reversed the trial court ruling in favor of Philip Morris Brasil and awarded plaintiffs R$768,000 (approximately $323,000).	In December 2004, a large panel of the Court of Appeal of Rio Grande do Sul overturned the adverse decision. Plaintiff has appealed to the Supreme Court. The appeal is pending.

Pending claims related to tobacco products generally fall within the following categories:

• Smoking and Health Litigation: These cases primarily allege personal injury and are brought by individual plaintiffs or on behalf of a class of individual plaintiffs. Plaintiffs’ allegations of liability in these 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, violations of deceptive trade practice laws and consumer protection statutes. Plaintiffs in these cases seek various forms of relief, including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include licit activity, failure to state a claim, lack of defect, lack of proximate cause, assumption of the risk, contributory negligence, and statute of limitations.

As of December 31, 2008, there were a number of smoking and health cases pending against our subsidiaries or indemnitees, as follows:

•

123 cases brought by individual plaintiffs against our subsidiaries (120) or indemnitees (3) in Argentina (43), Australia (1), Brazil (53), Canada (1), Chile (11), Costa Rica (1), Finland (3), Greece (1), Israel (1), Italy (5), the Philippines (1), Poland (1), and Scotland (1), compared with 136 such cases on December 31, 2007, and 137 cases on December 31, 2006; and

•

In the individual cases in Finland, in which our indemnitees (our former licensees now known as Amer Sports Corporation and Amerintie 1 Oy) and another member of the industry are defendants, plaintiffs allege personal injuries as a result of smoking. All three cases were tried together before the District Court of Helsinki . Trial began on March 3, 2008, and concluded on May 30, 2008. On October 10, 2008, the District Court issued decisions in favor of defendants in all three cases. Plaintiffs have filed appeals.

In the first class action pending in Brazil, 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, our subsidiary and another member of the industry are defendants. The plaintiff, a consumer organization, is seeking damages for smokers and former smokers, and injunctive relief. In February 2004, the trial court found defendants liable without hearing evidence. The court did not assess moral or actual damages, which were to be assessed in a second phase of the case. The size of the class was not defined in the ruling. In April 2004, the court clarified its ruling, awarding “moral damages” of R$1,000 (approximately $420) per smoker per full year of smoking plus interest at a rate of 1% per month, as of the date of the ruling. The court did not award actual damages, which were to be assessed in the second phase of the case. The size of the class still was not estimated. Defendants appealed to the Sao Paulo Court of Appeals, and the case, including the execution of the judgment, was stayed pending appeal. On November 12, 2008, the Sao Paulo Court of Appeals annulled the ruling finding that the trial court had inappropriately ruled without hearing evidence and returned the case to the trial court for further proceedings. In addition, the defendants have filed a constitutional appeal to the Federal Supreme Court on the basis that the consumer association did not have standing to bring the lawsuit. This appeal is still pending.

In the second class action pending in Brazil, Public Prosecutor of Sao Paulo v. Philip Morris Brasil Industria e Comercio Ltda, Civil Court of the City of Sao Paulo, Brazil, filed August 6, 2007, our subsidiary is a defendant. The plaintiff, the Public Prosecutor of the State of Sao Paulo, is seeking (1) unspecified damages on behalf of all smokers nationwide, former smokers, and their relatives; (2) unspecified damages on behalf of people exposed to environmental tobacco smoke (“ETS”) nationwide, and their relatives; and (3) reimbursement of the health care costs allegedly incurred for the treatment of tobacco-related diseases by all 27 States, approximately 5,000 Municipalities, and the Federal District. In an interim ruling issued in December 2007, the trial court limited the scope of this claim to the State of Sao Paulo only. Our subsidiary was served with the claim in February 2008, and filed its answer to the complaint in March 2008. On December 12, 2008, the trial court issued a decision declaring that it lacked jurisdiction and transferred the case to the 19th Civil Court in Sao Paulo where the ADESF case is pending.

In the case in Bulgaria, Yochkolovski v. Sofia BT AD, et al., Sofia City Court, Bulgaria, filed March 12, 2008, our subsidiaries and other members of the industry are defendants. The plaintiff brought a collective claim on behalf of classes of smokers who were allegedly misled by the tar and nicotine yields printed on cigarette packs and who suffered personal injuries as a result of increasing their consumption of cigarettes, and on behalf of underaged smokers who smoked more cigarettes as a result of marketing. Plaintiff seeks damages for economic loss, pain and suffering and medical treatment as well as withdrawal from the market of all cigarettes that allegedly do not comply with the tar and nicotine labeling requirements, until such time as they do comply. The court ruled initially that the claim failed to meet certain formal requirements. Plaintiff appealed and the Court of Appeal reversed the decision and returned the case to the trial court. The trial court accepted the claim and ordered the plaintiff to proceed with service. However, on September 24, 2008, a newly appointed judge issued a ruling that again dismissed

the claim, finding that it was inadmissible because the plaintiff lacked the capacity to bring the claim as a class action. On October 14, 2008, plaintiff filed an appeal against the dismissal. On November 10, 2008, the Sofia Appellate Court granted plaintiff’s second appeal, finding that the trial court had not given plaintiff the opportunity to establish his capacity to bring the claim, and returned the case to the trial court. On December 2, 2008, the trial court dismissed the claims related to youth marketing, because plaintiff is not a member of the class of youth smokers and thus cannot represent the class. The court additionally ordered the plaintiff to make more specific allegations against each defendant and provide the court with certain documentation to establish his capacity to bring the claim. Our subsidiaries have not been served with the complaint.

In the first class action pending in Canada, Cecilia Letourneau v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI Macdonald Corp., Quebec Superior Court, Canada, filed in September 1998, our subsidiary and two other Canadian manufacturers are defendants. The plaintiff, an individual smoker, is seeking compensatory and unspecified punitive damages for each member of the class who is deemed “addicted” to smoking. The class was certified in 2005. Defendants’ motion to dismiss on statute-of-limitations grounds was denied on May 5, 2008. Discovery is ongoing; no trial date has been set.

In the second class action pending in Canada, Conseil Quebecois Sur Le Tabac Et La Santé and Jean-Yves Blais v. Imperial Tobacco Ltd., Rothmans, Benson & Hedges Inc. and JTI Macdonald Corp., Quebec Superior Court, Canada, filed in November 1998, our subsidiary and two other Canadian manufacturers are defendants. The plaintiff, an individual smoker, is seeking compensatory and unspecified punitive damages for each member of the class who suffers from lung, larynx or throat cancer, or emphysema. The class was certified in 2005. Discovery is ongoing; no trial date has been set.

• Health Care Cost Recovery Litigation: These cases, brought by governmental and non-governmental plaintiffs, seek reimbursement of health care cost expenditures allegedly caused by tobacco products. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery including unjust enrichment, negligence, negligent design, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, defective product, failure to warn, sale of cigarettes to minors, and claims under statutes governing competition and deceptive trade practices. Plaintiffs in these cases seek various forms of relief including compensatory and other damages, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, remoteness of injury, failure to state a claim, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), and statute of limitations.

As of December 31, 2008, there were a total of 11 health care cost recovery cases pending against us, our subsidiaries and indemnitees, compared with 8 such cases on December 31, 2007, and 3 cases on December 31, 2006, as follows:

•

3 cases brought against us, our subsidiaries and our indemnitees in Canada (2) and in Israel (1); and

•

8 cases brought in Nigeria (7) and Spain (1) against our subsidiaries.

In the first health care cost recovery case pending in Canada, 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, we, our subsidiary, our indemnitee (PM USA), and other members of the industry are defendants. The plaintiff, the government of the province of British Columbia, brought a claim based upon legislation enacted by the province authorizing the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, or will incur, resulting from a “tobacco related wrong.” The Supreme Court has held that the statute is constitutional. We and certain other non-Canadian defendants challenged the jurisdiction of the court. The court rejected the jurisdictional challenge and the case is in the early stages of litigation. At the request of the parties, the trial date scheduled for September 2010 has been cancelled. No new trial date has been set.

On March 13, 2008, a second health care cost recovery case was filed in Canada, Her Majesty the Queen in Right of New Brunswick v. Rothmans Inc., et al., Court of Queen’s Bench of New Brunswick, Trial Court, New Brunswick, Fredericton, Canada, in which we, our subsidiary, our indemnitees (PM USA and Altria Group, Inc.), and other members of the industry are defendants. The claim was filed by the government of the province of New Brunswick based on legislation enacted in the province. This legislation is very similar to the law introduced in British Columbia that authorizes the government to file a direct action against cigarette manufacturers to recover the health care costs it has incurred, and will incur as a result of a “tobacco related wrong.” Our subsidiary, indemnitees, and we have been served with the complaint. Preliminary motions are pending before the Court.

In the first case in Nigeria, The Attorney General of Lagos State v. British American Tobacco (Nigeria) Limited, et al., High Court of Lagos State, Lagos, Nigeria, filed April 30, 2007, our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various injunctive relief, plus punitive damages. In February 2008, our subsidiary was served with a Notice of Discontinuance. The claim was formally dismissed in March 2008. However, the plaintiff has since refiled its claim. Our subsidiary has been served with the refiled complaint. We currently conduct no business in Nigeria.

In the second case in Nigeria, The Attorney General of Kano State v. British American Tobacco (Nigeria) Limited, et al., High Court of Kano State, Kano, Nigeria, filed May 9, 2007, our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various injunctive relief, plus punitive damages. The case is in the early stages of litigation, and the defendants have filed various preliminary motions upon which the court is yet to rule. Our subsidiary is contesting service.

In the third case in Nigeria, The Attorney General of Gombe State v. British American Tobacco (Nigeria) Limited, et al., High Court of Gombe State, Gombe, Nigeria, filed May 18, 2007, our subsidiary and other members of the industry are defendants . Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various injunctive relief, plus punitive damages. On July 8, 2008, the court dismissed the case against all defendants based on the plaintiff’s failure to comply with various procedural requirements when filing and serving the claim. The plaintiff did not appeal the dismissal. However, on October 17, 2008, the plaintiff refiled its claim. Our subsidiary has not yet been served with the refiled complaint.

In the fourth case in Nigeria, The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria) Limited, et al., High Court of Oyo State, Ibadan, Nigeria, filed May 25, 2007, our subsidiary and other members of the industry are defendants . Plaintiffs seek reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various injunctive relief, plus punitive damages. The case is in the early stages of litigation, and the defendants have filed various preliminary motions upon which the court is yet to rule. Our subsidiary is contesting service.

In the fifth case in Nigeria, The Attorney General of the Federation v. British American Tobacco (Nigeria) Limited, et al., Federal High Court, Abuja, Nigeria, filed July 25, 2007, our subsidiary and other members of the industry are defendants . Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various injunctive relief, plus punitive damages. Our subsidiary has not yet been served with the claim.

In the sixth case in Nigeria, The Attorney General of Akwa Ibom State v. British American Tobacco (Nigeria) Limited, et al., High Court of Akwa Ibom State, Uyo, Nigeria , the exact filing date is unknown at this time. Our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases, payment of anticipated costs of treating alleged smoking-related diseases, various injunctive relief, plus punitive damages. Our subsidiary has not yet been served with the claim.

In the seventh case in Nigeria, The Attorney General of Ogun State v. British American Tobacco (Nigeria) Limited, et al., High Court of Ogun State, Abeokuta, Nigeria , our subsidiary and other members of the industry are defendants. Plaintiff seeks reimbursement for the cost of treating alleged smoking-related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking-related diseases for the next 20 years, various injunctive relief, plus punitive damages. Our subsidiary was served with notice of the claim in December 2008.

In the series of proceedings in Spain, Junta de Andalucia, et al. v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, the first of which was filed February 21, 2002, our subsidiary and other members of the industry were defendants. The plaintiffs sought reimbursement for the cost of treating certain of their citizens for various smoking-related illnesses. In May 2004, the first instance court dismissed the initial case, finding that the State was a necessary party to the claim, and thus, the claim must be filed in the Administrative Court. The plaintiffs appealed. In February 2006, the appellate court affirmed the lower court’s dismissal. The plaintiffs then filed notice that they intended to pursue their claim in the Administrative Court against the State. Because they were defendants in the original proceeding, our subsidiary and other members of the industry filed notices with the Administrative Court that they are interested parties in the case. On September 20, 2007, the plaintiffs filed their complaint in the Administrative Court. In November 2007, the Administrative Court dismissed the claim. The plaintiffs asked the Administrative Court to reconsider its decision dismissing the case, and that request was rejected in a ruling rendered in February 2008. Plaintiffs have filed a

brief seeking leave to appeal to the Supreme Court. On June 10, 2008, our subsidiary filed a brief of appearance before the Supreme Court giving notice that it is an interested party in the appeal proceedings initiated by the plaintiffs. Plaintiffs have filed a second claim in the Administrative Court against the Ministry of Economy. This second claim seeks the same relief as the original claim, but relies on a different procedural posture. The Administrative Court has recognized our subsidiary as a party.

• Lights Cases: These cases, brought by individual plaintiffs, or on behalf of a class of individual plaintiffs, allege that the use of the term “lights” constitutes fraudulent and misleading conduct. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery including misrepresentation, deception, and breach of consumer protection laws. Plaintiffs seek various forms of relief including restitution, and compensatory and other damages. Defenses raised include lack of causation, lack of reliance, assumption of the risk, and statute of limitations.

As of December 31, 2008, there were a number of lights cases pending against our subsidiaries and indemnitees, as follows:

•

3 cases brought on behalf of various classes of individual plaintiffs (some overlapping) in Israel, compared with 2 such cases on December 31, 2007 and December 31, 2006;

•

In the third class action pending in Israel, Numberg, et al. v. Philip Morris Products S.A., et al., District Court of Tel-Aviv/Jaffa, Israel, filed May 19, 2008, our subsidiaries and our indemnitee (our distributor M.H. Eliashar Distribution Ltd.) and other members of the industry are defendants. The plaintiffs filed a purported class action claiming that the class members were misled by pack colors, terms such as “slims” or “super slims” or “blue,” and text describing tar and nicotine yields. Plaintiffs allege that these pack features misled consumers to believe that the cigarettes are safer than full flavor cigarettes. Plaintiffs seek recovery of the price of the brands at issue that were purchased from December 31, 2004 to the date of filing of the claim. They also seek compensation for mental anguish and punitive damages. Our subsidiaries Philip Morris Ltd. and Philip Morris Products S.A., and our indemnitee M.H. Eliashar Distribution Ltd., have been served with the claim.

• Public Civil Actions: Claims have been filed either by an individual, or a public or private entity, seeking to protect collective or individual rights, such as the right to health, the right to information or the right to safety. Plaintiffs’ allegations of liability in these cases are based on various theories of recovery including product defect, concealment, and misrepresentation. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.

As of December 31, 2008, there were 11 public civil actions pending against our subsidiaries in Argentina (1), Brazil (3), and Colombia (7) compared with 9 such cases on December 31, 2007, and 5 such cases on December 31, 2006.

In the first public civil action in Brazil, Osorio v. Philip Morris Brasil Industria e Comercio Ltda., et al., Federal Court of Sao Paulo, Brazil, filed September 2003, our subsidiary, another member of the industry and various government entities are defendants . The plaintiff seeks a ban on the production and sale of cigarettes on the grounds that they are harmful to health and cause the government to spend money on health care. Plaintiff alleges that smoking violates the Brazilian constitutional right to health, that smokers have no free will because they are addicted, and that ETS is harmful. Plaintiff seeks the suspension of the defendants’ licenses to manufacture cigarettes, the revocation of any import licenses for tobacco-related products, the collection of all tobacco-containing products from the market, and a daily fine amounting to R$1 million (approximately $420,000) for any violation of the injunction order. Our subsidiary filed its answer to the complaint in June 2004.

In the second public civil action in Brazil, Associacao dos Consumidores Explorados do Distrito Federal v. Sampoerna Tabacos America Latina Ltda., State Trial Court of Brasilia, Brazil, filed April 14, 2006, our subsidiary is a defendant. The plaintiff, a consumer association, seeks a ban on the production and sale of cigarettes on the grounds that they are harmful to health. Plaintiff’s complaint also requests that a fine amounting to R$1 million (approximately $420,000) per day be imposed should the ban be granted and defendant continue to produce or sell cigarettes. Our subsidiary filed a response to the complaint in June 2006. The trial court dismissed the case in November 2007. Plaintiff appealed. On November 12, 2008, the appellate court affirmed the trial court’s dismissal. Plaintiff has filed a further appeal.

In the third public civil action pending in Brazil, The Brazilian Association for the Defense of Consumer Health (SAUDECON) v. Philip Morris Brasil Industria e Comercio Ltd and Souza Cruz S.A., Civil Court of City of Porto Alegre, Brazil, filed November 3, 2008, our subsidiary is a defendant. The plaintiff, a consumer organization, is asking the court to establish a fund that will be used to provide treatment to smokers who claim to be addicted and who do not otherwise have access to smoking cessation treatment, for a minimum of two years. Plaintiff requests that each defendant’s liability be determined according to its market share. Our subsidiary was served with the complaint on December 3, 2008.

In the first public civil action in Colombia, Garrido v. Philip Morris Colombia S.A., Civil Court of Bogotá , Colombia, filed August 28, 2006, against one of our subsidiaries, the plaintiff seeks various forms of injunctive relief, including the ban of the use of “lights” descriptors, and requests that defendant be ordered to finance a national campaign against smoking. Our subsidiary filed its answer in April 2007.

In the second public civil action in Colombia, Garrido v. Coltabaco (Garrido II), Civil Court of Bogotá, Colombia, filed October 27, 2006, against another of our subsidiaries, the plaintiff’s claims are identical to those in Garrido , above. Our subsidiary filed its answer in April 2007.

In the third public civil action in Colombia, Morales v. Philip Morris Colombia S.A. and Colombian Government, Administrative Court of Bogotá, Colombia, filed February 12, 2007, against one of our subsidiaries and a government entity, the plaintiff alleges violations of the collective right to a healthy environment, public health rights, and the rights of consumers, and that the government failed to protect those rights. Plaintiff seeks various monetary damages and other relief, including a ban on descriptors and a ban on cigarette advertising. Our subsidiary filed its answer to the complaint in March 2007.

In the fourth public civil action in Colombia , Morales, et al. v. Coltabaco (Morales II), Civil Court of Bogotá, Colombia, filed February 5, 2008, against another of our subsidiaries, the plaintiffs allege misleading advertising, product defect, failure to inform, and the targeting of minors in advertising and marketing. Plaintiffs seek various monetary relief including a percentage of the costs incurred by the state each year for treating tobacco-related illnesses to be paid to the Ministry of Social Protection (from the date of incorporation of Coltabaco). After this initial payment, plaintiffs seek a fixed annual contribution to the government of $50 million. Plaintiffs also request that a statutory incentive award be paid to them for filing the claim. Our subsidiary filed its answer in July 2008.

In the fifth public civil action in Colombia, Morales, et al. v. Productora Tabacalera de Colombia S.A. (Protabaco), et al., (Morales III), Administrative Court of Bogotá, Colombia , filed December 19, 2007, against both of our subsidiaries, other members of the industry, and various government entities, the plaintiffs’ claims are identical to those in Morales II , above. Our subsidiaries filed their answers in August 2008.

In the public civil action in Turkey, Consumer Awareness Enhancement Association v. TEKEL, et al., Istanbul Consumer Court, Istanbul, Turkey, filed March 23, 2007, our subsidiary and another member of the industry are defendants . The plaintiff, a consumer association, argues that cigarette manufacturers and importers should be banned from providing cigarettes to Turkish consumers. Our subsidiary filed its answer in June 2007. The trial court dismissed the case in October 2007. Plaintiff appealed. In October 2008, the appellate court affirmed the trial court’s dismissal. Plaintiff did not appeal further and the case is now terminated. Therefore, this case is not included in the above pending case count and will not be reported in the future.

•

Other Litigation: Other litigation includes an antitrust suit and various tax cases:

•

Antitrust: 1 case brought on behalf of a class of individual plaintiffs in the state of Kansas in the United States against us and other members of the industry alleging price-fixing; and

•

Tax: In Brazil, there are 91 tax cases involving Philip Morris Brasil S.A. relating to the payment of state tax on the sale and transfer of goods and services, federal social contributions, excise, social security and income tax, and other matters. Thirty-one of these cases are under administrative review by the relevant fiscal authorities and 60 are under judicial review by the courts.

In the antitrust class action in Kansas, Smith v. Philip Morris Companies, Inc., et al., District Court of Seward County, Kansas, filed February 7, 2000, we and other members of the industry are defendants . The plaintiff asserts that the defendant cigarette companies engaged in an international conspiracy to fix wholesale prices of cigarettes and sought certification of a class comprised of all persons in Kansas who were indirect purchasers of cigarettes from the defendants. The plaintiff claims unspecified economic damages resulting from the alleged price-fixing, trebling of those damages under the Kansas price-fixing statute and counsel fees. The trial court granted plaintiff’s motion for class certification and refused to permit the defendants to appeal. The case is now in the discovery phase, and no trial date has yet been set.

Third-Party Guarantees

At December 31, 2008, PMI’s third-party guarantees, which are primarily related to excise taxes, were $49 million, of which $44 million have no specific expiration dates. The remainder expires through 2012, with no guarantees expiring during 2009. PMI is required to perform under these guarantees in the event that a third party fails to make contractual payments. PMI does not have a liability on its consolidated balance sheet at December 31, 2008, as the fair value of these guarantees is insignificant due to the fact that the probability of future payments under these guarantees is remote.

Under the terms of the Distribution Agreement between Altria and PMI, liabilities concerning tobacco products will be allocated based in substantial part on the manufacturer. PMI will indemnify Altria Group, Inc. and PM USA for liabilities related to tobacco products manufactured by PMI or contract manufactured for PMI by PM USA, and PM USA will indemnify PMI for liabilities related to tobacco products manufactured by PM USA, excluding tobacco products contract manufactured for PMI. PMI does not have a liability recorded on its balance sheet at December 31, 2008, as the fair value of this indemnification is insignificant since the probability of future payments under this indemnification is remote.

Note 19.

Quarterly Financial Data (Unaudited):

2008 Quarters

(in millions, except per share data)

1st

2nd

3rd

4th

Net revenues

14,354

16,703

17,365

15,218

Gross profit

3,740

4,247

4,472

3,918

Net earnings

1,673

1,692

2,080

1,445

Per share data:

Basic EPS

0.79

0.81

1.01

0.72

Diluted EPS

0.79

0.80

1.01

0.71

Dividends declared to public shareholders

—

0.46

0.54

Market price:

— High

54.70

53.95

56.26

51.95

— Low

50.00

47.43

46.80

33.30

The first quarter 2008 market price information in the table above reflects the market prices for PMI stock on March 31, 2008, which was the first publicly-traded day subsequent to the Distribution Date.

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.


	2007 Quarters
(in millions, except per share data)	1st		2nd		3rd		4th
Net revenues	$	12,170	$	13,948	$	14,232	$	14,893

Gross profit	$	3,158	$	3,591	$	3,687	$	3,663

Net earnings	$	1,263	$	1,483	$	1,725	$	1,567

Per share data:
Basic EPS	$	0.60	$	0.70	$	0.82	$	0.74

Diluted EPS	$	0.60	$	0.70	$	0.82	$	0.74

For the 2007 quarters, basic and diluted EPS are calculated based on the number of shares distributed by Altria on the Distribution Date.

As discussed in Note 1. Background and Basis of Presentation, results have been revised to reflect the movement of certain subsidiaries to a December 31 closing date.

During 2008 and 2007, PMI recorded the following pre-tax charges or (gains) in net earnings:


	2008 Quarters
(in millions)	1st		2nd		3rd		4th
Asset impairment and exit costs	$	23	$	48	$	13	$	—
Equity loss from RBH legal settlement		—		124		—		—

	$	23	$	172	$	13	$	—


	2007 Quarters
(in millions)	1st		2nd		3rd		4th
Asset impairment and exit costs	$	62	$	76	$	15	$	55
Gain on sale of leasing business		—		—		—		(52	)

	$	62	$	76	$	15	$	3

As discussed in Note 10. Income Taxes, PMI has recognized income tax benefits and charges in the consolidated statements of earnings during 2008 and 2007 as a result of various tax events.

Report of Independent

Registered Public Accounting Firm

LOGO

To the Board of Directors and Stockholders of

Philip Morris International Inc. and Subsidiaries:

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 financial position of Philip Morris International Inc. and its subsidiaries (“PMI”) at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, PMI maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). PMI’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on PMI’s internal control over financial reporting based on our audit (which was an integrated audit for 2008). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Notes 10 and 12 to the consolidated financial statements, PMI changed the measurement date for non-U.S. pension plans in fiscal 2008, the manner in which it accounts for uncertain tax positions in fiscal 2007, and the manner in which it accounts for pension and postemployment plans in fiscal 2006.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers SA



/s/ Christopher Hardt				/s/ John Martin Aked
Christopher Hardt				John Martin Aked

Lausanne, Switzerland
February 4, 2009

Report of Management on Internal Control

Over Financial Reporting

Management of Philip Morris International Inc. (“PMI”) is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15 (f) and 15d-15 (f) under the Securities Exchange Act of 1934. PMI’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those written policies and procedures that:

•

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of PMI;

•

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America;

•

provide reasonable assurance that receipts and expenditures of PMI are being made only in accordance with authorization of management and directors of PMI; and

•

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on the consolidated financial statements.

Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices and actions taken to correct deficiencies as identified.

Management assessed the effectiveness of PMI’s internal control over financial reporting as of December 31, 2008. Management based this assessment on criteria for effective internal control over financial reporting described in “ Internal Control — Integrated Framework ” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included an evaluation of the design of PMI’s internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors.

Based on this assessment, management determined that, as of December 31, 2008, PMI maintained effective internal control over financial reporting.

PricewaterhouseCoopers SA, an independent registered public accounting firm, who audited and reported on the consolidated financial statements of PMI included in this report, has audited the effectiveness of PMI’s internal control over financial reporting as of December 31, 2008, as stated in their report herein.

February 4, 2009

Exhibit 21

List of Significant Subsidiaries

As of December 31, 2008

Listed below are subsidiaries of Philip Morris International Inc. (the “Company”) as of December 31, 2008 and their country of organization. This list omits the subsidiaries of the Company that in the aggregate would not constitute a “significant subsidiary” of the Company, as that term is defined in Rule 1-02(w) of Regulation S-X.


Name		Country of Organization
Philip Morris International Management SA		Switzerland

Philip Morris Products S.A.		Switzerland

Philip Morris GmbH		Germany

PT. Hanjaya Mandala Sampoerna Tbk.		Indonesia

ZAO Philip Morris Izhora		Russia

PHILSA, Philip Morris Sabanci Sigara ve Tutunculuk Sanayi ve Ticaret A.S.		Turkey

Philip Morris Japan Kabushiki Kaisha		Japan

Philip Morris Limited		Australia

Philip Morris Mexico, Sociedad Anónima de Capital Variable		Mexico

Philip Morris Holland B.V.		Holland

Tabaqueira II, S.A.		Portugal

CJSC Philip Morris Ukraine		Ukraine

Philip Morris Spain, S.L.		Spain

Philip Morris Holland Holdings B.V.		Holland

Philip Morris Italia S.r.l.		Italy

Philip Morris Finance S.A.		Switzerland

Rothmans, Benson & Hedges Inc.		Canada

FTR Holding S.A.		Switzerland

Exhibit 23

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in Philip Morris International Inc.’s Registration Statements on Form S-3 (File No. 333-150449) and Form S-8 (File Nos. 333-1498222, 333-149821), of our report dated February 4, 2009, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting of Philip Morris International Inc., which appears in the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K.

PricewaterhouseCoopers SA



/s/ Christopher Hardt				/s/ John Martin Aked
Christopher Hardt				John Martin Aked

Lausanne, Switzerland

February 26, 2009

Exhibit 24

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENT THAT the undersigned, a Director of Philip Morris International Inc., a Virginia corporation (the “Company”), does hereby constitute and appoint Louis C. Camilleri, Hermann Waldemer, Charles R. Wall and G. Penn Holsenbeck, 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, 2008 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.