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PROXY STATEMENT This proxy statement is furnished by the management of Philip Morris Incorporated (the "Company"), 100 Park Avenue, New York, N.Y. 10017, in connection with its solicitation of proxies for use at the annual meeting of stockholders on Thursday, April 27, 1978, and at any and all adjournments thereof. Mailing of the proxy statement will commence on or about March 23, 1978. Holders of record of Common Stock, $1 par value, at the close of business on March 15, 1978 will be entitled to one vote for each share held on all matters to come before the meeting. On March 13, 1978, there were outstanding 59,924,737 shares of Common Stock. A proxy on the enclosed form may be revoked at any time before it has been exercised. Unless so revoked, it will be voted and, if a choice is made with respect to any matter to be acted upon, in accordance with such choice. ELECTION OF DIRECTORS Twenty-one directors are to be elected to hold office until the next annual meeting of stockholders and until their successors have been elected. The Nominating Committee of the Board of Directors has recommended to the Board the persons named below as management's nominees, and, unless a proxy is otherwise marked, it will be voted for such persons, all of whom were elected by the stockholders at the 1977 annual meeting. Although management does not anticipate that any of the persons named below will be unable or unwilling to stand for election, a proxy, in the event of such an occurrence, may be voted for a substitute designated by the Board of Directors. In addition to certain biographical information with respect to the nominees, their beneficial ownership of the Company's Common Stock at January 31, 1978 (as well as beneficial ownership of equity securities of subsidiaries and affiliates of the Company) is also set forth below. Except where specifically noted, there are included, without separate iden- tification, holdings (beneficial ownership of which is disclaimed) in certain fiduciary capacities and of wives, minor children and other relatives sharing the homes of the nominees. Thomas F. Ahrensfeld First employed by the Company in 1959, Mr. Ahrensfeld be- Senior Vice President and came a Vice President in 1970 and Senior Vice President in General Counsel 1976. Prior to joining the Company, he practiced law in New York City. He is a member of the Environmental Director since 1976 Committee of the Board of Directors of the Company. Common Stock: 35,350 shs. 1

James C. Bowling Senior Vice President and Director of Corporate Affairs Alfred Brittain III Chairman of the Board of Bankers Trust Company, New York, N.Y. George V. Comfort Chairman of the Board of George Comfort & Sons, Inc., New York, N. Y., real estate management Director since 1971 Common Stock: 1,000 shs. Dr. J. A. Cordido-Freytes Member of Betancourt, Cordido and Associates, Caracas, Ven- ezuela, attorneys Director since 1968 Common Stock: 2,000 shs.(1) First employed by the Company in 1951, Mr. Bowling became a Vice President in 1964, Director of Corporate Affairs in 1969 and has been a Senior Vice President since 1976. He is the chairman of the board and a director of Keep America Beautiful, Inc. and a trustee of Berea College. Mr. Bowling is a member of the Environmental and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. Mr. Brittain serves as chairman of the board and as a direc- tor of Bankers Trust New York Corporation and Bankers Trust Company. He is a director of Collins & Aikman Cor- poration, the Economic Development Council and the New York Chamber of Commerce and Industry. Mr. Brittain is a member of the Finance and Incentive Compensation Com- mittees of the Board of Directors of the Company. Mr. Comfort serves as a director of General Cable Corpora- tion, The Mutual Life Insurance Company of New York, The Sperry & Hutchinson Company, Burns International Security Services, Inc. and the Harlem Savings Bank. He is a mem- ber of the Executive, Incentive Compensation, Nominating and Stock Unit Plan Committees of the Board of Directors of the Company. Dr. Cordido-Freytes also serves as a director and president of Banco Exterior, Caracas, Venezuela, and president of C.A. Tabacalera Nacional, an affiliate of the Company. He is a member of the Environmontal Committee of the Board of Directors of the Company. (1) Dr. Cordido-Freytes owns 4,752 shares of C.A. Tabacalera Nacional. 2 k_1

Hugh Cullman Executive Vice President and President of Philip Morris International Director since 1964 Common Stock: 93,816 shs.(2) Joseph F. Cullman 3rd Chairman of the Board and Chief Executive Officer Director since 1954 Common Stock: 180,749 shs.(3) Richard W. Dammann Member of Dammann & Heming, New York, N.Y., attorneys Director since 1959 Common Stock: 77,616 shs. Clifford H. Goldsmith Executive Vice President and President of Philip Morris U.S.A. First employed in 1948 by Benson and Hedges, Mr. Cullman became Executive Vice President of the Company in 1966 and President of Philip Morris International in 1967. He is a director of United Virginia Bankshares Incorporated and serves as trustee and is a member of the Executive Com- mittee of the U.S. Council of the International Chamber of Commerce. Mr. Culiman serves on the Executive and Finance Committees of the Board of Directors of the Company. He is a first cousin to Joseph F. Cullman 3rd. First employed in 1946 by Benson and Hedges, Mr. Cullman became President and Chief Executive Officer of the Com- pany in 1957 and assumed his present title in 1966. He is a director of Bankers Trust New York Corporation, Ford Motor Company, IBM World Trade Europe/Middle East/Africa Cor- poration, Levi Strauss & Co. and the World Wildlife Fund- U.S.A., a commissioner of The Port Authority of New York and New Jersey and a trustee of the American Museum of Natural History and the Colonial Williamsburg Foundation. Mr. Cull- man is chairman of the Executive Committee and serves on the Stock Unit Plan Committee of the Board of Directors of the Company. He is a first cousin to Hugh Culiman. Mr. Dammann is chairman of the board and a director of U.S. Rubber Reclaiming Co., Inc. He is a member of the Audit, Executive, Incentive Compensation, Public Affairs and Social Responsibility and Stock Unit Plan Committees of the Board of Directors of the Company. First employed in 1945 by Benson and Hedges, Mr. Goldsmith became Executive Vice President of the Company and Presi- dent of Philip Morris U.S.A. in 1973. He serves as a director of the Central National Corporation and the Central National Director since 1966 Bank, Richmond, Virginia, and the National Multiple Sclerosis Common Stock: 42,000 shs. Society. Mr. Goldsmith is a member of the Environmental, Executive, Finance and Public Affairs and Social Responsi- bility Committees of the Board of Directors of the Company. (2) Mr. Hugh Cullman owns 2,498 ordinary shares of Philip Morris (Australia) Limited, and members of his immediate family own 2,220 ordinary shares. (3) Mr. Joseph F. Cullman 3rd owns 2,000 ordinary shares of Philip Morris (Australia) Limited, and he is a trustee and beneficiary of trusts which own 56,072 shares of Common Stock of Philip Morris Incorporated. 3

Robert E. R. Huntley President, Washington and Lee University, Lexington, Va. John T. Landry Senior Vice President and Executive Vice President of Philip Morris U.S.A. Director since 1972 Common Stock: 23,304 shs. Edward Lasker Counsel, McKenna & Fitting, Los Angeles, Calif., attorneys Director since 1961 Common Stock: 38,000 shs. Jacques G. Maisonrouge Chairman of IBM World Trade Europe/Middle East/Africa Corporation, White Plains, N.Y. Director since 1974 Common Stock: 100 shs. , I Mr. Huntley serves as a director of Shenandoah Life Insur- ance Company, Best Products Incorporated, Central Tele- phone & Utilities Corporation, Central Telephone Company of Virginia and the George C. Marshall Research Founda- tion. He is a member of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. First employed by the Company in 1956, Mr. Landry became a Vice President in 1969 and Senior Vice President in 1976. He has been Executive Vice President of Philip Morris U.S.A. since 1973. He is a member of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. Mr. Lasker serves as a director of Great Western Financial Corporation and Great Western Savings and Loan Associa- tion and as a trustee of Pomona College. He is a member of the Audit, Executive, Finance, Nominating and Stock Unit Plan Committees of the Board of Directors of the Company. Mr. Maisonrouge, who is also a senior vice president of IBM Corp., serves as a director of IBM World Trade Europe/Middle East/Africa Corporation and L'Air Liquide. He is a member of the Audit Committee of the Board of Directors of the Company.

H. Robert Marschalk Vice Chairman of the Board of Richardson-Merrell, Inc., Wilton, Conn., pharmaceuticals manu- facturer Director since 1966 Common Stock: 1,440 shs. Hamish Maxwell Senior Vice President and Executive Vice President of Philip Morris International Director since 1974 Common Stock: 21,400 shs.(4) Ross R. Millhiser President Director since 1963 Common Stock: 75,989 shs.(5) T. Justin Moore, Jr. Vice Chairman and Chief Executive Officer of Virginia Electric and Power Company, Richmond, Va. Director since 1973 Common Stock: 2,070 shs. Mr. Marschalk serves as a director of Piedmont Manage- ment Corp., Richardson-Merrell, Inc. and Thyssen-Borne- misza N.V. He is a member of the Audit, Executive, Finance and Incentive Compensation Committees of the Board of Directors of the Company. First employed by the Company in 1954, Mr. Maxwell be- came a Vice President in 1969 and Senior Vice President in 1976. He has been Executive Vice President of Philip Morris International since 1973. Mr. Maxwell is a member of the Committee on Public Affairs and Social Responsibility of the Board of Directors of the Company. First employed by the Company in 1941, Mr. Millhiser be- came President in 1973. He serves as a director of First & Merchants Corporation and First & Merchants National Bank, Richmond, Virginia. Mr. Millhiser is a member of the Execu- tive and Finance Committees of the Board of Directors of the Company. In addition to serving on the Board of Directors of the Vir- ginia Electric and Power Company, Mr. Moore is a director of Central National Corporation and Central National Bank, Richmond, Virginia, and serves as a trustee of the Colonial Williamsburg Foundation and the University of Richmond. He is a member of the Executive, Finance, Nominating and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. (4) Mr. Maxwell owns 5,332 ordinary shares of Philip Morris (Australia) Limited. (5) Mr. Millhiser owns 7,481 ordinary shares of Philip Morris (Australia) Limited. 5

John A. Murphy Executive Vice President and President of Miller Brewing Company John S. Reed Executive Vice President of Citicorp and Citibank, N.A., New York, N.Y. Director since 1958 Common Stock: 73,800 shs.(6) Margaret B. Young Chairman of the Whitney M. Young, Jr. Memorial Foundation, New York, N.Y.; Consultant to the Company First employed by the Company in 1962, Mr. Murphy be- came Executive Vice President in 1976. Joining Miller Brewing Company In 1971, he has served as its president since 1972. Mr. Murphy serves as a director of M & I Mar- shall & lisley Bank and Marquette University. He is a member of the Environmental, Finance and Public Affairs and Social Responsibility Committees of the Board of Directors of the Company. Mr. Reed serves as a director of Arlen Realty & Development Corp. and Citibank (New York State) N.A. and as a trustee of the Russell Sage Foundation and the Memorial Sloan-Ketter- ing Cancer Center. He is a member of the Audit, Finance and Stock Unit Plan Committees of the Board of Directors of the Company. First employed by the Company in 1952, Mr. Weissman became President of the Company in 1967 and assumed his present position in 1973. He serves as a director of Avnet Incorporated, the Harlem Savings Bank and the Lincoln Center for the Performing Arts and as a member of the Swarthmore College CoUncil and the Boards of Visitors of the City University of New York and the City College of New York. Mr. Weissman is a member of the Executive and Finance Committees of the Board of Directors of the Company. Mrs. Young is a member of the Board of Governors of the United Nations Association and a director of the Metropolitan Museum of Art and the Lincoln Center for the Performing Arts. She is a member of the Environmental and Public Affairs and Social Responsibility Committees of the Board of Direc- tors of the Company. (6) Mr. Weissman owns 8,332 ordinary shares of Philip Morris (Australia) Limited.

Remuneration of Directors and Officers The table below sets forth, with respect to the fiscal year ended December 31, 1977, information concerning each director whose aggregate direct remuneration from the Company and its subsidiaries exceeded $40,000 and concerning all directors and officers as a group. The three highest paid officers are also directors. Names and Capacities in Which Remuneration Was Received _ _ Aggregate Direct Remuneration(1) Deferred Profit-Sharing Plan(2) Incentive Compensation Plan(3) T. F. Ahrensfeld, Senior Vice President and General Counsel $ 139,347 $ 9,031 $ 65,250 J. C. Bowling, Senior Vice President 148,943 10,044 72,000 J. E. Cookman, Chairman of Finance Committee 110,975 7,427 57,700 J. A. Cordido-Freytes, President and Director of C.A. Tabacalera Nacional, Director of the Company 92,725 - - Hugh Cullman, Executive Vice President 214,053 13,927 123,750 J. F. Cullman 3rd, Chairman of the Board and Chief Executive Officer 324,288(4) 21,776 234,000 C. H. Goldsmith, Executive Vice President 220,037 14,095 141,000 J. T. Landry, Senior Vice President 145,357 9,791 80,000 Hamish Maxwell, Senior Vice President 141,741 8,440 70,000 R. R. Millhiser, President 244,056 16,459 162,000 J. A. Murphy, Executive Vice President 170,000 11,479 120,000 George Weissman, Vice Chairman of the Board 252,375 16,796 165,000 All Directors and Officers $4,805,342 $ 285,789 $2,215,550 (51 in number) (1) Amounts paid or to be paid under the Deferred Profit-Sharing and Incentive Com- pensation Plans are shown separately. Direct remuneration shown is the aggregate amount paid by the Company and its subsidiaries for the full year. Certain officers and employees are reimbursed for club dues and assessments when such memberships are maintained for business purposes. The aggregate direct remuneration shown in the table does not include the incidental economic benefit of personal use of clubs, since, in the opinion of management, such benefit cannot be valued. (2) The amounts heretofore allocated to the above persons are: Mr. Ahrensfeld, $53,728; Mr. Bowling, $58,208; Mr. Cookman, $76,005; Mr. Hugh Cullman, $84,881; Mr. J. F. Cullman 3rd, $157,870; Mr. Goldsmith, $77,718; Mr. Landry, $53,945; Mr. Maxwell, $42,430; 7

t I Mr. Millhiser, $97,011; Mr. Murphy, $49,596; Mr. Weissman, $115,332; all directors and officers, $1,558,796. Reference is made to the material appearing under the caption "Amendments to Deferred Profit-Sharing Plan". (3) Awarded in 1978 with respect to the calendar year 1977 and payable 50% in 1978 and 50%, subject to certain conditions, in 1979. Reference is made to the material appear- ing under the caption "Amendment to Incentive Compensation Plan". (4) The Company has agreed to pay Mr. Joseph F. Cullman 3rd annual compensation of at least $310,000 during his tenure as chief executive officer and thereafter, until April 30, 1982, 50% of his annual compensation as of December 31, 1978 or as of his relinquish- ment of the office of chief executive officer, whichever first occurs. The Board of Directors intends to select a new chief executive officer between April 30, 1978 and December 31, 1978, such selection to be effective no later than December 31, 1978. Examples of annual full retirement allowances* payable under the Retirement Plan to employees, including officers, are set forth in the following table. The examples assume retirement at the normal retirement age of 65 after assumed periods of service. Five-Year Average Compensation Years of Service 5 10 20 30 40 $100,000 $ 8,544 $ 17,087 $ 34,174 $ 51,262 $ 68,349 150,000 12,919 25,837 51,674 77,512 103,349 200,000 17,294 34,587 69,174 103,762 138,349 250,000 21,669 43,337 86,674 130,012 173,349 300,000 26,044 52,087 104,174 156,262 208,349 350,000 30,419 60,837 121,674 182,512 243,349 *Full retirement allowances are payable upon retirement at the normal retirement age of 65; such annual retirement allowances are computed at the rate of 11/4 % of five-year average compensation (the average amount of annual compensation received during the 60 highest paid consecutive months of the last 120 months of an employee's accredited service) not in excess of the applicable social security integration level, plus 13/a % of that portion of five-year average compensation in excess of such social security integration level, multi- plied by the number of years of accredited service. In the table, the social security integra- tion level in effect for the calendar year 1978 has been used. The Employee Retirement Income Security Act of 1974 limits the maximum annual benefit payable under a retirement plan. If an annual benefit exceeds the limit imposed by said Act, the payment of the excess will be made from the Company's general funds rather than from the Retirement Plan Trusts. During the year ended December 31, 1977, the firm of Betancourt, Cordido and Associates, of which Dr. Cordido-Freytes is a member, received legal fees of $110,106 from the Com- pany and its affiliates, and the firm of McKenna & Fitting, to which Mr. Lasker is counsel, received legal fees of $363,787.

The Company and its subsidiaries have transactions in the ordinary course of business, including borrowings, with Bankers Trust Company, New York, N.Y., of which Mr. Brittain is chairman of the board; Citibank, N.A., New York, N.Y., of which Mr. Reed is an executive vice president; and Banco Exterior, Caracas, Venezuela, of which Dr. Cordido-Freytes is president. From January 1, 1977 to January 31, 1978, the maximum amount of borrowings outstanding at any one time from Bankers Trust Company was $19,800,000; from Citibank, N.A. was $91,600,000; and from Banco Exterior was $4,200,000; at January 31, 1978, the amounts outstanding were $14,300,000, $73,400,000 and $1,200,000, respectively. During the period January 1, 1977 to January 31, 1978, interest (including commitment fees) accrued to Bankers Trust Company was $1,555,000; Citibank, N.A., $8,184,000; and Banco Exterior, $201,000. Such borrowings were on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with other financial institutions. The Company and certain of its subsidiaries maintain deposit account balances with Bankers Trust Company and Citibank, N.A. to compensate those banks for account handling and other important services and to support lines of credit. Bankers Trust Company is a participant in and the agent for a $250,000,000 Eurodollar Revolving Credit concluded by the Company with 23 banks in 1977. Edward M. Schaaf, Jr., a vice president, is a director, and his wife owns 23% of the stock, of Richmond Cold Storage Company, Inc. ("Storage"), Richmond, Virginia. The Company uses Storage's public warehouse at negotiated and competitive rates. In 1976, Storage constructed, for $3,650,000, a cold storage warehouse (the "Warehouse") for use by the Company and for which Storage obtained 100% mortgage financing. The Warehouse has been leased (with an option to buy) to the Company for at least ten years at a rental sufficient to cover debt service, taxes and insurance. For warehousing services, the Com- pany pays 115% of the operating expenses of the Warehouse. In 1977, the total amount paid by the Company to Storage amounted to approximately $456,000,'of which $412,000 represents rent and operating expenses for the Warehouse. AMENDMENTS TO DEFERRED PROFIT-SHARING PLAN Participation by Additional Employees At present, the Philip Morris Incorporated Deferred Profit-Sharing Plan (the "Profit- Sharing Plan") covers only employees of the Company and one subsidiary, Philip Morris Overseas, Inc., approximately 13,000 persons. Management now believes it advisable to provide for participation by certain other employees. Accordingly, the Board of Directors has adopted, subject to stockholder and Internal Revenue Service approval, amendments to the Profit-Sharing Plan which would extend participation to employees of Miller Brewing Company and most of its subsidiaries (the "Miller Group") as of January 1, 1978 and to employees of other subsidiaries when and if such subsidiaries elect to participate and if 9

7 such participation is approved by the Board of Directors of the Company. At present, approximately 1,300 employees of the Miller Group will participate. Employees with more than two years of service are eligible to participate. In addition to the employer's contribution, employees are permitted to make contributions not exceeding 10% of annual compensation. The employer's contribution for each year is allocated among those who were participants on the last business day of such year in the propor- tion which the compensation for such year of each such participant bears to the aggregate compensation for such year of all such participants. Distribution of the part of an individual's share in the trust fund which is attributable to the employer's contributions is normally made after he or she ceases to be an employee, but an employee is permitted to withdraw amounts up to 50% of his or her proportionate share of the employer's contri- butions under certain circumstances. For the fiscal year ended December 31, 1977, the employer's contribution, which was made entirely by the Company, amounted to $11,938,701. See "Remuneration of Directors and Officers" herein. Increase in Annual Contribution As presently in effect, the Company's annual contribution is an amount equal to 3% of the Company's earnings for the year in question on an unconsolidated basis, before Federal income taxes and before deduction of the sum to be contributed to the Profit- Sharing Plan and the amount allocated to the Incentive Compensation Plan Reserve. The amendments provide that once a subsidiary or group of subsidiaries is approved for participation an additional contribution will be made annually on behalf of its or their participating employees, which will, subject to certain immaterial exceptions, equal the smaller of (i) 3% of Operating Profit of the subsidiary or group, as the case may be, and (ii) 15% of the aggregate annual compensation of the participants among whom the con- tribution is to be allocated, or (iii) such lesser amount as shall be determined by the Board of Directors of the Company. Operating Profit means operating revenues less operating expenses (computed before deducting any sums contributed under the Profit-Sharing Plan and any incentive compensation plan) of the subsidiary or group, as the case may be, as determined by the Company's independent public accountants in accordance with generally accepted accounting principles. At present, the Board of Directors intends to limit contributions so that participating employees of subsidiaries or groups will not receive allocations which, as a percentage of compensation, are greater than those received by present participants in the Profit-Sharing Plan. Had the Miller Group participated in the Profit-Sharing Plan in 1977, it would have made an employer contribution of approxi- mately $700,000, although 15% of the 1977 compensation of those who would have been eligible participants was $3,103,780 and 3% of the Operating Profit of the Miller Group was $3,193,680. 10 3J ~ .~ ~ ~ ~