Edgar Filing: ALTRIA GROUP, INC.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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 1-8940

Altria Group, Inc.

(Exact name of registrant as specified in its charter)

Virginia

13-3260245

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


6601 West Broad Street, Richmond, Virginia		23230
(Address of principal executive offices)		(Zip Code)


Registrant’s telephone number, including area code		(804) 274-2200

Former name, former address and former fiscal year, if changed since last report

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 is required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “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 ¨

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

At October 27, 2008, there were 2,060,397,687 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.

ALTRIA GROUP, INC.

TABLE OF CONTENTS


		Page No.
PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007	3 – 4

	Condensed Consolidated Statements of Earnings for the Nine Months Ended September 30, 2008 and 2007	5
	Three Months Ended September 30, 2008 and 2007	6

	Condensed Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2007 and the Nine Months Ended September 30, 2008	7

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	8 – 9

	Notes to Condensed Consolidated Financial Statements	10 – 60

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	61 – 95

Item 4.	Controls and Procedures	96

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	97

Item 1A.	Risk Factors	97

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	97

Item 6.	Exhibits	98 – 99

Signature		100

-2-

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)


	September 30, 2008		December 31, 2007
ASSETS
Consumer products
Cash and cash equivalents	$	915	$	4,842

Receivables (less allowances of $3 in 2008 and 2007)		52		83

Inventories:
Leaf tobacco		643		861
Other raw materials		160		160
Finished product		257		233

		1,060		1,254

Current assets of discontinued operations				14,767
Other current assets		1,818		1,944


Total current assets		3,845		22,890

Property, plant and equipment, at cost		5,316		5,626
Less accumulated depreciation		3,154		3,204

		2,162		2,422

Goodwill		81		76
Other intangible assets, net		3,041		3,049
Prepaid pension assets		960		912
Investment in SABMiller		4,146		3,960
Long-term assets of discontinued operations				16,969
Other assets		876		870


Total consumer products assets		15,111		51,148

Financial services
Finance assets, net		5,527		6,029
Other assets		32		34


Total financial services assets		5,559		6,063


TOTAL ASSETS	$	20,670	$	57,211

See notes to condensed consolidated financial statements.

Continued

-3-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Continued)

(in millions of dollars, except share and per share data)

(Unaudited)


	September 30, 2008			December 31, 2007
LIABILITIES
Consumer products
Current portion of long-term debt	$	284		$	2,354
Accounts payable		293			611
Payable to Philip Morris International Inc.		28			257
Accrued liabilities:
Marketing		321			327
Taxes, except income taxes		43			70
Employment costs		204			283
Settlement charges		3,696			3,986
Other		916			849
Income taxes		23			184
Dividends payable		665			1,588
Current liabilities of discontinued operations					8,273

Total current liabilities		6,473			18,782

Long-term debt		101			1,885
Deferred income taxes		1,180			968
Accrued pension costs		172			198
Accrued postretirement health care costs		1,894			1,916
Long-term liabilities of discontinued operations					8,065
Other liabilities		1,236			1,240

Total consumer products liabilities		11,056			33,054

Financial services
Long-term debt		500			500
Deferred income taxes		4,635			4,911
Other liabilities		301			192


Total financial services liabilities		5,436			5,603


Total liabilities		16,492			38,657


Contingencies (Note 12)

STOCKHOLDERS’ EQUITY
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued)		935			935
Additional paid-in capital		6,369			6,884
Earnings reinvested in the business		22,113			34,426
Accumulated other comprehensive losses		(795	)		(237	)

		28,622			42,008
Less cost of repurchased stock (745,701,112 shares in 2008 and 698,284,555 shares in 2007)		(24,444	)		(23,454	)


Total stockholders’ equity		4,178			18,554


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	20,670		$	57,211

See notes to condensed consolidated financial statements.

-4-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)


	For the Nine Months Ended September 30,
	2008			2007
Net revenues	$	14,702		$	14,136
Cost of sales		6,285			5,905
Excise taxes on products		2,578			2,626

Gross profit		5,839			5,605
Marketing, administration and research costs		2,060			2,059
Asset impairment and exit costs		294			392
Gain on sale of corporate headquarters building		(404	)
Recoveries from airline industry exposure					(214	)
Amortization of intangibles		5

Operating income		3,884			3,368
Interest and other debt expense, net		27			190
Loss on early extinguishment of debt		393
Equity earnings in SABMiller		(344	)		(392	)

Earnings from continuing operations before income taxes		3,808			3,570
Provision for income taxes		1,397			1,259

Earnings from continuing operations		2,411			2,311
Earnings from discontinued operations, net of income taxes and minority interest		1,840			5,287

Net earnings	$	4,251		$	7,598


Per share data:

Basic earnings per share:
Continuing operations	$	1.16		$	1.10
Discontinued operations		0.88			2.52

Net earnings	$	2.04		$	3.62


Diluted earnings per share:
Continuing operations	$	1.15		$	1.09
Discontinued operations		0.88			2.50

Net earnings	$	2.03		$	3.59


Dividends declared	$	1.36		$	2.30

See notes to condensed consolidated financial statements.

-5-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)


	For the Three Months Ended September 30,
	2008			2007
Net revenues	$	5,238		$	4,987
Cost of sales		2,230			2,096
Excise taxes on products		897			927

Gross profit		2,111			1,964
Marketing, administration and research costs		763			736
Asset impairment and exit costs		17			13
Recoveries from airline industry exposure					(7	)
Amortization of intangibles		2

Operating income		1,329			1,222
Interest and other debt expense, net		25			27
Equity earnings in SABMiller		(54	)		(132	)

Earnings from continuing operations before income taxes		1,358			1,327
Provision for income taxes		491			427

Earnings from continuing operations		867			900
Earnings from discontinued operations, net of income taxes and minority interest					1,733

Net earnings	$	867		$	2,633


Per share data:

Basic earnings per share:
Continuing operations	$	0.42		$	0.43
Discontinued operations					0.82

Net earnings	$	0.42		$	1.25


Diluted earnings per share:
Continuing operations	$	0.42		$	0.43
Discontinued operations					0.81

Net earnings	$	0.42		$	1.24


Dividends declared	$	0.32		$	0.75

See notes to condensed consolidated financial statements.

-6-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the Year Ended December 31, 2007 and

the Nine Months Ended September 30, 2008

(in millions of dollars, except per share data)

(Unaudited)


	Common Stock		Addi- tional Paid-in Capital			Earnings Reinvested in the Business			Accumulated Other Comprehensive Earnings (Losses)
	Common Stock		Addi- tional Paid-in Capital			Earnings Reinvested in the Business			Currency Translation Adjustments			Other			Total			Cost of Repurchased Stock			Total Stock- holders’ Equity
Balances, January 1, 2007	$	935	$	6,356		$	59,879		$	(97	)	$	(3,711	)	$	(3,808	)	$	(23,743	)	$	39,619
Comprehensive earnings:
Net earnings							9,786															9,786
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments										736						736						736
Change in net loss and prior service cost													744			744						744
Change in fair value of derivatives accounted for as hedges													(18	)		(18	)					(18	)

Total other comprehensive earnings																						1,462

Total comprehensive earnings																						11,248


Adoption of FIN 48 and FAS 13-2							711															711
Exercise of stock options and issuance of other stock awards (1)				528															289			817
Cash dividends declared ($3.05 per share)							(6,430	)														(6,430	)
Spin-off of Kraft Foods Inc.							(29,520	)		89			2,020			2,109						(27,411	)


Balances, December 31, 2007		935		6,884			34,426			728			(965	)		(237	)		(23,454	)		18,554

Comprehensive earnings:
Net earnings							4,251															4,251
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments										233						233						233
Change in net loss and prior service cost													41			41						41
Change in fair value of derivatives accounted for as hedges													(177	)		(177	)					(177	)

Total other comprehensive earnings																						97

Total comprehensive earnings																						4,348


Exercise of stock options and issuance of other stock awards (2)				(515	)														176			(339	)
Cash dividends declared ($1.36 per share)							(2,844	)														(2,844	)
Stock repurchased																			(1,166	)		(1,166	)
Spin-off of Philip Morris International Inc.							(13,720	)		(961	)		306			(655	)					(14,375	)


Balances, September 30, 2008	$	935	$	6,369		$	22,113		$	—		$	(795	)	$	(795	)	$	(24,444	)	$	4,178

(1)	Includes $179 million increase to additional paid-in capital for the reimbursement from Kraft as a result of modifications to Altria Group, Inc. stock awards.

(2)	Includes $449 million decrease to additional paid-in capital for the reimbursement to PMI as a result of modifications to Altria Group, Inc. stock awards. See Note 1.

Total comprehensive earnings were $880 million and $2,564 million for the quarters ended September 30, 2008 and 2007, respectively, and $8,461 million for the nine months ended September 30, 2007.

See notes to condensed consolidated financial statements.

-7-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)


		For the Nine Months Ended September 30,
		2008			2007
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

Earnings from continuing operations	- Consumer products	$	2,363		$	2,104
	- Financial services		48			207
Earnings from discontinued operations, net of income taxes and minority interest			1,840			5,287

Net earnings			4,251			7,598

Impact of earnings from discontinued operations, net of income taxes and minority interest			(1,840	)		(5,287	)

Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization			162			174
Deferred income tax provision			128			157
Equity earnings in SABMiller			(344	)		(392	)
Asset impairment and exit costs, net of cash paid			84			328
Gain on sale of corporate headquarters building			(404	)
Loss on early extinguishment of debt			393
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net			(102	)		149
Inventories			194			370
Accounts payable			(157	)		(161	)
Income taxes			19			(358	)
Accrued liabilities and other current assets			(114	)		(68	)
Accrued settlement charges			(290	)		129
Pension plan contributions			(37	)		(27	)
Pension provisions and postretirement, net			92			163
Other			259			320
Financial services
Deferred income tax benefit			(276	)		(253	)
Other			224			(34	)


Net cash provided by operating activities, continuing operations			2,242			2,808
Net cash provided by operating activities, discontinued operations			1,666			5,477


Net cash provided by operating activities			3,908			8,285

See notes to condensed consolidated financial statements.

Continued

-8-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(in millions of dollars)

(Unaudited)


	For the Nine Months Ended September 30,
	2008			2007
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES

Consumer products
Capital expenditures	$	(131	)	$	(210	)
Proceeds from sale of corporate headquarters building		525
Other		110			108
Financial services
Investments in finance assets					(4	)
Proceeds from finance assets		389			363


Net cash provided by investing activities, continuing operations		893			257
Net cash used in investing activities, discontinued operations		(317	)		(1,152	)

Net cash provided by (used in) investing activities		576			(895	)


CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

Consumer products
Net issuance of short-term borrowings					2
Long-term debt repaid		(3,908	)		(500	)
Financial services
Long-term debt repaid					(617	)

Repurchase of Altria Group, Inc. common stock		(1,166	)
Dividends paid on Altria Group, Inc. common stock		(3,767	)		(5,069	)
Issuance of Altria Group, Inc. common stock		79			357
Kraft Foods Inc. dividends paid to Altria Group, Inc.					728
Philip Morris International Inc. dividends paid to Altria Group, Inc.		3,019			2,480
Tender and consent fees related to the early extinguishment of debt		(371	)
Changes in amounts due to/from Philip Morris International Inc.		(721	)		480
Other		(227	)		90


Net cash used in financing activities, continuing operations		(7,062	)		(2,049	)
Net cash used in financing activities, discontinued operations		(1,648	)		(2,966	)

Net cash used in financing activities		(8,710	)		(5,015	)


Effect of exchange rate changes on cash and cash equivalents:
Discontinued operations		(126	)		165


Cash and cash equivalents, continuing operations:

(Decrease) increase		(3,927	)		1,016

Balance at beginning of period		4,842			3,105


Balance at end of period	$	915		$	4,121

See notes to condensed consolidated financial statements.

-9-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation and PMI Spin-Off:

Basis of Presentation

The interim condensed consolidated financial statements of Altria Group, Inc. and subsidiaries (“Altria Group, Inc.”) are unaudited. It is the opinion of Altria Group, Inc.’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year.

These statements should be read in conjunction with the consolidated financial statements and related notes, which appear in Altria Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on June 5, 2008 (the “June Form 8-K”) and on September 8, 2008 (the “September Form 8-K”). Altria Group, Inc.’s June Form 8-K revised certain information disclosed in Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007 in order to reflect Philip Morris International Inc. (“PMI”) as a discontinued operation, and to reflect the change in reportable segments both of which are discussed further below. Altria Group, Inc.’s September Form 8-K was filed to provide subsequent event footnotes to the financial statements of Altria Group, Inc. for the year ended December 31, 2007 as filed on the June Form 8-K. These subsequent event footnotes included condensed consolidating financial information provided in connection with the issuance by Philip Morris USA Inc. (“PM USA”) of guarantees of certain of Altria Group, Inc.’s indebtedness, which is discussed further in Note 14. Condensed Consolidating Financial Information.

Balance sheet accounts are segregated by two broad types of businesses. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices. The financial services long-term debt of $500 million matures in July 2009.

On March 28, 2008, Altria Group, Inc. distributed all of its interest in PMI to Altria Group, Inc.’s stockholders in a tax-free distribution, as discussed below. Altria Group, Inc. has reflected the results of PMI prior to the distribution as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to PMI were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2007.

On March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft Foods Inc. (“Kraft”) on a pro-rata basis to Altria Group, Inc. stockholders in a tax-free distribution. Altria Group, Inc. has reflected the results of Kraft prior to the Kraft distribution date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows.

The products of Altria Group, Inc.’s subsidiaries include cigarettes and other tobacco products sold in the United States by PM USA, and machine-made large cigars and pipe tobacco sold by John Middleton Co. (“Middleton”). Beginning with the first quarter of 2008, Altria Group, Inc. revised its reportable segments to reflect the change in the way in which Altria Group, Inc.’s management reviews the business as a result of the acquisition of Middleton and the PMI spin-off. Altria Group, Inc.’s revised segments, which are reflected in these financial statements, are Cigarettes and other tobacco products; Cigars; and Financial services. Accordingly, prior period segment results have been revised.

Certain prior year amounts have been reclassified to conform with the current year’s presentation, due primarily to the classification of PMI as a discontinued operation and revised segment information.

-10-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

PMI Spin-Off

On March 28, 2008 (the “Distribution Date”), Altria Group, Inc. distributed all of its interest in PMI to Altria Group, Inc. stockholders of record as of the close of business on March 19, 2008 (the “Record Date”), in a tax-free distribution. Altria Group, Inc. distributed one share of PMI common stock for every share of Altria Group, Inc. common stock outstanding as of the Record Date. Following the Distribution Date, Altria Group, Inc. does not own any shares of PMI stock.

Holders of Altria Group, Inc. stock options were treated similarly to public stockholders and, accordingly, had their stock awards split into two instruments. Holders of Altria Group, Inc. 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 Group, Inc. options:

—

a new PMI option to acquire the same number of shares of PMI common stock as the number of Altria Group, Inc. options held by such person on the Distribution Date; and

—

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

As set forth in the Employee Matters Agreement, the exercise price of each option was developed to reflect the relative market values of PMI and Altria Group, Inc. shares, by allocating the share price of Altria Group, Inc. common stock before the spin-off ($73.83) to PMI shares ($51.44) and Altria Group, Inc. shares ($22.39) and then multiplying each of these allocated values by the Option Conversion Ratio. The Option Conversion Ratio was equal to the exercise price of the Altria Group, Inc. option, prior to any adjustment for the spin-off, divided by the share price of Altria Group, Inc. common stock before the spin-off ($73.83). As a result, the new PMI option and the adjusted Altria Group, Inc. option had an aggregate intrinsic value equal to the intrinsic value of the pre-spin Altria Group, Inc. option.

Holders of Altria Group, Inc. 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 Group, Inc. deferred stock awarded on January 30, 2008, who were employed by Altria Group, Inc. after the Distribution Date, received additional shares of deferred stock of Altria Group, Inc. to preserve the intrinsic value of the award. Recipients of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by PMI after the Distribution Date, received substitute shares of deferred stock of PMI to preserve the intrinsic value of the award.

To the extent that employees of the remaining Altria Group, Inc. received PMI stock options, Altria Group, Inc. reimbursed PMI in cash for the Black-Scholes fair value of the stock options received. To the extent that PMI employees held Altria Group, Inc. stock options, PMI reimbursed Altria Group, Inc. in cash for the Black-Scholes fair value of the stock options. To the extent that employees of Altria Group, Inc. received PMI deferred stock, Altria Group, Inc. paid to PMI the fair value of the PMI deferred stock less the value of projected forfeitures. To the extent that PMI employees held Altria Group, Inc. restricted stock or deferred stock, PMI reimbursed Altria Group, Inc. 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 Group, Inc. stock awards outstanding at the Distribution Date, the net amount of these reimbursements resulted in a payment of $449 million from Altria Group, Inc. to PMI. The reimbursement to PMI is reflected as a decrease to the additional paid-in capital of Altria Group, Inc. on the September 30, 2008 condensed consolidated balance sheet.

-11-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In connection with the spin-off, PMI paid to Altria Group, Inc. $4.0 billion in special dividends in addition to its normal dividends to Altria Group, Inc. PMI paid $3.1 billion of these special dividends in 2007 and paid the additional $900 million in the first quarter of 2008.

Prior to the PMI spin-off, PMI was included in the Altria Group, Inc. consolidated federal income tax return, and PMI’s federal income tax contingencies were recorded as liabilities on the balance sheet of Altria Group, Inc. Altria Group, Inc. reimbursed PMI in cash for these liabilities, which were $97 million.

Prior to the PMI spin-off, certain employees of PMI participated in the U.S. benefit plans offered by Altria Group, Inc. The benefits previously provided by Altria Group, Inc. are now provided by PMI. As a result, new plans were established by PMI, and the related plan assets (to the extent that the benefit plans were previously funded) and liabilities were transferred to the PMI plans. The transfer of these benefits resulted in Altria Group, Inc. reducing its benefit plan liabilities by $129 million and increasing its prepaid pension assets by $33 million in its condensed consolidated balance sheet, partially offset by the related deferred tax assets ($23 million) and the corresponding Statement of Financial Accounting Standards (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” adjustment to stockholders’ equity ($27 million). Altria Group, Inc. paid PMI a corresponding amount of $112 million in cash, which is net of the related tax benefit.

A subsidiary of Altria Group, Inc. previously provided PMI with certain corporate services at cost plus a management fee. After the Distribution Date, PMI independently undertook most of these activities. Any remaining limited services provided to PMI by the Altria Group, Inc. service subsidiary under the Transition Services Agreement are expected to cease in 2008. The settlement of the intercompany accounts (including the amounts discussed above related to stock awards, tax contingencies and benefit plans) resulted in a net payment from Altria Group, Inc. to PMI of $332 million. In March 2008, Altria Group, Inc. made an estimated payment of $427 million to PMI, thereby resulting in PMI reimbursing $95 million to Altria Group, Inc. in the second quarter of 2008.

The distribution resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $14.4 billion on the Distribution Date.

Dividends and Share Repurchases

During the second quarter of 2008, Altria Group, Inc.’s Board of Directors adjusted Altria Group, Inc.’s quarterly dividend rate to $0.29 per common share. This adjustment was intended to allow Altria Group, Inc. stockholders who retained their PMI shares to initially receive, in the aggregate, the same cash dividend rate that existed before the spin-off. During the third quarter of 2008, Altria Group, Inc.’s Board of Directors approved a 10.3% increase in the quarterly dividend rate to $0.32 per common share. The present annualized dividend rate is $1.28 per Altria Group, Inc. common share. The dividend remains subject to the discretion of the Board of Directors.

In conjunction with the announced acquisition of UST Inc. (“UST”) (for further discussion see Note 2. UST Acquisition) the Altria Group, Inc. Board of Directors modified its previously announced two-year $7.5 billion share repurchase program and authorized the repurchase of up to $4.0 billion in Altria Group, Inc. common stock over a three-year (2008 to 2010) period. As of September 30, 2008, Altria Group, Inc. had repurchased 53.5 million shares of its common stock at an aggregate cost of approximately $1.2 billion, or an average price of $21.81 per share. Altria Group, Inc.’s share repurchase program is at the discretion of the Board of Directors.

-12-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Tender Offer for Altria Group, Inc. Notes

As a result of the tender offers and consent solicitations, Altria Group, Inc. recorded a pre-tax loss of $393 million, which included tender and consent fees of $371 million, on the early extinguishment of debt in the first quarter of 2008.

Note 2. UST Acquisition:

On September 8, 2008, Altria Group, Inc. and UST announced that they had entered into a definitive agreement for Altria Group, Inc. to acquire all outstanding shares of UST, the world’s leading moist smokeless tobacco manufacturer. Under the terms of the agreement, shareholders of UST will receive $69.50 in cash for each share of UST common stock. The transaction is valued at approximately $11.7 billion, which includes the assumption of approximately $1.3 billion of debt.

On October 2, 2008, Altria Group, Inc. and UST agreed to extend, at Altria Group, Inc.’s option, the closing date of the transaction in the event conditions for closing are met prior to the end of 2008. As part of the extension, Altria Group, Inc. agreed to increase the termination fee it must pay to $300 million under certain circumstances where Altria Group, Inc. is required to close the acquisition but does not do so. On October 16, 2008, Altria Group, Inc. and UST announced that Altria Group, Inc.’s proposed acquisition of UST had passed federal antitrust review. Completion of the transaction remains subject to UST shareholder approval and certain other customary closing conditions. If such conditions to closing are satisfied, Altria Group, Inc. expects the transaction to close during the first full week of January 2009 and no later than January 7, 2009.

-13-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 3. Asset Impairment and Exit Costs:

Pre-tax asset impairment and exit costs consisted of the following:


		For the Nine Months Ended September 30,				For the Three Months Ended September 30,
		2008		2007		2008		2007
		(in millions)
Separation program	Cigarettes and other tobacco products	$	44	$	293	$	15	$	10
Separation program	General corporate		195		17		2
Asset impairment	Cigarettes and other tobacco products				35
Kraft spin-off fees	General corporate				47				3
PMI spin-off fees	General corporate		55

Asset impairment and exit costs		$	294	$	392	$	17	$	13

The movement in the asset impairment and exit cost liabilities for Altria Group, Inc. for the nine months ended September 30, 2008 was as follows:


	Severance			Other			Total
	(in millions)
Liability balance, January 1, 2008	$	279		$	3		$	282
Charges		144			150			294
Cash spent		(119	)		(91	)		(210	)
Other		4			(22	)		(18	)

Liability balance, September 30, 2008	$	308		$	40		$	348

Other charges in the table above primarily represent PMI spin-off fees, as well as pension and postretirement termination benefits.

Manufacturing Optimization Program

In June 2007, PMI established plans to move the U.S.-based production of cigarettes from PM USA to PMI facilities. Due to declining U.S. cigarette volume, as well as PMI’s decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. PM USA anticipates that its cigarette production for PMI, which approximated 57 billion cigarettes in 2007, will end during the fourth quarter of 2008. PM USA expects to close its Cabarrus manufacturing facility by the end of 2010.

As a result of this program, from 2007 through 2011, PM USA expects to incur total pre-tax charges of approximately $670 million, comprised of accelerated depreciation of $143 million, employee separation costs of $353 million and other charges of $174 million, primarily related to the relocation of employees and equipment, net of estimated gains on sales of land and buildings. Approximately $440 million, or 66% of the total pre-tax charges, will result in cash expenditures.

-14-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

PM USA recorded total pre-tax charges for this program as follows:


	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2008		2007		2008		2007
	(in millions)
Asset impairment and exit costs	$	44	$	328	$	15	$	10
Implementation costs		48		12		16		12

Total	$	92	$	340	$	31	$	22

The pre-tax implementation costs were primarily related to accelerated depreciation and were included in cost of sales in the condensed consolidated statements of earnings for the nine months and three months ended September 30, 2008 and 2007. Total pre-tax charges incurred since the inception of the program were $463 million. Pre-tax charges of approximately $32 million are expected during the remainder of 2008 for the program. Cash payments related to the program of $53 million and $24 million were made during the nine and three months ended September 30, 2008, respectively, for a total of $64 million since inception.

Corporate Asset Impairment and Exit Costs

During the first quarter of 2008, in connection with the PMI spin-off, Altria Group, Inc. restructured its corporate headquarters and incurred pre-tax charges of $195 million for the nine months ended September 30, 2008, consisting primarily of employee separation costs. Substantially all of these charges will result in cash expenditures. Cash payments for the program of $121 million and $52 million were made during the nine months and three months ended September 30, 2008, respectively.

In addition, during the nine months ended September 30, 2008 and 2007, corporate asset impairment and exit costs also included investment banking and legal fees associated with the PMI spin-off in 2008 and the Kraft spin-off in 2007, as well as the streamlining of various corporate functions in 2007.

Note 4. Benefit Plans:

Altria Group, Inc. sponsors noncontributory defined benefit pension plans covering substantially all employees. In addition, Altria Group, Inc. and its subsidiaries provide health care and other benefits to substantially all retired employees.

-15-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following:


	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2008			2007			2008			2007
	(in millions)
Service cost	$	73		$	80		$	23		$	26
Interest cost		228			229			75			76
Expected return on plan assets		(319	)		(316	)		(109	)		(105	)
Amortization:
Net loss		46			78			12			28
Prior service cost		7			7			3			1
Other		40			31			2			7

Net periodic pension cost	$	75		$	109		$	6		$	33

“Other” pension cost of $40 million for the nine months ended September 30, 2008, primarily reflects termination benefits related to Altria Group, Inc.’s restructuring of its corporate headquarters. “Other” pension costs of $31 million and $7 million for the nine months and three months ended September 30, 2007, respectively, were due primarily to curtailment losses and an early retirement program related to PM USA’s announced closure of its Cabarrus, North Carolina manufacturing facility.

Employer Contributions

Altria Group, Inc. 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 plans and to pay benefits that relate to plans for salaried employees that cannot be funded under Internal Revenue Service regulations. Employer contributions of $37 million were made to Altria Group, Inc.’s pension plans during the nine months ended September 30, 2008. Currently, Altria Group, Inc. anticipates making additional contributions during the remainder of 2008 of approximately $20 million to its pension plans, based on current tax law. However, these estimates are 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.

-16-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following:


	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2008			2007			2008			2007
	(in millions)
Service cost	$	29		$	36		$	10		$	12
Interest cost		87			93			29			30
Amortization:
Net loss		18			25			5			8
Prior service credit		(6	)		(6	)		(2	)		(2	)
Other		9			(4	)		1

Net postretirement health care costs	$	137		$	144		$	43		$	48

“Other” postretirement cost of $9 million for the nine months ended September 30, 2008, primarily reflects termination benefits related to Altria Group, Inc.’s restructuring of its corporate headquarters. “Other” postretirement gains of $4 million for the nine months ended September 30, 2007, were due primarily to curtailment gains related to PM USA’s announced closure of its Cabarrus, North Carolina manufacturing facility.

Note 5. Goodwill and Other Intangible Assets, net:

Goodwill and other intangible assets, net, by segment were as follows (in millions):


	Goodwill				Other Intangible Assets, net
	September 30, 2008		December 31, 2007		September 30, 2008		December 31, 2007
Cigarettes and other tobacco products	$	-	$	-	$	283	$	283
Cigars		81		76		2,758		2,766

Total	$	81	$	76	$	3,041	$	3,049

Intangible assets were as follows (in millions):


	September 30, 2008				December 31, 2007
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Non-amortizable intangible assets	$	2,923			$	2,894
Amortizable intangible assets		123	$	5		155	$	-

Total intangible assets	$	3,046	$	5	$	3,049	$	-

Non-amortizable intangible assets substantially consist of trademarks from the December 2007 acquisition of Middleton. Amortizable intangible assets consist primarily of customer relationships. Pre-tax amortization expense for intangible assets during the nine months and three months ended September 30, 2008, was $5 million and $2 million, respectively. Annual amortization expense for each of the next five

-17-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

years is estimated to be $10 million or less, excluding any impact from the UST acquisition and assuming no additional transactions occur that require the amortization of intangible assets.

Goodwill relates to the December 2007 acquisition of Middleton. The change in goodwill and gross carrying amount of intangible assets from December 31, 2007 to September 30, 2008, is as follows (in millions):


	Goodwill		Intangible Assets
Balance at December 31, 2007	$	76	$	3,049
Changes due to:
Purchase price revisions		5		(3	)

Balance at September 30, 2008	$	81	$	3,046

The changes in goodwill and intangible assets resulted from revisions to the purchase price allocation as appraisals for the acquisition of Middleton were finalized during the first quarter of 2008.

Note 6. Financial Instruments:

During the nine months ended September 30, 2008 and 2007, and the three months ended September 30, 2007, ineffectiveness related to fair value hedges and cash flow hedges was not material. During the first quarter of 2008, Altria Group, Inc. purchased forward foreign exchange contracts to mitigate its exposure to changes in exchange rates from its euro-denominated debt. While these forward exchange contracts were effective as economic hedges, they did not qualify for hedge accounting treatment and therefore $21 million of gains for the nine months ended September 30, 2008 relating to these contracts were reported in Altria Group, Inc.’s condensed consolidated statements of earnings. These contracts and the related debt matured in the second quarter of 2008. Subsequent to the maturities of these contracts, Altria Group, Inc. has had no derivative financial instruments remaining.

Within currency translation adjustments during the nine months ended September 30, 2008 and 2007, Altria Group, Inc. recorded losses, net of income taxes, of $85 million and gains, net of income taxes, of $2 million, respectively, which represented effective hedges of net investments. The accumulated losses recorded as net investment hedges of foreign operations were recognized and recorded in connection with the PMI distribution. Subsequent to the PMI distribution, Altria Group, Inc. has had no such net investment hedges remaining.

Hedging activity affected accumulated other comprehensive earnings (losses), net of income taxes, as follows:


	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2008			2007			2008		2007
	(in millions)

(Loss) gain at beginning of period	$	(5	)	$	13		$	-	$	8
Derivative losses (gains) transferred to earnings		93			(38	)				3
Change in fair value		(270	)		45					11
Kraft spin-off					2
PMI spin-off		182

Gain as of September 30	$	-		$	22		$	-	$	22

-18-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

See Note 11. Fair Value Measurements, for disclosures related to the fair value of derivative financial instruments.

Note 7. Divestitures:

Discontinued Operations

As further discussed in Note 1. Basis of Presentation and PMI Spin-Off, on March 28, 2008, Altria Group, Inc. distributed all of its interest in PMI to Altria Group, Inc. stockholders in a tax-free distribution. The distribution resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $14.4 billion on March 28, 2008.

On March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft on a pro-rata basis to Altria Group, Inc. stockholders in a tax-free distribution. The distribution resulted in a net decrease of $27.4 billion to Altria Group, Inc.’s stockholders’ equity on March 30, 2007.

Altria Group, Inc. has reflected the results of PMI and Kraft prior to their respective distribution dates as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to PMI were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2007.

Summarized financial information for discontinued operations for the nine months ended September 30, 2008 and 2007, and for the three months ended September 30, 2007 were as follows (in millions):


	For the Nine Months Ended September 30, 2008			For the Nine Months Ended September 30, 2007
	PMI			PMI			Kraft			Total

Net revenues	$	15,376		$	41,436		$	8,586		$	50,022


Earnings before income taxes and minority interest	$	2,701		$	6,834		$	1,059		$	7,893
Provision for income taxes		(800	)		(1,975	)		(356	)		(2,331	)
Minority interest in earnings from discontinued operations		(61	)		(197	)		(78	)		(275	)

Earnings from discontinued operations, net of income taxes and minority interest	$	1,840		$	4,662		$	625		$	5,287

-19-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


	For the Three Months Ended September 30, 2007
	PMI

Net revenues	$	14,220


Earnings before income taxes and minority interest	$	2,499
Provision for income taxes		(690	)
Minority interest in earnings from discontinued operations		(76	)

Earnings from discontinued operations, net of income taxes and minority interest	$	1,733

Summarized assets and liabilities of discontinued operations for PMI as of December 31, 2007 were as follows (in millions):


	December 31, 2007
Assets:
Cash and cash equivalents	$	1,656
Receivables, net		3,240
Inventories		9,317
Other current assets		554

Current assets of discontinued operations		14,767

Property, plant and equipment, net		6,435
Goodwill		7,925
Other intangible assets, net		1,904
Prepaid pension assets		408
Other assets		297

Long-term assets of discontinued operations		16,969


Liabilities:
Short-term borrowings		638
Current portion of long-term debt		91
Accounts payable		595
Accrued liabilities		6,479
Income taxes		470

Current liabilities of discontinued operations		8,273


Long-term debt		5,578
Deferred income taxes		1,214
Accrued pension costs		190
Other liabilities		1,083

Long-term liabilities of discontinued operations		8,065


Net Assets	$	15,398

-20-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 8. Stock Plans:

In connection with the PMI spin-off, Altria Group, Inc. 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 Group, Inc. awards. For each employee stock option outstanding, the aggregate intrinsic value of the option immediately after the Distribution Date was not greater than the aggregate intrinsic value of the option immediately before the Distribution Date. Due to the fact that 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 Group, Inc. awards.

On January 30, 2008, Altria Group, Inc. issued 1.9 million shares of deferred stock to eligible U.S.-based and non-U.S. employees. Restrictions on these shares lapse in the first quarter of 2011. The market value per share was $76.76 on the date of grant. Recipients of 0.5 million of these Altria Group, Inc. deferred shares, who were employed by Altria Group, Inc. after the PMI spin-off, received 1.3 million additional shares of deferred stock of Altria Group, Inc. to preserve the intrinsic value of the award. Recipients of 1.4 million shares of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by PMI after the PMI spin-off, received substitute shares of deferred stock of PMI to preserve the intrinsic value of the award.

During the nine months ended September 30, 2008, 1.3 million shares of restricted stock and 0.7 million shares of deferred stock vested. The total fair value of restricted and deferred stock vested during the nine months ended September 30, 2008 was $140 million. The grant date fair value per share of these awards was $60.10 (reflects historical market prices which are not adjusted to reflect the Kraft and PMI spin-offs).

Note 9. Earnings Per Share:

Basic and diluted EPS from continuing and discontinued operations were calculated using the following:


	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2008		2007		2008		2007
	(in millions)

Earnings from continuing operations	$	2,411	$	2,311	$	867	$	900
Earnings from discontinued operations		1,840		5,287				1,733

Net earnings	$	4,251	$	7,598	$	867	$	2,633


Weighted average shares for basic EPS		2,080		2,100		2,058		2,103

Plus incremental shares from assumed conversions:
Restricted stock and deferred stock		3		2		3		2
Stock options		10		13		9		12


Weighted average shares for diluted EPS		2,093		2,115		2,070		2,117

For the nine months and three months ended September 30, 2008 and 2007, there were no antidilutive stock options.

-21-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 10. Segment Reporting:

The products of Altria Group, Inc.’s subsidiaries include cigarettes and other tobacco products sold in the United States by PM USA, and machine-made large cigars and pipe tobacco sold by Middleton. Another subsidiary of Altria Group, Inc., Philip Morris Capital Corporation (“PMCC”), maintains a portfolio of leveraged and direct finance leases.

As discussed in Note 1. Basis of Presentation and PMI Spin-Off, beginning with the first quarter of 2008, Altria Group, Inc. revised its reportable segments. Altria Group, Inc.’s reportable segments are Cigarettes and other tobacco products; Cigars; and Financial services.

Altria Group, Inc.’s management reviews operating companies income to evaluate segment performance and allocate resources. Operating companies income for the segments excludes general corporate expense and amortization of intangibles. Interest and other debt expense, net (consumer products), and provision for income taxes are centrally managed at the corporate level and, accordingly, such items are not presented by segment since they are excluded from the measure of segment profitability reviewed by Altria Group, Inc.’s management.

Segment data were as follows:


	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2008			2007			2008			2007
	(in millions)
Net revenues:
Cigarettes and other tobacco products	$	14,233		$	13,998		$	5,084		$	4,944
Cigars		290						98
Financial services		179			138			56			43

Net revenues	$	14,702		$	14,136		$	5,238		$	4,987


Earnings from continuing operations before income taxes:
Operating companies income (loss):
Cigarettes and other tobacco products	$	3,746		$	3,429		$	1,369		$	1,295
Cigars		128						37
Financial services		97			344			(7	)		45
Amortization of intangibles		(5	)					(2	)
Gain on sale of corporate headquarters building		404
General corporate expense		(236	)		(341	)		(66	)		(115	)
Corporate asset impairment and exit costs		(250	)		(64	)		(2	)		(3	)

Operating income		3,884			3,368			1,329			1,222
Interest and other debt expense, net		(27	)		(190	)		(25	)		(27	)
Loss on early extinguishment of debt		(393	)
Equity earnings in SABMiller		344			392			54			132

Earnings from continuing operations before income taxes	$	3,808		$	3,570		$	1,358		$	1,327

-22-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Items affecting the comparability of results from continuing operations were as follows:

—

Asset Impairment and Exit Costs – See Note 3. Asset Impairment and Exit Costs, for a breakdown of asset impairment and exit costs by segment.

—

Sales to PMI – During the nine months and three months ended September 30, 2008, PM USA recorded net revenues of $207 million and $97 million, respectively, from contract volume manufactured for PMI under an agreement that is expected to terminate before the end of 2008.

—

Gain on Sale of Corporate Headquarters Building – On March 25, 2008, Altria Group, Inc. sold its corporate headquarters building in New York City for $525 million and recorded a pre-tax gain on sale of $404 million.

—

Loss on Early Extinguishment of Debt – As more fully discussed in Note 1. Basis of Presentation and PMI Spin-Off, in the first quarter of 2008, Altria Group, Inc. and its subsidiary, Altria Finance (Cayman Islands) Ltd., completed tender offers to purchase for cash $2.3 billion of notes and debentures denominated in U.S. dollars, and €373 million in euro-denominated bonds, equivalent to $568 million in U.S. dollars.

—

PMCC Allowance for Losses – During the third quarter of 2008, PMCC increased its allowance for losses by $50 million as a result of credit rating downgrades of certain lessees and financial market conditions.

—

Recoveries from Airline Industry Exposure – During the nine months and three months ended September 30, 2007, PMCC recorded pre-tax gains of $214 million and $7 million, respectively, on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down.

—

SABMiller plc (“SABMiller”) Intangible Asset Impairments – Altria Group, Inc.’s third quarter 2008 equity earnings in SABMiller included intangible asset impairment charges of $85 million.

—

Acquisition of Middleton – In December 2007, Altria Group, Inc. acquired Middleton.

Note 11. Fair Value Measurements:

On January 1, 2008, Altria Group, Inc. 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, which 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:

-23-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)


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.

Investments

The fair value of Altria Group, Inc.’s equity investment in SABMiller is based on readily available quoted market prices.

Debt

The fair value of a portion of Altria Group, Inc.’s outstanding debt can be determined by using readily available quoted market prices. For the portion of Altria Group, Inc.’s debt where quoted market prices are not available, the fair value is determined by utilizing quotes and market interest rates currently available to Altria Group, Inc. for issuances of debt with similar terms and remaining maturities.

The fair value of Altria Group, Inc.’s equity investment in SABMiller and Altria Group, Inc.’s debt is utilized for annual disclosure purposes.

Derivative Financial Instruments

Altria Group, Inc. 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. As discussed in Note 6. Financial Instruments, at September 30, 2008, Altria Group, Inc. had no derivative financial instruments remaining.

On February 12, 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which delays the effective date of SFAS No. 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis until 2009. Altria Group, Inc. adopted this Staff Position beginning January 1, 2008 and deferred the application of SFAS No. 157 to goodwill and other intangible assets, net, until January 1, 2009.

Note 12. Contingencies:

Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.

-24-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending or future cases. An unfavorable outcome or settlement of pending tobacco related or other litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related or other litigation are or can be significant and, in certain cases, range in 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.

Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 43 states now limit the dollar amount of bonds or require no bond at all.

Altria Group, Inc. and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they 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, except as discussed elsewhere in this Note 12. Contingencies: (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.

It is possible that PM USA’s or Altria Group, Inc.’s 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, management believes the litigation environment has substantially improved in recent years. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. However, Altria Group, Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so.

Overview of Tobacco-Related Litigation

Types and Number of Cases

Claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, (iv) class action suits alleging that the uses of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law fraud, or violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), and (v) other tobacco-related litigation described below. Plaintiffs’ theories of recovery and the defenses raised in pending smoking and health, health care cost recovery and “Lights/Ultra Lights” cases are discussed below.

-25-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, Altria Group, Inc. as of November 1, 2008, November 1, 2007 and November 1, 2006.


Type of Case	Number of Cases Pending as of November 1, 2008	Number of Cases Pending as of November 1, 2007	Number of Cases Pending as of November 1, 2006
Individual Smoking and Health Cases (1)	98	195	191
Smoking and Health Class Actions and Aggregated Claims Litigation (2)	9	10	9
Health Care Cost Recovery Actions	3	3	6
“Lights/Ultra Lights” Class Actions	17	17	21
Tobacco Price Cases	2	2	2
Cigarette Contraband Cases	0	0	0

(1)

Does not include 2,620 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. Also, does not include nine individual smoking and health cases brought against certain retailers that are indemnitees of PM USA. Additionally, does not include approximately 2,335 individual smoking and health cases brought by or on behalf of approximately 9,121 plaintiffs in Florida following the decertification of the Engle case discussed below. It is possible that some of these cases are duplicates and additional cases have been filed but not yet recorded on the courts’ dockets.

(2)

Includes as one case the 728 civil actions (of which 414 are actions against PM USA) that are proposed to be tried in a single proceeding in West Virginia. Middleton was named as a defendant in this action but it, along with other non-cigarette manufacturers, has been severed from this case. The West Virginia Supreme Court of Appeals has ruled that the United States Constitution does not preclude a trial in two phases in this case. Issues related to defendants’ conduct, plaintiffs’ entitlement to punitive damages and a punitive damages multiplier, if any, would be determined in the first phase. The second phase would consist of individual trials to determine liability, if any, and compensatory damages. In November 2007, the West Virginia Supreme Court of Appeals denied defendants’ renewed motion for review of the trial plan. In December 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court, which was denied on February 25, 2008. In February 2008, the court granted defendants’ motion to stay the case pending the United States Supreme Court’s decision in Good v. Altria Group, Inc. et al., discussed below.

In addition, as of November 1, 2008, PM USA is a named defendant in a “Lights” class action in Israel and a health care cost recovery action in Israel. PM USA is a named defendant in two health care cost recovery actions in Canada, one of which also names Altria Group, Inc. as a defendant.

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Pending and Upcoming Trials

As of November 1, 2008, one Engle-progeny case against PM USA is scheduled for trial through the end of 2008. There are currently no individual smoking and health cases scheduled for trial through the end of 2008. Cases against other tobacco companies are also scheduled for trial through the end of 2008. Trial dates are subject to change.

Recent Trial Results

Since January 1999, verdicts have been returned in 45 smoking and health, “Lights/Ultra Lights” and health care cost recovery cases in which PM USA was a defendant. Verdicts in favor of PM USA and other defendants were returned in 28 of the 45 cases. These 28 cases were tried in California (4), Florida (9), Mississippi (1), Missouri (2), New Hampshire (1), New Jersey (1), New York (3), Ohio (2), Pennsylvania (1), Rhode Island (1), Tennessee (2), and West Virginia (1). A motion for a new trial was granted in one of the cases in Florida. In addition, in December 2002, a court dismissed an individual smoking and health case in California at the end of trial.

In July 2005, a jury in Tennessee returned a verdict in favor of PM USA in a case in which plaintiffs had challenged PM USA’s retail promotional and merchandising programs under the Robinson-Patman Act.

Of the 17 cases in which verdicts were returned in favor of plaintiffs, eight have reached final resolution. A verdict against defendants in one health care cost recovery case has been reversed and all claims were dismissed with prejudice. In addition, a verdict against defendants in a purported “Lights” class action in Illinois has been reversed and the case has been dismissed with prejudice. After exhausting all appeals, PM USA has paid judgments totaling $73.5 million and interest totaling $35.1 million.

The chart below lists the verdicts and post-trial developments in the nine pending cases that have gone to trial since January 1999 in which verdicts were returned in favor of plaintiffs.

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
May 2007	California/ Whiteley	Individual Smoking and Health	Approximately $2.5 million in compensatory damages against PM USA and the other defendant in the case, as well as $250,000 in punitive damages against the other defendant in the case.	In July 2007, the trial court granted plaintiffs’ motion for a limited re-trial against PM USA on the question of whether plaintiffs are entitled to punitive damages against PM USA, and if so, the amount. In October 2007, the jury found that plaintiffs are not entitled to punitive damages against PM USA. In November, the trial court entered final judgment and PM USA filed a motion for a new trial and for judgment notwithstanding the verdict. The trial court rejected these motions in January 2008. In March 2008, PM USA noticed an appeal to the California Court of Appeal, First Appellate District and in May 2008, posted a $2.2 million appeal bond.

August 2006	District of Columbia/ United States of America	Health Care Cost Recovery	Finding that defendants, including Altria Group, Inc. and PM USA, violated the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO). No monetary damages were assessed, but court made specific findings and issued injunctions. See Federal Government’s Lawsuit below.	See Federal Government’s Lawsuit below.

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
March 2005	New York/ Rose	Individual Smoking and Health	$3.42 million in compensatory damages against two defendants, including PM USA, and $17.1 million in punitive damages against PM USA.	On April 10, 2008, an intermediate New York appellate court reversed the verdict and vacated the compensatory and punitive damages awards against PM USA. Plaintiff has appealed to New York’s highest court. Argument is scheduled for November 18, 2008.

May 2004	Louisiana/ Scott	Smoking and Health Class Action	Approximately $590 million against all defendants, including PM USA, jointly and severally, to fund a 10-year smoking cessation program.	See Scott Class Action below.

October 2002	California/ Bullock	Individual Smoking and Health	$850,000 in compensatory damages and $28 billion in punitive damages against PM USA.	In December 2002, the trial court reduced the punitive damages award to $28 million. In April 2006, the California Court of Appeal affirmed the $28 million punitive damages award. In January 2008, the California Court of Appeal reversed the judgment with respect to the $28 million punitive damages award, affirmed the judgment in all other respects, and remanded the case to the trial court to conduct a new trial on the amount of punitive damages. In April 2008, the California Supreme Court denied PM USA’s petition for review. See discussion (1) below.

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
June 2002	Florida/ Lukacs	Individual Smoking and Health	$37.5 million in compensatory damages against all defendants, including PM USA.	In March 2003, the trial court reduced the damages award to $24.86 million. PM USA’s share of the damages award is approximately $6 million. In January 2007, defendants petitioned the trial court to set aside the jury’s verdict and dismiss plaintiffs’ punitive damages claim. On August 14, 2008, the trial court granted plaintiffs’ motion for entry of judgment and ordered compensatory damages of $24.8 million plus interest from the date of the verdict. On August 15, 2008, PM USA filed a motion for reconsideration.

March 2002	Oregon/ Schwarz	Individual Smoking and Health	$168,500 in compensatory damages and $150 million in punitive damages against PM USA.	In May 2002, the trial court reduced the punitive damages award to $100 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the Court of Appeals’ decision reversing and remanding the case for a new trial on punitive damages. In

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
				October 2006, the Oregon Supreme Court announced that it would hold this petition in abeyance until the United States Supreme Court decided the Williams case discussed below. In February 2007, the United States Supreme Court vacated the punitive damages judgment in Williams and remanded the case to the Oregon Supreme Court for proceedings consistent with its decision. The parties have submitted their briefs to the Oregon Supreme Court setting forth their respective views on how the Williams decision impacts the plaintiff’s pending petition for review.

July 2000	Florida/ Engle	Smoking and Health Class Action	$145 billion in punitive damages against all defendants, including $74 billion against PM USA.	See Engle Class Action below.

March 1999	Oregon/ Williams	Individual Smoking and Health	$800,000 in compensatory damages (capped statutorily at $500,000), $21,500 in medical expenses and $79.5 million in punitive damages against PM USA.	See discussion (2) below.

(1)

Bullock: In August 2006, the California Supreme Court denied plaintiffs’ petition to overturn the trial court’s reduction of the punitive damages award and granted PM USA’s petition for review challenging the punitive damages award. The court granted review of the case on a “grant and hold” basis under which further action by the court was deferred pending the United States Supreme Court’s decision on punitive damages in the Williams case described below. In February 2007, the United States Supreme Court vacated the punitive damages judgment in Williams and remanded the case to the Oregon Supreme Court for proceedings consistent with its decision. Parties to the appeal in Bullock requested that the court establish a briefing schedule on the merits of the pending appeal. In May 2007, the California Supreme Court transferred the case to the Second District of the California Court of Appeal with directions that the court vacate its 2006 decision and reconsider the

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case in light of the United States Supreme Court’s decision in Williams. In January 2008, the California Court of Appeal reversed the judgment with respect to the $28 million punitive damages award, affirmed the judgment in all other respects, and remanded the case to the trial court to conduct a new trial on the amount of punitive damages. In March 2008, plaintiffs and PM USA appealed to the California Supreme Court. In April 2008, the California Supreme Court denied both petitions for review. Following this decision, PM USA decided to record a provision for compensatory damages of $850,000 plus costs and interest in the second quarter. The case has been remanded to the superior court for a new trial on the amount of punitive damages, if any. In July 2008, $43.3 million of U.S. Treasury Bills in escrow were returned to PM USA.

(2)

Williams: The trial court reduced the punitive damages award to $32 million, and PM USA and plaintiff appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. Following the Oregon Supreme Court’s refusal to hear PM USA’s appeal, PM USA recorded a provision of $32 million in connection with this case and petitioned the United States Supreme Court for further review. In October 2003, the United States Supreme Court set aside the Oregon appellate court’s ruling and directed the Oregon court to reconsider the case in light of the 2003 State Farm decision by the United States Supreme Court, which limited punitive damages. In June 2004, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. In February 2006, the Oregon Supreme Court affirmed the Court of Appeals’ decision. Following this decision, PM USA recorded an additional provision of approximately $25 million in interest charges related to this case. The United States Supreme Court granted PM USA’s petition for writ of certiorari in May 2006. In February 2007, the United States Supreme Court vacated the $79.5 million punitive damages award, holding that the United States Constitution prohibits basing punitive damages awards on harm to non-parties. The Court also found that states must assure that appropriate procedures are in place so that juries are provided with proper legal guidance as to the constitutional limitations on awards of punitive damages. Accordingly, the Court remanded the case to the Oregon Supreme Court for further proceedings consistent with this decision. In January 2008, the Oregon Supreme Court affirmed the Oregon Court of Appeals’ June 2004 decision, which in turn, upheld the jury’s compensatory damage award and reinstated the jury’s award of $79.5 million in punitive damages. In March 2008, PM USA filed a petition for writ of certiorari with the United States Supreme Court, which was granted in June 2008. Oral argument before the United States Supreme Court is scheduled for December 3, 2008.

With respect to certain adverse verdicts currently on appeal, as of November 1, 2008, PM USA has posted various forms of security totaling approximately $129 million, the majority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. The cash deposits are included in other assets on the consolidated balance sheets.

Engle Class Action

In July 2000, in the second phase of the Engle smoking and health class action in Florida, a jury returned a verdict assessing punitive damages totaling approximately $145 billion against various defendants, including $74 billion against PM USA. Following entry of judgment, PM USA posted a bond in the amount of $100 million and appealed.

In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the judicial review, will be paid to the court and the court will determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In July 2001, PM USA also placed $1.2 billion into an interest-bearing

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escrow account, which was returned to PM USA in December 2007. In addition, the $100 million bond related to the case has been discharged. In connection with the stipulation, PM USA recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.

In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified, and that members of the decertified class could file individual actions against defendants within one year of issuance of the mandate. The court further declared the following Phase I findings are entitled to “res judicata” effect in such individual actions brought within one year of the issuance of the mandate: (i) that smoking causes various diseases; (ii) that nicotine in cigarettes is addictive; (iii) that defendants’ cigarettes were defective and unreasonably dangerous; (iv) that defendants concealed or omitted material information not otherwise known or available knowing that the material was false or misleading or failed to disclose a material fact concerning the health effects or addictive nature of smoking; (v) that all defendants agreed to misrepresent information regarding the health effects or addictive nature of cigarettes with the intention of causing the public to rely on this information to their detriment; (vi) that defendants agreed to conceal or omit information regarding the health effects of cigarettes or their addictive nature with the intention that smokers would rely on the information to their detriment; (vii) that all defendants sold or supplied cigarettes that were defective; and (viii) that all defendants were negligent. The court also reinstated compensatory damage awards totaling approximately $6.9 million to two individual plaintiffs and found that a third plaintiff’s claim was barred by the statute of limitations. In February 2008, PM USA paid a total of $2,964,685, which represents its shares of compensatory damages and interest to the two individual plaintiffs identified in the Florida Supreme Court’s order.

In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. In January 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Third District Court of Appeal or by the Florida Supreme Court. In February 2007, the Third District Court of Appeal denied defendants’ motion. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court. In October 2007, the United States Supreme Court denied defendants’ petition. In November 2007, the United States Supreme Court denied defendants’ petition for rehearing from the denial of their petition for writ of certiorari.

By the January 11, 2008 deadline required by the Florida Supreme Court’s decision, approximately 2,335 cases had been served upon PM USA or Altria Group, Inc. asserting individual claims on or on behalf of approximately 9,121 plaintiffs. It is possible that some of these cases are duplicates and additional cases have been filed but not yet recorded on the courts’ dockets. Some of these cases have been removed from

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various Florida state courts to the federal district courts in Florida, while others were filed in federal court. In July 2007, PM USA and other defendants requested that the multi-district litigation panel order the transfer of all such cases pending in the federal courts, as well as any other Engle-progeny cases that may be filed, to the Middle District of Florida for pretrial coordination. The panel denied this request in December 2007. In October 2007, attorneys for plaintiffs filed a motion to consolidate all pending and future cases filed in the state trial court in Hillsborough County. The court denied this motion in November 2007. In February 2008, the trial court decertified the class except for purposes of the May 2001 bond stipulation, and formally vacated the punitive damage award pursuant to the Florida Supreme Court’s mandate. In April 2008, the trial court ruled that certain defendants, including PM USA, lacked standing with respect to allocation of the funds escrowed under the May 2001 bond stipulation and will receive no credit at this time from the $500 million paid by PM USA against any future punitive damages awards in cases brought by former Engle class members.

In May 2008, the trial court, among other things, decertified the limited class maintained for purposes of the May 2001 bond stipulation and, in July 2008, severed the remaining plaintiffs’ claims except for those of Howard Engle. The only remaining plaintiff in the Engle case, Howard Engle, voluntarily dismissed his claims with prejudice. In July 2008, attorneys for a putative former Engle class member petitioned the Florida Supreme Court to permit members of the Engle class additional time to file individual lawsuits.

Three federal district courts (in the Merlob, Brown and Burr cases) have ruled that the findings in the first phase of the Engle proceedings cannot be used to satisfy elements of plaintiffs’ claims, and two of those rulings (Brown and Burr) have been certified by the trial court for interlocutory review. The certification in both cases has been granted by the United States Court of Appeals for the Eleventh Circuit. Approximately 4,000 Engle progeny cases pending in the federal district courts in the Middle District of Florida have been stayed pending interlocutory review by the Eleventh Circuit. Several state trial court judges have issued contrary rulings that allowed plaintiffs to use the Engle findings to establish elements of their claims and required certain defenses to be stricken.

Scott Class Action

In July 2003, following the first phase of the trial in the Scott class action, in which plaintiffs sought creation of a fund to pay for medical monitoring and smoking cessation programs, a Louisiana jury returned a verdict in favor of defendants, including PM USA, in connection with plaintiffs’ medical monitoring claims, but also found that plaintiffs could benefit from smoking cessation assistance. The jury also found that cigarettes as designed are not defective but that the defendants failed to disclose all they knew about smoking and diseases and marketed their products to minors. In May 2004, in the second phase of the trial, the jury awarded plaintiffs approximately $590 million against all defendants jointly and severally, to fund a 10-year smoking cessation program.

In June 2004, the court entered judgment, which awarded plaintiffs the approximately $590 million jury award plus prejudgment interest accruing from the date the suit commenced. PM USA’s share of the jury award and prejudgment interest has not been allocated. Defendants, including PM USA, appealed. Pursuant to a stipulation of the parties, the trial court entered an order setting the amount of the bond at $50 million for all defendants in accordance with an article of the Louisiana Code of Civil Procedure, and a Louisiana statute (the “bond cap law”), fixing the amount of security in civil cases involving a signatory to the MSA (as defined below). Under the terms of the stipulation, plaintiffs reserve the right to contest, at a later date, the sufficiency or amount of the bond on any grounds including the applicability or constitutionality of the bond cap law. In September 2004, defendants collectively posted a bond in the amount of $50 million.

In February 2007, the Louisiana Court of Appeal issued a ruling on defendants’ appeal that, among other things: affirmed class certification but limited the scope of the class; struck certain of the categories of damages that comprised the judgment, reducing the amount of the award by approximately $312 million;

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vacated the award of prejudgment interest, which totaled approximately $444 million as of February 15, 2007; and ruled that the only class members who are eligible to participate in the smoking cessation program are those who began smoking before, and whose claims accrued by, September 1, 1988. As a result, the Louisiana Court of Appeal remanded the case for proceedings consistent with its opinion, including further reduction of the amount of the award based on the size of the new class. In March 2007, the Louisiana Court of Appeal rejected defendants’ motion for rehearing and clarification. In January 2008, the Louisiana Supreme Court denied plaintiffs’ and defendants’ petitions for writ of certiorari. Following the Louisiana Supreme Court’s denial of defendants’ petition for writ of certiorari, PM USA recorded a provision of $26 million in connection with the case. In March 2008, plaintiffs filed a motion to execute the approximately $279 million judgment plus post-judgment interest or, in the alternative, for an order to the parties to submit revised damages figures. Defendants filed a motion to have judgment entered in favor of defendants based on accrual of all class member claims after September 1, 1988 or, in the alternative, for the entry of a case management order. In April 2008, the Louisiana Supreme Court denied defendants’ motion to stay proceedings and the defendants filed a petition for writ of certiorari with the United States Supreme Court. In June 2008, the United States Supreme Court denied the defendant’s petition. Plaintiffs filed a motion to enter judgment in the amount of approximately $280 million (subsequently changed to approximately $264 million) and defendants filed a motion to enter judgment in their favor dismissing the case entirely or, alternatively, to enter a case management order for a new trial. In July 2008, the trial court entered an Amended Judgment and Reasons for Judgment denying both motions, but ordering defendants to deposit into the registry of the court the sum of $263,532,762 plus post-judgment interest of $87.7 million (as of November 1, 2008). The Reasons for Judgment, however, state that the judgment award “may be satisfied with something less than a full cash payment now” and that the court would “favorably consider” returning unused funds annually to defendants if monies allocated for that year were not fully expended. On September 9, 2008, defendants filed an application for writ of mandamus or supervisory writ to secure the right to appeal with the Louisiana Circuit Court of Appeals and the court issued an order staying execution of the amended final judgment pending future order of the court.

Smoking and Health Litigation

Overview

Plaintiffs’ allegations of liability in smoking and health cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violations of deceptive trade practice laws and consumer protection statutes, and claims under the federal and state anti-racketeering statutes. Plaintiffs in the smoking and health actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief. Defenses raised in these cases include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, statutes of limitations and preemption by the Federal Cigarette Labeling and Advertising Act.

In July 2008, the New York Supreme Court, Appellate Division, First Department in Fabiano, an individual personal injury case, held that plaintiffs’ punitive damages claim was barred by the MSA (as defined below) based on principles of res judicata because the New York Attorney General had already litigated the punitive damages claim on behalf of all New York residents. On August 28, 2008, plaintiffs filed a motion for permission to appeal to the Court of Appeals. On September 9, 2008 PM USA filed a motion in opposition.

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Smoking and Health Class Actions

Since the dismissal in May 1996 of a purported nationwide class action brought on behalf of allegedly addicted smokers, plaintiffs have filed numerous putative smoking and health class action suits in various state and federal courts. In general, these cases purport to be brought on behalf of residents of a particular state or states (although a few cases purport to be nationwide in scope) and raise addiction claims and, in many cases, claims of physical injury as well.

Class certification has been denied or reversed by courts in 57 smoking and health class actions involving PM USA in Arkansas (1), the District of Columbia (2), Florida (2), Illinois (2), Iowa (1), Kansas (1), Louisiana (1), Maryland (1), Michigan (1), Minnesota (1), Nevada (29), New Jersey (6), New York (2), Ohio (1), Oklahoma (1), Pennsylvania (1), Puerto Rico (1), South Carolina (1), Texas (1) and Wisconsin (1). A class remains certified in the Scott class action discussed above.

Two purported class actions pending against PM USA have been brought in New York (Caronia, filed in January 2006 in the United States District Court for the Eastern District of New York) and Massachusetts (Donovan, filed in December 2006, in the United States District Court for the District of Massachusetts) on behalf of each state’s respective residents who: are age 50 or older; have smoked the Marlboro brand for 20 pack-years or more; and have neither been diagnosed with lung cancer nor are under investigation by a physician for suspected lung cancer. Plaintiffs in these cases seek to impose liability under various product-based causes of action and the creation of a court-supervised program providing members of the purported class Low Dose CT Scanning in order to identify and diagnose lung cancer. Neither claim seeks punitive damages. Plaintiffs’ motion for class certification is pending in Caronia. Defendants’ motions for summary judgment and judgment on the pleadings and plaintiffs’ motion for class certification are pending in Donovan.

Health Care Cost Recovery Litigation

Overview

In health care cost recovery litigation, governmental entities and non-governmental plaintiffs seek reimbursement of health care cost expenditures allegedly caused by tobacco products and, in some cases, of future expenditures and damages as well. Relief sought by some but not all plaintiffs includes punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.

The claims asserted include the claim that cigarette manufacturers were “unjustly enriched” by plaintiffs’ payment of health care costs allegedly attributable to smoking, as well as claims of indemnity, negligence, strict liability, breach of express and implied warranty, violation of a voluntary undertaking or special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under federal and state statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under federal and state anti-racketeering statutes.

Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to “set off” any alleged damages to the extent the plaintiffs benefit economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of

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subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by “standing in the shoes” of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.

Although there have been some decisions to the contrary, most judicial decisions have dismissed all or most health care cost recovery claims against cigarette manufacturers. Nine federal circuit courts of appeals and six state appellate courts, relying primarily on grounds that plaintiffs’ claims were too remote, have ordered or affirmed dismissals of health care cost recovery actions. The United States Supreme Court has refused to consider plaintiffs’ appeals from the cases decided by five circuit courts of appeals.

In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In addition, a $17.8 million verdict against defendants (including $6.8 million against PM USA) was reversed in a health care cost recovery case in New York, and all claims were dismissed with prejudice in February 2005 (Blue Cross/Blue Shield). The trial in the health care cost recovery case brought by the City of St. Louis, Missouri and approximately 40 Missouri hospitals, in which PM USA and Altria Group, Inc. are defendants, is scheduled to begin in January 2010.

Individuals and associations have also sued in purported class actions or as private attorneys general under the Medicare as Secondary Payer (“MSP”) provisions of the Social Security Act to recover from defendants Medicare expenditures allegedly incurred for the treatment of smoking-related diseases. Cases brought in New York (Mason), Florida (Glover) and Massachusetts (United Seniors Association) have been dismissed by federal courts, and plaintiffs appealed in United Seniors Association. In August 2007, the United States Court of Appeals for the First Circuit affirmed the district court’s dismissal in United Seniors Association and, in January 2008, the United States Supreme Court denied plaintiff’s petition for writ of certiorari. In April 2008, an action, National Committee to Preserve Social Security and Medicare, et al. v. Philip Morris USA, et al. (“National Committee I”), was brought under the Medicare as Secondary Payer statute in the Circuit Court of the Eleventh Judicial Circuit of and for Miami County, Florida, but was dismissed voluntarily in May 2008. The action purported to be brought on behalf of Medicare to recover an unspecified amount of damages equal to double the amount paid by Medicare for smoking-related health care services provided from April 19, 2002 to the present. In May 2008, an action, National Committee to Preserve Social Security, et al. v. Philip Morris USA, et al., was brought under the Medicare as Secondary Payer statute in United States District Court for the Eastern District of New York. This action was brought by the same plaintiffs as National Committee I and similarly purports to be brought on behalf of Medicare to recover an unspecified amount of damages equal to double the amount paid by Medicare for smoking-related health care services provided from May 21, 2002 to the present. In July 2008, defendants filed a motion to dismiss plaintiffs’ claims and plaintiffs filed a motion for partial summary judgment.

In addition to the cases brought in the United States, health care cost recovery actions have also been brought against tobacco industry participants, including PM USA, in Israel (1), the Marshall Islands (1 dismissed), and Canada (2) and other entities have stated that they are considering filing such actions. In September 2005, in the first of the two health care recovery cases filed in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case, which had previously been dismissed by the trial court, was permitted to proceed. PM USA’s and other defendants’ challenge to the British Columbia court’s exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision. During 2008, the Province of New Brunswick, Canada, proclaimed into law previously adopted legislation allowing reimbursement claims to be brought against cigarette manufacturers, and it filed suit shortly thereafter. Altria Group, Inc. and PM USA are named as defendants in New Brunswick’s case. Several other provinces in Canada have enacted similar legislation

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or are in the process of enacting similar legislation. See “Third Party Guarantees” for a discussion of the Distribution Agreement between Altria Group, Inc. and PMI that provides for indemnities for certain liabilities concerning tobacco products.

Settlements of Health Care Cost Recovery Litigation

In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the original participating manufacturers make substantial annual payments of $9.4 billion each year (excluding future annual payments, if any, under the National Tobacco Grower Settlement Trust discussed below), subject to adjustments for several factors, including inflation, market share and industry volume. In addition, the original participating manufacturers are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million.

The State Settlement Agreements also include provisions relating to advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to certain tobacco control and underage use laws, restrictions on lobbying activities and other provisions.

Possible Adjustments in MSA Payments for 2003, 2004, 2005 and 2006

Pursuant to the provisions of the MSA, domestic tobacco product manufacturers, including PM USA, who are original signatories to the MSA (the “Original Participating Manufacturers” or “OPMs”) are participating in proceedings that may result in downward adjustments to the amounts paid by the OPMs and the other MSA participating manufacturers to the states and territories that are parties to the MSA for the years 2003, 2004, 2005 and 2006. The proceedings are based on the collective loss of market share for 2003, 2004, 2005 and 2006, respectively, by all participating manufacturers who are subject to the payment obligations and marketing restrictions of the MSA to non-participating manufacturers (“NPMs”) who are not subject to such obligations and restrictions.

In these proceedings, an independent economic consulting firm jointly selected by the MSA parties or otherwise selected pursuant to the MSA’s provisions is required to determine whether the disadvantages of the MSA were a “significant factor” contributing to the collective loss of market share for the year in question. If the firm determines that the disadvantages of the MSA were such a “significant factor,” each state may avoid a downward adjustment to its share of the participating manufacturers’ annual payments for that year by establishing that it diligently enforced a qualifying escrow statute during the entirety of that year. Any potential downward adjustment would then be reallocated to those states that do not establish such diligent enforcement. PM USA believes that the MSA’s arbitration clause requires a state to submit its claim to have diligently enforced a qualifying escrow statute to binding arbitration before a panel of three former federal judges in the manner provided for in the MSA. A number of states have taken the position that this claim should be decided in state court on a state-by-state basis.

In March 2006, an independent economic consulting firm determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers’ collective loss of market share for the year 2003. In February 2007, this same firm determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers’ collective loss of market share for the year 2004. In February 2008, the same economic consulting firm determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers’ collective loss of market

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share for the year 2005. A different economic consulting firm has been selected to make the “significant factor” determination regarding the participating manufacturers’ collective loss of market share for the year 2006. The new firm’s decision with respect to 2006 is expected in March 2009.

Following the economic consulting firm’s determination with respect to 2003, thirty-eight states filed declaratory judgment actions in state courts seeking a declaration that the state diligently enforced its escrow statute during 2003. The OPMs and other MSA-participating manufacturers have responded to these actions by filing motions to compel arbitration in accordance with the terms of the MSA, including filing motions to compel arbitration in eleven MSA states and territories that have not filed declaratory judgment actions. Courts in all 46 MSA states and the District of Columbia and Puerto Rico have ruled that the question of whether a state diligently enforced its escrow statute during 2003 is subject to arbitration. Several of these rulings remain subject to appeal or further review. Additionally, Ohio filed a declaratory judgment action in state court with respect to the 2004 diligent enforcement issue. The action has been stayed pending the decision about the 2003 payments.

The availability and the precise amount of any NPM adjustment for 2003, 2004, 2005 and 2006 will not be finally determined until 2009 or thereafter. There is no certainty that the OPMs and other MSA-participating manufacturers will ultimately receive any adjustment as a result of these proceedings. If the OPMs do receive such an adjustment through these proceedings, the adjustment would be allocated among the OPMs pursuant to the MSA’s provisions, and PM USA’s share would likely be applied as a credit against one or several future MSA payments.

National Grower Settlement Trust

As part of the MSA, the settling defendants committed to work cooperatively with the tobacco-growing states to address concerns about the potential adverse economic impact of the MSA on tobacco growers and quota holders. To that end, in 1999, four of the major domestic tobacco product manufacturers, including PM USA, established the National Tobacco Grower Settlement Trust (“NTGST”), a trust fund to provide aid to tobacco growers and quota holders. The trust was to be funded by these four manufacturers over 12 years with payments, prior to application of various adjustments, scheduled to total $5.15 billion. Provisions of the NTGST allowed for offsets to the extent that industry-funded payments were made for the benefit of growers or quota holders as part of a legislated end to the federal tobacco quota and price support program.

In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA provides for the elimination of the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the buy-out, which is estimated at approximately $9.5 billion, is being paid over 10 years by manufacturers and importers of each kind of tobacco product. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. The quota buy-out payments offset already scheduled payments to the NTGST. However, two of the grower states, Maryland and Pennsylvania, have filed claims in the North Carolina state courts, asserting that the companies which established the NTGST (including PM USA) must continue making payments under the NTGST through 2010 for the benefit of Maryland and Pennsylvania growers (such continuing payments would represent slightly more than one percent of the originally scheduled payments that would have been due to the NTGST for the years 2005 through 2010) notwithstanding the offsets resulting from the FETRA payments. The North Carolina trial court has held in favor of Maryland and Pennsylvania, and the companies (including PM USA) have appealed. The North Carolina Court of Appeals heard oral argument in August 2008. In addition to the approximately $9.5 billion cost of the buy-out, FETRA also obligated manufacturers and importers of tobacco products to cover any losses (up to $500 million) that the government incurred on the disposition of tobacco pool stock

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accumulated under the previous tobacco price support program. PM USA has paid $138 million for its share of the tobacco pool stock losses. Altria Group, Inc. does not currently anticipate that the quota buy-out will have a material adverse impact on its consolidated results in 2008 and beyond.

Other MSA-Related Litigation

PM USA was named as a defendant in an action brought on October 28, 2008 in the U.S. District Court for the Western District of Kentucky by an MSA participating manufacturer that is not an OPM. Other defendants include various other participating manufacturers and the Attorneys General of all 52 States and Territories that are parties to the MSA. The plaintiff alleges that certain of the MSA’s payment provisions discriminate against it in favor of certain other participating manufacturers in violation of the federal antitrust laws and the United States Constitution. The plaintiff is seeking injunctive relief, alteration of certain MSA payment provisions as applied to it, treble damages under the federal antitrust laws, and/or rescission of its joinder in the MSA. The plaintiff has also filed a motion for a preliminary injunction enjoining the States from enforcing the allegedly discriminatory payment provisions against it during the pendency of action.

Without naming PM USA or any other private party as a defendant, manufacturers that have elected not to sign the MSA (NPMs) and/or their distributors or customers have filed several legal challenges to the MSA and related legislation. New York state officials are defendants in a lawsuit pending in the United States District Court for the Southern District of New York in which cigarette importers allege that the MSA and/or related legislation violates federal antitrust laws and the Commerce Clause of the United States Constitution. In a separate proceeding pending in the same court, plaintiffs assert the same theories against not only New York officials but also the Attorneys General for thirty other states. The United States Court of Appeals for the Second Circuit has held that the allegations in both actions, if proven, establish a basis for relief on antitrust and Commerce Clause grounds and that the trial courts in New York have personal jurisdiction sufficient to enjoin other states’ officials from enforcing their MSA-related legislation. On remand in those two actions, one trial judge preliminarily enjoined New York from enforcing its “allocable share” amendment to the MSA’s Model Escrow Statute against the plaintiffs, while another trial judge refused to do so after concluding that the plaintiffs were unlikely to prove their allegations. Summary judgment motions are pending in one of those cases.

In another action, the United States Court of Appeals for the Fifth Circuit reversed a trial court’s dismissal of challenges to MSA-related legislation in Louisiana under the First and Fourteenth Amendments to the United States Constitution. The case and another challenge to Louisiana’s participation in the MSA and Louisiana’s MSA-related legislation are scheduled to begin summary judgment proceedings during the fourth quarter of 2008. Another proceeding has been initiated before an international arbitration tribunal under the provisions of the North American Free Trade Agreement. A two-day hearing on the merits is scheduled for June 2009. Appeals from trial court decisions holding that plaintiffs have failed either to make allegations establishing a claim for relief or to submit evidence supporting those allegations may soon be filed with the United States Court of Appeals for the Eighth Circuit. The United States Courts of Appeals for the Sixth and Ninth Circuits have affirmed the dismissals in two similar challenges. In July 2008, the United States Court of Appeals for the Tenth Circuit affirmed dismissals and summary judgment orders in two cases emanating from Kansas and Oklahoma, and in doing so rejected antitrust and constitutional challenges to the allocable share amendment legislation in those states.

Federal Government’s Lawsuit

In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including Altria Group, Inc. asserting claims under three federal statutes, namely the Medical Care Recovery Act (“MCRA”), the MSP provisions of the Social Security Act and the civil provisions of RICO. Trial of the case ended in June 2005. The lawsuit sought to recover an unspecified amount of health care costs for tobacco-related

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illnesses allegedly caused by defendants’ fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans’ health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleged that such costs total more than $20 billion annually. It also sought what it alleged to be equitable and declaratory relief, including disgorgement of profits which arose from defendants’ allegedly tortious conduct, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government’s future costs of providing health care resulting from defendants’ alleged past tortious and wrongful conduct. In September 2000, the trial court dismissed the government’s MCRA and MSP claims, but permitted discovery to proceed on the government’s claims for relief under the civil provisions of RICO.

The government alleged that disgorgement by defendants of approximately $280 billion is an appropriate remedy. In May 2004, the trial court issued an order denying defendants’ motion for partial summary judgment limiting the disgorgement remedy. In February 2005, a panel of the United States Court of Appeals for the District of Columbia Circuit held that disgorgement is not a remedy available to the government under the civil provisions of RICO and entered summary judgment in favor of defendants with respect to the disgorgement claim. In April 2005, the Court of Appeals denied the government’s motion for rehearing. In July 2005, the government petitioned the United States Supreme Court for further review of the Court of Appeals’ ruling that disgorgement is not an available remedy, and in October 2005, the Supreme Court denied the petition.

In June 2005, the government filed with the trial court its proposed final judgment seeking remedies of approximately $14 billion, including $10 billion over a five-year period to fund a national smoking cessation program and $4 billion over a ten-year period to fund a public education and counter-marketing campaign. Further, the government’s proposed remedy would have required defendants to pay additional monies to these programs if targeted reductions in the smoking rate of those under 21 are not achieved according to a prescribed timetable. The government’s proposed remedies also included a series of measures and restrictions applicable to cigarette business operations — including, but not limited to, restrictions on advertising and marketing, potential measures with respect to certain price promotional activities and research and development, disclosure requirements for certain confidential data and implementation of a monitoring system with potential broad powers over cigarette operations.

In August 2006, the federal trial court entered judgment in favor of the government. The court held that certain defendants, including Altria Group, Inc. and PM USA, violated RICO and engaged in 7 of the 8 “sub-schemes” to defraud that the government had alleged. Specifically, the court found that:

•

defendants falsely denied, distorted and minimized the significant adverse health consequences of smoking;

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defendants hid from the public that cigarette smoking and nicotine are addictive;

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defendants falsely denied that they control the level of nicotine delivered to create and sustain addiction;

•

defendants falsely marketed and promoted “low tar/light” cigarettes as less harmful than full-flavor cigarettes;

•

defendants falsely denied that they intentionally marketed to youth;

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defendants publicly and falsely denied that ETS is hazardous to non-smokers; and

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•

defendants suppressed scientific research.

The court did not impose monetary penalties on the defendants, but ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe one cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the Federal Trade Commission, for a period of ten years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the government’s costs in bringing the action.

In September 2006, defendants filed notices of appeal to the United States Court of Appeals for the District of Columbia Circuit. In September 2006, the trial court denied defendants’ motion to stay the judgment pending defendants’ appeals, and defendants then filed an emergency motion with the Court of Appeals to stay enforcement of the judgment pending their appeals. In October 2006, the government filed a notice of appeal to the Court of Appeals in which it appeals the denial of certain remedies, including the disgorgement of profits and the cessation remedies it had sought. In October 2006, a three-judge panel of the United States Court of Appeals granted defendants’ motion and stayed the trial court’s judgment pending its review of the decision. Certain defendants, including PM USA and Altria Group, Inc., filed a motion to clarify the trial court’s August 2006 Final Judgment and Remedial Order. In March 2007, the trial court denied in part and granted in part defendants’ post-trial motion for clarification of portions of the court’s remedial order. As noted above, the trial court’s judgment and remedial order remain stayed pending the appeal to the Court of Appeals. Oral argument before the United States Court of Appeals for the District of Columbia Circuit was heard on October 14, 2008.

“Lights/Ultra Lights” Cases

Overview

Plaintiffs in these class actions (some of which have not been certified as such), allege, among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law fraud, or RICO violations, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, Altria Group, Inc. or its subsidiaries, on behalf of individuals who purchased and

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consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury, and damages, the statute of limitations, express preemption by the Federal Cigarette Labeling and Advertising Act and implied preemption by the policies and directives of the Federal Trade Commission, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. Seventeen cases are pending in Arkansas (2), Delaware (1), Florida (1), Illinois (1), Maine (1), Massachusetts (1), Minnesota (1), Missouri (1), New Hampshire (1), New Jersey (1), New Mexico (1), New York (1), Oregon (1), Tennessee (1), and West Virginia (2). In addition, a purported “Lights” class action is pending against PM USA in Israel. Other entities have stated that they are considering filing such actions against Altria Group, Inc. and PM USA.

The Good Case

In May 2006, a federal trial court in Maine granted PM USA’s motion for summary judgment in Good, a purported “Lights” class action, on the grounds that plaintiffs’ claims are preempted by the Federal Cigarette Labeling and Advertising Act and dismissed the case. In August 2007, the United States Court of Appeals for the First Circuit vacated the district court’s grant of PM USA’s motion for summary judgment on federal preemption grounds and remanded the case to district court. The district court stayed the case pending the United States Supreme Court’s ruling on defendants’ petition for writ of certiorari with the United States Supreme Court, which was granted on January 18, 2008. The case has been stayed pending the United States Supreme Court’s decision. The United States Supreme Court heard oral argument on October 6, 2008.

“Lights” Cases Dismissed, Not Certified or Ordered De-Certified

To date, 12 courts in 13 cases have refused to certify class actions, reversed prior class certification decisions or have entered judgment in favor of PM USA. Trial courts in Arizona, Kansas, New Mexico, Oregon, Washington and New Jersey have refused to certify a class, an appellate court in Florida has overturned class certification by a trial court, the Ohio Supreme Court has overturned class certifications in two cases, the United States Court of Appeals for the Fifth Circuit has dismissed a purported “Lights” class action brought in Louisiana federal court (Sullivan) on the grounds that plaintiffs’ claims were preempted by the Federal Cigarette Labeling and Advertising Act, plaintiffs voluntarily dismissed an action in a federal trial court in Michigan after the court dismissed claims asserted under the Michigan Unfair Trade and Consumer Protection Act, and the Supreme Court of Illinois has overturned a judgment in favor of a plaintiff class in the Price case. An intermediate appellate court in Oregon and the Supreme Court in Washington have denied plaintiffs’ motions for interlocutory review of the trial courts’ refusals to certify a class. In the Oregon case (Pearson), in February 2007, PM USA filed a motion for summary judgment based on federal preemption and the Oregon statutory exemption. In September 2007, the District Court granted PM USA’s motion based on express preemption under the Federal Cigarette Labeling and Advertising Act, and plaintiffs appealed this dismissal to the Oregon Court of Appeals. In February 2008, the parties filed a joint motion to hold the appeal in abeyance pending the United States Supreme Court’s decision in Good, which motion was denied. Plaintiffs in the case in Washington voluntarily dismissed the case with prejudice. Plaintiffs in the New Mexico case renewed their motion for class certification, but the case has been stayed pending the United States Supreme Court’s decision in Good. Plaintiffs in the Florida case (Hines) petitioned the Florida Supreme Court for further review, and in January 2008, the Florida Supreme Court denied this petition. The Hines court, in July 2008, stayed the case pending the United States Supreme Court’s decision in Good.

In September 2005, a New York federal trial court in Schwab granted in part defendants’ motion for partial summary judgment dismissing plaintiffs’ claims for equitable relief and denied a number of plaintiffs’

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motions for summary judgment. In November 2005, the trial court ruled that the plaintiffs would be permitted to calculate damages on an aggregate basis and use “fluid recovery” theories to allocate them among class members. In September 2006, the trial court denied defendants’ summary judgment motions and granted plaintiffs’ motion for certification of a nationwide class of all United States residents that purchased cigarettes in the United States that were labeled “light” or “lights” from the first date defendants began selling such cigarettes until the date trial commences. The court also declined to certify the order for interlocutory appeal, declined to stay the case and ordered jury selection to begin in January 2007, with trial scheduled to begin immediately after the jury is impaneled. In October 2006, a single judge of the United States Court of Appeals for the Second Circuit granted PM USA’s petition for a temporary stay of pre-trial and trial proceedings pending disposition of the petitions for stay and interlocutory review by a three-judge panel of the Court of Appeals. In November 2006, the Second Circuit granted interlocutory review of the trial court’s class certification order and stayed the case before the trial court pending the appeal. In April 2008, the Second Circuit overturned the trial court’s class certification decision.

Trial Court Class Certifications

Trial courts have certified classes against PM USA in Massachusetts (Aspinall), Minnesota (Curtis), and Missouri (Craft). PM USA has appealed or otherwise challenged these class certification orders. Developments in these cases include:

•

Aspinall: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In August 2006, the trial court denied PM USA’s motion for summary judgment based on the state consumer protection statutory exemption and federal preemption. On motion of the parties, the trial court has subsequently reported its decision to deny summary judgment to the appeals court for review and the trial court proceedings are stayed pending completion of the appellate review. Motions for direct appellate review with the Massachusetts Supreme Judicial Court were granted in April 2007 and oral arguments were heard in January 2008. In March 2008, the Supreme Judicial Court issued an order staying the proceedings pending the resolution of Good.

•

Curtis: In April 2005, the Minnesota Supreme Court denied PM USA’s petition for interlocutory review of the trial court’s class certification order. In September 2005, PM USA removed Curtis to federal court based on the Eighth Circuit’s decision in Watson, which upheld the removal of a “Lights” case to federal court based on the “federal officer” jurisdiction of the Federal Trade Commission. In February 2006, the federal court denied plaintiffs’ motion to remand the case to state court. The case was stayed pending the outcome of Dahl v. R. J. Reynolds Tobacco Co., which was argued before the United States Court of Appeals for the Eighth Circuit in December 2006. In February 2007, the United States Court of Appeals for the Eighth Circuit issued its ruling in Dahl, and reversed the federal district court’s denial of plaintiffs’ motion to remand that case to the state trial court. In October 2007, the federal district court remanded the Curtis case to state court. In December 2007, the Minnesota Court of Appeals reversed the trial court’s determination in Dahl that plaintiffs’ claims in that case were subject to express preemption and defendant in that case has petitioned the Minnesota Supreme Court for review. Curtis has been stayed pending the United States Supreme Court’s decision in Good.

•

Craft: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In September 2005, PM USA removed Craft to federal court based on the Eighth Circuit’s decision in Watson. In March 2006, the federal trial court granted plaintiffs’ motion and remanded the case to the Missouri state trial court. In May 2006, the Missouri Supreme Court declined to review the trial court’s class certification decision. The case has been stayed pending the United States Supreme Court’s decision in Good.

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In addition to these cases, in June 2007, the United States Supreme Court reversed the lower court rulings in the Watson case that denied plaintiffs’ motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants’ contention that the case must be tried in federal court under the “federal officer” statute. The case has been remanded to the state trial court in Arkansas. In March 2008, the case was stayed pending the outcome of the United States Supreme Court’s decision in Good. In December 2005, in the Miner case, which was pending at that time in the United States District Court for the Western District of Arkansas, plaintiffs moved for certification of a class composed of individuals who purchased Marlboro Lights or Cambridge Lights brands in Arkansas, California, Colorado, and Michigan. PM USA’s motion for summary judgment based on preemption and the Arkansas statutory exemption is pending. Following the filing of this motion, plaintiffs moved to voluntarily dismiss Miner without prejudice, which PM USA opposed. The court then stayed the case pending the United States Supreme Court’s decision on a petition for writ of certiorari in the Watson case discussed above. In July 2007, the case was remanded to a state trial court in Arkansas. In August 2007, plaintiffs renewed their motion for class certification. In October 2007, the court denied PM USA’s motion to dismiss on procedural grounds and the court entered a case management order. The case is currently stayed pending the outcome of the United States Supreme Court’s decision in Good. In addition, plaintiffs’ motion for class certification is pending in a case in Tennessee.

Certain Other Tobacco-Related Litigation

Tobacco Price Cases: As of November 1, 2008, two cases were pending in Kansas and New Mexico in which plaintiffs allege that defendants, including PM USA, conspired to fix cigarette prices in violation of antitrust laws. Altria Group, Inc. is a defendant in the case in Kansas. Plaintiffs’ motions for class certification have been granted in both cases. In June 2006, defendants’ motion for summary judgment was granted in the New Mexico case. Plaintiffs in the New Mexico case have appealed. The case in Kansas had been stayed pending the Kansas Supreme Court’s decision on defendants’ petition regarding certain discovery rulings by the trial court; the Kansas Supreme Court denied the petition in April 2008 and the stay has been lifted.

Cigarette Contraband Cases: In 2008, Canadian authorities concluded their investigation relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s and executed a complete release of Altria Group, Inc. and its affiliates.

Cases Under the California Business and Professions Code: In June 1997, a lawsuit (Brown) was filed in California state court alleging that domestic cigarette manufacturers, including PM USA and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted as to plaintiffs’ claims that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. In September 2004, the trial court granted defendants’ motion for summary judgment as to plaintiffs’ claims attacking defendants’ cigarette advertising and promotion and denied defendants’ motion for summary judgment on plaintiffs’ claims based on allegedly false affirmative statements. Plaintiffs’ motion for rehearing was denied. In March 2005, the court granted defendants’ motion to decertify the class based on a recent change in California law, which, in two July 2006 opinions, the California Supreme Court ruled applicable to pending cases. Plaintiffs’ motion for reconsideration of the order that decertified the class was denied, and plaintiffs have appealed. In September 2006, an intermediate appellate court affirmed the trial court’s order decertifying the class. In November 2006, the California Supreme Court accepted review of the appellate court’s decision.

In May 2004, a lawsuit (Gurevitch) was filed in California state court on behalf of a purported class of all California residents who purchased the Merit brand of cigarettes since July 2000 to the present alleging

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that defendants, including PM USA, violated California’s Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices, including false and misleading advertising. The complaint also alleges violations of California’s Consumer Legal Remedies Act. Plaintiffs seek injunctive relief, disgorgement, restitution, and attorneys’ fees. In July 2005, defendants’ motion to dismiss was granted; however, plaintiffs’ motion for leave to amend the complaint was also granted, and plaintiffs filed an amended complaint in September 2005. In October 2005, the court stayed this action pending the California Supreme Court’s rulings on two cases not involving PM USA. In July 2006, the California Supreme Court issued rulings in the two cases and held that a recent change in California law known as Proposition 64, which limits the ability to bring a lawsuit to only those plaintiffs who have “suffered injury in fact” and “lost money or property” as a result of defendant’s alleged statutory violations, properly applies to pending cases. In September 2006, the stay was lifted and defendants filed their demurrer to plaintiffs’ amended complaint. In March 2007, the court, without ruling on the demurrer, again stayed the action pending rulings from the California Supreme Court in another case involving Proposition 64 that is relevant to PM USA’s demurrer.

In September 2005, a purported class action lawsuit (Reynolds) was filed by a California consumer against PM USA alleging that PM USA violated certain California consumer protection laws in connection with the alleged expiration of Marlboro Miles’ proofs of purchase, which could be used in accordance with the terms and conditions of certain time-limited promotions to acquire merchandise from Marlboro catalogues. PM USA’s motion to dismiss the case was denied in March 2006. In September 2006, PM USA filed a motion for summary judgment as to plaintiff’s claims for breach of the implied covenant of good faith and fair dealing. In October 2006, PM USA filed a second summary judgment motion seeking dismissal of plaintiff’s claims under certain California consumer protection statutes. In June 2007, the court denied PM USA’s motions for summary judgment. In January 2008, PM USA’s application for interlocutory review by the United States Court of Appeals for the Ninth Circuit was granted.

Certain Other Actions

IRS Challenges to PMCC Leases: The IRS concluded its examination of Altria Group, Inc.’s consolidated tax returns for the years 1996 through 1999, and issued a final Revenue Agent’s Report (“RAR”) in March 2006. The RAR disallowed benefits pertaining to certain PMCC leveraged lease transactions for the years 1996 through 1999. Altria Group, Inc. has agreed with all conclusions of the RAR, with the exception of the disallowance of benefits pertaining to several PMCC leveraged lease transactions for the years 1996 through 1999. Altria Group, Inc. contests approximately $150 million of tax and net interest assessed and paid with regard to them. The IRS may in the future challenge and disallow more of PMCC’s leveraged lease benefits based on Revenue Rulings, an IRS Notice and subsequent case law addressing specific types of leveraged leases (lease-in/lease-out (“LILO”) and sale-in/lease-out (“SILO”) transactions). In October 2006, Altria Group, Inc. filed a complaint in the United States District Court for the Southern District of New York to claim refunds on a portion of these tax payments and associated interest for the years 1996 and 1997. In March 2008, Altria Group, Inc. and the government filed simultaneous motions for summary judgment. Those motions are pending.

In March 2008, Altria Group, Inc. filed a second complaint in the United States District Court for the Southern District of New York seeking a refund of the tax payments and associated interest for the years 1998 and 1999 attributable to the disallowance of benefits claimed in those years with respect to the leases included in the October 2006 filing and with respect to certain other leases entered into in 1998 and 1999.

Should Altria Group, Inc. not prevail in this litigation, Altria Group, Inc. may have to accelerate the payment of significant amounts of federal income tax and significantly lower its earnings to reflect the recalculation of the income from the affected leveraged leases, which could have a material effect on the earnings and cash flows of Altria Group, Inc. in a particular fiscal quarter or fiscal year. Altria Group, Inc.

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considered this matter in its adoption of FASB Interpretation No. 48 and FASB Staff Position No. FAS 13-2. Related litigation involving another party and a significantly different LILO transaction has been decided in favor of the IRS in a recent decision in the Fourth Circuit. Related litigation involving another party and a significantly different SILO transaction has been decided in favor of the IRS in a recent decision in the United States District Court for the Northern District of Ohio.

Kraft Thrift Plan Case: Four participants in the Kraft Foods Global, Inc. Thrift Plan (“Kraft Thrift Plan”), a defined contribution plan, filed a class action complaint on behalf of all participants and beneficiaries of the Kraft Thrift Plan in July 2008 in the United States District Court for the Northern District of Illinois alleging breach of fiduciary duty under the Employee Retirement Income Security Act (“ERISA”). Named defendants in this action include Altria Corporate Services, Inc. (now Altria Client Services Inc.) and certain company committees that allegedly had a relationship to the Kraft Thrift Plan. Plaintiffs request, among other remedies, that defendants restore to the Kraft Thrift Plan all losses improperly incurred. The Altria Group, Inc. defendants deny any violation of ERISA or other unlawful conduct and intend to defend the case vigorously. Under the terms of a Distribution Agreement between Altria Group, Inc. and Kraft, Altria Client Services Inc. and related defendants may be entitled to indemnity against any liabilities incurred in connection with this case.

UST Litigation: On September 8, 2008, plaintiffs filed a purported class action on behalf of a purported class of UST Inc. stockholders in Superior Court in Connecticut to enjoin the proposed acquisition of UST Inc. by Altria Group, Inc., alleging that UST Inc. and/or nine of its directors had violated their fiduciary duties by agreeing to the terms of the acquisition and that Altria Group, Inc. had aided and abetted in the alleged violation. On October 30, 2008, plaintiffs amended the complaint to add allegations concerning UST’s definitive proxy statement and certain benefits payable to UST’s officers in connection with the transaction. The amended complaint also added aiding and abetting claims against UST.

Environmental Regulation

Altria Group, Inc. and its subsidiaries (and former subsidiaries) are subject to various federal, state and local laws and regulations concerning the discharge of materials into the environment, or otherwise related to environmental protection, including, in the United States; the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation and Liability Act (commonly known as “Superfund”), which can impose joint and several liability on each responsible party. Subsidiaries (and former subsidiaries) of Altria Group, Inc. are involved in several matters subjecting them to potential costs related to remediations under Superfund or other laws and regulations. Altria Group, Inc.’s 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 Altria Group, Inc.’s consolidated results of operations, capital expenditures, financial position, earnings or competitive position.

Third-Party Guarantees

At September 30, 2008, Altria Group, Inc.’s third-party guarantees, which are related to divestiture activities, were $22 million. These guarantees have no specified expiration dates. Altria Group, Inc. is required to perform under these guarantees in the event that a third party fails to make contractual payments. Altria Group, Inc. has a liability of $22 million on its condensed consolidated balance sheet at September 30, 2008, relating to these guarantees. In the ordinary course of business, certain subsidiaries of Altria Group, Inc. have agreed to indemnify a limited number of third parties in the event of litigation.

-47-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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. Altria Group, Inc. does not have a related liability recorded on its condensed consolidated balance sheet at September 30, 2008 as the fair value of this indemnification is insignificant.

Note 13. 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, the first day of Altria Group, Inc.’s annual reporting period beginning after December 15, 2008. SFAS 141(R) requires the recognition of assets acquired, liabilities assumed and any noncontrolling interest in the acquiree to be measured at fair value as of the acquisition date. Additionally, costs incurred to effect the acquisition are to be recognized as expenses in the periods in which the costs are incurred. As discussed in Note 2. UST Acquisition, Altria Group, Inc. expects the transaction to close during the first full week of January 2009 and no later than January 7, 2009. Accordingly, the acquisition will be accounted for under SFAS No. 141 (R). Under SFAS 141 (R), Altria Group, Inc. will expense as incurred various acquisition costs including, but not limited to, transaction costs and costs related to restructuring UST.

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.

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 EITF 03-6-1”). FSP EITF 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 EITF 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.

Altria Group, Inc. is currently in the process of evaluating the impact of these pronouncements.

-48-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 14. Condensed Consolidating Financial Information:

PM USA has issued guarantees relating to Altria Group, Inc.’s outstanding debt securities and borrowings under Altria Group, Inc.’s existing revolving credit facilities and commercial paper programs (the “Guarantees”). Collectively, these Guarantees pertain to substantially all of Altria Group, Inc.’s current debt instruments and will pertain to borrowings under the $7 billion senior 364-day term bridge loan facility contemplated by the commitment letter entered into by Altria Group, Inc. and two banks on September 7, 2008, which commitment letter is more particularly discussed at Note 2. UST Acquisition. Pursuant to the Guarantees, PM USA fully and unconditionally guarantees, as primary obligor, the payment and performance of Altria Group, Inc.’s obligations under the guaranteed debt instruments (the “Obligations”), as described below.

The guarantees provide that PM USA will fully and unconditionally guarantee the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of the Obligations. The liability of PM USA under the Guarantees shall be absolute and unconditional irrespective of any lack of validity, enforceability or genuineness of any provision of any agreement or instrument relating thereto; any change in the time, manner or place of payment of, or in any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to departure from any agreement or instrument relating thereto; any exchange, release or non-perfection of any collateral, or any release or amendment or waiver of or consent to departure from any other guarantee, for all or any of the Obligations; or any other circumstance that might otherwise constitute a defense available to, or a discharge of, Altria Group, Inc. or PM USA.

The obligations of PM USA under the Guarantees will be limited to the maximum amount as will, after giving effect to such maximum amount and all other contingent and fixed liabilities of PM USA that are relevant under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law to the extent applicable to the Guarantees, result in PM USA’s obligations under the Guarantees not constituting a fraudulent transfer or conveyance. For purposes hereof, “Bankruptcy Law” means Title 11, U.S. Code, or any similar federal or state law for the relief of debtors.

PM USA will be unconditionally released and discharged from its obligations under each of the Guarantees upon the earliest to occur of:

•

the date, if any, on which PM USA consolidates with or merges into Altria Group, Inc. or any successor;

•

the date, if any, on which Altria Group, Inc. or any successor consolidates with or merges into PM USA;

•

the payment in full of the Obligations pertaining to such Guarantee; or

•

the rating of Altria Group, Inc.’s long-term senior unsecured debt by Standard & Poor’s of A or higher.

The respective principal wholly-owned subsidiaries of Altria Group, Inc. and PM USA currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.

The following sets forth the condensed consolidating balance sheets as of September 30, 2008 and December 31, 2007, condensed consolidating statements of earnings for the nine months and three months ended September 30, 2008 and 2007, and condensed consolidating statements of cash flows for the nine

-49-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

months ended September 30, 2008 and 2007 for Altria Group, Inc., PM USA and Altria Group, Inc.’s other subsidiaries that are not guarantors of Altria Group, Inc.’s debt instruments (the “Non-Guarantor Subsidiaries”) (in millions of dollars). The financial information is based on Altria Group, Inc.’s understanding of the SEC interpretation and application of Rule 3-10 of the SEC Regulation S-X.

The financial information may not necessarily be indicative of results of operations or financial position had PM USA and Non-Guarantor Subsidiaries operated as independent entities. Altria Group, Inc. accounts for investments in these subsidiaries under the equity method of accounting.

-50-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheets

September 30, 2008


	Altria Group, Inc.		PM USA		Non- Guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
ASSETS
Consumer products
Cash and cash equivalents	$	913	$	-	$	2	$	-		$	915

Receivables		1		24		27					52

Inventories:
Leaf tobacco				627		16					643
Other raw materials				156		4					160
Finished product				252		5					257

				1,035		25					1,060

Due from Altria Group, Inc. and subsidiaries		1,169		3,033		254		(4,456	)
Other current assets		61		1,736		21					1,818


Total current assets		2,144		5,828		329		(4,456	)		3,845

Property, plant and equipment, at cost		2		4,748		566					5,316
Less accumulated depreciation		1		2,845		308					3,154

		1		1,903		258					2,162

Goodwill						81					81
Other intangible assets, net				283		2,758					3,041
Prepaid pension assets				598		362					960
Investment in SABMiller		4,146									4,146
Investment in consolidated subsidiaries		1,996						(1,996	)
Due from Altria Group, Inc. and subsidiaries		2,000						(2,000	)
Other assets		634		190		52					876


Total consumer products assets		10,921		8,802		3,840		(8,452	)		15,111

Financial services
Finance assets, net						5,527					5,527
Due from Altria Group, Inc. and subsidiaries						898		(898	)
Other assets						32					32


Total financial services assets						6,457		(898	)		5,559


TOTAL ASSETS	$	10,921	$	8,802	$	10,297	$	(9,350	)	$	20,670

-51-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheets (Continued)

September 30, 2008


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
LIABILITIES
Consumer products
Current portion of long-term debt	$	149		$	135		$	-		$	-		$	284
Accounts payable		97			200			24						321
Accrued liabilities:
Marketing					321									321
Taxes, except income taxes					42			1						43
Employment costs		23			48			133						204
Settlement charges					3,696									3,696
Other		61			549			306						916
Income taxes		(482	)		525			(20	)					23
Dividends payable		665												665
Due to Altria Group, Inc. and subsidiaries		3,929			97			1,328			(5,354	)


Total current liabilities		4,442			5,613			1,772			(5,354	)		6,473

Long-term debt		101												101
Deferred income taxes		1,368			(176	)		(12	)					1,180
Accrued pension costs		165						7						172
Accrued postretirement health care costs					1,774			120						1,894
Due to Altria Group, Inc. and subsidiaries								2,000			(2,000	)
Other liabilities		667			441			128						1,236


Total consumer products liabilities		6,743			7,652			4,015			(7,354	)		11,056

Financial services
Long-term debt								500						500
Deferred income taxes								4,635						4,635
Other liabilities								301						301


Total financial services liabilities								5,436						5,436


Total liabilities		6,743			7,652			9,451			(7,354	)		16,492


Contingencies

STOCKHOLDERS’ EQUITY
Common stock		935						9			(9	)		935
Additional paid-in capital		6,369			412			1,032			(1,444	)		6,369
Earnings reinvested in the business		22,113			1,346			(91	)		(1,255	)		22,113
Accumulated other comprehensive losses		(795	)		(608	)		(104	)		712			(795	)

		28,622			1,150			846			(1,996	)		28,622

Less cost of repurchased stock		(24,444	)											(24,444	)


Total stockholders’ equity		4,178			1,150			846			(1,996	)		4,178


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	10,921		$	8,802		$	10,297		$	(9,350	)	$	20,670

-52-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheets

December 31, 2007


	Altria Group, Inc.		PM USA		Non- Guarantor Subsidiaries		Total Consolidating Adjustments			Consolidated
ASSETS
Consumer products
Cash and cash equivalents	$	4,835	$	1	$	6	$	-		$	4,842

Receivables		21		22		40					83

Inventories:
Leaf tobacco				853		8					861
Other raw materials				157		3					160
Finished product				223		10					233

				1,233		21					1,254
Current assets of discontinued operations						14,767					14,767
Due from Altria Group, Inc. and subsidiaries		1,321		3,458		1,681		(6,460	)
Other current assets		207		1,701		36					1,944


Total current assets		6,384		6,415		16,551		(6,460	)		22,890

Property, plant and equipment, at cost		194		5,135		297					5,626
Less accumulated depreciation		94		2,999		111					3,204

		100		2,136		186					2,422

Goodwill						76					76
Other intangible assets, net				283		2,766					3,049
Prepaid pension assets				558		354					912
Investment in SABMiller		3,960									3,960
Long-term assets of discontinued operations						16,969					16,969
Investment in consolidated subsidiaries		23,667						(23,667	)
Due from Altria Group, Inc. and subsidiaries		2,000		6,000				(8,000	)
Other assets		498		311		61					870


Total consumer products assets		36,609		15,703		36,963		(38,127	)		51,148

Financial services
Finance assets, net						6,029					6,029
Due from Altria Group, Inc. and subsidiaries						513		(513	)
Other assets						34					34


Total financial services assets						6,576		(513	)		6,063


TOTAL ASSETS	$	36,609	$	15,703	$	43,539	$	(38,640	)	$	57,211

-53-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Balance Sheets (Continued)

December 31, 2007


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
LIABILITIES
Consumer products
Current portion of long-term debt	$	850		$	1		$	1,503		$	-		$	2,354
Accounts payable		10			649			209						868
Accrued liabilities:
Marketing					326			1						327
Taxes, except income taxes					67			3						70
Employment costs		35			98			150						283
Settlement charges					3,986									3,986
Other		100			582			167						849
Income taxes		107			80			(3	)					184
Dividends payable		1,588												1,588
Current liabilities of discontinued operations								8,273						8,273
Due to Altria Group, Inc. and subsidiaries		5,545			86			1,342			(6,973	)


Total current liabilities		8,235			5,875			11,645			(6,973	)		18,782

Long-term debt		1,750			135									1,885
Deferred income taxes		1,207			(166	)		(73	)					968
Accrued pension costs		191						7						198
Accrued postretirement health care costs					1,743			173						1,916
Long-term liabilities of discontinued operations								8,065						8,065
Due to Altria Group, Inc. and subsidiaries		6,000						2,000			(8,000	)
Other liabilities		672			530			38						1,240


Total consumer products liabilities		18,055			8,117			21,855			(14,973	)		33,054

Financial services
Long-term debt								500						500
Deferred income taxes								4,911						4,911
Other liabilities								192						192


Total financial services liabilities								5,603						5,603


Total liabilities		18,055			8,117			27,458			(14,973	)		38,657


Contingencies

STOCKHOLDERS’ EQUITY
Common stock		935						9			(9	)		935
Additional paid-in capital		6,884			586			2,123			(2,709	)		6,884
Earnings reinvested in the business		34,426			7,647			12,458			(20,105	)		34,426
Accumulated other comprehensive (losses) earnings		(237	)		(647	)		1,491			(844	)		(237	)

		42,008			7,586			16,081			(23,667	)		42,008

Less cost of repurchased stock		(23,454	)											(23,454	)


Total stockholders’ equity		18,554			7,586			16,081			(23,667	)		18,554


TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	36,609		$	15,703		$	43,539		$	(38,640	)	$	57,211

-54-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statements of Earnings

For the Nine Months Ended September 30, 2008


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net revenues	$	-		$	14,233		$	469		$	-		$	14,702
Cost of sales					6,209			76						6,285
Excise taxes on products					2,533			45						2,578

Gross profit					5,491			348						5,839
Marketing, administration and research costs		133			1,766			161						2,060
Asset impairment and exit costs		74			44			176						294
(Gain) loss on sale of corporate headquarters building		(407	)					3						(404	)
Amortization of intangibles								5						5

Operating income		200			3,681			3						3,884
Interest and other debt expense (income), net		147			(249	)		129						27
Loss on early extinguishment of debt		386						7						393
Equity earnings in SABMiller		(344	)											(344	)

Earnings (loss) from continuing operations before income taxes and equity earnings of subsidiaries		11			3,930			(133	)					3,808
(Benefit) provision for income taxes		(38	)		1,466			(31	)					1,397
Equity earnings of subsidiaries		4,202									(4,202	)

Earnings (loss) from continuing operations		4,251			2,464			(102	)		(4,202	)		2,411
Earnings from discontinued operations, net of income taxes and minority interest								1,840						1,840

Net earnings	$	4,251		$	2,464		$	1,738		$	(4,202	)	$	4,251

-55-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statements of Earnings

For the Nine Months Ended September 30, 2007


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net revenues	$	-		$	13,998		$	138		$	-		$	14,136
Cost of sales					5,900			5						5,905
Excise taxes on products					2,626									2,626

Gross profit					5,472			133						5,605
Marketing, administration and research costs		234			1,764			61						2,059
Asset impairment and exit costs		49			328			15						392
Recoveries from airline industry exposure								(214	)					(214	)

Operating (loss) income		(283	)		3,380			271						3,368
Interest and other debt expense (income), net		663			(466	)		(7	)					190
Equity earnings in SABMiller		(392	)											(392	)

(Loss) earnings from continuing operations before income taxes and equity earnings of subsidiaries		(554	)		3,846			278						3,570
(Benefit) provision for income taxes		(268	)		1,427			100						1,259
Equity earnings of subsidiaries		7,884									(7,884	)

Earnings from continuing operations		7,598			2,419			178			(7,884	)		2,311
Earnings from discontinued operations, net of income taxes and minority interest								5,287						5,287

Net earnings	$	7,598		$	2,419		$	5,465		$	(7,884	)	$	7,598

-56-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statements of Earnings

For the Three Months Ended September 30, 2008


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net revenues	$	-		$	5,084		$	154		$	-		$	5,238
Cost of sales					2,205			25						2,230
Excise taxes on products					883			14						897

Gross profit					1,996			115						2,111
Marketing, administration and research costs		44			639			80						763
Asset impairment and exit costs					15			2						17
Amortization of intangibles								2						2

Operating (loss) income		(44	)		1,342			31						1,329
Interest and other debt expense (income), net		11			(12	)		26						25
Equity earnings in SABMiller		(54	)											(54	)

(Loss) earnings before income taxes and equity earnings of subsidiaries		(1	)		1,354			5						1,358
(Benefit) provision for income taxes		(16	)		499			8						491
Equity earnings of subsidiaries		852									(852	)

Net earnings	$	867		$	855		$	(3	)	$	(852	)	$	867

-57-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statements of Earnings

For the Three Months Ended September 30, 2007


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments			Consolidated
Net revenues	$	-		$	4,944		$	43		$	-		$	4,987
Cost of sales					2,095			1						2,096
Excise taxes on products					927									927

Gross profit					1,922			42						1,964
Marketing, administration and research costs		71			633			32						736
Asset impairment and exit costs		3			10									13
Recoveries from airline industry exposure								(7	)					(7	)

Operating (loss) income		(74	)		1,279			17						1,222
Interest and other debt expense (income), net		192			(164	)		(1	)					27
Equity earnings in SABMiller		(132	)											(132	)

(Loss) earnings from continuing operations before income taxes and equity earnings of subsidiaries		(134	)		1,443			18						1,327
(Benefit) provision for income taxes		(109	)		537			(1	)					427
Equity earnings of subsidiaries		2,658									(2,658	)

Earnings from continuing operations		2,633			906			19			(2,658	)		900
Earnings from discontinued operations, net of income taxes and minority interest								1,733						1,733

Net earnings	$	2,633		$	906		$	1,752		$	(2,658	)	$	2,633

-58-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2008


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments		Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash (used in) provided by operating activities, continuing operations	$	(541	)	$	2,731		$	52		$	-	$	2,242
Net cash provided by operating activities, discontinued operations								1,666					1,666

Net cash (used in) provided by operating activities		(541	)		2,731			1,718			-		3,908

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures					(122	)		(9	)				(131	)
Proceeds from sale of corporate headquarters building		525											525
Changes in amounts due to/from Altria Group, Inc. and subsidiaries		(7,558	)		6,000			1,558
Other					2			108					110
Financial services
Proceeds from finance assets								389					389

Net cash (used in) provided by investing activities, continuing operations		(7,033	)		5,880			2,046					893
Net cash used in investing activities, discontinued operations								(317	)				(317	)

Net cash (used in) provided by investing activities		(7,033	)		5,880			1,729					576

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Long-term debt repaid		(2,350	)					(1,558	)				(3,908	)
Repurchase of Altria Group, Inc. common stock		(1,166	)										(1,166	)
Dividends paid on Altria Group, Inc. common stock		(3,767	)										(3,767	)
Issuance of Altria Group, Inc. common stock		79											79
Philip Morris International Inc. dividends paid to Altria Group, Inc.		3,019											3,019
Tender and consent fees related to the early extinguishment of debt		(368	)					(3	)				(371	)
Changes in amounts due to/from Philip Morris International Inc.		(721	)										(721	)
Changes in amounts due to/from Altria Group, Inc. and subsidiaries		82			291			(373	)
Cash dividends received from/(paid by) subsidiaries		8,812			(8,765	)		(47	)
Other		32			(138	)		(121	)				(227	)

Net cash provided by (used in) financing activities, continuing operations		3,652			(8,612	)		(2,102	)				(7,062	)
Net cash used in financing activities, discontinued operations								(1,648	)				(1,648	)

Net cash provided by (used in) financing activities		3,652			(8,612	)		(3,750	)				(8,710	)

Effect of exchange rate changes on cash and cash equivalents:
Discontinued operations								(126	)				(126	)

Cash and cash equivalents, continuing operations:
Decrease		(3,922	)		(1	)		(4	)		-		(3,927	)
Balance at beginning of period		4,835			1			6					4,842

Balance at end of period	$	913		$	-		$	2		$	-	$	915

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Condensed Consolidating Statements of Cash Flows

For the Nine Months Ended September 30, 2007


	Altria Group, Inc.			PM USA			Non- Guarantor Subsidiaries			Total Consolidating Adjustments		Consolidated
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net cash (used in) provided by operating activities, continuing operations	$	(1,773	)	$	4,353		$	228		$	-	$	2,808
Net cash provided by operating activities, discontinued operations								5,477					5,477

Net cash (used in) provided by operating activities		(1,773	)		4,353			5,705			-		8,285

CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures					(184	)		(26	)				(210	)
Other		62			6			40					108
Financial services
Investments in finance assets								(4	)				(4	)
Proceeds from finance assets								363					363

Net cash provided by (used in) investing activities, continuing operations		62			(178	)		373					257
Net cash used in investing activities, discontinued operations								(1,152	)				(1,152	)

Net cash provided by (used in) investing activities		62			(178	)		(779	)				(895	)

CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net issuance of short-term borrowings								2					2
Long-term debt repaid		(500	)										(500	)
Financial services
Long-term debt repaid								(617	)				(617	)
Dividends paid on Altria Group, Inc. common stock		(5,069	)										(5,069	)
Issuance of Altria Group, Inc. common stock		357											357
Kraft Foods Inc. dividends paid to Altria Group, Inc.		728											728
Philip Morris International Inc. dividends paid to Altria Group, Inc.		2,480											2,480
Changes in amounts due to/from Philip Morris International Inc.		480											480
Changes in amounts due to/from Altria Group, Inc. and subsidiaries		1,052			(1,142	)		90
Cash dividends received from/(paid by) subsidiaries		2,941			(2,900	)		(41	)
Other		305			(134	)		(81	)				90

Net cash provided by (used in) financing activities, continuing operations		2,774			(4,176	)		(647	)				(2,049	)
Net cash used in financing activities, discontinued operations								(2,966	)				(2,966	)

Net cash provided by (used in) financing activities		2,774			(4,176	)		(3,613	)				(5,015	)

Effect of exchange rate changes on cash and cash equivalents:
Discontinued operations								165					165

Cash and cash equivalents, continuing operations:
Increase (decrease)		1,063			(1	)		(46	)		-		1,016
Balance at beginning of period		3,058			1			46					3,105

Balance at end of period	$	4,121		$	-		$	-		$	-	$	4,121

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Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of the Company

Altria Group, Inc.’s wholly-owned subsidiaries include Philip Morris USA Inc. (“PM USA”), which is engaged in the manufacture and sale of cigarettes and other tobacco products in the United States, and John Middleton Co. (“Middleton”), which is engaged in the manufacture and sale of machine-made large cigars and pipe tobacco. Philip Morris Capital Corporation (“PMCC”), another wholly-owned subsidiary, maintains a portfolio of leveraged and direct finance leases. In addition, Altria Group, Inc. held a 28.5% economic and voting interest in SABMiller plc (“SABMiller”) at September 30, 2008. Altria Group, Inc.’s access to the operating cash flows of its subsidiaries consists principally of cash received from the payment of dividends by its subsidiaries.

PMI Spin-Off

On March 28, 2008 (the “Distribution Date”), Altria Group, Inc. distributed all of its interest in Philip Morris International Inc. (“PMI”) to Altria Group, Inc. stockholders of record as of the close of business on March 19, 2008 (the “Record Date”) in a tax-free distribution. Altria Group, Inc. distributed one share of PMI common stock for every share of Altria Group, Inc. common stock outstanding as of the Record Date. Following the Distribution Date, Altria Group, Inc. does not own any shares of PMI stock.

•

a new PMI option to acquire the same number of shares of PMI common stock as the number of Altria Group, Inc. options held by such person on the Distribution Date; and

•

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

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The distribution resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $14.4 billion on the Distribution Date.

Altria Group, Inc. has reflected the results of PMI prior to the Distribution Date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to PMI were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2007.

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Dividends and Share Repurchases

Other

On March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft Foods, Inc. (“Kraft”) on a pro-rata basis to Altria Group, Inc.’s stockholders in a tax-free distribution. Altria Group, Inc. has reflected the results of Kraft prior to the Kraft distribution date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows.

Beginning with the first quarter of 2008, Altria Group, Inc. revised its reportable segments to reflect the change in the way in which Altria Group, Inc.’s management reviews the business as a result of the acquisition of Middleton and the PMI spin-off. Altria Group, Inc.’s revised segments are Cigarettes and other tobacco products; Cigars; and Financial services. Accordingly, prior period segment results have been revised.

Altria Group, Inc. has entered into a commitment letter with two banks to provide up to $7.0 billion under a senior 364-day bridge loan facility, which, together with Altria Group, Inc.’s existing credit facilities and cash, is expected to be more than sufficient to fund the acquisition. Given the conditions in the public debt markets, until Altria Group, Inc. completes its long-term financing for the transaction, it will be difficult to predict if the UST acquisition will be accretive to Altria Group, Inc.’s diluted earnings per share within twelve months of closing as was initially anticipated.

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Executive Summary

The following executive summary is intended to provide significant highlights of the Discussion and Analysis that follows.

Consolidated Operating Results for the Nine Months Ended September 30, 2008 – The changes in Altria Group, Inc.’s earnings from continuing operations and diluted earnings per share (“EPS”) from continuing operations for the nine months ended September 30, 2008, from the nine months ended September 30, 2007, were due primarily to the following (in millions, except per share data):


	Earnings from Continuing Operations			Diluted EPS from Continuing Operations
For the nine months ended September 30, 2007	$	2,311		$	1.09

2007 Asset impairment, exit and implementation costs		256			0.13
2007 Recoveries from airline industry exposure		(137	)		(0.06	)
2007 Interest on tax reserve transfers to Kraft		50			0.02
2007 Tax Items		(55	)		(0.03	)

Subtotal 2007 items		114			0.06


2008 Asset impairment, exit, integration and implementation costs		(223	)		(0.10	)
2008 Gain on sale of corporate headquarters building		263			0.12
2008 Loss on early extinguishment of debt		(256	)		(0.12	)
2008 SABMiller intangible asset impairments		(54	)		(0.03	)
2008 Financing fees		(3	)

Subtotal 2008 items		(273	)		(0.13	)


Change in tax rate		4
Lower shares outstanding					0.01

Operations		255			0.12

For the nine months ended September 30, 2008	$	2,411		$	1.15

See 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, Exit, Integration and Implementation Costs – In June 2007, PMI established plans to move the U.S.-based production of cigarettes from PM USA to PMI facilities. Due to declining U.S. cigarette volume, as well as PMI’s decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. From 2007 through 2011, PM USA expects to incur total pre-tax asset impairment, exit and implementation charges of approximately $670 million for the program, including $92 million ($58 million after taxes) and $340 million ($218 million after taxes) incurred during the nine months ended September 30, 2008 and 2007, respectively. In addition, during the nine months ended September 30, 2008 and 2007, pre-tax asset impairment and exit costs of $250 million ($158 million after taxes) and $64 million ($38 million after taxes), respectively, were recorded in general corporate expense. The general corporate costs in 2008 primarily reflect the restructuring of Altria Group, Inc.’s corporate headquarters, including the move to Richmond, Virginia, as a result of the PMI spin-off. Middleton recorded pre-tax integration costs of $12 million ($7 million after taxes) during the nine months ended September 30, 2008. For further details on asset impairment, exit and implementation costs, see Note 3. Asset Impairment and Exit Costs, to the Condensed Consolidated Financial Statements.

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Gain on Sale of Corporate Headquarters Building – On March 25, 2008, Altria Group, Inc. sold its corporate headquarters building in New York City for $525 million and recorded a pre-tax gain on sale of $404 million ($263 million after taxes).

SABMiller Intangible Asset Impairments – Altria Group Inc.’s equity earnings in SABMiller for the nine months ended September 30, 2008 included intangible asset impairment charges of $85 million ($54 million after taxes).

Recoveries from Airline Industry Exposure – During the nine months ended September 30, 2007, PMCC recorded a pre-tax gain of $214 million ($137 million after taxes) on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down.

Interest on Tax Reserve Transfers to Kraft – The interest on tax reserves transferred to Kraft is related to the Kraft spin-off and the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) in 2007.

Income Taxes – The 2007 tax rate includes net tax benefits of $55 million related to the reversal of tax reserves and associated interest resulting from the expiration of a statute of limitations.

Shares Outstanding – Lower shares outstanding during the nine months ended September 30, 2008 were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase program during the second quarter of 2008.

Operations – The increase of $255 million was due primarily to the following:

•

Cigars income, reflecting the acquisition of Middleton in December 2007;

•

Lower general corporate expense, due primarily to the restructuring and streamlining of Altria Group, Inc.’s corporate headquarters;

•

Lower interest and other debt expense, net;

•

Higher cigarettes and other tobacco products income, reflecting lower wholesale promotional allowance rates and lower general and administrative expenses, partially offset by lower volume, higher ongoing resolution costs, higher leaf costs, and costs related to the reduction of contract volume manufactured for PMI; and

•

Higher equity earnings in SABMiller (after excluding the impact of the intangible asset impairment charges);

partially offset by:

•

Lower financial services income (after excluding the impact of the recoveries from airline industry exposure in 2007), due primarily to an increase in the allowance for losses.

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Consolidated Operating Results for the Three Months Ended September 30, 2008 – The changes in Altria Group, Inc.’s earnings from continuing operations and diluted EPS from continuing operations for the three months ended September 30, 2008, from the three months ended September 30, 2007, were due primarily to the following (in millions, except per share data):


	Earnings from Continuing Operations			Diluted EPS from Continuing Operations
For the three months ended September 30, 2007	$	900		$	0.43

2007 Asset impairment, exit and implementation costs		15
2007 Recoveries from airline industry exposure		(4	)
2007 Tax items		(55	)		(0.03	)

Subtotal 2007 items		(44	)		(0.03	)


2008 Asset impairment, exit, integration and implementation costs		(27	)		(0.01	)
2008 SABMiller intangible asset impairments		(54	)		(0.03	)
2008 Financing fees		(3	)

Subtotal 2008 items		(84	)		(0.04	)


Change in tax rate		4
Lower shares outstanding					0.01
Operations		91			0.05


For the three months ended September 30, 2008	$	867		$	0.42

See 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, Exit, Integration and Implementation Costs – During the third quarter of 2008 and 2007, PM USA incurred pre-tax charges of $31 million ($20 million after taxes) and $22 million ($13 million after taxes) related to the announced closing of its Cabarrus, North Carolina manufacturing facility. During the third quarter of 2008 and 2007, pre-tax asset impairment and exit costs of $2 million and $3 million ($2 million after taxes) were recorded in general corporate expense. Middleton recorded pre-tax integration costs of $9 million ($5 million after taxes) during the third quarter of 2008. For further details on asset impairment, exit and implementation costs, see Note 3. Asset Impairment and Exit Costs, to the Condensed Consolidated Financial Statements.

SABMiller Intangible Asset Impairments – Altria Group, Inc.’s equity earnings in SABMiller for the three months ended September 30, 2008 included intangible asset impairment charges of $85 million ($54 million after taxes).

Recoveries from Airline Industry Exposure – During the third quarter of 2007, PMCC recorded a pre-tax gain of $7 million ($4 million after taxes) on the sale of bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down.

Shares Outstanding – Lower shares outstanding during the three months ended September 30, 2008 were due primarily to shares repurchased by Altria Group, Inc. under its share repurchase program during the second quarter of 2008.

Operations – The increase of $91 million was due primarily to the following:

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•

Higher cigarettes and other tobacco products income, reflecting lower wholesale promotional allowance rates, and lower general and administrative expenses, partially offset by lower volume, higher ongoing resolution costs, higher leaf costs, and costs related to the reduction of contract volume manufactured for PMI;

•

Lower general corporate expense, due primarily to the restructuring and streamlining of Altria Group, Inc.’s corporate headquarters; and

•

Cigars income, reflecting the acquisition of Middleton in December 2007;

partially offset by:

•

Lower financial services income (after excluding the impact of the recoveries from airline industry exposure in 2007), due primarily to an increase in the allowance for losses.

For further details, see the Consolidated Operating Results and Operating Results by Business Segment sections of the following Discussion and Analysis.

2008 Forecasted Results – On October 23, 2008, Altria Group, Inc. reaffirmed its 2008 earnings per share guidance. Altria Group, Inc. forecasts that 2008 adjusted full-year diluted earnings per share from continuing operations is expected to be in the range of $1.63 to $1.67. This range represents a 9% to 11% growth rate in earnings per share from an adjusted base of $1.50 per share in 2007. Altria Group, Inc. continues to expect full-year operating companies income growth from continuing operations in the mid-single digits on both a reported and adjusted basis. 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.

Reconciliation of 2007 Reported Diluted EPS from Continuing Operations to

2007 Adjusted Diluted EPS from Continuing Operations



2007 Reported diluted EPS from continuing operations	$	1.48
Tax items		(0.09	)
PMCC recoveries from airline industry exposure		(0.06	)
Interest on tax reserve transfers to Kraft		0.02
Asset impairment, exit and implementation costs		0.15

2007 Adjusted diluted EPS from continuing operations	$	1.50

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Discussion and Analysis

Consolidated Operating Results

See pages 92-95 for a discussion of Cautionary Factors That May Affect Future Results.


	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2008			2007			2008			2007
	(in millions)
Net revenues:
Cigarettes and other tobacco products	$	14,233		$	13,998		$	5,084		$	4,944
Cigars		290						98
Financial services		179			138			56			43

Net revenues	$	14,702		$	14,136		$	5,238		$	4,987

Excise taxes on products:
Cigarettes and other tobacco products	$	2,533		$	2,626		$	883		$	927
Cigars		45						14

Excise taxes on products	$	2,578		$	2,626		$	897		$	927

Operating income:
Operating companies income (loss):
Cigarettes and other tobacco products	$	3,746		$	3,429		$	1,369		$	1,295
Cigars		128						37
Financial services		97			344			(7	)		45
Amortization of intangibles		(5	)					(2	)
Gain on sale of corporate headquarters building		404
General corporate expense		(236	)		(341	)		(66	)		(115	)
Corporate asset impairment and exit costs		(250	)		(64	)		(2	)		(3	)

Operating income	$	3,884		$	3,368		$	1,329		$	1,222

As discussed in Note 10. Segment Reporting, management reviews operating companies income, which is defined as operating income before general corporate expense and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.

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The following events that occurred during the nine months ended September 30, 2008 and 2007, affected the comparability of statement of earnings amounts.

•

Asset Impairment and Exit Costs – For the nine and three months ended September 30, 2008 and 2007, pre-tax asset impairment and exit costs consisted of the following:


		For the Nine Months Ended September 30,				For the Three Months Ended September 30,
		2008		2007		2008		2007
			(in millions)
Separation program	Cigarettes and other tobacco products	$	44	$	293	$	15	$	10
Separation program	General corporate		195		17		2
Asset impairment	Cigarettes and other tobacco products				35
Kraft spin-off fees	General corporate				47				3
PMI spin-off fees	General corporate		55

Asset impairment and exit costs		$	294	$	392	$	17	$	13

Manufacturing Optimization Program

PM USA recorded total pre-tax charges for this program as follows:


	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2008		2007		2008		2007
	(in millions)
Asset impairment and exit costs	$	44	$	328	$	15	$	10
Implementation costs		48		12		16		12

Total	$	92	$	340	$	31	$	22

The pre-tax implementation costs were primarily related to accelerated depreciation and were included in cost of sales in the condensed consolidated statement of earnings for the nine months and three months ended September 30, 2008 and 2007. Total pre-tax charges incurred since the inception of the program were $463 million. Pre-tax charges of approximately $32 million are expected during the remainder of

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2008 for the program. Cash payments related to the program of $53 million and $24 million were made during the nine and three months ended September 30, 2008, respectively, for a total of $64 million since inception.

In addition, the program will entail capital expenditures of approximately $230 million. Capital expenditures for the program of $35 million and $24 million were made during the nine and three months ended September 30, 2008, respectively, for a total of $72 million since inception. The program is expected to generate annual pre-tax cost savings of approximately $156 million by 2011.

Corporate Asset Impairment and Exit Costs

•

SABMiller Intangible Asset Impairments – Altria Group, Inc.’s third quarter 2008 equity earnings in SABMiller included intangible asset impairment charges of $85 million.

•

Recoveries from Airline Industry Exposure – During the nine months and three months ended September 30, 2007, PMCC recorded pre-tax gains of $214 million and $7 million, respectively, on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down.

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•

Income Tax Benefit – The tax provision for the nine and three months ended September 30, 2007 included net tax benefits of $55 million related to the reversal of tax reserves and associated interest resulting from the expiration of a statute of limitations.

•

Discontinued Operations – As a result of the PMI and Kraft spin-offs, which are more fully discussed in Note 1. Basis of Presentation and PMI Spin-Off, to the condensed consolidated financial statements, Altria Group, Inc., has reclassified and reflected the results of PMI and Kraft prior to their respective distribution dates as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to PMI were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2007.

Consolidated Results of Operations for the Nine Months Ended September 30, 2008

The following discussion compares consolidated operating results for the nine months ended September 30, 2008, with the nine months ended September 30, 2007.

Net revenues, which include excise taxes billed to customers, increased $566 million (4.0%). Excluding excise taxes, net revenues increased $614 million (5.3%), due primarily to the acquisition of Middleton ($245 million), revenues for contract volume manufactured for PMI ($207 million) and higher revenues from the cigarettes and other tobacco products, and financial services segments.

Excise taxes on products decreased $48 million (1.8%), due primarily to the impact of lower volume in the cigarettes and other tobacco products segment, partially offset by the acquisition of Middleton.

Cost of sales increased $380 million (6.4%), due primarily to higher ongoing resolution costs, the acquisition of Middleton, implementation costs related to the closure of the Cabarrus manufacturing facility, higher leaf costs, contract volume manufactured for PMI and costs related to the reduction of volume produced for PMI, partially offset by lower volume.

Marketing, administration and research costs increased $1 million, due primarily to the acquisition of Middleton, an increase in the allowance for losses at PMCC and higher marketing costs, mostly offset by lower corporate, and general and administrative costs.

Operating income increased $516 million (15.3%), due primarily to the gain on the sale of the corporate headquarters building, the acquisition of Middleton, lower general corporate expense, lower charges for asset impairment, exit and implementation costs, and higher operating results from the cigarettes and other tobacco products segment, partially offset by lower financial services income due to cash recoveries in 2007 from assets which had previously been written down and an increase to the allowance for losses in 2008.

Interest and other debt expense, net, of $27 million decreased $163 million (85.8%), due primarily to lower average debt levels during the first nine months of 2008, and interest expense on tax reserve transfers to Kraft in 2007, partially offset by lower interest income.

Equity earnings in SABMiller decreased $48 million (12.2%), due primarily to intangible asset impairment charges.

Altria Group, Inc.’s income tax rate increased 1.4 percentage points to 36.7%. The 2007 tax rate included net tax benefits of $55 million related to the reversal of tax reserves and associated interest resulting from the expiration of a statute of limitations.

Earnings from continuing operations of $2,411 million increased $100 million (4.3%), due primarily to higher operating income, and the decrease in interest and other debt expense, net, partially offset by the 2008

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loss on early extinguishment of debt, lower equity earnings in SABMiller, and a higher income tax rate versus the prior year. Diluted and basic EPS from continuing operations of $1.15 and $1.16, respectively, each increased by 5.5%.

Earnings from discontinued operations, net of income taxes and minority interest (which represents the results of PMI and Kraft prior to the spin-offs), decreased $3,447 million (65.2%), due to the spin-off of Kraft in the first quarter of 2007 and the spin-off of PMI in the first quarter of 2008.

Net earnings of $4,251 million decreased $3,347 million (44.1%). Diluted and basic EPS from net earnings of $2.03 and $2.04, respectively, decreased by 43.5% and 43.6%, respectively.

Consolidated Results of Operations for the Three Months Ended September 30, 2008

The following discussion compares consolidated operating results for the three months ended September 30, 2008, with the three months ended September 30, 2007.

Net revenues, which include excise taxes billed to customers, increased $251 million (5.0%). Excluding excise taxes, net revenues increased $281 million (6.9%), due primarily to the acquisition of Middleton ($84 million), revenues for contract volume manufactured for PMI ($97 million) and higher revenues from the cigarettes and other tobacco products, and financial services segments.

Excise taxes on products decreased $30 million (3.2%), due primarily to the impact of lower volume in the cigarettes and other tobacco products segment, partially offset by the acquisition of Middleton.

Cost of sales increased $134 million (6.4%), due primarily to higher ongoing resolution costs, the acquisition of Middleton, higher leaf costs, contract volume manufactured for PMI and costs related to the reduction of volume produced for PMI, partially offset by lower volume.

Marketing, administration and research costs increased $27 million (3.7%), due primarily to an increase in the allowance for losses at PMCC, higher marketing costs and the acquisition of Middleton, partially offset by lower corporate, and general and administrative costs.

Operating income increased $107 million (8.8%), due primarily to higher operating results from the cigarettes and other tobacco products segment, lower general corporate expense and the acquisition of Middleton, partially offset by lower financial services income due to an increase to the allowance for losses.

Interest and other debt expense, net, of $25 million decreased $2 million (7.4%), due primarily to lower average debt levels during the three months ended September 30, 2008, mostly offset by lower interest income.

Equity earnings in SABMiller decreased $78 million (59.1%), due primarily to intangible asset impairment charges.

Altria Group, Inc.’s income tax rate increased 4.0 percentage points to 36.2%. The 2007 tax rate included net tax benefits of $55 million related to the reversal of tax reserves and associated interest resulting from the expiration of a statute of limitations.

Earnings from continuing operations of $867 million decreased $33 million (3.7%), due primarily to lower equity earnings in SABMiller and a higher income tax rate versus the prior year, partially offset by higher operating income. Diluted and basic EPS from continuing operations of $0.42 each decreased by 2.3%.

Earnings from discontinued operations, net of income taxes and minority interest (which represents the results of PMI prior to the spin-off), were $1,733 million for the third quarter of 2007.

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Net earnings of $867 million decreased $1,766 million (67.1%). Diluted and basic EPS from net earnings of $0.42, decreased by 66.1% and 66.4%, respectively.

Operating Results by Business Segment

Tobacco

Business Environment

Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Smoking

The United States tobacco industry faces a number of challenges that may adversely affect the business and sales volume of our tobacco subsidiaries and our consolidated results of operations, cash flows and financial position. These challenges, which are discussed below and in Cautionary Factors That May Affect Future Results, include:

•

pending and threatened litigation and bonding requirements as discussed in Note 12. Contingencies (“Note 12”);

•

competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation;

•

actual and proposed excise tax increases as well as changes in tax structures;

•

actual and proposed restrictions affecting tobacco product manufacturing, marketing, advertising and sales;

•

the sale of counterfeit tobacco products by third parties;

•

the sale of tobacco products by third parties over the Internet and by other means designed to avoid the collection of applicable taxes;

•

price gaps and changes in price gaps between premium and lowest price brands;

•

diversion into one market of products intended for sale in another;

•

the outcome of proceedings and investigations, and the potential assertion of claims, relating to contraband shipments of tobacco products;

•

governmental investigations;

•

governmental and private bans and restrictions on tobacco use;

•

governmental restrictions on the sale of tobacco products by certain retail establishments;

•

the diminishing prevalence of cigarette smoking and increased efforts by tobacco control advocates to further restrict tobacco use;

•

governmental requirements setting ignition propensity standards for cigarettes;

•

potential adverse changes in tobacco price, availability and quality; and

•

other actual and proposed tobacco product legislation and regulation.

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In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact 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: Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States.

At the federal level, legislation has been passed by Congress that would increase the federal excise tax on cigarettes by $0.61 a pack, and impose similar increases in the excise tax rates for other tobacco products. The President has twice vetoed this legislation. It is not possible to predict whether such legislation will be reintroduced and become law or if similar or higher federal tax increases will be enacted.

State and local excise taxes have increased substantially over the past decade, far outpacing the rate of inflation. For example, between the end of 1997 and the end of 2007, the weighted year-end average state and certain local cigarette excise taxes increased from $0.35 to $1.01 per pack. In 2007, ten states that represent a significant amount of industry volume, including Texas, increased their cigarette excise taxes. So far in 2008, three states and the District of Columbia have enacted cigarette excise tax increases and excise tax increases have taken effect (or will take effect) in four additional states based on legislation enacted in prior years. Once these increases have taken effect, the estimated average state cigarette excise tax will be approximately $1.12 per pack.

Tax increases are expected to continue to have an adverse impact on sales of tobacco products by our tobacco subsidiaries, due to lower consumption levels and to a potential shift in consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products.

Food and Drug Administration (the “FDA”) Regulations: In February 2007, bipartisan legislation was introduced in the United States Senate and House of Representatives that, if enacted, would grant the FDA broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products and disclosures of related information. The legislation also would grant the FDA authority to extend the application of this legislation, by regulation, to other tobacco products, including cigars. Among other measures, this legislation would:

•

provide the FDA with authority to regulate nicotine yields and to reduce or eliminate harmful smoke constituents or harmful ingredients or other components of tobacco products;

•

ban descriptors such as “light” and “low tar,” unless expressly authorized by the FDA;

•

require complete ingredient disclosure to the FDA and more limited public ingredient disclosure;

•

require FDA approval of any express or implied claims that a tobacco product is or may be less harmful than other tobacco products;

•

prohibit cigarettes with characterizing flavors other than menthol and tobacco (under legislation approved by the United States House of Representatives (see below), a scientific advisory committee would study the impact of the use of menthol in cigarettes on the public health);

•

impose new restrictions on the sale and distribution of tobacco products; and

•

change the language of the current cigarette and smokeless tobacco product health warnings, enlarge their size, and grant the FDA authority to require new warnings, including graphic warnings, in the future.

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This legislation would also grant the FDA the authority to impose certain recordkeeping and reporting obligations to address counterfeit and contraband tobacco products and would impose fees to pay for the cost of regulation and other matters.

Under this legislation pending before Congress, significant new restrictions also could be imposed on the advertising and promotion of tobacco products. For example, subject to further amendment by the FDA and constitutional or other legal challenge, the FDA legislation would require the re-promulgation by the FDA of certain advertising and promotion restrictions that were previously adopted by the FDA in 1996, in connection with the FDA’s prior effort — which ultimately was overturned by the U.S. Supreme Court in 2000 — to regulate cigarettes and smokeless tobacco products as a drug and device. Among other measures, those 1996 regulations included substantial restrictions on the advertising and promotion of cigarettes and smokeless tobacco products that extended significantly beyond the restrictions agreed upon by participating manufacturers in connection with the state settlement agreements discussed below.

In August 2007, the Senate Health, Education, Labor and Pensions Committee approved a revised version of this legislation. On July 30, 2008, the United States House of Representatives approved its version of the legislation. Also on July 30, 2008, the Executive Office of the President, Office of Management and Budget, issued a Statement of Administration Policy stating that if the legislation on which the United States House of Representatives voted were presented to the President, his senior advisers would recommend that he veto it. Whether Congress will grant the FDA broad authority over tobacco products, and the precise nature and execution of that authority, if granted, cannot be predicted. If the FDA were granted such authority, regulations imposed by the FDA could impact consumer acceptability of tobacco products.

Altria Group, Inc. and PM USA believe that tough but reasonable federal regulation could benefit consumers, shareholders and other stakeholders by creating a regulatory framework: (1) under which all tobacco product manufacturers and importers doing business in the United States would operate at the same high standards; (2) for the pursuit of tobacco product alternatives that are less harmful than conventional cigarettes; and (3) that would provide for transparent, scientifically grounded, and accurate communication about tobacco products to consumers.

The World Health Organization’s (“WHO’s”) Framework Convention on Tobacco Control (the “FCTC”): The FCTC entered into force on February 27, 2005. As of November 2008, 160 countries, as well as the European Community, have become parties to the FCTC. While the United States is a signatory of the FCTC, it is not currently a party to the agreement, as the agreement has not been submitted to, or ratified by, the United States Senate. 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) signatory nations to enact legislation that would, among other things:

•

establish specific actions to prevent youth tobacco product use;

•

restrict or eliminate all tobacco product advertising, marketing, promotion and sponsorship;

•

initiate public education campaigns to inform the public about the health consequences of tobacco consumption and exposure to tobacco smoke 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 tobacco product smuggling and counterfeit tobacco products;

•

restrict smoking in public places;

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•

implement fiscal policies (tax and price increases);

•

adopt and implement measures that ensure that descriptive terms do not create the false impression that one brand of tobacco products is safer than another;

•

phase out duty-free tobacco product sales;

•

encourage litigation against tobacco product manufacturers; and

•

adopt and implement guidelines for “testing and measuring the contents and emissions of tobacco products.”

In addition, there are a number of proposals currently under consideration by the governing body of the FCTC, some of which call for substantial restrictions on the manufacture and marketing of tobacco products. It is not possible to predict the outcome of the measures under consideration or the impact of any such measures or FCTC recommendations or requirements on legislation or regulation in the United States, whether or not the United States becomes a party to the FCTC.

Laws Addressing Certain Characterizing Flavors: In a number of states, legislation has been proposed which would prohibit the sale of tobacco products with certain characterizing flavors. The proposed legislation varies in terms of the type of tobacco products subject to prohibition, the conditions under which the sale of such products would be prohibited, and exceptions to the prohibitions. To date, Maine and New Jersey are the only states in which such a prohibition has been enacted. The provisions of the Maine law, which affect cigarette and cigar products, take effect in July 2009, and covered products may be granted exemptions under that state’s law. The New Jersey law, effective January 1, 2009, prohibits the sale or marketing of cigarettes with characterizing flavors other than tobacco, menthol and clove. PM USA does not currently manufacture or market cigarettes with a characterizing flavor other than menthol or tobacco, which are permitted under the Maine and New Jersey laws, as well as the FDA legislation as currently proposed. Depending upon the outcome of any proceedings in Maine, Middleton has certain brand styles that could be impacted by that state’s law. Whether other states will enact legislation in this area, and the precise nature of such legislation if enacted, cannot be predicted.

Tar and Nicotine Test Methods and Brand Descriptors: A number of public health organizations have determined that the existing standardized machine-based methods for measuring tar and nicotine yields in cigarettes do not provide useful information about tar and nicotine deliveries and that such results are misleading to smokers. For example, in the 2001 publication of Monograph 13, the U.S. National Cancer Institute (“NCI”) concluded that measurements based on the Federal Trade Commission (“FTC”) standardized method “do not offer smokers meaningful information on the amount of tar and nicotine they will receive from a cigarette” or “on the relative amounts of tar and nicotine exposure likely to be received from smoking different brands of cigarettes.” Thereafter, the FTC stated that it would work with the NCI to determine what changes should be made to its testing method to “correct the limitations” identified in Monograph 13. In 2002, PM USA petitioned the FTC to promulgate new rules governing the use of existing standardized machine-based methodologies for measuring tar and nicotine yields and descriptors. That petition remains pending. In July 2008, the FTC issued a proposal to rescind its guidance that it is generally not a violation of the Federal Trade Commission Act to make factual statements of the tar and nicotine yields of cigarettes when statements of such yields are supported by the FTC’s standardized measurement method. In September 2008, PM USA and various other persons and entities submitted comments to the FTC regarding its proposed notice of rescission.

In addition, the WHO has concluded that these standardized measurements are “seriously flawed” and that measurements based upon the current standardized methodology “are misleading and should not be displayed.” The International Organization for Standardization (“ISO”) established a working group, chaired by the WHO, to propose a new measurement method that would more accurately reflect human smoking behavior. PM USA has supported the concept of supplementing the ISO test method with a more intensive method, which PM USA believes would better illustrate the wide variability in the delivery of tar, nicotine and carbon monoxide, depending on how an individual smokes a cigarette. The working group has issued a final report proposing two

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alternative measurement methods. Currently, ISO is in the process of deciding whether to begin further development of the two methods or to wait for additional guidance from the FCTC’s governing body.

In light of public health concerns about the limitations of current machine measurement methodologies, governments and public health organizations have increasingly challenged the use of descriptors — such as “light,” “mild,” and “low tar” — that are based in part on measurements produced by those methods. For example, as noted above, the pending FDA legislation would ban descriptors such as “light” and “low tar” (unless expressly authorized by the FDA). In addition, as discussed in Note 12, in August 2006, a federal trial court entered judgment in favor of the United States government in its lawsuit against various cigarette manufacturers and others, including PM USA and Altria Group, Inc., and enjoined the defendants from using brand descriptors, such as “lights,” “ultra-lights” and “low tar.” In October 2006, the Court of Appeals stayed enforcement of the judgment pending its review of the trial court’s decision.

Tobacco Quota Buy-Out: In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA provides for the elimination of the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the buy-out is approximately $9.5 billion and is being paid over 10 years by manufacturers and importers of each kind of tobacco product. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. The quota buy-out payments will offset already scheduled payments to the National Tobacco Grower Settlement Trust (the “NTGST”), a trust fund established in 1999 by four of the major domestic tobacco product manufacturers to provide aid to tobacco growers and quota holders. For a discussion of the NTGST, see Note 12. Manufacturers and importers of tobacco products were also obligated to cover any losses (up to $500 million) that the government incurred on the disposition of tobacco pool stock accumulated under the previous tobacco price support program. The disposition of such pool stock is now complete. PM USA paid $138 million for its share of the tobacco pool stock losses. Middleton is also subject to the requirements of FETRA, but the amounts it pays are not material. The quota buy-out did not have a material adverse impact on our consolidated results in 2007 and we do not anticipate that the quota buy-out will have a material adverse impact on our consolidated results in 2008 and beyond.

Health Effects of Cigarette Smoking and Exposure to Environmental Tobacco Smoke (“ETS”): Reports with respect to the health effects of cigarette smoking have been publicized for many years, including in a June 2006 United States Surgeon General report on ETS entitled “The Health Consequences of Involuntary Exposure to Tobacco Smoke.” Many jurisdictions within the United States have restricted smoking in public places. The pace and scope of public smoking bans have increased significantly. Some public health groups have called for, and some jurisdictions have adopted or proposed, bans on smoking in outdoor places, in private apartments and in cars with minors in them.

It is the policy of PM USA to support a single, consistent public health message on the health effects of cigarette smoking in the development of diseases in smokers, smoking and addiction, and on exposure to ETS. It is also PM USA’s policy to defer to the judgment of public health authorities as to the content of warnings in advertisements and on product packaging regarding the health effects of smoking, addiction and exposure to ETS.

PM USA has established a website that includes, among other things, the views of public health authorities on smoking, disease causation in smokers, addiction and ETS. The site reflects PM USA’s 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 smokers, and those considering smoking, to rely on the messages of public health authorities in making all smoking-related decisions. The website address is www.philipmorrisusa.com. The information on PM USA’s website is not, and shall not be deemed to be, a part of this document or incorporated into any filings Altria Group, Inc. makes with the Securities and Exchange Commission.

It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure. Although most regulation of ETS exposure to date has been done at the state or local level through bans in public establishments, the State of California has been particularly active

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in evaluating the health risks of ETS exposure. Currently, the California Air Resources Board (“CARB”) under its toxic air contaminant program and the California Office of Environmental Health Hazard Assessment (“OEHHA”) under California Proposition 65 are developing programs to regulate ETS exposures in California. Those programs have not yet been fully developed and there is no specific timeframe for them to be completed.

Reduced Cigarette Ignition Propensity Legislation: Legislation or regulation requiring cigarettes to meet reduced ignition propensity standards has been adopted or is being considered in a vast majority of the states. New York State implemented ignition propensity standards in June 2004. As of November 1, 2008, comparable standards have been enacted by thirty-six other states and the District of Columbia. As of January 1, 2009, ignition propensity standards will be in effect in twenty-two states and the District of Columbia, covering approximately half of current PM USA cigarette volume. PM USA supports the enactment of federal legislation mandating a uniform and technically feasible national standard for reduced ignition propensity cigarettes that would preempt state standards and apply to all cigarettes sold in the United States. Although PM USA believes that a national standard is the most appropriate way to address the issue, it has been actively supporting the adoption of laws at the state level that require all manufacturers to comply with the standard first adopted in New York. PM USA anticipates that a number of the remaining states will adopt ignition propensity standards in the next year.

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. For example, at the federal level, one bill pending in Congress, which has been passed by the House of Representatives, would address illegal Internet sales by, among other things, imposing a series of restrictions and requirements on the delivery and sale of such products and make such products non-mailable through the U.S. Postal Service. Another bill pending in Congress contemplated, among other things, the implementation of a new federal tax stamping system. PM USA supports strict regulations and enforcement measures to prevent all forms of illicit trade in tobacco products. For example, PM USA is engaged in a number of initiatives to help prevent contraband trade in cigarettes, including: enforcement of PM USA wholesale and retail trade policies on trade in contraband cigarettes and Internet/remote sales; engagement with and support of law enforcement and regulatory agencies; litigation to protect the company’s trademarks; and support for a variety of federal and state legislative initiatives. PM USA’s legislative initiatives to address contraband trade in cigarettes are designed to better control and protect the legitimate channels of distribution, impose more stringent penalties for the violation of laws and provide additional tools for law enforcement.

State Settlement Agreements: As discussed in Note 12, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements require PM USA to make substantial annual payments. The settlements also place numerous restrictions on PM USA’s business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes and smokeless tobacco products. Among these are prohibitions of outdoor and transit brand advertising, payments for product placement, and free sampling (except in adult-only facilities). Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.

Other Legislation or Governmental Initiatives: In addition to the actions discussed above, other regulatory initiatives affecting the tobacco industry have been adopted or are being considered at the federal level and in a number of state and local jurisdictions. For example, in recent years, legislation has been introduced at the state level to subject cigarettes and other tobacco products to various reporting requirements and performance standards; establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities; and further restrict the sale, marketing and advertising of cigarettes and other tobacco products.

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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 tobacco products, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented in the United States that might materially adversely affect the business and volume of our tobacco subsidiaries and our consolidated results of operations and cash flows.

Governmental Investigations: From time to time, Altria Group, Inc. and its subsidiaries are subject to governmental investigations on a range of matters. Canadian authorities have concluded their investigation relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s and executed a complete release of Altria Group, Inc. and its affiliates. Altria Group, Inc. and its subsidiaries cannot predict whether additional investigations may be commenced.

Tobacco Price, Availability and Quality: Shifts in crops driven by economic conditions and adverse weather patterns, government mandated prices and production control programs may increase or decrease the cost or reduce the quality of tobacco and other agricultural products used to manufacture our products. As with other agriculture commodities, the price of tobacco leaf can be influenced by economic conditions and imbalances in supply and demand and crop quality and availability can be influenced by variations in weather patterns. Tobacco production in certain countries is subject to a variety of controls, including governmental mandated prices and production control programs. Changes in the patterns of demand for agricultural products and the cost of tobacco production could cause tobacco leaf prices to increase and could result in farmers growing less tobacco. Any significant change in the price of tobacco leaf, quality and quantity could affect our tobacco subsidiaries’ profitability and business.

Operating Results – Nine Months Ended September 30, 2008

The following discussion compares tobacco operating results for the nine months ended September 30, 2008, with the nine months ended September 30, 2007.


	For the Nine Months Ended September 30,
	Net Revenues				Operating Companies Income
	2008		2007		2008		2007
	(in millions)
Cigarettes and other tobacco products	$	14,233	$	13,998	$	3,746	$	3,429
Cigars		290				128

Total tobacco	$	14,523	$	13,998	$	3,874	$	3,429

Cigarettes and other tobacco products. Net revenues, which include excise taxes billed to customers, increased $235 million (1.7%). Excluding excise taxes, net revenues increased $328 million (2.9%) to $11,700 million, due primarily to lower wholesale promotional allowance rates ($606 million), partially offset by lower volume ($273 million). Net revenues for the nine months ended September 30, 2008 included contract volume manufactured for PMI of $207 million.

Operating companies income increased $317 million (9.2%), due primarily to lower wholesale promotional allowance rates, net of higher ongoing resolution and leaf costs ($405 million), lower pre-tax charges in 2008 for asset impairment, exit and implementation costs related to the announced closing of the Cabarrus, North Carolina cigarette manufacturing facility ($248 million), and lower general and administrative expenses, partially offset by lower volume ($302 million), costs related to the reduction of volume produced for PMI ($86 million) and higher marketing costs.

PM USA’s shipment volume was 128.6 billion units, a decrease of 3.6% or 4.7 billion units, but was estimated to be down approximately 3.5% to 4% when adjusted for changes in trade inventories and calendar differences. In the premium segment, PM USA’s shipment volume decreased 3.4%. Marlboro shipment

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volume decreased 2.7 billion units (2.4%) to 107.4 billion units. In the discount segment, PM USA’s shipment volume decreased 5.7%, with Basic shipment volume down 8.2% to 9.3 billion units.

The following table summarizes PM USA’s cigarette volume performance by brand, which includes units sold as well as promotional units, and excludes Puerto Rico, U.S. Territories, Overseas Military, Philip Morris Duty Free Inc. and contract manufacturing for PMI, for the nine months ended September 30, 2008 and 2007:


	For the Nine Months Ended September 30,
	2008	2007
	(in billion units)
Marlboro	107.4	110.1
Parliament	4.1	4.4
Virginia Slims	4.7	5.4
Basic	9.3	10.1

Focus Brands	125.5	130.0
Other	3.1	3.3

Total PM USA	128.6	133.3

The following table summarizes PM USA’s retail share performance, based on data from the Information Resources, Inc. (“IRI”)/Capstone Total Retail Panel, which is a tracking service that uses a sample of stores to project market share performance in retail stores selling cigarettes. The panel was not designed to capture sales through other channels, including the Internet and direct mail:


	For the Nine Months Ended September 30,
	2008		2007
Marlboro	41.6	%	41.0	%
Parliament	1.8		1.9
Virginia Slims	2.0		2.2
Basic	4.0		4.1

Focus Brands	49.4		49.2
Other	1.4		1.3

Total PM USA	50.8	%	50.5	%

Effective May 5, 2008, PM USA reduced its wholesale promotional allowances on Marlboro, Basic and L&M by $0.09 per pack, from $0.35 to $0.26, and eliminated the $0.20 per pack wholesale promotional allowances on Parliament. In addition, PM USA increased the list price on its other brands by $0.09 per pack.

Effective January 7, 2008, PM USA reduced its wholesale promotional allowances on Parliament by $0.15 per pack from $0.35 to $0.20, and eliminated the $0.20 per pack wholesale promotional allowances on Virginia Slims.

Effective September 10, 2007, PM USA reduced its wholesale promotional allowances on Marlboro, Parliament and Basic by $0.05 per pack, from $0.40 to $0.35, and Virginia Slims by $0.20 per pack, from $0.40 to $0.20. In addition, PM USA raised the price on its other brands by $0.05 per pack effective September 10, 2007 and by $0.20 per pack effective February 12, 2007.

As the cigarette industry environment continues to evolve, PM USA believes that it can no longer accurately predict estimated future cigarette industry decline rates and PM USA is no longer providing this guidance. Evolving industry dynamics include: the prevailing economic conditions; unpredictable cigarette excise tax increases; adult consumer activity across multiple tobacco categories; and trade inventory changes as

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wholesalers and retailers continue to adjust their levels of cigarette inventories. PM USA believes that its results may be materially adversely affected by the items discussed under the caption Tobacco — Business Environment.

Cigars. In December 2007, Altria Group, Inc. acquired Middleton. Net revenues, which include excise taxes billed to customers, were $290 million. Operating companies income was $128 million, which includes a pre-tax charge of $12 million for integration costs. Cigars shipment volume increased 7.1% versus the prior-year period to 996 million units, driven by Middleton’s leading brand, Black & Mild. Middleton’s 2008 retail share through August 31, 2008 increased 2.3 share points versus the prior-year period to 28.4% of the machine-made large cigar segment, driven by Black & Mild. Retail share for Black & Mild increased 2.6 share points versus the prior-year period to 27.6% of the machine-made large cigar segment. Retail share performance is based on the year-to-date periods ending August 31, 2008 and September 2, 2007 from the IRI Cigar Database for Food, Drug, Mass Merchandise and Convenience trade classes, which was created to specifically track cigar market share performance.

Middleton entered into an agreement with PM USA to leverage PM USA’s distribution network and field sales force to represent Middleton’s brands. In mid-March 2008, PM USA’s sales force began representing Middleton’s brands at retail and supporting the execution of Middleton’s trade marketing programs.

Operating Results – Three Months Ended September 30, 2008

The following discussion compares tobacco operating results for the three months ended September 30, 2008, with the three months ended September 30, 2007.


	For the Three Months Ended September 30,
	Net Revenues				Operating Companies Income
	2008		2007		2008		2007
	(in millions)
Cigarettes and other tobacco products	$	5,084	$	4,944	$	1,369	$	1,295
Cigars		98				37

Total tobacco	$	5,182	$	4,944	$	1,406	$	1,295

Cigarettes and other tobacco products. Net revenues, which include excise taxes billed to customers, increased $140 million (2.8%). Excluding excise taxes, net revenues increased $184 million (4.6%) to $4,201 million, due primarily to lower wholesale promotional allowance rates ($335 million), partially offset by lower volume ($149 million). Net revenues for the three months ended September 30, 2008 included contract volume manufactured for PMI of $97 million.

Operating companies income increased $74 million (5.7%), due primarily to lower wholesale promotional allowance rates, net of higher ongoing resolution and leaf costs ($274 million), and lower general and administrative expenses, partially offset by lower volume ($158 million), costs related to the reduction of volume produced for PMI ($34 million), higher marketing costs, and higher asset impairment, exit and implementation costs.

PM USA’s shipment volume was 44.9 billion units, a decrease of 4.8% or 2.2 billion units, but was estimated to be down approximately 4.0% when adjusted for changes in trade inventories and calendar differences. In the premium segment, PM USA’s shipment volume decreased 4.8%. Marlboro shipment volume decreased 1.6 billion units (3.9%) to 37.5 billion units. In the discount segment, PM USA’s shipment volume decreased 5.3%, with Basic shipment volume down 8.0% to 3.2 billion units.

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	For the Three Months Ended September 30,
	2008	2007
	(in billion units)
Marlboro	37.5	39.1
Parliament	1.5	1.5
Virginia Slims	1.6	1.9
Basic	3.2	3.5

Focus Brands	43.8	46.0
Other	1.1	1.1

Total PM USA	44.9	47.1

The following table summarizes PM USA’s retail share performance, based on data from the IRI/Capstone Total Retail Panel, which is a tracking service that uses a sample of stores to project market share performance in retail stores selling cigarettes. The panel was not designed to capture sales through other channels, including the Internet and direct mail:


	For the Three Months Ended September 30,
	2008		2007
Marlboro	41.6	%	41.1	%
Parliament	1.7		1.9
Virginia Slims	2.0		2.2
Basic	3.9		4.0

Focus Brands	49.2		49.2
Other	1.3		1.4

Total PM USA	50.5	%	50.6	%

Cigars. Net revenues, which include excise taxes billed to customers, were $98 million. Operating companies income was $37 million, which includes a pre-tax charge of $9 million for integration costs. Cigars shipment volume increased 2.3% versus the prior-year period to 329 million units, driven by Middleton’s leading brand, Black & Mild. Middleton’s third quarter 2008 retail share through August 31, 2008 increased 1.9 share points versus the prior-year period to 30.0% of the machine-made large cigar segment, driven by Black & Mild. Retail share for Black & Mild increased 2.2 share points versus the prior-year period to 29.2% of the machine-made large cigar segment. Retail share performance is based on the 12-week periods ending August 31, 2008 and September 2, 2007 from the IRI Cigar Database for Food, Drug, Mass Merchandise and Convenience trade classes, which was created to specifically track cigar market share performance.

Financial Services

Business Environment

PMCC remains focused on managing its portfolio of leased assets to maximize gains and cash flows from income generating assets, as well as asset sales and related activities. PMCC is not making new investments and expects that its operating companies income will vary over time as investments mature or are sold.

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During the nine months and three months ended September 30, 2008, PMCC received proceeds of $389 million and $241 million, respectively, and recorded gains of $78 million and $24 million, respectively, in operating companies income from asset sales. During the nine months and three months ended September 30, 2007, PMCC received proceeds of $363 million and $23 million, respectively, and operating companies income of $268 million and $22 million, respectively, from asset sales, lease maturities and bankruptcy recoveries on assets which had been previously written down.

Included in the proceeds for 2007 were partial recoveries of amounts previously charged to earnings in the allowance for losses related to PMCC’s airline exposure. The operating companies income associated with these recoveries, which is included in the gains shown above, was $214 million and $7 million for the nine months and three months ended September 30, 2007, respectively.

The activity in the allowance for losses on finance assets for the nine months ended September 30, 2008 and 2007 was as follows (in millions):


	For the Nine Months Ended September 30,
	2008		2007
Balance at beginning of the year	$	204	$	480
Amounts charged to earnings/(recovered)		50		(129	)
Amounts written-off				(128	)

Balance at September 30	$	254	$	223

During the third quarter of 2008, PMCC increased its allowance for losses by $50 million as a result of credit rating downgrades of certain lessees and financial market conditions. PMCC may have to increase its allowance for losses if economic and credit conditions, relative to PMCC’s portfolio, continue to worsen.

PMCC’s overall portfolio remains highly creditworthy and all lessees remain current on their lease obligations. Additionally, PMCC’s portfolio remains well diversified by lessee, industry segment and asset type. As of September 30, 2008, approximately 73% of PMCC’s lessees were investment grade as measured by Moody’s and Standard & Poor’s. Excluding aircraft lease investments, approximately 86% of PMCC’s lessees were investment grade.

The net impact to the allowance for losses for the nine months ended September 30, 2007 related primarily to various airline leases. Amounts recovered of $129 million during the nine months ended September 30, 2007 related to partial recoveries of amounts charged to earnings in the allowance for losses in prior years. In addition, PMCC recovered $85 million related to amounts previously charged to earnings and written-off in the allowance for losses in prior years. In total, these recoveries resulted in additional operating companies income of $214 million for the nine months ended September 30, 2007.

In the second and third quarters of 2008, the credit ratings of Ambac Assurance Corporation (Ambac) and American International Group, Inc. (AIG), respectively, were downgraded by Moody’s and Standard & Poor’s. Ambac and AIG provide credit support on various PMCC structured lease transactions, which involved the financing of core operating assets to creditworthy lessees. The recent credit rating downgrades of Ambac and AIG triggered certain requirements to post collateral or replace Ambac and AIG as credit support providers in several of these transactions. Additional collateral has been posted for one transaction, one transaction was sold and PMCC is continuing discussions with certain other lessees in order to replace Ambac and AIG on the remaining transactions.

As discussed further in Note 12, the IRS has disallowed benefits pertaining to several PMCC leveraged lease transactions for the years 1996 through 1999.

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Operating Results


	2008			2007
	(in millions)
Net revenues:
Nine months ended September 30,	$	179		$	138

Three months ended September 30,	$	56		$	43


Operating companies income (loss):
Nine months ended September 30,	$	97		$	344

Three months ended September 30,	$	(7	)	$	45

PMCC’s net revenues for the nine months ended September 30, 2008, increased $41 million (29.7%) from the comparable period in 2007, due primarily to higher asset management gains. Net revenues for the three months ended September 30, 2008, increased $13 million (30.2%) from the comparable period in 2007, due primarily to higher asset management gains.

PMCC’s operating companies income for the nine months ended September 30, 2008 decreased $247 million (71.8%) from the comparable period in 2007, due primarily to 2007 cash recoveries of $214 million on aircraft leases which had been previously written down and the 2008 increase to the allowance for losses of $50 million, partially offset by higher asset management gains. PMCC’s operating companies income for the three months ended September 30, 2008, decreased $52 million (100.0+%) from the comparable period in 2007, due primarily to the 2008 increase to the allowance for losses of $50 million.

Financial Review

Net Cash Provided by Operating Activities, Continuing Operations

During the first nine months of 2008, net cash provided by operating activities on a continuing operations basis was $2,242 million, compared with $2,808 million during the comparable 2007 period. The decrease in cash provided by operating activities was due primarily to higher settlement charge payments and a higher use of cash to fund working capital. The higher use of working capital was due primarily to the timing of leaf inventory purchases and usage.

Net Cash Provided by Investing Activities, Continuing Operations

Altria Group, Inc. and PM USA from time to time consider acquisitions as part of their adjacency strategy as evidenced by Altria Group, Inc.’s 2007 acquisition of Middleton, and the pending acquisition of UST, see Note 2. UST Acquisition, for further discussion.

During the first nine months of 2008, net cash provided by investing activities on a continuing operations basis was $893 million, compared with $257 million during the first nine months of 2007. The increase in cash provided by investing activities was due primarily to proceeds from the sale of Altria Group, Inc.’s corporate headquarters building in New York City during the first quarter of 2008 and lower capital expenditures.

Net Cash Used in Financing Activities, Continuing Operations

During the first nine months of 2008, net cash used in financing activities on a continuing operations basis was $7,062 million compared with $2,049 million during the first nine months of 2007. The increase in cash used in financing activities was due primarily to the following:

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•

cash used in 2008 to repurchase common stock under the previously announced share repurchase program;

•

debt tender offers during the first quarter of 2008 which resulted in the repayment of debt as well as the payment of tender and consent fees;

•

a payment of $449 million to PMI during the first nine months of 2008 as a result of the modification to Altria Group, Inc. stock awards; and

•

cash used during the first nine months of 2008 as opposed to cash provided during the first nine months of 2007 related to financing transactions with PMI;

partially offset by:

•

lower dividends paid on Altria Group, Inc. common stock during the first nine months of 2008 as a result of the Kraft and PMI spin-offs; and

•

higher dividends received from PMI during the first quarter of 2008.

Debt and Liquidity

Credit Ratings – Prior to the announcement of the proposed UST Inc. acquisition, the credit ratings and outlook for Altria Group, Inc.’s indebtedness by major credit rating agencies were:


	Short-term Debt	Long-term Debt	Outlook

Moody’s	P-2	Baa1	Stable
Standard & Poor’s	A-2	BBB	Stable
Fitch	F-2	BBB+	Positive

Following the announcement of the proposed acquisition of UST Inc., the major credit rating agencies announced the following credit ratings and outlook for Altria Group, Inc.’s indebtedness:


	Short-term Debt	Long-term Debt	Outlook

Moody’s	P-2	Baa1	Negative
Standard & Poor’s	A-2	BBB	Stable
Fitch	F-2	BBB+	Stable

Credit Lines – Altria Group, Inc. maintains credit facilities and uses them to support the issuance of commercial paper and to fund short-term cash needs when the commercial paper market is unavailable. At September 30, 2008, Altria Group, Inc. had no commercial paper outstanding and no borrowings under its credit lines.

At September 30, 2008, Altria Group, Inc. had in place a multi-year revolving credit facility in the amount of $3.5 billion, which expires April 15, 2010. The facility requires Altria Group, Inc. to maintain a ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest expense (as defined in the credit agreement) of not less than 4.0 to 1.0, and requires the maintenance of a ratio of debt to EBITDA

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(as defined in the agreement) of not more than 2.5 to 1.0. At September 30, 2008, the ratios of EBITDA to interest expense, and debt to EBITDA, calculated in accordance with the agreement, were 19.0 to 1.0 and 0.2 to 1.0, respectively.

On January 28, 2008, Altria Group, Inc. entered into a $4.0 billion, revolving 364-day bridge loan facility. Altria Group, Inc. is discussing with its lenders amendments to this facility that would require Altria Group, Inc.: to maintain a ratio of EBITDA to interest expense (as defined in the credit agreement) of not less than 4.0 to 1.0 and a ratio of debt to EBITDA (as defined in the agreement) of not more than 3.0 to 1.0; and to prepay any outstanding borrowings with, and to reduce the amount of borrowing capacity by, the amount of the proceeds of any capital market transaction or certain asset sales. The facility, if amended, would be extendible at Altria Group, Inc.’s option for two three-month periods, for up to a total of six months. Banks with $3.5 billion in participations have agreed to the amendments.

Altria Group, Inc. expects to continue to meet its covenants. The above facilities require changed pricing in the event of a change in credit rating, but do not include any other credit rating triggers or any provisions that could require the posting of collateral. Altria Group, Inc. does not believe that any such pricing changes would be material.

At September 30, 2008, the credit lines for Altria Group, Inc., and the related activity, were as follows (in billions of dollars):


	September 30, 2008
Type	Credit Lines		Amount Drawn		Commercial Paper Outstanding		Lines Available

Bridge loan facility	$	4.0	$	-	$	-	$	4.0
Multi-year revolving facility		3.5						3.5

	$	7.5	$	-	$	-	$	7.5

In connection with the proposed acquisition of UST Inc., on September 7, 2008, Altria Group, Inc. entered into a commitment letter with two banks to provide up to $7.0 billion under a 364-day term bridge loan facility, which, together with its existing credit facilities and cash, is expected to be more than sufficient to fund the acquisition. The commitment is subject to various conditions, including no material adverse change having occurred in Altria Group, Inc.’s financial condition or operations; no Company Material Adverse Effect (as defined in the merger agreement) having occurred that would permit Altria Group, Inc. not to complete its proposed acquisition of UST; the negotiation of definitive documentation with respect to the new 364-day bridge facility satisfactory to the initial lenders; and other closing conditions. This 364-day facility will expire in January 2010, assuming the UST acquisition closes, as anticipated, during the first full week of January 2009. On October 20, 2008, the parties amended this commitment letter to address changing credit market conditions.

The new bridge facility will require Altria Group, Inc. to maintain a ratio of EBITDA to interest expense (as defined in the credit agreement) of not less than 4.0 to 1.0, and will require the maintenance of a ratio of debt to EBITDA (as defined in the agreement) of not more than 3.0 to 1.0. In addition, the new bridge facility will require prepayment of outstanding borrowings with, and the reduction of borrowing capacity by the amount in excess of $4.0 billion of the proceeds from any capital market transaction or certain asset sales. The new bridge facility will require changed pricing in the event of a change in credit rating but will not include any other credit rating triggers or any provisions that could require the posting of collateral. Altria Group, Inc. does not believe that any such pricing changes would be material.

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The recent turmoil in the financial markets has caused an increase in the overall cost of maintaining Altria Group, Inc.’s current and committed bridge loan facilities, but Altria Group, Inc. does not believe that increase is material to the UST acquisition.

Altria Group, Inc. intends to draw under certain of these credit facilities in financing the UST acquisition.

Financial Market Environment – Events over the past several months, including recent failures and near failures of a number of large financial service companies, have made the capital markets increasingly volatile. Altria Group, Inc. continues to monitor the credit quality of its bank group and is not aware of any potential non-performing credit provider, other than as noted in the following two paragraphs. Altria Group, Inc. believes the lenders in its bank group will be willing and able to advance funds in accordance with their legal obligations.

A subsidiary of Lehman Brothers Holdings Inc. (“Lehman Brothers”) has a $108 million participation in Altria Group, Inc.’s $3.5 billion multi-year revolving credit facility. To date, the Lehman Brothers subsidiary has not, to Altria Group, Inc.’s knowledge, filed for bankruptcy protection. Altria Group, Inc. does not believe that failure by this subsidiary to fund its participation would be material.

Another subsidiary of Lehman Brothers was a participant in Altria Group, Inc.’s $4.0 billion bridge loan facility. That Lehman Brothers subsidiary has assigned its rights and obligations to another participant in the facility.

It is Altria Group, Inc.’s intention to access the public debt market to refinance all short-term borrowings associated with the UST acquisition. Altria Group, Inc. will continue to closely monitor the public debt market capacity and be prepared to execute contingency plans if overall debt capacity is constrained. Despite adverse financial market conditions, Altria Group, Inc. believes it has adequate liquidity, financial resources and access to additional financial resources to meet its anticipated obligations in the foreseeable future.

Debt – Altria Group, Inc.’s total debt (consumer products and financial services) was $885 million and $4.7 billion at September 30, 2008 and December 31, 2007, respectively. Total financial services debt of $500 million matures in July 2009. Total consumer products debt was $385 million and $4.2 billion at September 30, 2008 and December 31, 2007, respectively. The decrease primarily relates to the tender offers discussed below, as well as the repayment of long-term debt that matured.

In connection with the spin-off of PMI, in the first quarter of 2008, Altria Group, Inc. and its subsidiary, Altria Finance (Cayman Islands) Ltd., completed tender offers to purchase for cash $2.3 billion of notes and debentures denominated in U.S. dollars, and €373 million in euro-denominated bonds, equivalent to $568 million in U.S. dollars. As a result of the tender offers and consent solicitations, Altria Group, Inc. recorded a pre-tax loss of $393 million, which included tender and consent fees of $371 million, on the early extinguishment of debt in the first quarter of 2008.

Guarantees – As discussed in Note 12, at September 30, 2008, Altria Group, Inc.’s third-party guarantees, which are related to divestiture activities, were $22 million. These guarantees have no specified expiration dates. Altria Group, Inc. is required to perform under these guarantees in the event that a third party fails to make contractual payments. Altria Group, Inc. has a liability of $22 million on its condensed consolidated balance sheet at September 30, 2008, relating to these guarantees. In the ordinary course of business, certain subsidiaries of Altria Group, Inc. have agreed to indemnify a limited number of third parties in the event of future litigation. At September 30, 2008, subsidiaries of Altria Group, Inc. were also contingently liable for $17 million of guarantees related to their own performance, consisting primarily of surety bonds. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.

Under the terms of the Distribution Agreement between Altria Group, Inc. 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

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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. Altria Group, Inc. does not have a related liability recorded on its condensed consolidated balance sheet at September 30, 2008 as the fair value of this indemnification is insignificant.

As more fully discussed in Note 14, Condensed Consolidating Financial Information, PM USA has issued certain guarantees relating to Altria Group, Inc.’s outstanding debt securities and borrowings under Altria Group, Inc.’s existing credit facilities and commercial paper programs.

Payments Under State Settlement and Other Tobacco Agreements – As discussed previously and in Note 12, PM USA has entered into State Settlement Agreements with the states and territories of the United States and also entered into a trust agreement to provide certain aid to U.S. tobacco growers and quota holders, but PM USA’s obligations under this trust have now been eliminated by the obligations imposed on PM USA by FETRA. Each of these agreements calls for payments that are based on variable factors, such as cigarette volume, market share and inflation. PM USA accounts for the cost of these agreements as a component of cost of sales as product is shipped.

As a result of these agreements and the enactment of FETRA, PM USA and Middleton (enactment of FETRA) recorded the following amounts in cost of sales (in millions):


	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2008		2007		2008		2007
PM USA	$	4,193	$	4,137	$	1,475	$	1,462
Middleton		3				1

Total	$	4,196	$	4,137	$	1,476	$	1,462

Based on current agreements and current estimates of volume and market share, the estimated amounts that PM USA and Middleton may charge to cost of sales under these agreements will be approximately as follows:


PM USA		Middleton
(in billions)		(in millions)
2008	$5.6	2008	$4
2009	5.5	2009	4
2010	5.6	2010	5
2011	5.6	2011	5
2012	5.6	2012	5
2013 to 2017	5.6 annually	2013	5
Thereafter	5.7 annually	2014	5

The estimated amounts charged to cost of sales in each of the years above would generally be paid in the following year. As previously stated, the payments due under the terms of these agreements are subject to adjustment for several factors, including volume, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The amounts shown in the table above are estimates, and actual amounts will differ as underlying assumptions differ from actual future results. See Note 12 for a discussion of proceedings that may result in a downward adjustment of amounts paid under State Settlement Agreements for the years 2003, 2004, 2005 and 2006.

Litigation Escrow Deposits – With respect to certain adverse verdicts currently on appeal, as of September 30, 2008, PM USA has posted various forms of security totaling approximately $129 million, the majority of

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which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. These cash deposits are included in other assets on the condensed consolidated balance sheets.

Although litigation is subject to uncertainty and could result in material adverse consequences for the financial condition, cash flows or results of operations of PM USA or Altria Group, Inc. in a particular fiscal quarter or fiscal year, management believes the litigation environment has substantially improved and expects cash flow from operations, together with existing credit facilities, to provide sufficient liquidity to meet the ongoing needs of the business.

Leases – PMCC’s investment in leases is included in the line item finance assets, net, on the condensed consolidated balance sheets as of September 30, 2008 and December 31, 2007. At September 30, 2008, PMCC’s net finance receivable of $5.4 billion in leveraged leases, which is included in finance assets, net on Altria Group, Inc.’s condensed consolidated balance sheet, consists of rents receivable ($17.5 billion) and the residual value of assets under lease ($1.4 billion), reduced by third-party nonrecourse debt ($11.4 billion) and unearned income ($2.1 billion). The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. The third-party nonrecourse debt has been offset against the related rents receivable and has been presented on a net basis. Finance assets net, at September 30, 2008, also include net finance receivables for direct finance leases ($0.4 billion) less an allowance for losses ($0.3 billion).

Equity and Dividends

As discussed in Note 1. Basis of Presentation and PMI Spin-Off, on March 28, 2008, Altria Group, Inc. distributed all of its interest in PMI to Altria Group, Inc. stockholders of record as of the close of business on March 19, 2008 in a tax-free distribution. The distribution resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $14.4 billion on March 28, 2008.

As discussed in Note 8. Stock Plans, on January 30, 2008, Altria Group, Inc. issued 1.9 million shares of deferred stock to eligible U.S.-based and non-U.S. employees. Restrictions on these shares lapse in the first quarter of 2011. The market value per share was $76.76 on the date of grant. Recipients of 0.5 million of these Altria Group, Inc. deferred shares, who were employed by Altria Group, Inc. after the PMI spin-off, received 1.3 million additional shares of deferred stock of Altria Group, Inc. to preserve the intrinsic value of the award. Recipients of 1.4 million shares of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by PMI after the PMI spin-off, received substitute shares of deferred stock of PMI to preserve the intrinsic value of the award. During the nine months ended September 30, 2008, 1.3 million shares of restricted stock and 0.7 million shares of deferred stock vested. The total fair value of restricted and deferred stock vested during the nine months ended September 30, 2008 was $140 million.

Dividends paid in the first nine months of 2008 and 2007 were $3.8 billion and $5.1 billion, respectively, a decrease of 25.7%, primarily reflecting a lower dividend rate in 2008, as a result of the Kraft and PMI spin-offs.

Following the Kraft spin-off, Altria Group, Inc. lowered its dividend so that holders of both Altria Group, Inc. and Kraft shares would initially receive, in the aggregate, the same dividends paid by Altria Group, Inc. prior to the Kraft spin-off. In addition, following the PMI spin-off, Altria Group, Inc. lowered its dividend so that holders of both Altria Group, Inc. and PMI shares would initially receive, in the aggregate, the same dividends paid by Altria Group, Inc. prior to the PMI spin-off.

During the third quarter of 2008, Altria Group, Inc.’s Board of Directors approved a 10.3% increase in the quarterly dividend rate from $0.29 per common share to $0.32 per common share. The present annualized dividend rate is $1.28 per Altria Group, Inc. common share. The dividend remains subject to the discretion of the Board of Directors.

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In conjunction with the announced acquisition of UST, for further discussion see Note 2. UST Acquisition, the Altria Group, Inc. Board of Directors modified its previously announced two-year $7.5 billion share repurchase program and authorized the repurchase of up to $4.0 billion in Altria Group, Inc. common stock over a three-year (2008 to 2010) period. As of September 30, 2008, Altria Group, Inc. had repurchased 53.5 million shares of its common stock at an aggregate cost of approximately $1.2 billion, or an average price of $21.81 per share. Altria Group, Inc.’s share repurchase program is at the discretion of the Board of Directors.

Market Risk

Derivative financial instruments are used by Altria Group, Inc. and its subsidiaries, principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates by creating offsetting exposures. Altria Group, Inc. is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes.

Hedging activity affected accumulated other comprehensive earnings (losses), net of income taxes, as follows:


	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2008			2007			2008		2007
	(in millions)
(Loss) gain at beginning of period	$	(5	)	$	13		$	-	$	8
Derivative losses (gains) transferred to earnings		93			(38	)				3
Change in fair value		(270	)		45					11
Kraft spin-off					2
PMI spin-off		182

Gain as of September 30	$	-		$	22		$	-	$	22

See Note 11. Fair Value Measurements, for disclosures related to the fair value of derivative financial instruments.

Foreign exchange rates - During the first quarter of 2008, Altria Group, Inc. purchased forward foreign exchange contracts to mitigate its exposure to changes in exchange rates from its euro-denominated debt. While these forward exchange contracts were effective as economic hedges, they did not qualify for hedge accounting treatment and therefore $21 million of gains for the nine months ended September 30, 2008 relating to these contracts were reported in Altria Group, Inc.’s condensed consolidated statements of earnings. These contracts and the related debt matured in the second quarter of 2008. Subsequent to the maturities of these contracts, Altria Group, Inc. has had no derivative financial instruments remaining.

In addition, Altria Group, Inc. used foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps converted fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity, and were accounted for as cash flow hedges. Subsequent to the PMI distribution, Altria Group, Inc. has had no such swap agreements remaining. At December 31, 2007, the notional amounts of foreign currency swap agreements aggregated $1.5 billion.

Altria Group, Inc. also designated certain foreign currency denominated debt and forwards as net investment hedges of foreign operations. During the nine months ended September 30, 2008 and 2007, these hedges of net investments resulted in losses, net of income taxes, of $85 million and gains, net of income taxes, of $2 million, respectively, and were reported as a component of accumulated other comprehensive earnings (losses) within currency translation adjustments. The accumulated losses recorded as net investment hedges of foreign operations were recognized and recorded in connection with the PMI distribution. Subsequent to the PMI distribution, Altria Group, Inc. has no such net investment hedges remaining.

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For additional discussion of Market Risk, see Financial Market Environment under the Debt and Liquidity section.

New Accounting Standards

See Note 11. Fair Value Measurements and Note 13. New Accounting Standards, for a discussion of new accounting standards.

Contingencies

See Note 12 for a discussion of contingencies.

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Cautionary Factors That May Affect Future Results

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 Altria Group, Inc.’s 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 subsidiaries’ businesses. 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.

Tobacco-Related Litigation. Legal proceedings covering a wide range of matters are pending or threatened in various United States and foreign jurisdictions against Altria Group, Inc. and its subsidiaries, including PM USA, as well as their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors.

Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. An unfavorable outcome or settlement of pending tobacco related litigation could encourage the commencement of additional litigation. Damages claimed in some tobacco-related litigation are significant and, in certain cases, range in the billions of dollars. The variability in pleadings, 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.

It is possible that PM USA’s or Altria Group, Inc.’s 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, management believes the litigation environment has substantially improved. Altria Group, Inc. and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are, and will continue to be, vigorously defended. However, Altria Group,

^*	This section uses the terms “we,” “our” and “us” when it is not necessary to distinguish among Altria Group, Inc. and its various operating subsidiaries or when any distinction is clear from the context.

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Inc. and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of Altria Group, Inc. to do so. Please see Note 12 for a discussion of pending tobacco-related litigation.

Tobacco Control Action in the Public and Private Sectors. Our tobacco subsidiaries face significant governmental action, including efforts aimed at reducing the incidence of smoking, restricting marketing and advertising, imposing regulations on packaging, warnings and disclosure of ingredients and flavors, prohibiting the sale of tobacco products with certain characterizing flavors and the sale of tobacco products by certain retail establishments, and seeking to hold them responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke. Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volume, and we expect that such actions will continue to reduce consumption levels.

Excise Taxes. Tobacco products are subject to substantial excise taxes and significant increases in tobacco product-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States at the state, federal and local level. Tax increases are expected to continue to have an adverse impact on sales of our tobacco products due to lower consumption levels and to a shift in consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products. For further discussion, see Business Environment – Excise Taxes.

Increased Competition in the United States Tobacco Market. Settlements of certain tobacco litigation in the United States have resulted in substantial cigarette price increases. PM USA faces competition from lowest priced brands sold by certain United States and foreign manufacturers that have cost advantages because they are not parties to these settlements. These manufacturers may fail to comply with related state escrow legislation or may avoid escrow deposit obligations on the majority of their sales by concentrating on certain states where escrow deposits are not required or are required on fewer than all such manufacturers’ cigarettes sold in such states. Additional competition has resulted from diversion into the United States market of cigarettes intended for sale outside the United States, 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 collection of applicable taxes, and increased imports of foreign lowest priced brands. Further competition has resulted from consumer purchase shifts from cigarettes to other tobacco product categories.

Governmental Investigations. From time to time, Altria Group, Inc. and its tobacco subsidiaries are subject to governmental investigations on a range of matters. We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible that our tobacco subsidiaries’ businesses could be materially affected by an unfavorable outcome of pending or future investigations.

New Tobacco Product Technologies. PM USA continues to seek ways to develop and to commercialize new tobacco product technologies that may reduce the health risks associated with the tobacco products it manufactures, while continuing to offer adult consumers tobacco products that meet their taste expectations. Potential solutions being researched include tobacco products that reduce or eliminate exposure to cigarette smoke, including those constituents identified by public health authorities as harmful. PM USA may not succeed in these efforts. If it does not succeed, but one or more of its competitors does, PM USA 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 or whether consumers’ purchase decisions would be affected by such claims, which could affect the commercial viability of any tobacco products that might be developed.

Adjacency Strategy. Altria Group, Inc. and PM USA have adjacency growth strategies involving moves and potential moves into complementary tobacco or tobacco-related products or processes. We cannot guarantee that these strategies, or any products introduced in connection with these strategies, will be successful.

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Tobacco Price, Availability and Quality. Any significant change in tobacco leaf prices, quality or quantity could affect our tobacco subsidiaries’ profitability and business. For a discussion of factors that influence leaf prices, availability and quality, see Business Environment – Tobacco Price, Availability and Quality.

Attracting and Retaining Talent. Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the decreasing social acceptance of tobacco usage. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, our tobacco subsidiaries may be unable to attract and retain the best talent.

Competition and Economic Downturns. Each of our tobacco subsidiaries is subject to intense competition, changes in consumer preferences and changes in economic conditions. To be successful, they must continue to:

•

promote brand equity successfully;

•

anticipate and respond to new consumer trends;

•

develop new products and markets and to broaden brand portfolios in order to compete effectively with lower priced products;

•

improve productivity; and

•

be able to protect or enhance margins through price increases.

The willingness of consumers to purchase premium tobacco product brands depends in part on economic conditions. In periods of economic uncertainty, consumers may purchase more private label and other economy brands and/or consider lower price tobacco products, and the volumes of our tobacco products subsidiaries could suffer accordingly.

Our finance subsidiary, PMCC, holds investments in finance leases, principally in transportation (including aircraft), power generation and manufacturing equipment and facilities. Its lessees are also subject to intense competition and economic conditions. If parties to PMCC’s leases fail to manage through difficult economic and competitive conditions, PMCC may have to increase its allowance for losses, which would adversely affect our earnings.

Acquisitions. Altria Group, Inc. and PM USA from time to time consider acquisitions as part of their adjacency strategy. 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. Although we seek to maintain or improve our debt ratings over time, it is possible that completing a given acquisition or other event could impact our debt ratings or the outlook for those ratings. Furthermore, 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 can be no assurance that we will be able to continue to acquire attractive businesses on favorable terms, that we will realize any of the anticipated benefits from an acquisition or that all future acquisitions will be quickly accretive to earnings.

UST Acquisition. There can be no assurance that the conditions to the completion of our proposed acquisition of UST will be satisfied, including that stockholder approval of the transaction will be obtained in a timely manner, if at all; or that no event will occur that could give rise to termination rights under the merger agreement. If our proposed acquisition of UST is completed, there can be no assurance that we will achieve expected synergies or that the integration of UST will be successful.

The merger agreement relating to our proposed acquisition of UST does not contain a financing condition. Although we have commitments in place, these commitments contain conditions, as discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations that, if not satisfied,

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would permit the providers of such financing to decline to deliver their funds. If we are unable to complete our proposed acquisition of UST due to any breach on our part, including failure to obtain financing, we may be exposed to claims by UST.

We have entered into a commitment letter with the initial lenders pursuant to which they have committed to provide up to $7.0 billion under a new 364-day bridge loan facility. In addition, we are discussing with our lenders an amendment to our existing 364-day bridge loan agreement providing for borrowings of up to an aggregate principal amount of $4.0 billion to extend the facility at Altria Group, Inc.’s option for two three-month periods. Banks with $3.5 billion in participations have agreed to this amendment. Borrowings under our new 364-day bridge loan facility must be repaid within one year of the closing date of our proposed acquisition of UST; borrowings under our existing 364-day bridge loan agreement must be repaid no later than January 26, 2009 unless the existing facility is amended. We intend to repay these borrowings by issuing long-term debt. Our ability to complete the anticipated issuances of debt securities to repay these borrowings, and the terms of the issuances, will depend upon market conditions, and unfavorable conditions could increase costs beyond what is anticipated. Such costs could have a material adverse impact on cash flows or the results of operations or both.

Capital Markets. Access to the capital markets is important for us to satisfy our liquidity and financing needs. Disruption and uncertainty in the capital markets and any resulting tightening of credit availability, pricing and/or credit terms may increase our costs and adversely affect our earnings or our dividend rate.

Asset Impairment. We periodically calculate the fair value of our goodwill and intangible assets to test for impairment. This calculation may be affected by the market conditions noted above, as well as interest rates and general economic conditions. If an impairment is determined to exist, we will incur impairment losses, which will reduce our earnings.

IRS Challenges to PMCC Leases. The Internal Revenue Service has challenged the tax treatment of certain of PMCC’s leveraged leases. Should Altria Group, Inc. not prevail in this litigation, Altria Group, Inc. may have to accelerate the payment of significant amounts of federal income tax and significantly lower its earnings to reflect the recalculation of the income from the affected leveraged leases, which could have a material effect on the earnings and cash flows of Altria Group, Inc. in a particular fiscal quarter or fiscal year. For further discussion see Note 12.

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Item 4. Controls and Procedures.

Altria Group, Inc. carried out an evaluation, with the participation of Altria Group, Inc.’s management, including Altria Group, Inc.’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of Altria Group, Inc.’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, Altria Group, Inc.’s Chief Executive Officer and Chief Financial Officer concluded that Altria Group, Inc.’s disclosure controls and procedures are effective. There have been no changes in Altria Group, Inc.’s internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, Altria Group, Inc.’s internal control over financial reporting.

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Part II - OTHER INFORMATION

Item 1.

Legal Proceedings.

See Note 12. Contingencies, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of legal proceedings pending against Altria Group, Inc. and its subsidiaries. See also Exhibits 99.1 and 99.2 to this report.

Item 1A.

Risk Factors.

Information regarding Risk Factors appears in “MD&A – Cautionary Factors That May Affect Future Results,” in Part I – Item 2 of this Form 10-Q and in Part I – Item 1A. Risk Factors of our Report on Form 10-K for the year ended December 31, 2007. Other than as set forth in Part I – Item 2. of this Form 10-Q, there have been no material changes from the risk factors previously disclosed in our Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Altria Group, Inc.’s share repurchase activity for each of the three months ended September 30, 2008, was as follows:


Period	Total Number of Shares Repurchased (3)	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)(2)	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (1)

July 1-31, 2008	-	-	53,450,000	$2,834,083,553

August 1-31, 2008	69	$20.72	53,450,000	$2,834,083,553

September 1-30, 2008	4,736	$21.41	53,450,000	$2,834,083,553


For the Quarter Ended September 30, 2008	4,805	$21.40

(1)

In conjunction with the announced acquisition of UST (for further discussion see Note 2. UST Acquisition) the Altria Group, Inc. Board of Directors modified its previously announced two-year $7.5 billion share repurchase program and authorized the repurchase of up to $4.0 billion in Altria Group, Inc. common stock over a three-year (2008 to 2010) period. As of September 30, 2008, Altria Group, Inc. had repurchased 53.5 million shares of its common stock at an aggregate cost of approximately $1.2 billion, or an average price of $21.81 per share. Altria Group, Inc.’s share repurchase program is at the discretion of the Board of Directors.

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

(3)	Represents shares tendered to Altria Group, Inc. by employees who vested in restricted and deferred stock, or exercised stock options, and used shares to pay all, or a portion of, the related taxes and/or option exercise price.

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Item 6.

Exhibits.


2.1		Agreement and Plan of Merger, dated as of September 7, 2008, by and among UST Inc., a Delaware corporation, Altria Group, Inc., a Virginia corporation, and Armchair Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Altria Group, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on September 8, 2008).

2.2		Amendment No. 1 to the Agreement and Plan of Merger, dated as of October 2, 2008, by and among UST Inc., a Delaware corporation, Altria Group, Inc., a Virginia corporation, and Armchair Merger Sub, Inc., a Delaware corporation and an indirect wholly-owned subsidiary of Altria Group, Inc. (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on October 3, 2008).

3.1		Amended and Restated By-laws of Altria Group, Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on October 28, 2008).

10.1		Guarantee dated as of September 8, 2008, made by Philip Morris USA Inc., in favor of the lenders parties to the 5-Year Revolving Credit Agreement, dated as of April 15, 2005, among Altria Group, Inc., the lenders named therein, and JPMorgan Chase Bank, N.A. and Citibank, N.A., as Administrative Agents (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on September 8, 2008).

10.2		Guarantee dated as of September 8, 2008, made by Philip Morris USA Inc., in favor of the lenders parties to the Bridge Loan Agreement dated as of January 28, 2008, among Altria Group, Inc., the lenders named therein, and Goldman Sachs Credit Partners L.P. and Lehman Commercial Paper Inc., as Administrative Agents (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on September 8, 2008).

10.3		Guarantee dated as of September 8, 2008, made by Philip Morris USA Inc., in favor of The Bank of New York (as successor in interest to JPMorgan Chase Bank, formerly known as The Chase Manhattan Bank), as trustee for the holders of the 5.625% Notes due 2008, 7.000% Notes due 2013, and 7.750% Debentures due 2027 under the Indenture dated as of December 2, 1996 (incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K filed on September 8, 2008).

10.4		Commitment Letter, dated September 7, 2008 (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on September 8, 2008).

10.5		Amended and Restated Commitment Letter, dated as of October 20, 2008, by and among Altria Group, Inc., JPMorgan Chase Bank, N.A., Goldman Sachs Credit Partners L.P. and Goldman Sachs Bank USA.

10.6		Amendment No. 1 to 364-Day Bridge Loan Agreement, dated as of October 31, 2008.

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

31.1		Certification of 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 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.

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

99.1		Certain Litigation Matters and Recent Developments.

99.2		Trial Schedule for Certain Cases.

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Signature

Pursuant to the requirements 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.


ALTRIA GROUP, INC.

/s/ DAVID R. BERAN

David R. Beran
Executive Vice President and
Chief Financial Officer

November 3, 2008

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