10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2009
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission File Number: 001-34097

Lorillard, Inc.

(Exact name of registrant as specified in its charter)

Delaware	13-1911176
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
714 Green Valley Road, Greensboro, North Carolina (Address of principal executive offices)	27408-7018 (Zip Code)

(336) 335-7000

(Registrant’s telephone number, including area code)

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

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	New York Stock Exchange

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

None

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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. (Check one):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

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

The aggregate market value of voting and non-voting common equity of the registrant held by nonaffiliates of the registrant as of June 30, 2009 was $11.3 billion.

Class	Outstanding at February 19, 2010
Common Stock, $0.01 par value	154,810,465 shares

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the definitive proxy statement for the registrant’s 2010 Annual Meeting of Shareholders to be held on May 20, 2010 are incorporated by reference into Part III hereof.

TABLE OF CONTENTS

			Page
PART I				3
	Item 1.	BUSINESS		3
	Item 1A.	RISK FACTORS		12
	Item 1B.	UNRESOLVED STAFF COMMENTS		22
	Item 2.	PROPERTIES		22
	Item 3.	LEGAL PROCEEDINGS		22
	Item 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		22
		PART II
	Item 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES		24
	Item 6.	SELECTED FINANCIAL DATA		26
	Item 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		27
	Item 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		39
	Item 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		40
	Item 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		86
	Item 9A.	CONTROLS AND PROCEDURES		86
	Item 9B.	OTHER INFORMATION		88
		PART III
	Item 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		88
	Item 11.	EXECUTIVE COMPENSATION		88
	Item 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		88
	Item 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		88
	Item 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		88
PART IV				89
	Item 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		89
		SIGNATURES		92

Unless otherwise indicated or the context otherwise requires, references to “Lorillard”, “we,” “us” and “our” refer to Lorillard, Inc., a Delaware corporation, and its subsidiaries. “Lorillard, Inc.” refers solely to the parent company and “Lorillard Tobacco” refers solely to Lorillard Tobacco Company, the principal subsidiary of Lorillard, Inc.

FORWARD-LOOKING STATEMENTS

Investors are cautioned that certain statements contained in this Annual Report on Form 10-K are “forward-looking” statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain the words “expect,” “intend,” “plan,” “anticipate,” “estimate,” “believe,” “will be,” “will continue,” “will likely result” and similar expressions. In addition, any statement concerning future financial performance (including future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by us, which may be provided by our management team are also forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995.

Forward-looking statements are based on current expectations and projections about future events and are inherently subject to a variety of risks and uncertainties, many of which are beyond the control of our management team, which could cause actual results to differ materially from those anticipated or projected. These risks and uncertainties include, among others:

•  the outcome of pending or future litigation, including risks associated with adverse jury and judicial determinations, courts reaching conclusions at variance with the general understandings of applicable law, bonding requirements and the absence of adequate appellate remedies to get timely relief from any of the foregoing;

•  health concerns, claims, regulations and other restrictions relating to the use of tobacco products and exposure to environmental tobacco smoke;

•  the effect on pricing and consumption rates of legislation, including actual and potential federal and state excise tax increases, and tobacco litigation settlements;

•  continued intense competition from other cigarette manufacturers, including significant levels of promotional activities and the presence of a sizable deep discount category;

•  the continuing decline in volume in the domestic cigarette industry;

•  the increasing restrictions on the marketing and use of cigarettes through governmental regulation and privately imposed smoking restrictions;

•  the possibility of restrictions or bans on the use of certain ingredients, including menthol, in cigarettes;

•  general economic and business conditions;

•  changes in financial markets (such as interest rate, credit, currency, commodities and equities markets) or in the value of specific investments;

•  the availability of financing upon favorable terms, the results of our financing efforts and the impact of any breach of a debt covenant or a credit rating downgrade;

•  potential changes in accounting policies by the Financial Accounting Standards Board, the Securities and Exchange Commission (the “SEC”) or regulatory agencies for the industry in which we partici pate that may cause us to revise our financial accounting and/or disclosures in the future, and which may change the way analysts measure our business or financial performance;

•  the risk of fire, violent weather or other disasters adversely affecting our production, storage and other facilities;

•  changes in the price, quality or quantity of tobacco leaf and other raw materials available for use in our cigarettes;

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•  reliance on a limited number of suppliers for certain raw materials;

•  the impact of regulatory initiatives, including the regulation of cigarettes by the Food and Drug Administration, and compliance with governmental regulations;

•  our ability to attract and retain the best talent to implement our strategies as a result of the decreasing social acceptance of cigarettes; and

•  the closing of any contemplated transactions and agreements.

Adverse developments in any of these factors, as well as the risks and uncertainties described in “Item 1. Business,” “Item 1A. Risk Factors,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Environment” and elsewhere in this Annual Report on Form 10-K, could cause our results to differ materially from results that have been or may be anticipated or projected. Forward-looking statements speak only as of the date of this Annual Report on Form 10-K and we expressly disclaim any obligation or undertaking to update these statements to reflect any change in expectations or beliefs or any change in events, conditions or circumstances on which any forward-looking statement is or may be based.

INTRODUCTORY NOTE

For periods presented in this Annual Report on Form 10-K prior to June 10, 2008, Lorillard, Inc. was a wholly-owned subsidiary of Loews Corporation (“Loews”), a publicly traded company listed on the New York Stock Exchange (the “NYSE”). Our results of operations and financial condition were included as a separate reporting segment in Loews’s financial statements and filings with the SEC. Beginning in 2002 and through June 10, 2008, Loews had also issued a separate class of its common stock, referred to as the “Carolina Group Stock,” to track the economic performance of Loews’s 100% interest in Lorillard, Inc. and certain liabilities, costs and expenses of Loews and Lorillard arising out of or related to tobacco or tobacco-related businesses. On June 10, 2008, we began operating as an independent, publicly traded company pursuant to our separation from Loews (the “Separation”). In connection with the Separation, we entered into a Separation Agreement with Loews to provide for the separation of our business from Loews as well as providing for indemnification and allocation of taxes between the parties.

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PART I

Item 1.   BUSINESS

Overview

Lorillard is the third largest manufacturer of cigarettes in the United States. Founded in 1760, Lorillard is the oldest continuously operating tobacco company in the United States. Newport, our flagship menthol flavored premium cigarette brand, is the top selling menthol and second largest selling cigarette brand overall in the United States based on gross units sold in 2009. The Newport brand accounted for approximately 91.5% of our sales revenue for the fiscal year ended December 31, 2009. In addition to the Newport brand, our product line has five additional brand families marketed under the Kent, True, Maverick, Old Gold and Max brand names. These six brands include 41 different product offerings which vary in price, taste, flavor, length and packaging. In 2009, we shipped 36.3 billion cigarettes, all of which were sold in the United States and certain U.S. possessions and territories. We sold our major trademarks outside of the United States in 1977. We manufacture all of our products at our Greensboro, North Carolina facility.

We produce cigarettes for both the premium and discount segments of the domestic cigarette market. We do not compete in a subcategory of the discount segment that we identify as the deep discount segment. Premium brands are well known, established brands marketed at higher retail prices. Discount brands are generally less well recognized brands marketed at lower retail prices. We define the deep discount subcategory to include brands sold at the lowest retail prices. Deep discount cigarettes are typically manufactured by smaller companies, relative to us and other major U.S. manufacturers, many of which have no, or significantly lower, payment obligations under the State Settlement Agreements, consisting of the Master Settlement Agreement among major tobacco manufacturers and 46 states and various other governments and jurisdictions (the “MSA”) and the settlements of similar claims brought by Mississippi, Florida, Texas and Minnesota.

In 2006 we entered into a joint venture with Swedish Match North America to develop and evaluate the opportunity to market a smokeless tobacco product for the U.S. market, called Triumph Snus. During 2008, we commenced test marketing of Triumph Snus in Ohio and Georgia. The test market results did not meet either our volume or profit benchmarks and the sale of Triumph Snus was discontinued in December 2009. In connection therewith, Lorillard and Swedish Match North America mutually agreed to terminate the joint venture. During 2010 we intend to enter certain test markets with a traditional moist snuff product to assess opportunities to broaden our product offering. This product will be produced to our specifications by a third-party manufacturer.

Advertising and Sales Promotion

The predominant form of promotion in the industry and for us consists of retail price reduction programs, such as discounting or lowering the price of a pack or carton of cigarettes in the retail store, and free pack with purchase promotions. These programs are developed, implemented and executed by our sales force through merchandising or promotional agreements with retail chain accounts and independent retailers.

We focus our retail programs in markets and stores reflecting unique potential for increased menthol sales. Our direct buying wholesale customers provide us with information as to the quantities of cigarettes shipped to their retail accounts on a weekly basis. This data covers approximately 99% of wholesale units shipped by us and our major competitors, and enables us to analyze, plan and execute retail promotion programs in markets and stores that optimize the most efficient and effective return on our promotional investments.

We employ other promotion methods to communicate with our adult consumers as well as with adult smokers of our competitors’ products. These promotional programs include the use of direct marketing communications, retail coupons, relationship marketing and promotional materials intended to be displayed at retail. Relationship marketing entails the use of various communication techniques to directly reach adult consumers in order to establish a relationship with them for the purpose of advertising and promoting a product or products. We use our proprietary database of smokers of our brands and smokers of our

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competitors’ brands to reach adult consumers with targeted communications about a given brand through age-restricted direct mail and internet programs. We regularly review the results of our promotional spending activities and adjust our promotional spending programs in an effort to maintain our competitive position. Accordingly, sales promotion costs in any particular fiscal period are not necessarily indicative of costs that may be realized in subsequent periods.

Advertising plays a relatively lesser role in our overall marketing strategy. We advertise Newport in a limited number of magazines that meet certain requirements regarding the age and composition of their readership. Newport is our only brand that receives advertising and promotion support.

Advertising of tobacco products through television and radio has been prohibited since 1971. Under the State Settlement Agreements, the participating cigarette manufacturers agreed to severe restrictions on their advertising and promotion activities including, among other things:

•  prohibiting the targeting of youth in the advertising, promotion or marketing of tobacco products;

•  banning the use of cartoon characters in all tobacco advertising and promotion;

•  limiting each tobacco manufacturer to one event sponsorship during any twelve-month period, which may not include major team sports or events in which the intended audience includes a significant percentage of youth;

•  banning all outdoor advertising of tobacco products with the exception of small signs at retail establishments that sell tobacco products;

•  banning tobacco manufacturers from offering or selling apparel and other merchandise that bears a tobacco brand name, subject to specified exceptions;

•  prohibiting the distribution of free samples of tobacco products except within adult-only facilities;

•  prohibiting payments for tobacco product placement in various media; and

•  banning gift offers based on the purchase of tobacco products without sufficient proof that the intended gift recipient is an adult.

On June 22, 2009 the federal Family Smoking Prevention and Tobacco Control Act (the “FSPTCA”) was signed into law granting authority over the regulation of tobacco products to the FDA. The law directs that the FDA to, among other things, reissue by June 22, 2010 a set of marketing and sales restrictions originally promulgated in 1996 as part of an unsuccessful effort by the agency to assert jurisdiction over tobacco products. See “Legislation and Regulation” below for additional information concerning the marketing and sales provisions of the FSPTCA. In addition, many states, cities and counties have enacted legislation or regulations further restricting tobacco advertising, marketing and sales promotions, and others may do so in the future. We cannot predict the impact of such initiatives on our marketing and sales efforts.

We fund a Youth Smoking Prevention Program, which is designed to discourage youth from smoking by promoting parental involvement and assisting parents in discussing the issue of smoking with their children. We are also a founding and principal member of the Coalition for Responsible Tobacco Retailing which through its “We Card” program trains retailers in how to prevent the purchase of cigarettes by underage persons. In addition, we have adopted guidelines established by the National Association of Attorneys General to restrict advertising in magazines with large readership among people under the age of 18.

Customers and Distribution

Our field sales personnel are based throughout the United States, and we maintain field sales offices in major cities throughout the United States. Our sales department is divided into regions based on geography and sales territories. We sell our products primarily to wholesale distributors, who in turn service retail outlets, chain store organizations, and government agencies, including the U.S. Armed Forces. Upon completion of the manufacturing process, we ship cigarettes to public distribution warehouse facilities for rapid order fulfillment to wholesalers and other direct buying customers. We retain a portion of our manufactured cigarettes at our

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Greensboro central distribution center and Greensboro cold-storage facility for future finished goods replenishment.

As of December 31, 2009, we had approximately 500 direct buying customers servicing more than 400,000 retail accounts. We do not sell cigarettes directly to consumers. During 2009, 2008 and 2007, sales made by us to the McLane Company, Inc. comprised 26%, 26% and 24%, respectively, of our revenues. No other customer accounted for more than 10% of 2009, 2008 or 2007 sales. We do not have any written sales agreements with our customers, including the McLane Company, Inc. We do not have any backlog orders.

Most of our customers buy cigarettes on a next-day-delivery basis. Customer orders are shipped from public distribution warehouses via third party carriers. We do not ship products directly to retail stores. In 2009, approximately 99% of our customers purchased cigarettes using electronic funds transfer, which provides immediate payment to us.

Raw Materials and Manufacturing

In our production of cigarettes, we use domestic and foreign grown burley and flue-cured leaf tobaccos, as well as aromatic tobaccos grown primarily in Turkey and other Near Eastern countries. We believe that there is an adequate supply of tobacco leaf of the type and quality we require at competitive prices from a combination of global sources, and that we are not dependent on any one geographic region or country for our requirements. An affiliate of Reynolds American Inc. (“RAI”) manufactures all of our reconstituted tobacco pursuant to our specifications, as set forth in the agreement between us and RAI. Reconstituted tobacco is a form of tobacco material manufactured as a paper-like sheet from small pieces of tobacco that are too small to incorporate into the cigarette directly and may include some tobacco stems, and which is used as a component of cigarette blends.

We purchase our tobacco leaf through tobacco dealers, which contract with leaf growers. Such purchases are made at prevailing market prices in the country of origin. Due to the varying size and quality of annual crops and other economic factors, tobacco prices have historically fluctuated. We direct these dealers in the purchase of tobacco according to our specifications for quality, grade, yield, particle size, moisture content, and other characteristics. The dealers purchase and process the whole leaf and then dry and package it for shipment to and storage at our Danville, Virginia facility. We have not experienced any difficulty in purchasing our requirement of leaf tobacco.

We purchase more than 80% of our domestic leaf tobacco from one dealer, Alliance One International, Inc. (“Alliance One”). If Alliance One becomes unwilling or unable to supply leaf tobacco to us, we believe that we can readily obtain high-quality leaf tobacco from well-established, alternative industry sources. However, we believe that such high-quality leaf tobacco may not be available at prices comparable to those we pay to Alliance One.

We store our tobacco in 29 storage warehouses on our 130-acre Danville, Virginia facility. To protect against loss, amounts of all types and grades of tobacco are stored in separate warehouses. Certain types of tobacco used in our blends must be allowed to mature over time to allow natural chemical changes that enhance certain characteristics affecting taste. Because of these aging requirements, we maintain large quantities of leaf tobacco at all times. We believe our current tobacco inventories are sufficient and adequately balanced for our present and expected production requirements. If necessary, we can typically purchase aged tobacco in the open market to supplement existing inventories.

We produce cigarettes at our Greensboro, North Carolina manufacturing plant, which has a production capacity of approximately 185 million cigarettes per day and approximately 43 billion cigarettes per year. Through various automated systems and sensors, we actively monitor all phases of production to promote quality and compliance with applicable regulations.

Research and Development

We have an experienced research and development team that continuously evaluates new products and line extensions and assesses new technologies and scientific advancements to be able to respond to

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marketplace demands and developing regulatory requirements. The team includes 60 scientists, 33 of whom have advanced degrees. Our research and development efforts focus primarily on:

•  developing quality products that appeal to adult consumers;

•  studying and developing consumer-acceptable products with the potential for reduced exposure to smoke constituents or reduced health risk;

•  identifying and investigating, through the use of internal and external resources, suspect constituents of cigarette products or their components to determine the feasibility of reduction or elimination;

•  maintaining state-of-the-art knowledge about public health and scientific issues related to cigarette products;

•  developing new, or modifying existing, products and processes to promote quality control and to comply with current and anticipated laws and regulations, including investigating ways to reduce cigarette ignition propensity; and

•  collaborating and cooperating with outside public and private scientific institutions and encouraging independent research relating to cigarette products.

Tobacco-related research activities include: analysis of cigarette components, including cigarette paper, filters, tobacco and ingredients; analysis of mainstream and sidestream smoke; and modification of cigarette design. We employ advanced scientific equipment in our research efforts, including gas chromatographs, mass spectrographs and liquid chromatographs. We use this equipment to structurally identify and measure the amount of chemical compounds found in cigarette smoke and various tobaccos. These measurements allow us to better understand the relationship between the tobacco and the smoke yielded from cigarettes.

Information Technology

We are committed to the use of information technology throughout the organization to provide operating effectiveness, cost reduction and competitive advantages. We believe our system platform provides the appropriate level of information in a timely fashion to effectively manage the business. We utilize proven technologies while also continuously exploring new technologies consistent with our information technology architecture strategy. Our information technology environment is anchored by a SAP enterprise resource planning (“ERP”) system designed to meet the processing and analysis needs of our core business operations and financial control requirements. The process control and production methods in our manufacturing operation utilize scanning, radio frequency identification, wireless technologies and software products to monitor and control the manufacturing process. Our primary data center is located at our corporate headquarters and is staffed by an in-house team of experienced information technology professionals. A satellite data center, located at our manufacturing facility, supports our manufacturing environment. In addition, we have a comprehensive redundancy and disaster recovery plan in place.

Employees

As of December 31, 2009, we had approximately 2,700 full-time employees. As of that date, approximately 1,000 of those employees were represented by labor unions covered by three collective bargaining agreements. Local Union #317T of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (AFL-CIO-CLC) represents workers at our Greensboro manufacturing plant. The agreement covering this Union expires in September 2011. Workers at our Danville, Virginia tobacco storage facility are represented by Local Union #233T of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (AFL-CIO-CLC) and Local Union #513 of the National Conference of Firemen and Oilers/SEIU (AFL-CIO-CLC). The current agreements with Local Union #233T and Local Union #513 will expire in April 2012. We have historically had an amicable relationship with the unions representing our employees.

We provide a retirement plan, a profit sharing plan and other benefits for our hourly paid employees who are represented by unions. In addition, we provide to our salaried employees a retirement plan, group life,

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disability and health insurance program and a savings plan. We also maintain an incentive compensation plan for certain salaried employees.

Intellectual Property

We believe that our trademarks, including brand names, are important to our business. We own the patents, trade secrets, know-how and trademarks, including our brand names and the distinctive packaging and displays, used by us in our business. All of our material trademarks are registered with the U.S. Patent and Trademark Office. Rights in these trademarks in the United States will continue indefinitely as long as we continue to use the trademarks.

We consider the blends of tobacco and the flavor formulas used to make our brands to be trade secrets. These trade secrets are generally not the subject of patents, though various of our manufacturing processes are patented.

We sold the international rights to substantially all of our major brands, including Newport, in 1977.

Competition

The domestic market for cigarettes is highly competitive. Competition is primarily based on a brand’s price, including the level of discounting and other promotional activities, positioning, consumer loyalty, retail display, quality and taste.

Our principal competitors are the two other major U.S. cigarette manufacturers, Philip Morris USA Inc. (“Philip Morris”), a subsidiary of Altria Group, Inc., and R.J. Reynolds Tobacco Company (“RJR Tobacco”), a subsidiary of RAI. We also compete with numerous other smaller manufacturers and importers of cigarettes. We believe our ability to compete even more effectively has been restrained in some marketing areas as a result of retail merchandising contracts offered by Philip Morris and RJR Tobacco which limit the retail shelf space available to our brands. As a result, in some retail locations we are limited in competitively supporting our promotional programs, which may constrain sales.

Please read the sections entitled “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Business Environment” and “— Selected Industry and Market Share Data” beginning on pages 29 and 32, respectively, for additional information.

Legislation and Regulation

Our business operations are subject to a variety of federal, state and local laws and regulations governing, among other things, publication of health warnings on cigarette packaging, advertising and sales of tobacco products, restrictions on smoking in public places and fire safety standards. From time to time, new legislation and regulations are proposed and reports are published by government sponsored committees and others recommending additional regulation of tobacco products.

We cannot predict the ultimate outcome of these proposals, reports and recommendations. If they are enacted, certain of these proposals could have a material adverse effect on our business and our financial condition or results of operations in the future.

Federal Regulation

The Federal Comprehensive Smoking Education Act, which became effective in 1985, requires that cigarette packaging and advertising display one of the following four warning statements, on a rotating basis:

(1) “SURGEON GENERAL’S WARNING: Smoking Causes Lung Cancer, Heart Disease, Emphysema, and may Complicate Pregnancy.”

(2) “SURGEON GENERAL’S WARNING: Quitting Smoking Now Greatly Reduces Serious Risks to Your Health.”

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(3) “SURGEON GENERAL’S WARNING: Smoking By Pregnant Women May Result in Fetal Injury, Premature Birth, and Low Birth Weight.”

(4) “SURGEON GENERAL’S WARNING: Cigarette Smoke Contains Carbon Monoxide.”

This law also requires that each company that manufactures, packages or imports cigarettes shall annually provide to the Secretary of Health and Human Services a list of the ingredients added to tobacco in the manufacture of cigarettes. This list of ingredients may be submitted in a manner that does not identify the company that uses the ingredients or the brand of cigarettes that contain the ingredients.

In addition, bills have been introduced in Congress, including those that would:

•  prohibit all tobacco advertising and promotion;

•  authorize the establishment of various anti-smoking education programs;

•  provide that current federal law should not be construed to relieve any person of liability under common or state law;

•  permit state and local governments to restrict the sale and distribution of cigarettes;

•  direct the placement of advertising of tobacco products;

•  provide that cigarette advertising not be deductible as a business expense;

•  prohibit the mailing of unsolicited samples of cigarettes and otherwise restrict the sale or distribution of cigarettes in retail stores, by mail or over the internet;

•  impose additional, or increase existing, excise taxes on cigarettes and

•  require that cigarettes be manufactured in a manner that will cause them, under certain circumstances, to be self-extinguishing.

In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking Prevention and Tobacco Control Act that grants the Food and Drug Administration (“FDA”) authority to regulate tobacco products. The legislation:

•  establishes a Tobacco Products Scientific Advisory Committee to, among other things, evaluate the issues surrounding the use of menthol as a flavoring or ingredient in cigarettes within one year of such committee’s establishment;

•  grants the FDA the regulatory authority to consider and impose broad additional restrictions through a rule making process, including a ban on the use of menthol in cigarettes;

•  requires larger and more severe health warnings on packs and cartons;

•  bans the use of descriptors on tobacco products, such as “low tar” and “light”;

•  requires the disclosure of ingredients and additives to consumers;

•  requires pre-market approval by the FDA for claims made with respect to reduced risk or reduced exposure products;

•  allows the FDA to require the reduction of nicotine or any other compound in cigarettes;

•  allows the FDA to mandate the use of reduced risk technologies in conventional cigarettes;

•  allows the FDA to place more severe restrictions on the advertising, marketing and sales of cigarettes; and

•  permits inconsistent state regulation of the advertising or promotion of cigarettes and eliminate the existing federal preemption of such regulation.

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We believe that such regulation may adversely affect our ability to compete against our larger competitors, including Philip Morris, who may be able to more quickly and cost-effectively comply with these new rules and regulations.

The legislation permits the FDA to ban menthol upon a finding that such prohibition would be appropriate for the public health. Any ban or material limitation on the use of menthol in cigarettes would materially adversely affect our results of operation, cash flows and financial condition. It is possible that such additional regulation, including regulation of menthol short of a ban thereof, could result in a decrease in cigarette sales in the United States (including sales of our brands) and increased costs to us, which may have a material adverse effect on our financial condition, results of operations, and cash flows.

Environmental Tobacco Smoke

Various publications and studies by governmental entities have reported that environmental tobacco smoke (“ETS”) presents health risks. In addition, public health organizations have issued statements on the adverse health effects of ETS, and scientific papers have been published that address the health problems associated with ETS exposure. Various states, cities and municipalities have restricted public smoking in recent years, and these restrictions have been based at least in part on the publications regarding the health risks believed to be associated with ETS exposure.

The governmental entities that have published these reports have included the Surgeon General of the United States, first in 1986 and again in 2006. The 2006 report, for instance, concluded that there is no risk-free level of exposure to ETS. In 2000, the Department of Health and Human Services listed ETS as a known human carcinogen. In 1993, the U.S. Environmental Protection Agency concluded that ETS is a human lung carcinogen in adults and causes respiratory effects in children.

Agencies of state governments also have issued publications regarding ETS, including reports by California entities that were published in 1997, 1999 and 2006. In the 2006 study, the California Air Resources Board determined that ETS is a toxic air contaminant. Based on these or other findings, public health concerns regarding ETS could lead to the imposition of additional restrictions on public smoking, including bans, which could have a material adverse effect on our business and financial condition or results of operations in the future.

State and Local Regulation

Many state, local and municipal governments and agencies, as well as private businesses, have adopted legislation, regulations or policies which prohibit or restrict, or are intended to discourage, smoking, including legislation, regulations or policies prohibiting or restricting smoking in various places such as public buildings and facilities, stores, restaurants and bars and on airline flights and in the workplace. This trend has increased significantly since the release of the EPA’s report regarding ETS in 1993. As of December 31, 2009, 39 states and the District of Columbia have passed laws banning or restricting smoking in restaurants.

Two states, Massachusetts and Texas, have enacted legislation requiring each manufacturer of cigarettes sold in those states to submit an annual report identifying for each brand sold certain “added constituents,” and pro viding nicotine yield ratings and other information for certain brands. Neither law allows for the public release of trade secret information.

A New York law which became effective in June 2004 requires cigarettes sold in that state to meet a mandated standard for ignition propensity. We developed proprietary technology to comply with the standards and were compliant by the effective date. Since the passage of the New York law, an additional 48 states and the District of Columbia have passed similar laws utilizing the same technical standards. The effective dates of these laws range from May 2006 to January 2011. As of November 1, 2009, all of our cigarettes were manufactured using this technology.

Other similar laws and regulations have been enacted or considered by other state and local governments. We cannot predict the impact which these regulations may have on our business, though if enacted, they could have a material adverse effect on our business and financial condition or results of operations in the future.

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Excise Taxes and Assessments

Cigarettes are subject to substantial federal, state and local excise taxes in the United States and, in general, such taxes have been increasing. Effective April 1, 2009, the federal excise tax on cigarettes increased to $50.33 per thousand cigarettes (or $1.0066 per pack of 20 cigarettes) from $19.50 per thousand cigarettes (or $0.39 per pack of 20 cigarettes). State excise taxes, which are levied upon and paid by the distributors, are also in effect in the fifty states, the District of Columbia and many municipalities. Increases in state excise taxes on cigarette sales were implemented in fourteen states and the District of Columbia during 2009 and ranged from $0.10 per pack to $1.00 per pack. For the twelve months ended December 31, 2009, the combined state and municipal taxes ranged from $0.07 to $4.25 per pack of cigarettes.

A federal law enacted in October 2004 repealed the federal supply management program for tobacco growers and compensated tobacco quota holders and growers with payments to be funded by an assessment on tobacco manufacturers and importers. Cigarette manufacturers and importers are responsible for paying 95.5% of a $10.14 billion payment to tobacco quota holders and growers over a ten-year period. The law provides that payments will be based on shipments for domestic consumption.

Separation Agreement with Loews Corporation

In connection with the Separation, we entered into a Separation Agreement with Loews Corporation on May 7, 2008. The Separation Agreement sets forth the relationship between Lorillard and Loews following the Separation, including provisions relating to indemnification and tax allocation between the parties.

Indemnification Provisions

We agreed to indemnify Loews and its officers, directors, employees and agents against all costs and expenses arising out of third party claims (including, without limitation, attorneys’ fees, interest, penalties and costs of investigation or preparation for defense), judgments, fines, losses, claims, damages, liabilities, taxes, demands, assessments and amounts paid in settlement based on, arising out of or resulting from:

•  the ownership or the operation of our assets and properties, and the operation or conduct of our businesses at any time prior to or following the Separation (including with respect to any smoking and health claims and litigation);

•  certain tax matters, as discussed below;

•  any other activities in which we may engage;

•  any action or omission by us (or any successor entity) that causes the Separation to become taxable to Loews;

•  any breach by us of the Separation Agreement;

•  any other acts or omissions by us arising out of the performance of our obligations under the Separation Agreement;

•  misstatements in or omissions from the registration statement filed with regard to the Separation, other than misstatements or omissions made in reliance on information relating to and furnished by Loews for use in the preparation of such registration statement; and

•  any taxes and related losses resulting from the receipt of any such indemnity payment.

Our indemnification obligations, including the tax indemnification obligations described below, are binding on our successors. We are not permitted to merge, consolidate, transfer or convey all or a significant portion of our properties or assets unless the resulting entity, transferee or successor expressly agrees in writing to be bound by these indemnification obligations. Any equity security or equity interest of Lorillard Licensing Company, LLC (“Lorillard Licensing”), an indirect wholly-owned subsidiary and owner of our trademarks, or any interest in the intellectual property owned by Lorillard Licensing, is deemed a “significant portion” for purposes of the foregoing.

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We also agreed to release Loews and its shareholders, officers, directors and employees from any liability owed by any of them to us with respect to acts or events occurring on or prior to the Separation date, except with respect to tax matters.

The Separation Agreement also provides that Loews will indemnify us and our officers, directors, employees and agents against losses, including but not limited to, litigation matters, and other claims, based on, arising out of or resulting from:

•  any activity that Loews and its subsidiaries (other than us) engage in;

•  any breach by Loews of the Separation Agreement;

•  any other acts or omissions by Loews arising out of the performance of its obligations under the Separation Agreement; and

•  misstatements in or omissions from the registration statement filed with regard to the Separation, but only with respect to misstatements or omissions made in reliance on information relating to and furnished by Loews for use in the preparation of such registration statement.

Loews agreed to release us and all of our directors, officers and employees from any liability owed by any of us to Loews with respect to acts or events occurring on or prior to the Separation date, except with respect to tax matters.

Tax Allocation Provisions

Following the Separation, we are no longer included in Loews’s consolidated group for federal income tax purposes. In connection with the Separation, the Separation Agreement provides certain tax allocation arrangements, pursuant to which we will indemnify Loews for tax liabilities that are allocated to us for taxable periods ending on or before the Separation date. The amount of federal income taxes allocated to us for such periods is generally equal to the federal income taxes that would have been payable by us during such periods if we had filed separate consolidated returns. In addition, with respect to periods in which we were included in Loews’s consolidated group, Loews will indemnify us with respect to the tax liability of the members of the Loews consolidated group other than us. After the Separation, we have the right to be notified of and participate in tax matters for which we are financially responsible under the terms of the Separation Agreement, although Loews will generally control such matters.

The Separation Agreement imposes restrictions on our ability to engage in certain significant corporate transactions, for a period of two years, that could cause the Separation to become taxable to Loews. We, however, may undertake any such action if we first obtain a supplemental ruling from the IRS or an unqualified tax opinion of a nationally recognized law firm, in either case in form and substance reasonably acceptable to Loews, to the effect that the proposed transaction would not adversely affect the tax-free nature of the Separation. The Separation Agreement also requires us (and any successor entity) to indemnify Loews for any losses resulting from the failure of the Separation to qualify as a tax-free transaction (except if the failure to qualify is solely due to Loews’s fault). This indemnification obligation applies regardless of whether the action is restricted as described above, or whether we or a potential successor obtains a supplemental ruling or an opinion of counsel.

The Separation Agreement further provides for cooperation between us and Loews with respect to additional tax matters, including the exchange of information and the retention of records which may affect the income tax liability of the parties to the Separation Agreement.

Available Information

We are listed on the NYSE under the symbol “LO.” Our principal offices are located at 714 Green Valley Road, Greensboro, North Carolina 27408. Our telephone number is (336) 335-7000. Our corporate website is located at www.lorillard.com, and our filings pursuant to Section 13(a) of the Exchange Act are available free of charge on our website under the tabs “Investor Relations — SEC Filings” as soon as reasonably practicable after such filings are electronically filed with the SEC. Our Corporate Governance Guidelines, Code of

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Business Conduct and Ethics and charters for the audit, compensation and nominating and corporate governance committees of our Board of Directors are also available on our website under the tabs, “Investor Relations — Corporate Governance” and printed copies are available upon request. The information contained on our website is not, and shall not be deemed to be, a part of this Annual Report on Form 10-K or incorporated into any other filings we make with the SEC.

Investors may also read and copy any materials that we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Readers may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet site at www.sec.gov that contains our reports.

Item 1A.   RISK FACTORS

As of February 22, 2010, Lorillard Tobacco is a defendant in approximately 10,275 tobacco-related lawsuits, including approximately 710 cases in which Lorillard, Inc. is a co-defendant. These cases, which are extremely costly to defend, could result in substantial judgments against Lorillard Tobacco and/or Lorillard, Inc.

Numerous legal actions, proceedings and claims arising out of the sale, distribution, manufacture, development, advertising, marketing and claimed health effects of cigarettes are pending against Lorillard Tobacco and Lorillard, Inc., and it is likely that similar claims will continue to be filed for the foreseeable future. In addition, several cases have been filed against Lorillard Tobacco and other tobacco companies challenging certain provisions of the MSA among major tobacco manufacturers and 46 states and various other governments and jurisdictions, and state statutes promulgated to carry out and enforce the MSA.

Punitive damages, often in amounts ranging into the billions of dollars, are specifically pleaded in a number of cases in addition to compensatory and other damages. It is possible that the outcome of these cases, individually or in the aggregate, could result in bankruptcy. It is also possible that Lorillard Tobacco and Lorillard, Inc. may be unable to post a surety bond in an amount sufficient to stay execution of a judgment in jurisdictions that require such bond pending an appeal on the merits of the case. Even if Lorillard Tobacco and Lorillard, Inc. are successful in defending some or all of these actions, these types of cases are very expensive to defend. A material increase in the number of pending claims could significantly increase defense costs and have an adverse effect on our results of operation and financial condition. Further, adverse decisions in litigations against other tobacco companies could have an adverse impact on the industry, including us.

A judgment has been rendered against Lorillard Tobacco in the Scott litigation.

In July 2008, the District Court of Orleans Parish, Louisiana, entered an amended final judgment in favor of the plaintiffs in Scott v. The American Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed May 24, 1996), a class action on behalf of certain cigarette smokers resident in the State of Louisiana. Lorillard, Inc., which was a party to the case in the past, is no longer a defendant in Scott. The amended final judgment orders defendants, including Lorillard Tobacco, to pay approximately $264 million to fund a court-supervised cessation program for class members. The amended final judgment also awards post-judgment judicial interest that will continue to accrue from June 2004 until the judgment either is paid or is reversed on appeal. As of February 22, 2010, judicial interest totaled approximately $107 million. Defendants have appealed the amended final judgment to the Louisiana Court of Appeal, Fourth District, but it is not possible to predict the outcome of this appeal.

Lorillard Tobacco’s share of any judgment, including an award of post-judgment interest, has not been determined. In the fourth quarter of 2007, we recorded a pretax provision of approximately $66 million for this matter.

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The Florida Supreme Court’s ruling in Engle has resulted in additional litigation against cigarette manufacturers, including us.

The case of Engle v. R.J. Reynolds Tobacco Co., et al. (Circuit Court, Dade County, Florida, filed May 5, 1994) was certified as a class action on behalf of Florida residents, and survivors of Florida residents, who were injured or died from medical conditions allegedly caused by addiction to smoking. The case was tried between 1998 and 2000 in a multi-phase trial that resulted in verdicts in favor of the class. During 2006, the Florida Supreme Court issued a ruling that, among other things, determined that the case could not proceed further as a class action. In February 2008, the trial court entered an order on remand from the Florida Supreme Court that formally decertified the class.

The 2006 ruling by the Florida Supreme Court in Engle also permitted members of the Engle class to file individual claims, including claims for punitive damages. The Florida Supreme Court held that these individual plaintiffs are entitled to rely on a number of the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial. These findings included that smoking cigarettes causes a number of diseases; that cigarettes are addictive or dependence-producing; and that the defendants, including Lorillard Tobacco and Lorillard, Inc., were negligent, breached express and implied warranties, placed cigarettes on the market that were defective and unreasonably dangerous, and concealed or conspired to conceal the risks of smoking. Lorillard Tobacco is a defendant in approximately 7,600 cases pending in various state and federal courts in Florida that were filed by members of the Engle class (the “Engle Progeny Cases”), including approximately 700 cases in which Lorillard, Inc. is a co-defendant.

As of February 22, 2010, Lorillard Tobacco was a defendant in several Engle Progeny Cases that have been placed on courts’ 2010 trial calendars or in which specific 2010 trial dates have been set. Lorillard, Inc. is a co-defendant in some of these cases. Trial schedules are subject to change and it is not possible to predict how many of the Engle Progeny Cases pending against Lorillard Tobacco or Lorillard, Inc. will be tried during 2010. It also is not possible to predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases for trial. One case involving the claims of three plaintiffs is scheduled for trial in 2010.

Verdicts have been returned in eleven Engle Progeny cases since the Florida Supreme Court issued its 2006 ruling. Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in these eleven trials. In four of the eleven trials, juries awarded actual damages and punitive damages. The punitive damages awards were $2 million, $5 million, $25 million and $254 million. In four of the trials, juries awarded only actual damages. In the three other trials, juries found in favor of the defendants that the plaintiffs were not former Engle class members.

The verdict returned in the federal government’s reimbursement case, while not final, could impose significant financial burdens on us and adversely affect future sales and profits.

In August 2006, a final judgment and remedial order was entered in United States of America v. Philip Morris USA, Inc., et al. (U.S. District Court, District of Columbia, filed September 22, 1999). The court based its final judgment and remedial order on the government’s only remaining claims, which were based on the defendants’ alleged violations of the Racketeering Influenced and Corrupt Organizations Act (“RICO”). Lorillard, Inc. is not a party to this matter, but Lorillard Tobacco is one of the defendants in the case. Although the verdict did not award monetary damages to the plaintiff, the final judgment and remedial order imposed a number of requirements on the defendants. Such requirements include, but are not limited to, corrective statements by defendants related to the health effects of smoking. The remedial order also would place certain prohibitions on the manner in which defendants market their cigarette products and would eliminate any use of “lights” or similar product descriptors. It is likely that the remedial order, including the prohibitions on the use of the descriptors relating to low tar cigarettes, will negatively affect our future sales and profits.

In May 2009, a three judge panel of the Circuit Court of Appeals for the District of Columbia upheld substantially all of the District Court’s final judgment and remedial order. In September 2009, the Court of Appeals rejected defendants’ rehearing petitions. Defendants received a stay of the judgment and remedial

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order from the Court of Appeals that remains in effect while the appeal is pending. Defendants have petitioned the Court of Appeals to stay its order that formally relinquishes jurisdiction of their appeal pending the filing and disposition of their petitions for writ of certiorari to the U.S. Supreme Court. While trial was underway, the Court of Appeals ruled that plaintiff may not seek to recover profits earned by the defendants. Prior to trial, the government had claimed that it was entitled to approximately $280.0 billion from the defendants for its claim to recover profits earned by the defendants. In the most recent appeal, the government preserved its right to seek review of this claim by the United States Supreme Court, but the issue of recovery of profits was not considered. This issue may however be considered by the U.S. Supreme Court. The government and the defendants filed petitions for writ of certiorari with the U.S. Supreme Court on February 19, 2010.

A ruling by the United States Supreme Court could limit the ability of cigarette manufacturers to contend that certain claims asserted against them in product liability litigation are barred. The Supreme Court’s decision also could encourage litigation involving cigarettes labeled as “lights” or “low tar.”

In December 2008, the United States Supreme Court issued a decision that neither the Federal Cigarette Labeling and Advertising Act nor the Federal Trade Commission’s regulation of cigarettes’ tar and nicotine disclosures preempts (or bars) some of plaintiffs’ claims. The decision also more broadly addresses the scope of preemption based on the Federal Cigarette Labeling and Advertising Act, and could significantly limit cigarette manufacturers’ arguments that certain of plaintiffs’ other claims in smoking and health litigation, including claims based on the alleged concealment of information with respect to the hazards of smoking, are preempted. In addition, the Supreme Court’s ruling could encourage litigation against cigarette manufacturers, including us, regarding the sale of cigarettes labeled as “lights” or “low tar,” and it may limit cigarette manufacturers’ ability to defend such claims. The Supreme Court issued this ruling in a purported “lights” class action, Good v. Altria Group, Inc. We are not a defendant in Good.

Actions by the Federal Trade Commission could be cited as support for allegations against cigarette manufacturers, including us.

In November 2008, the Federal Trade Commission (“FTC”) rescinded its guidance regarding disclosure of tar and nicotine yields and prohibited use of the phrase “per FTC Method” to describe those yields. In its rescission of guidance, the FTC stated that “there is now a consensus among the public health and scientific communities that the Cambridge Filter Method is sufficiently flawed that statements of tar and nicotine yields as measured by that method are not likely to help consumers make informed decisions.” The Cambridge Filter Method is a standardized test utilizing a smoking machine to determine the tar and nicotine, among other constituents, in a particular brand or style of cigarettes. The FTC further stated that it “believes the statements of tar and nicotine yields as measured by this test method are confusing at best, and are likely to mislead consumers who believe they will get proportionately less tar and nicotine from lower-rated cigarettes than from higher-rated brands.” In addition, the FTC stated that any continued use of cigarette descriptors must “not convey an erroneous or unsubstantiated message that a particular cigarette presents a reduced risk of harm or is otherwise likely to mislead consumers.” It is possible that these actions by the FTC could be cited as support for allegations by plaintiffs in pending or future litigation, or encourage additional litigation against cigarette manufacturers, including us.

Lorillard Tobacco is a defendant in a case that was initially certified as a nationwide class action involving “lights” cigarettes and that could result in a substantial verdict, if the class certification order is reinstated.

Schwab v. Philip Morris USA, Inc., et al. (U.S. District Court, Eastern District, New York, filed May 11, 2004), was certified by a federal judge as a nationwide class action on behalf of individuals who purchased “light” cigarettes. Plaintiffs’ claims in Schwab are based on defendants’ alleged RICO violations in the manufacture, marketing and sale of “light” cigarettes. Plaintiffs have estimated damages to the class to be in the hundreds of billions of dollars. Any damages awarded to the plaintiffs based on defendants’ violation of the RICO statute would be multiplied by a factor of three. In March 2008, a federal court of appeals reversed the class certification ruling. Plaintiffs did not seek further review of this decision and the case has been returned to the Eastern District of New York for further proceedings. During 2009, Schwab was one of several

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purported “lights” class actions identified for inclusion in a specially constituted court for consolidated pretrial proceedings. In September 2009, the Judicial Panel on Multidistrict Litigation issued a conditional order that denied the request to include Schwab as part of the consolidated proceeding. This order became final in October 2009. We cannot predict future activity in this case.

The U.S. Surgeon General has issued a report regarding the risks of cigarette smoking to non-smokers that could result in additional litigation against cigarette manufacturers, additional restrictions placed on the use of cigarettes, and additional regulations placed on the manufacture or sale of cigarettes.

In a report entitled “The Health Consequences of Involuntary Exposure to Tobacco Smoke: A Report of the Surgeon General, 2006,” the U.S. Surgeon General summarized conclusions from previous Surgeon General’s reports concerning the health effects of exposure to second-hand smoke by non-smokers. According to this report, scientific evidence now supports six major conclusions:

•  Second-hand smoke causes premature death and disease in children and in adults who do not smoke.

•  Children exposed to second-hand smoke are at an increased risk for sudden infant death syndrome, acute respiratory infections and ear problems.

•  Exposure of adults to second-hand smoke has immediate adverse effects on the cardiovascular system and causes heart disease and lung cancer.

•  The scientific evidence indicates that there is no risk-free level of exposure to second-hand smoke.

•  Many millions of Americans, both children and adults, are exposed to second-hand smoke in their homes and workplaces.

•  Eliminating smoking in indoor spaces fully protects non-smokers from exposure to second-hand smoke. Separating smokers from non-smokers, cleaning the air, and ventilating buildings cannot eliminate exposures of non-smokers to second-hand smoke.

This report could form the basis of additional litigation against cigarette manufacturers, including us. The report could be used to support existing litigation against us or other cigarette manufacturers. It also is possible that the Surgeon General’s report could result in additional restrictions placed on cigarette smoking or in additional regulations placed on the manufacture or sale of cigarettes. It is possible that such additional restrictions or regulations could result in a decrease in cigarette sales in the United States, including sales of our brands. These developments may have a material adverse effect on our financial condition, results of operations, and cash flows.

The regulation of cigarettes by the Food and Drug Administration may materially adversely affect our business.

In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking Prevention and Tobacco Control Act that grants the FDA authority to regulate tobacco products. The legislation:

•  establishes a Tobacco Products Scientific Advisory Committee to, among other things, evaluate the issues surrounding the use of menthol as a flavoring or ingredient in cigarettes within one year of such committee’s establishment;

•  grants the FDA the regulatory authority to consider and impose broad additional restrictions through a rule making process, including a ban on the use of menthol in cigarettes;

•  requires larger and more severe health warnings on packs and cartons;

•  bans the use of descriptors on tobacco products, such as “low tar” and “light”;

•  requires the disclosure of ingredients and additives to consumers;

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•  requires pre-market approval by the FDA for claims made with respect to reduced risk or reduced exposure products;

•  allows the FDA to require the reduction of nicotine or any other compound in cigarettes;

•  allows the FDA to mandate the use of reduced risk technologies in conventional cigarettes;

•  allows the FDA to place more severe restrictions on the advertising, marketing and sales of cigarettes; and

•  permits inconsistent state regulation of the advertising or promotion of cigarettes and eliminates the existing federal preemption of such regulation.

We believe that such regulation may adversely affect our ability to compete against our larger competitors, including Philip Morris, who may be able to more quickly and cost-effectively comply with these new rules and regulations.

The legislation permits the FDA to ban menthol upon a finding that such prohibition would be appropriate for the public health. Any ban or material limitation on the use of menthol in cigarettes would materially adversely affect our results of operation, cash flows and financial condition. It is possible that such additional regulation, including regulation of menthol short of a ban thereof, could result in a decrease in cigarette sales in the United States (including sales of our brands) and increased costs to us, which may have a material adverse effect on our financial condition, results of operations, and cash flows.

We have substantial payment obligations under litigation settlement agreements which will have a material adverse effect on our cash flows and operating income in future periods.

In 1998, Lorillard Tobacco, Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the “Original Participating Manufacturers”) entered into the MSA with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. We and certain other U.S. tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (the “Initial State Settlements” and, together with the MSA, are referred to as the “State Settlement Agreements”).

Under the State Settlement Agreements, we paid $1.118 billion in 2009 and are obligated to pay between $1.125 and $1.175 billion in 2010, primarily based on 2009 estimated industry volume. Annual payments under the State Settlement Agreements are required to be paid in perpetuity and are based, among other things, on our domestic market share and unit volume of domestic shipments, with respect to the MSA, in the year preceding the year in which payment is due, and, with respect to the Initial State Settlements, in the year in which payment is due.

We are unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of certain material pending litigation.

We record provisions in our consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Except for the impact of the State Settlement Agreements and the provision relating to the Scott case, as described in the risk factor “— A judgment has been rendered against Lorillard Tobacco in the Scott litigation” above, we are unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of material pending litigation and, therefore, no material provision has been made in our consolidated financial statements for any unfavorable outcome. It is possible that our results of operations, cash flows and financial position could be materially adversely affected by an unfavorable outcome of certain pending or future litigation.

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

We compete primarily on the basis of product quality, brand recognition, brand loyalty, service, marketing, advertising and price. We are subject to highly competitive conditions in all aspects of our business. The competitive environment and our competitive position can be significantly influenced by weak economic conditions, erosion of consumer confidence, competitors’ introduction of low-priced products or innovative products, higher cigarette taxes, higher absolute prices and larger gaps between price categories, and product regulation that diminishes the ability to differentiate tobacco products.

Our principal competitors are the two other major U.S. cigarette manufacturers, Philip Morris and RJR Tobacco. We also compete against numerous other smaller manufacturers or importers of cigarettes. If our major competitors were to significantly increase the level of price discounts offered to consumers, we could respond by increasing price discounts, which could have a materially adverse effect on our profitability and results of operations.

Concerns that mentholated cigarettes may pose greater health risks could adversely affect our business.

Some plaintiffs and other sources, including public health agencies, have claimed or expressed concerns that mentholated cigarettes may pose greater health risks than non-mentholated cigarettes, including concerns that menthol cigarettes may make it easier to start smoking and harder to quit. In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking Prevention and Tobacco Control Act that includes a provision establishing a Tobacco Products Scientific Advisory Committee to, among other things, evaluate issues surrounding the use of menthol as a flavoring or ingredient in cigarettes. In addition, the legislation permits the FDA to ban menthol upon a finding that such prohibition would be appropriate for the public health. In June 2008, seven former U.S. health secretaries criticized a bill then under consideration in the House of Representatives to grant the FDA the authority to regulate tobacco products and ban the use of characterizing flavors other than menthol in cigarettes. The former health secretaries argued that the menthol exemption discriminates against African-American smokers who often prefer menthol cigarettes and have higher rates of some smoking-related diseases. In the course of consideration of the bill by a committee of the House of Representatives an amendment was offered and rejected which would have banned the use of menthol as an ingredient in cigarettes. In 2002, the U.S. Department of Health and Human Services National Institutes of Health, Center for Disease Control and Prevention and National Cancer Institute and other public health agencies supported the First Conference on Menthol Cigarettes. The executive summary of the conference proceedings outlined “why it is important to study menthol cigarettes” and included statements that “menthol’s sensation of coolness might result in deeper inhalation” and “could contribute to increased uptake of inhaled tobacco constituents, including nicotine and cancer-causing agents...” In addition, the Center for Disease Control and Prevention has published a pamphlet titled “Pathways to Freedom, Winning the Fight Against Tobacco” that, under the heading “The Dangers of Menthol” states that “menthol can make it easier for a smoker to inhale deeply, which may allow more chemicals to enter the lungs. Menthol in cigarettes does not make smoking safer. In fact, menthol may even make things worse.” In October 2009, the Second Conference on Menthol Cigarettes (“Second Menthol Conference”) was held in Washington, D.C. during which tobacco control advocates met to discuss the state of science regarding menthol cigarettes. In December 2009, the chairs of the Second Menthol Conference provided a “Report to the Food and Drug Administration (FDA) Prepared as Public Comment” which summarized the proceedings of the Second Menthol Conference. Although no formal resolutions were passed at the Second Menthol Conference, the report contained “findings for the banning of menthol” which included, among other things, that menthol may be a starter product for youth, presented a greater addiction potential and was a social justice issue. Since we are the leading manufacturer of mentholated cigarettes in the United States, we could face increased exposure to tobacco-related litigation as a result of such allegations. Even if such claims are unsubstantiated, increased concerns about the health impact of mentholated cigarettes could adversely affect our sales, including sales of Newport. In addition, any ban or material limitation on the use of menthol in cigarettes would materially adversely affect our results of operation, cash flows and financial condition.

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We are subject to important limitations on advertising and marketing cigarettes that could harm our competitive position.

Television and radio advertisements of tobacco products have been prohibited since 1971. Under the State Settlement Agreements, we generally cannot use billboard advertising, cartoon characters, sponsorship of concerts, non-tobacco merchandise bearing Lorillard’s brand names and various other advertising and marketing techniques. In addition, the MSA prohibits the targeting of youth in advertising, promotion or marketing of tobacco products. Accordingly, we have determined not to advertise our cigarettes in magazines with large readership among people under the age of 18. On June 22, 2009 the federal Family Smoking Prevention and Tobacco Control Act was signed into law granting authority over the regulation of tobacco products to the FDA. The law directs that the FDA to, among other things, reissue by June 22, 2010 a set of marketing and sales restrictions originally promulgated in 1995 as part of an unsuccessful effort by the agency to assert jurisdiction over tobacco products. In addition, many states, cities and counties have enacted legislation or regulations further restricting tobacco advertising, marketing and sales promotions, and others may do so in the future. Additional restrictions may be imposed or agreed to in the future. These limitations may make it difficult to maintain the value of an existing brand if sales or market share decline for any reason. Moreover, these limitations significantly impair the ability of cigarette manufacturers, including us, to launch new premium brands.

Sales of cigarettes are subject to substantial federal, state and local excise taxes.

On April 1, 2009, the federal excise tax on cigarettes increased $0.6166 per pack to $1.0066 per pack to finance health insurance for children. For the twelve months ended December 31, 2009, combined state and local excise taxes ranged from $0.07 to $4.25 per pack. Various states and localities have raised the excise tax on cigarettes substantially in recent years. In addition, increases in state excise taxes on cigarette sales were implemented in fourteen states and the District of Columbia during 2009 and ranged from $0.10 per pack to $1.00 per pack. It is our expectation that several states will propose further increases in 2010 and in subsequent years. We believe that increases in excise and similar taxes have had an adverse impact on sales of cigarettes. In addition, we believe that the 2009 increase in the federal excise tax, as well as possible future increases, the extent of which cannot be predicted, compounded by poor economic conditions, could result in further volume declines for the cigarette industry, including us, and an increased sales shift toward lower priced discount cigarettes rather than premium brands.

We are dependent on the domestic cigarette business, which we expect to continue to contract.

Although we conduct business in Puerto Rico, Guam and the U.S. Virgin Islands, our cigarette business in the 50 states of the United States (the “domestic cigarette market”) is currently our only significant business. The domestic cigarette market has generally been contracting and we expect it to continue to contract. We do not have foreign cigarette sales that could offset these effects, as we sold the international rights to substantially all of our brands, including Newport, in 1977. As a result of price increases, restrictions on advertising and promotions, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of smoking, increased pressure from anti-tobacco groups and other factors, industry-wide domestic cigarette shipments have decreased at a compound annual rate of approximately 3.0% during the period 1999 through 2009. Industry-wide domestic cigarette shipments decreased by an estimated 8.6% for 2009 compared to 2008, 3.3% for 2008 to 2007, 5.0% during 2007, compared to 2006, and 1.5% during 2006 compared to 2005.

We derive most of our revenue from one brand.

Our largest selling brand, Newport, accounted for approximately 91.5% of our sales revenue for 2009. Our principal strategic plan revolves around the marketing and sales promotion in support of the Newport brand. We cannot ensure that we will continue to successfully implement our strategic plan with respect to Newport or that implementation of our strategic plan will result in the maintenance or growth of the Newport brand.

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The use of significant amounts of promotion expenses and sales incentives in response to competitive actions and market price sensitivity may have a material adverse impact on our business.

Since 1998, the cigarette market has been increasingly price competitive due to the impact of, among other things, higher state and local excise taxes and the market share of deep discount brands. In response to these and other competitor actions and pricing pressures, we have engaged in significant use of promotional expenses and sales incentives. The cost of these measures could have a material adverse impact on our business. We regularly review the results of our promotional spending activities and adjust our promotional spending programs in an effort to maintain our competitive position. Accordingly, unit sales volume and sales promotion costs in any period are not necessarily indicative of sales and costs that may be realized in subsequent periods.

We rely on a limited number of key executives and may continue to experience difficulty in attracting and hiring qualified new personnel in some areas of our business.

The loss of any of our key employees could adversely affect our business. Other than with respect to our chief executive officer, Martin L. Orlowsky, we do not have employment agreements with any of our key employees. In November 2009, we announced that the Board of Directors would be implementing a succession review process in anticipation of the possible retirement of Mr. Orlowsky upon the December 31, 2010 expiration of his employment agreement. Our Board of Directors is taking steps to ensure an orderly succession, but we may not be able to identify and hire a suitable successor in the required time period. As a tobacco company, we may experience difficulty in identifying and hiring qualified executives and other personnel in some areas of our business. This difficulty is primarily attributable to the health and social issues associated with the tobacco industry. The loss of services of any key personnel or our inability to attract and hire personnel with requisite skills could restrict our ability to develop new products, enhance existing products in a timely manner, sell products or manage our business effectively. These factors could have a material adverse effect on our results of operations and financial condition.

Several of our competitors have developed alternative cigarette products.

Certain of the major cigarette makers have developed and marketed alternative cigarette products. For example, Philip Morris developed an alternative cigarette, called Accord, in which the tobacco is heated rather than burned. RJR Tobacco has developed and is marketing an alternative cigarette, called Eclipse, in which the tobacco is primarily heated, with only a small amount of tobacco burned. Vector Tobacco Inc. is marketing a cigarette of fered in several packings with declining levels of nicotine, called Quest. Philip Morris and RJR Tobacco have indicated that these products may deliver fewer smoke components compared to conventional cigarettes. We have not marketed similar alternative cigarettes. Should such alternative cigarette products gain a significant share of the domestic cigarette market, we may be at a competitive disadvantage.

We may not be able to develop, produce or commercialize competitive new products and technologies required by regulatory changes or changes in consumer preferences.

Consumer health concerns and changes in regulations are likely to require us to introduce new products or make substantial changes to existing products. For example, 49 states and the District of Columbia have passed legislation requiring cigarette manufacturers to reduce the ignition propensity of their products. We believe that there may be increasing pressure from public health authorities to develop a conventional cigarette, an alternative cigarette or an alternative tobacco product that provides a demonstrable reduced risk of adverse health effects. We may not be able to develop a reduced risk product that is acceptable to consumers. In addition, the costs associated with developing any such new products and technologies could be substantial.

Increased restrictions on smoking in public places could adversely affect our sales volume, revenue and profitability.

In recent years, states and many local and municipal governments and agencies, as well as private businesses, have adopted legislation, regulations or policies which prohibit, restrict, or discourage smoking;

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smoking in public buildings and facilities, stores, restaurants and bars; and smoking on airline flights and in the workplace. Other similar laws and regulations are currently under consideration and may be enacted by state and local governments in the future. Although we have no empirical evidence of the effect of such restrictions, we believe that restrictions on smoking in public and other places may lead to a decrease in the number of people who smoke or a decrease in the number of cigarettes smoked by smokers. Increased restrictions on smoking in public and other places may have caused a decrease, and may continue to cause a decrease in the volume of cigarettes that would otherwise be sold by us absent such restrictions, which may have a material adverse effect on our sales volume, revenue and profits.

The availability of counterfeit cigarettes could adversely affect our sales volume, revenue and profitability.

Sales of counterfeit cigarettes in the United States, including counterfeits of our Newport brand, could adversely impact sales by the manufacturers of the brands that are counterfeited and potentially damage the value and reputation of those brands. Additionally, smokers who mistake counterfeit cigarettes for our cigarettes may attribute quality and taste deficiencies in the counterfeit product to our brands and discontinue purchasing our brands. Although we do not believe that sales of counterfeit Newport cigarettes have had a material adverse effect on our sales volume, revenue and profits to date, the availability of counterfeit Newport cigarettes together with substantial increases in excise taxes and other potential price increases could result in increased demand for counterfeit product that could have a material adverse effect on our sales volume, revenue and profits in the future.

We rely on a single manufacturing facility for the production of our cigarettes.

We produce all of our cigarettes at our Greensboro, North Carolina manufacturing facility. If our manufacturing plant is damaged, destroyed or incapacitated or we are otherwise unable to operate our manufacturing facility, we may be unable to produce cigarettes and may be unable to meet customer demand which could have a material adverse effect on our sales volume, revenue and profits.

We rely on a small number of suppliers for certain of our domestic leaf tobacco and reconstituted tobacco.

We purchase approximately 80% of our domestic leaf tobacco through one supplier, Alliance One International, Inc. If Alliance One becomes unwilling or unable to supply leaf tobacco to us, we believe that leaf tobacco may not be available at prices comparable to those we pay to Alliance One, which could have a material adverse effect on our future profits. In addition, we purchase all of our reconstituted tobacco from one supplier, which is an affiliate of RAI, one of our major competitors. Reconstituted tobacco is a form of tobacco material manufactured as a paper-like sheet from small pieces of tobacco that are too small to incorporate into the cigarette directly and may include some tobacco stems, and which is used as a component of cigarette blends. If RAI becomes unwilling or unable to supply us and we are unable to find an alternative supplier on a timely basis, our operations could be dis rupted resulting in lower production levels and reduced sales, which could have a material adverse effect on our sales volume, revenue and profits in the future.

We may not be able to adequately protect our intellectual property, which could harm the value of our brands and have a material adverse effect on our business.

Our intellectual property is material to the conduct of our business. Our ability to maintain and further build brand recognition is dependent on the continued and exclusive use of our trademarks, service marks, trade dress, trade secrets and other proprietary intellectual property, including our name and logo and the unique features of our tobacco products. If our efforts to protect our intellectual property are ineffective, thereby permitting a third-party to misappropriate or infringe on our intellectual property, the value of our brands may be harmed, which could have a material adverse effect on our business and might prevent our brands from growing or maintaining market share.

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Provisions in our certificate of incorporation and by-laws, and of Delaware law, may prevent or delay an acquisition of us, which could decrease the trading price of our Common Stock.

Our certificate of incorporation and by-laws contain provisions that are intended to deter coercive takeover practices and inadequate takeover bids and to encourage prospective acquirers to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include:

•  a board of directors that is divided into three classes with staggered terms;

•  elimination of the right of our shareholders to act by written consent;

•  rules regarding how our shareholders may present proposals or nominate directors for election at shareholder meetings;

•  the right of our Board of Directors to issue preferred stock without shareholder approval; and

•  limitations on the right of shareholders to remove directors.

Delaware law also imposes some restrictions on mergers and other business combinations between us and any holder of 15% or more of our outstanding Common Stock.

We believe these provisions protect our shareholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our board with time to assess any acquisition proposal. These provisions are not intended to prevent such takeovers. However, these provisions apply even if the offer may be considered beneficial by some shareholders and could delay or prevent an acquisition that our Board of Directors determines is not in our best interests and those of our shareholders.

The Separation Agreement between us and Loews contains provisions that may prevent or discourage other companies from acquiring us.

The tax-free nature of the Separation may be affected by certain transactions undertaken by us. In particular, under Section 355(e) of the Internal Revenue Code, the Separation would become taxable to Loews if it was determined that 50% or more of the shares of our Common Stock were acquired, directly or indirectly, as part of a plan or series of related transactions that included the Separation. If, as a result of acquisitions of our Common Stock subsequent to the Separation, the Separation becomes taxable pursuant to Section 355(e), Loews would recognize a substantial gain for tax purposes as the Separation would be treated as a sale of Lorillard for federal income tax purposes.

The Separation Agreement imposes restrictions on our ability to engage in certain significant corporate transactions, for a period of two years, that could cause the Separation to become taxable to Loews. We, however, may undertake any such action if we first obtain a supplemental ruling from the IRS or an unqualified tax opinion of a nationally recognized law firm, in either case in form and substance reasonably acceptable to Loews, to the effect that the proposed transaction would not adversely affect the tax-free nature of the Separation. Moreover, the Separation Agreement requires us (and any successor entity) to indemnify Loews for any losses resulting from the failure of the Separation to qualify as a tax free transaction (except if the failure to qualify is solely due to Loews’s fault). This indemnification obligation applies regardless of whether the action is restricted as described above, or whether we or a potential acquirer obtains a supplemental ruling or an opinion of counsel. These restrictions and potential indemnification obligations may prevent or discourage other companies from acquiring us.

We are required to indemnify Loews against losses and other expenses incurred at any time (including with respect to smoking and health claims and litigation) with respect to our assets, properties and businesses.

In the Separation Agreement, we have agreed to indemnify Loews and its officers, directors, employees and agents against costs and expenses (including, but not limited to, litigation matters and other claims) based on, arising out of or resulting from, among other things, the ownership or the operation of us and our assets

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and properties, and the operation or conduct of us and our businesses at any time prior to or following the Separation (including with respect to smoking and health claims and litigation). If Loews incurs legal or other fees or costs and expenses resulting from the operation of our businesses or otherwise with respect to us, we are required to reimburse Loews for such losses and any legal or other fees related thereto, which could be substantial. These indemnification obligations may discourage third parties from trying to acquire us because our indemnification obligations are binding on our successors and we are prohibited by the Separation Agreement from merging, consolidating or transferring all or a significant portion of our properties or assets unless the resulting entity, transferee or successor agrees to be bound by these indemnification obligations. In addition, we could face substantial charges for indemnification payments to Loews, which could have a material adverse effect on our cash flows, financial condition and results of operations.

We do not expect that the Separation will alter our legal exposure with respect to tobacco-related claims.

Item 1B.   UNRESOLVED STAFF COMMENTS

None.

Item 2.   PROPERTIES

Our manufacturing facility is located on approximately 80 acres in Greensboro, North Carolina. This 854,300 square-foot plant contains modern high-speed cigarette manufacturing machinery. The Greensboro facility also includes a warehouse with shipping and receiving areas totaling 187,300 square feet. In addition, we own tobacco receiving and storage facilities totaling approximately 1,400,000 square feet in Danville, Virginia. Our executive offices are located in a 130,000 square-foot, four-story office building in Greensboro. Our 93,800 square-foot research facility is also located in Greensboro.

Our principal properties are owned in fee and generally we own all of the machinery we use. We believe that our properties and machinery are in generally good condition. We lease sales offices in major cities throughout the United States, a cold-storage facility in Greensboro and warehousing space in 19 public distribution warehouses located throughout the United States.

Item 3.   LEGAL PROCEEDINGS

Information regarding legal proceedings is set forth in Note 18 “Legal Contingencies” to our consolidated financial statements included in Part II, Item 8 of this report. The disclosure set forth in Note 18, “Legal Contingencies,” is incorporated herein by reference.

Item 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

Executive Officers of the Registrant

Name	Age		Position(s)
Martin L. Orlowsky		68	Chairman, President and Chief Executive Officer
David H. Taylor		54	Executive Vice President, Finance and Planning and Chief Financial Officer
Ronald S. Milstein		53	Senior Vice President, Legal and External Affairs, General Counsel and Secretary
Charles E. Hennighausen		55	Executive Vice President, Production Operations
Randy B. Spell		58	Executive Vice President, Marketing and Sales

Martin L. Orlowsky is a Director and the Chairman, President and Chief Executive Officer of Lorillard. He has served as President and Chief Executive Officer of Lorillard since January of 1999 and added the Chairman’s position in January 2001. Previously, he served as President and Chief Operating Officer and prior to this position he was Executive Vice President, Marketing & Sales. He has been with Lorillard since 1990.

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David H. Taylor is a Director and the Executive Vice President, Finance and Planning and Chief Financial Officer of Lorillard. Mr. Taylor joined Lorillard and was elected to its Board of Directors in January 2008. Prior to joining Lorillard, Mr. Taylor was a Senior Managing Director with FTI Palladium Partners, a firm specializing in providing interim management services. In that capacity, he served as Interim Chief Financial Officer of Eddie Bauer Holdings, Inc. from January 2006 to November 2007. Prior to joining FTI Palladium Partners, from 2002 to 2005, Mr. Taylor served as Executive Vice President and Chief Financial Officer of Guilford Mills, Inc.

Ronald S. Milstein is the Senior Vice President, Legal and External Affairs, General Counsel and Secretary of Lorillard and has served in the same executive positions with Lorillard since 2005. Previously, Mr. Milstein served as Vice President, General Counsel, and Secretary for seven years. Mr. Milstein has been with Lorillard since 1996.

Charles E. Hennighausen is the Executive Vice President, Production Operations of Lorillard. Mr. Hennighausen has served in the same position since he joined Lorillard in 2002. Prior to joining Lorillard, Mr. Hennighausen served as Senior Vice President, Operations and Product Supply at ConAgra Frozen & Prepared Foods for three years. He also served in a number of operations management positions with the Campbell Soup Company.

Randy B. Spell is the Executive Vice President, Marketing and Sales of Lorillard and has served in the same position with Lorillard since 1999. Previously, Mr. Spell served as Senior Vice President, Sales for four years and prior to that, as Vice President, Sales for one year. Mr. Spell has been with Lorillard since 1977.

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PART II

Item 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES.

Our Common Stock began trading “regular way” on the NYSE under the symbol “LO” on June 10, 2008. There were 73 shareholders of record as of February 19, 2010. This figure excludes any estimate of the indeterminate number of beneficial holders whose shares may be held of record by brokerage firms and clearing agencies. The following table presents the high and low sales prices of our Common Stock on the NYSE as well as cash dividends declared per share during the fiscal quarters indicated:

					Cash
					Dividends
	Price per Share				Declared
Common Stock Market Price	High		Low		per Share
2009
Fourth Quarter	$	81.76	$	73.61	$	1.00
Third Quarter		78.57		66.46		1.00
Second Quarter		69.94		58.73		0.92
First Quarter		67.00		52.51		0.92
2008
Fourth Quarter	$	71.91	$	53.30	$	0.92
Third Quarter		77.39		62.70		0.92
Second Quarter (commencing June 10, 2008)		79.00		66.70		—

Dividend Policy

The declaration and payment of future dividends to holders of our Common Stock will be at the discretion of our Board of Directors and depend upon many factors, including our financial condition, earnings, capital requirements of our business, legal requirements, regulatory constraints, industry practice, and other factors that the Board of Directors may deem relevant. As a holding company with no material liquid assets other than the capital stock of our subsidiaries, our ability to pay dividends is dependent on the receipt of dividends from our operating subsidiaries.

In 2009, we paid cash dividends of $155 million, $155 million, $163 million and $158 million on March 12, 2009, June 12, 2009, September 11, 2009 and December 11, 2009, respectively. In 2008, we paid cash dividends to Loews of $291 million and $200 million on January 24, 2008 and April 28, 2008, respectively, prior to the Separation. Following the Separation, we paid cash dividends of $158 million and $155 million to shareholders on September 12, 2008 and December 12, 2008, respectively. We expect to continue to pay cash dividends on our Common Stock.

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Performance Graph

The following graph compares the cumulative total shareholder return on our Common Stock from June 10, 2008, the date our Common Stock commenced trading on a “when issued” basis, to December 31, 2009 with the comparable cumulative return of (i) the S&P 500 Index and (ii) the S&P Tobacco Index. The graph assumes $100 was invested on June 10, 2008 in our Common Stock and in each of the indices and assumes that all cash dividends are reinvested. The table below the graph shows the dollar value of those investments as of the dates in the graph. The comparisons in the graph are required by the SEC and are not intended to forecast or be indicative of future performance of our Common Stock.

	6/10/08		6/30/08		9/30/08		12/31/08		3/31/09		6/30/09		9/30/09		12/31/09
Lorillard Common Stock Value	$	100.00	$	90.25	$	94.01	$	75.59	$	84.12	$	93.59	$	104.03	$	113.75
S&P 500 Index Value		100.00		94.23		85.86		66.49		58.73		67.67		77.82		82.09
S&P Tobacco Index Value		100.00		97.77		96.78		83.79		75.09		86.48		95.97		99.21

The performance graph and related information above shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In the fourth quarter of 2009, we repurchased the following number of shares of our Common Stock:

							Approximate
					Total Number of		Dollar Value of
					Shares Purchased		Shares that
			Average		as Part of		May yet Be
	Total Number		Price		Publicly		Purchased
	of Shares		Paid per		Announced Plans		Under the Plans
(In millions, except for per share amounts)	Purchased		Share		or Programs		or Programs
October 1, 2009 — October 31, 2009		1.1	$	77.24		1.1	$	414
November 1, 2009 — November 30, 2009		2.0	$	78.96		2.0	$	259
December 1, 2009 — December 31, 2009		2.1	$	78.93		2.1	$	90
Total		5.2	$	78.58		5.2

The shares repurchased were acquired under the share repurchase program authorized by the Board of Directors on July 27, 2009 for a maximum of $750 million. All repurchases were made in open market transactions. We record the repurchase of shares of Common Stock at cost based on the transaction date of the repurchase. As of December 31, 2009, the maximum dollar value of shares that could yet be purchased under the July 27, 2009 repurchase program was $90 million. As of January 19, 2010, the Company completed this repurchase program after repurchasing an additional 1.1 million shares in January 2010 at an average price of $78.36 per share. Cumulatively, we repurchased 9.8 million shares at an average price of $76.80 under this program.

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Item 6.   SELECTED FINANCIAL DATA

The following table includes our selected historical consolidated financial information as of the dates and for the periods indicated. The selected historical consolidated financial information as of and for the years ended December 31, 2005 through 2009 have been derived from our audited financial statements. You should read the following selected historical consolidated financial data in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing herein.

	Years Ended December 31,
	2009			2008			2007		2006		2005
	(In millions, except per share data)
Results of Operations:
Net sales(1)	$	5,233		$	4,204		$	3,969	$	3,755	$	3,568
Cost of sales		3,327			2,434			2,313		2,166		2,119
Gross profit		1,906			1,770			1,656		1,589		1,449
Selling, general and administrative(2)		365			355			382		348		365
Operating income		1,541			1,415			1,274		1,241		1,084
Investment income(3)		5			20			109		103		68
Interest expense		(27	)		(1	)		—		—		(1	)
Income before income taxes		1,519			1,434			1,383		1,344		1,151
Income taxes		571			547			485		518		445
Net income	$	948		$	887		$	898	$	826	$	706
Diluted weighted average number of shares outstanding		164.62			172.21			173.92		173.92		173.92
Diluted earnings per share	$	5.76		$	5.15		$	5.16	$	4.75	$	4.06
Dividends per share	$	3.84		$	4.67		$	6.72	$	4.50	$	3.71
Ratio of earnings to fixed charges		57.3			N/M			N/M		N/M		N/M

(1)	Includes excise taxes of $1,547, $712, $688, $699 and $676 million, respectively.
(2)	2008 included expenses of $18 million related to the Separation of Lorillard from Loews, 2007 included a $66 million charge related to litigation and 2006 included a $20 million restructuring charge.
(3)	Includes income (loss) from limited partnership investments of $0, ($1), $34, $26, $16 million, respectively.
	N/M - Not Meaningful

	December 31,
	2009		2008		2007		2006		2005
	(In millions)
Financial Position:
Current assets	$	2,181	$	1,962	$	2,103	$	2,115	$	2,069
Total assets		2,575		2,321		2,600		2,759		2,796
Current liabilities		1,337		1,273		1,188		1,151		1,240
Long-term debt		722		—		—		—		—
Total liabilities		2,488		1,690		1,587		1,464		1,456
Shareholders’ equity		87		631		1,013		1,295		1,340

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Item 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our consolidated financial statements, the notes related to those financial statements and “Item 6. Selected Financial Data” appearing herein. In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly from those projected in such forward-looking statements due to a number of factors, including those set forth in the “Forward-Looking Statements,” “Item 1A. Risk Factors,” “Business Environment” and elsewhere in this Annual Report on Form 10-K. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and the related notes. Actual results could differ from those estimates. The financial statements include our subsidiaries after the elimination of intercompany accounts and transactions.

The consolidated financial statements and accompanying notes have been prepared in accordance with GAAP, applied on a consistent basis. We continually evaluate the accounting policies and estimates used to prepare the consolidated financial statements. Significant estimates in the consolidated financial statements and related notes include: (1) accruals for tobacco settlement costs, legal expenses and litigation costs, sales incentive programs, income taxes and share based compensation, (2) the determination of discount and other rate assumptions for defined benefit pension and other postretirement benefit expenses and (3) the valuation of pension assets. In general, our estimates are based on historical experience, evaluation of current trends, information from third party professionals and various other assumptions that we believe are reasonable under the known facts and circumstances at the time.

We consider the accounting policies discussed below to be critical to an understanding of our consolidated financial statements as their application places the most significant demands on management’s judgment. Due to the inherent uncertainties involved with this type of judgment, actual results could differ significantly from estimates and may have a material adverse impact on our results of operations and equity.

Revenue Recognition

Revenue from product sales, net of sales incentives, is recognized at the time ownership of the goods transfers to customers and collectability is reasonably assured. Federal excise taxes are recognized on a gross basis and are included in both sales and cost of sales. Sales incentives include retail price discounts, coupons and retail display allowances and are recorded as a reduction of revenue based on amounts estimated as due to customers and consumers at the end of a period based primarily on use and redemption rates.

Tobacco Settlement Costs

In 1998, we and the other Original Participating Manufacturers entered into the MSA with 46 states and various other governments and jurisdictions to settle asserted and unasserted health care cost recovery and other claims. We and certain other U.S. tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (which are referred to as the Initial State Settlements, and together with the MSA, are referred to as the State Settlement Agreements). Our portion of ongoing adjusted settlement payments and legal fees is based on our relative share of the settling manufacturers’ domestic cigarette shipments, with respect to the MSA, in the year preceding that in which the payment is due, and, with respect to the Initial State Settlements, in the year in which payment is due. We record our portion of ongoing adjusted settlement payments as part of cost of sales as product is shipped. Please read “State Settlement Agreements” beginning on page 37 for additional information.

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Tobacco and Other Litigation

We and other cigarette manufacturers continue to be confronted with substantial litigation. Plaintiffs in most of the cases seek unspecified amounts of compensatory damages and punitive damages, although some seek damages ranging into the billions of dollars. Plaintiffs in some of the cases seek treble damages, statutory damages, return of profits, equitable and injunctive relief, and medical monitoring, among other damages.

We believe that we have valid defenses to the cases pending against us. We also believe we have valid bases for appeal of the adverse verdicts against us. While we intend to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties, and it is possible that some of these actions could be decided unfavorably. We may enter into discussions in an attempt to settle particular cases if we believe it is appropriate to do so.

We record provisions in the consolidated financial statements for pending litigation when we determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Except for the impact of the State Settlement Agreements and the provision relating to the Scott case, as described in Note 18, “Legal Contingencies,” to our consolidated financial statements beginning on page 75, our management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of material pending litigation and, therefore, no material provision has been made in our consolidated financial statements for any unfavorable outcome. It is possible that our results of operations, cash flows and financial position could be materially adversely affected by an unfavorable outcome of certain pending or future litigation.

Defense costs associated with product liability claims are a significant component of our selling, general and administrative expenses and are accrued as incurred. Defense costs may increase in future periods, in part, as a result of the Engle Progeny Cases as described in Note 18, “Legal Contingencies,” to our consolidated financial statements. Numerous factors affect product liability defense costs in any given period. The principal factors are as follows:

•  the number and types of cases filed and appealed;

•  the number of cases tried and appealed;

•  the development of the law;

•  the application of new or different theories of liability by plaintiffs and their counsel; and

•  litigation strategy and tactics.

Please read Note 18, “Legal Contingencies,” to our consolidated financial statements for detailed information regarding tobacco litigation affecting us.

Pension and Postretirement Benefit Obligations

We are required to make a significant number of assumptions in order to estimate the liabilities and costs related to our pension and postretirement benefit obligations to employees under our benefit plans. The assumptions that have the most impact on pension costs are the discount rate, the expected return on plan assets and the expected rate of compensation increases. These assumptions are evaluated relative to current market factors such as inflation, interest rates and fiscal and monetary policies. Changes in these assumptions can have a material impact on pension obligations and pension expense.

In determining the discount rate assumption, we utilized current market information and liability information, including a discounted cash flow analysis of our pension and postretirement obligations. In particular, the basis for our discount rate selection was the yield on indices of highly rated fixed income debt securities with durations comparable to that of our plan liabilities. The discount rate was determined by projecting the plan’s expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that resulted in the same projected benefit obligation.

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The salary growth assumption reflects our long-term actual experience and future and near-term outlook. Long-term return on plan assets is determined based on historical portfolio results, asset allocations and management’s expectation of the future economic environment. Our major assumptions are set forth in Note 12 to our consolidated financial statements beginning on page 57.

For 2009, hypothetical changes in the assumptions we used for the pension plans would have had the following impact on our pension expense:

•  A decrease of 25 basis points in the long-term rate of return would have increased our pension expense by approximately $2 million;

•  A decrease of 25 basis points in the discount rate would have increased our pension expense by approximately $2 million; and

•  An increase of 25 basis points in the future salary growth rate would have increased our net pension expense by approximately $1 million.

Income Taxes

We account for income taxes in accordance with Accounting Standard Codification Topic 740- Income Taxes. Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Judgment is required in determining income tax provisions and in evaluating tax positions. The uncertain tax provisions of ASC 740 prescribe a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Additionally, ASC 740 provides guidance on the measurement, derecognition, classification and disclosure of tax positions, along with accounting for the related interest and penalties. Certain provisions of ASC 740 were effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening earnings retained in the business. We recognized a liability for unrecognized tax benefits of $25 million that was accounted for as a reduction to the January 1, 2007 balance of earnings retained in the business.

Inventories

Inventories are valued at the lower of cost, determined on a last-in, first-out (“LIFO”) basis, or market. The inventory of leaf tobacco is classified as a current asset in accordance with generally recognized trade practice although, due to the duration of the aging processes, a significant portion of the tobacco on hand will not be sold or used within one year.

Recent Accounting Pronouncements

Please read “Recently adopted accounting pronouncements” in Note 1 to our consolidated financial statements beginning on page 48.

Business Environment

Participants in the U.S. tobacco industry, including us, face a number of issues that have adversely affected their results of operations and financial condition in the past and will continue to do so, including:

•  A substantial volume of litigation seeking compensatory and punitive damages ranging into the billions of dollars, as well as equitable and injunctive relief, arising out of allegations of cancer and other health effects resulting from the use of cigarettes, addiction to smoking or exposure to environmental tobacco smoke, including claims for economic damages relating to alleged misrepresentation concerning the use of descriptors such as “lights,” as well as other alleged damages.

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•  Substantial annual payments continuing in perpetuity, and significant restrictions on marketing and advertising have been agreed to and are required under the terms of certain settlement agreements, in cluding the Master Settlement Agreement among major tobacco manufacturers and 46 states and various other governments and jurisdictions (the “MSA”) that we entered into in 1998 along with Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the other “Original Participating Manufacturers”) to settle asserted and unasserted health care cost recovery and other claims. We and certain other U.S. tobacco product manufacturers previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (the “Initial State Settlements,” and together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements impose a stream of future payment obligations on us and the other major U.S. cigarette manufacturers and place significant restrictions on their ability to market and sell cigarettes.

•  The domestic cigarette market, in which we currently conduct our only significant business, continues to contract. As a result of price increases, restrictions on advertising, promotions and smoking in public and private facilities, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of smoking, increased pressure from anti-tobacco groups and other factors, domestic cigarette shipments have decreased at a compound rate of approximately 3.0% from 1999 through 2009.

•  Increases in cigarette prices since 1998 have led to an increase in the volume of discount and, specifically, deep discount cigarettes. Cigarette price increases have been driven by increases in federal, state and local excise taxes and by manufacturer price increases. Price increases have led, and continue to lead, to high levels of discounting and other promotional activities for premium brands. Deep discount brands have grown from an estimated share in 1998 of less than 2.0% to an estimated 14.3% for the twelve months ended December 31, 2009, and continue to be a significant competitive factor in the domestic market. We do not have sufficient empirical data to determine whether the increased price of cigarettes has deterred consumers from starting to smoke or encouraged them to quit smoking, but it is likely that increased prices may have had an adverse effect on consumption and may continue to do so.

•  The tobacco industry is subject to substantial and increasing regulation. In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking Prevention and Tobacco Control Act granting the FDA authority to regulate tobacco products. Pursuant to the terms of the new law, the FDA could promulgate regulations that could, among other things, result in a ban on or restrict the use of menthol in cigarettes. The law will impose new restrictions on the manner in which cigarettes can be advertised and marketed, require larger and more severe health warnings on cigarette packaging, permit restriction of the level of tar and nicotine contained in or yielded by cigarettes and may alter the way cigarette products are developed and manufactured. We believe that the law will provide our larger competitors with a competitive advantage. In August 2009, we, along with RJR Tobacco, other tobacco manufacturers and a tobacco retailer, filed a lawsuit in the U.S. District Court for the Western District of Kentucky against the FDA challenging the constitutionality of certain restrictions on speech included in the new law. These restrictions on speech include, among others, bans on the use of color and graphics in certain tobacco product advertising, limits on the right to make truthful statements regarding modified risk tobacco products, a prohibition on making certain statements about the FDA’s regulation of tobacco products, restrictions on the placement of outdoor advertising, a ban on certain promotions offering gifts in consideration for the purchase of tobacco products, a ban on brand name sponsorship of events and the sale of brand name merchandise, and a ban on the distribution of product samples. The suit also challenges the law’s requirement for extensive graphic warning labels on all packaging and advertising. The complaint seeks a judgment (i) declaring that such provisions of the new law violate the First and/or Fifth Amendments of the U.S. Constitution and (ii) enjoining the FDA from enforcing the unconstitutional provisions of the law. On January 4, 2010, the district court issued an order (a) striking down the provisions of the new law that banned the use of color and graphics in certain tobacco product advertising and prohibited tobacco manufacturers from making certain statements about the FDA’s regulation of tobacco products and (b) upholding the remaining challenged advertising provisions. The time for the plaintiffs or the FDA to file an appeal has not yet expired, and

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we have yet to decide whether to appeal the district court’s decision. While we believe there is established legal precedent supporting our claims, if there is an appeal of the district court’s decision (by either the plaintiffs or the FDA), we cannot predict the outcome of any such appeal. Nor can we make any assurances that any such appeal will be successful.

•  The federal government and many state and local governments and agencies, as well as private businesses, have adopted legislation, regulations or policies which prohibit, restrict or discourage smoking, including legislation, regulations or policies prohibiting or restricting smoking in public buildings and facilities, stores, restaurants and bars, on airline flights and in the workplace. Other similar laws and regulations are currently under consideration and may be enacted by federal, state and local governments in the future.

•  Substantial federal, state and local excise taxes are reflected in the retail price of cigarettes. As of April 1, 2009, the federal excise tax was $1.0066 per pack and for the twelve months ended December 31, 2009 combined state and local excise taxes ranged from $0.07 to $4.25 per pack. For the twelve months ended December 31, 2009, excise tax increases ranging from $0.10 to $1.00 per pack were implemented in fourteen states and the District of Columbia. Congress recently enacted and the President signed into law an increase in the federal excise tax on cigarettes by $0.6166 per pack to $1.0066 per pack, effective April 1, 2009, to finance health insurance for children. It is likely that increases in excise and similar taxes have had an adverse impact on sales of cigarettes and that the most recent increase and future increases, the extent of which cannot be predicted, could result in further volume declines for the cigarette industry, including us, and an increased sales shift toward deep discount cigarettes rather than premium brands. In addition, we and other cigarette manufacturers and importers are required to pay an assessment under a federal law designed to fund payments to tobacco quota holders and growers.

The domestic market for cigarettes is highly competitive. Competition is primarily based on a brand’s price, including the level of discounting and other promotional activities, positioning, consumer loyalty, retail display, quality and taste. Our principal competitors are the two other major U.S. cigarette manufacturers, Philip Morris and RJR Tobacco. We also compete with numerous other smaller manufacturers and importers of cigarettes, including deep discount cigarette manufacturers. We believe our ability to compete even more effectively has been restrained in some marketing areas as a result of retail merchandising contracts offered by Philip Morris and RJR Tobacco which limit the retail shelf space available to our brands. As a result, in some retail locations we are limited in competitively supporting our promotional programs, which may constrain sales.

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The following table presents selected industry and market share data for Lorillard for years ended December 31, 2009, 2008 and 2007:

Selected Industry and Market Share Data(1)

	Year Ended December 31,
(Volume in billions)	2009			2008			2007
Lorillard total domestic unit volume		35.6			37.0			35.8
Industry total domestic unit volume		315.7			345.3			357.2
Lorillard’s share of the domestic market		11.3	%		10.7	%		10.0	%
Lorillard’s premium volume as a percentage of its domestic volume		88.9			92.3			94.3
Lorillard’s share of the premium market		14.2			13.6			13.0
Newport’s share of the domestic market		9.8			9.7			9.2
Newport’s share of the premium market		13.9			13.3			12.6
Total menthol segment market share for the industry		28.8			28.4			27.9
Total discount segment market share for the industry		29.5			27.3			27.2
Newport’s share of the menthol market		34.1			34.0			32.9
Newport’s share of Lorillard’s total volume(2)		87.5			90.3			91.8
Newport’s share of Lorillard’s net sales(2)		91.5			93.7			93.9

(1)

Source: Management Science Associates, Inc. (“MSAI”), an independent third-party database management organization that collects wholesale shipment data from various cigarette manufacturers. MSAI divides the cigarette market into two price segments, the premium price segment and the discount or reduced price segment. MSAI’s information relating to unit sales volume and market share of certain of the smaller, primarily deep discount, cigarette manufacturers is based on estimates derived by MSAI. Management believes that volume and market share information for deep discount manufacturers may be understated and, correspondingly, market share information for the larger manufacturers, including Lorillard, may be overstated by MSAI. Lorillard has made certain adjustments to the data received from MSAI to reflect management’s judgment as to which brands are included in the menthol segment.

(2)

Source: Lorillard shipment reports.

Income Statement Captions

Net sales includes revenue from product sales, net of sales incentives, and is recognized at the time that ownership of the goods transfers to customers and collectability is reasonably assured. Federal excise taxes are recognized on a gross basis, and are included in both net sales and cost of sales. Sales incentives include retail price discounts, coupons and retail display allowances, and are recorded as a reduction of revenue based on amounts estimated as due to customers and consumers at the end of a period based primarily on use and redemption rates.

Cost of sales includes federal excise taxes, leaf tobacco cost, wrapping and casing material, manufacturing labor and production salaries, wages and overhead, depreciation related to manufacturing plant and equipment, research and development costs, distribution, other manufacturing costs, State Settlement Agreement expenses, the federal assessment for tobacco growers and promotional product expenses. Promotional product expenses include the cost, including all applicable excise taxes, of the free portion of “buy some get some free” promotions.

Selling, general and administrative expenses includes sales force expenses, legal and other costs of litigating and administering product liability claims, administrative expenses and advertising and marketing costs. Advertising and marketing costs include items such as direct mail, advertising, agency fees and point of sale materials.

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Investment income includes interest and dividend income, realized gains and losses on sale of investments and equity in the earnings of limited partnership investments.

Interest expense includes interest expense related to debt and income taxes.

Results of Operations

Year ended December 31, 2009 Compared to the Year ended December 31, 2008

	2009			2008
	(In millions)
Net sales (including excise taxes of $1,547 and $712)	$	5,233		$	4,204
Cost of sales		3,327			2,434
Gross profit		1,906			1,770
Selling, general and administrative		365			355
Operating income		1,541			1,415
Investment income		5			20
Interest expense		(27	)		(1	)
Income before income taxes		1,519			1,434
Income taxes		571			547
Net income	$	948		$	887

Net sales.  Net sales increased by $1.029 billion, or 24.5%, from $4.204 billion in 2008 to $5.233 billion in 2009. Net sales increased $835 million due to the increase in federal excise taxes effective April 1, 2009 and $533 million due to higher average unit prices reflecting price increases in May and December 2008 and February and March 2009, partially offset by $251 million due to lower unit sales volume and $88 million of higher sales incentives. Federal excise taxes are included in net sales and increased $30.83 per thousand units, or $0.62 per pack of 20 units, to $50.33 per thousand cigarettes, or $1.01 per pack of 20 cigarettes, effective April 1, 2009.

Our total unit volume and domestic unit volume decreased 3.9% during 2009 compared to 2008. Unit volume figures in this section are provided on a gross basis. Our domestic wholesale shipments in 2009 reflect the negative impact of the federal excise tax increase implemented on April 1, 2009. Total Newport unit volume and domestic Newport unit volume decreased 6.9% during 2009 compared to 2008. Industry-wide domestic unit volume decreased an estimated 8.6% during 2009 compared to 2008. Industry shipments of premium brands comprised 70.5% of industry-wide domestic unit volume during 2009 compared to 72.7% during 2008.

Cost of sales.  Cost of sales increased by $893 million, or 36.7%, from $2.434 billion in 2008 to $3.327 billion in 2009. The increase in cost of sales is primarily due to the increase in federal excise taxes ($835 million), higher raw material costs, primarily tobacco and wrapping materials ($74 million), higher expenses related to the State Settlement Agreements ($11 million), the assessment of Food and Drug Administration fees ($9 million) and higher pension expense ($15 million), partially offset by lower unit sales volume ($34 million) and the absence of free product promotions ($17 million). We recorded pre-tax charges for our obligations under the State Settlement Agreements of $1.128 billion and $1.117 billion for the years ended December 31, 2009 and 2008, respectively, an increase of $11 million. The $11 million increase is due to the impact of the inflation adjustment ($30 million) and other adjustments ($24 million), partially offset by lower unit sales ($43 million).

Selling, general and administrative.  Selling, general and administrative expenses increased $10 million, or 2.8%, from $355 million in 2008 to $365 million in 2009. The increase was primarily due to an increase in legal expenses of $18 million due to the continuing defense costs associated with the Engle Progeny cases and higher pension expense of $8 million, partially offset by a decrease in marketing costs of $6 million and the absence of an $18 million charge in 2008 related to the Separation.

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Investment income.  Investment income decreased $15 million in 2009, compared to 2008 and the decrease primarily reflects lower interest rates on investments.

Interest expense.  Interest expense increased $26 million in 2009, compared to 2008, and the increase reflects interest on the Senior Notes issued in the second quarter of 2009, net of the effect of interest rate swap agreements.

Income taxes.  Income taxes increased $24 million or 4.4% from $547 million in 2008 to $571 million in 2009. The change reflects the increase in income before income taxes of $85 million in 2009 or 5.9% partially offset by a decrease in the effective tax rate from 38.2% in 2008 to 37.6% in 2009. This decrease in the effective tax rate impacts income tax expense by $9 million, and is primarily due to the impact, in 2008, of the Separation on the availability of the manufacturer’s deduction for the pre-Separation period and the non-deductibility of certain Separation expenses, and, in 2009, the favorable resolution of certain state income tax matters, partially offset by an increase in state tax rates.

Year ended December 31, 2008 Compared to the Year ended December 31, 2007

	2008			2007
	(In millions)
Net sales (including excise taxes of $712 and $688)	$	4,204		$	3,969
Cost of sales		2,434			2,313
Gross profit		1,770			1,656
Selling, general and administrative		355			382
Operating income		1,415			1,274
Investment income		20			109
Interest expense		(1	)		—
Income before income taxes		1434			1,383
Income taxes		547			485
Net income	$	887		$	898

Net sales.  Net sales increased by $235 million, or 5.9%, from $3.969 billion in 2007 to $4.204 billion in 2008. Net sales increased $168 million due to an increase in unit sales volume and $109 million due to higher average unit prices reflecting price increases in September 2007, May 2008 and December 2008, partially offset by higher sales incentives of $42 million. Federal excise taxes are included in net sales and had remained constant at $19.50 per thousand units, or $0.39 per pack of 20 cigarettes, since January 1, 2002.

Our total unit volume increased 3.0% during 2008 compared to 2007 and our domestic unit volume increased 3.2% during 2008 compared to 2007. Unit volume amounts in this section are provided on a gross basis. Total Newport unit volume increased 1.4% in 2008 compared to 2007 and domestic Newport volume increased 1.5% in 2008 compared to 2007. Industry-wide domestic unit volume decreased an estimated 3.3% during 2008 compared to 2007. Industry shipments of premium brands comprised 72.7% of industry-wide domestic unit volume during 2008 compared to 72.8% during 2007.

Cost of sales.  Cost of sales increased by $121 million, or 5.2%, from $2.313 billion in 2007 to $2.434 billion in 2008. The increase in cost of sales is primarily attributed to higher expenses related to the State Settlement Agreements. We recorded pretax charges for our obligations under the State Settlement Agreements of $1.117 billion and $1.048 billion for the years ended December 31, 2008 and 2007, respectively, an increase of $69 million. The $69 million pretax increase is due to the impact of the inflation adjustment ($30 million), higher gross unit sales ($32 million) and other adjustments ($7 million). Higher unit sales resulted in higher Federal Excise taxes ($24 million), higher manufacturing costs ($24 million) and higher costs under the Federal Assessment for Tobacco Growers ($6 million). Additionally, higher material prices ($24 million) were partially offset by lower promotional product expenses ($20 million).

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Selling, general and administrative.  Selling, general and administrative expenses decreased $27 million, or 7.1%, from $382 million in 2007 to $355 million in 2008. The decrease was primarily due to a $66 million litigation charge in 2007, partially offset by an increase in legal expenses of $25 million in 2008 and $18 million of costs related to the separation of Lorillard from Loews. The $25 million increase in legal fees is primarily due to increased legal fees related to Engle Progeny case filings and legal fees related to a claim by Lorillard Tobacco that it is entitled to reduce its MSA payments based on a loss of market share to nonparticipating manufacturers. The $18 million of costs related to the separation from Loews includes $10 million for a management bonus and $8 million for financial and legal fees associated with the transaction.

Investment income.  Investment income decreased by $89 million, or 81.7%, from $109 million in 2007 to $20 million in 2008. Investment income includes a loss of $1 million from equity in the earnings of limited partnership investments in 2008 compared to income of $34 million in 2007. Investments in limited partnerships were substantially reduced during the first quarter of 2008. The remaining decrease in investment income reflects lower interest rates and a lower average invested asset balance for 2008 compared to 2007.

Income taxes.  Income taxes increased by $62 million, or 12.8%, from $485 million in 2007 to $547 million in 2008. The change reflects the increase in income before income taxes of $51 million in 2008, or 3.7% and an increase in the effective tax rate from 35.1% in 2007 to 38.2% in 2008. This increase in the effective tax rate impacts income tax expense by $44 million and is the result of the impact of the separation from Loews on the availability to us of the manufacturer’s deduction for the pre-separation period, the non-deductibility of certain separation expenses and the favorable resolution of certain tax matters in 2007.

Liquidity and Capital Resources

Our cash and cash equivalents of $1.384 billion at December 31, 2009 were invested in prime money market funds.

Cash Flows

Cash flow from operating activities.  The principal source of liquidity for our business and operating needs is internally generated funds from our operations. We generated net cash flow from operations of $1.037 billion for 2009 compared to $980 million for 2008. The increased cash flow in 2009 primarily reflects the increase in net income. Net cash flow from operations was $980 million for 2008, compared to $882 million for 2007. The increased cash flow in 2008 reflects the payment of invoices under the MSA based on sales made in the current year but invoiced mostly in the following year and timing differences related to cash payments of estimated taxes.

Cash flow from investing activities.  The changes in cash flow from investing activities arise from our decision to reposition our invested assets from fixed maturities classified as investments available for sale to short term instruments classified as cash equivalents. Our cash flow from investing activities used cash of $51 million for the twelve months ended December 31, 2009 compared to $201 million of cash provided for 2008. The decrease in cash flow provided by investing activities in 2009 is primarily due to no investment purchases and sales. Our cash flow from investing activities provided cash of $201 million and $367 million for the twelve months ended December 31, 2008 and 2007, respectively. The decrease in cash flow provided by investing activities in 2008 is primarily due to a decrease in the level of investment purchases and sales.

Capital expenditures were $51 million, $44 million and $51 million for 2009, 2008 and 2007, respectively. The expenditures were primarily for the modernization of manufacturing equipment. Our capital expenditures for 2010 are forecast to be between $55 million and $65 million.

Cash flow from financing activities.  Our cash flow from operations has exceeded our working capital and capital expenditure requirements in each of the years ended December 31, 2009, 2008 and 2007. We paid cash dividends to Loews of $1,170 million for the year ended December 31, 2007. We paid cash dividends to Loews of $291 million and $200 million on January 24, 2008 and April 28, 2008, respectively. We paid cash dividends to shareholders of $158 million and $155 million on September 12, 2008 and December 12, 2008,

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respectively. In 2009, we paid cash dividends of $155 million, $155 million, $163 million and $158 million on March 12, 2009, June 12, 2009, September 11, 2009 and December 11, 2009, respectively.

In June 2009, Lorillard Tobacco issued $750 million of 8.125% unsecured senior notes due June 23, 2019 (the “Notes”) pursuant to an Indenture, dated June 23, 2009, and First Supplemental Indenture, dated June 23, 2009 (the “Supplemental Indenture”). Lorillard Tobacco is the principal, wholly owned operating subsidiary of the Company and the Notes are unconditionally guaranteed on a senior unsecured basis by the Company. The net proceeds from the Notes will be used for general corporate purposes that may include, among other things, the repurchase, redemption or retirement of securities including our common stock, additions to working capital and capital expenditures.

The interest rate payable on the Notes is subject to incremental increases from 0.25% to 2.00% in the event either Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) or both Moody’s and S&P downgrade the Notes below investment grade (Baa3 and BBB- for Moody’s and S&P, respectively). The Notes are not entitled to any sinking fund and are not redeemable prior to maturity. The Notes contain covenants that restrict liens and sale and leaseback transactions, subject to a limited exception. In addition, upon the occurrence of a change of control triggering event, we will be required to make an offer to repurchase the Notes at a price equal to 101% of the aggregate principal amount of the Notes, plus accrued interest. A “change of control triggering event” occurs when there is both a “change of control” (as defined in the Supplemental Indenture) and the Notes cease to be rated investment grade by both Moody’s and S&P within 60 days of the occurrence of a change of control or public announcement of the intention to effect a change of control.

In September 2009, Lorillard Tobacco entered into interest rate swap agreements, which the Company guaranteed, with a notional amount of $750 million to modify its exposure to interest rate risk by converting the interest rate payable on the Notes from a fixed rate to a floating rate based on LIBOR. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for additional information on the interest rate swap agreements.

During 2009, we repurchased approximately 12.3 million shares under our repurchase programs at a cost of $910 million. As of December 31, 2009, the maximum dollar value of shares that could yet be purchased under the July 27, 2009 $750 million repurchase program was $90 million. As of January 19, 2010, the Company completed this repurchase program after repurchasing an additional 1.1 million shares at an average price of $78.36 per share.

Purchases by the Company under these programs were made from time to time at prevailing market prices in open market purchases, privately negotiated transactions, block purchase techniques or otherwise, as determined by the Company’s management. The purchases were funded from existing cash balances, including proceeds from the issuance of the Notes. These programs do not obligate the Company to acquire any particular amount of its common stock. The timing, frequency and amount of repurchase activity will depend on a variety of factors such as levels of cash generation from operations, cash requirements for investment in the Company’s business, current stock price, market conditions and other factors.

Liquidity

We believe that cash flow from operating activities will be sufficient for the foreseeable future to enable us to meet our obligations under the State Settlement Agreements and to fund our working capital and capital expenditure requirements. We cannot predict our cash requirements related to any future settlements or judgments, including cash required to bond any appeals, if necessary, and can make no assurance that we will be able to meet all of those requirements.

The rate of return on our pension assets in 2009 was a positive 16.2%. Our pension expense was approximately $32 million in 2009 and we anticipate pension expense of approximately $17 million in 2010. We contributed $23 million to our pension plans in 2009 and anticipate a contribution of $15 million in 2010.

We believe that it would be appropriate for a company of our size and financial characteristics to have a prudent level of debt as a component of our capital structure in order to reduce our total cost of capital and

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improve total shareholder returns. Accordingly, we raised $750 million of debt financing in 2009, and we expect that we will seek to raise additional debt financing in the future, although the structure, timing and amount of such indebtedness has not yet been determined and will depend on a number of factors, including, but not limited to the prevailing credit and interest rate environment, our cash requirements, and other business, financial and tax considerations. The proceeds of any such debt financing may be used to fund stock repurchases, acquisitions, dividends or for other general corporate purposes. We presently have no commitments or agreements with or from any third party regarding any debt financing transactions and no assurance can be given that we will ultimately pursue any debt financing or, if pursued, that we will be able to obtain debt financing at the suggested levels or on attractive terms.

State Settlement Agreements

The State Settlement Agreements require us and the other Original Participating Manufacturers (Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company) to make aggregate annual payments of $10.4 billion in perpetuity, subject to adjustment for several factors described below. In addition, the Original Participating Manufacturers are required to pay plaintiffs’ attorneys’ fees, subject to an aggregate annual cap of $500 million. These payment obligations are several and not joint obligations of each of the Original Participating Manufacturers. Our obligations under the State Settlement Agreements will materially adversely affect our cash flows and operating income in future years.

Both the aggregate payment obligations of the Original Participating Manufacturers, and our payment obligations, individually, under the State Settlement Agreements are subject to adjustment for several factors which include:

•  inflation;

•  aggregate volume of Original Participating Manufacturers cigarette shipments;

•  other Original Participating Manufacturers and our market share; and

•  aggregate Original Participating Manufacturers operating income, allocated to such manufacturers that have operating income increases.

The inflation adjustment increases payments on a compounded annual basis by the greater of 3.0% or the actual total percentage change in the consumer price index for the preceding year. The inflation adjustment is measured starting with inflation for 1999. The volume adjustment increases or decreases payments based on the increase or decrease in the total number of cigarettes shipped in or to the 50 U.S. states, the District of Columbia and Puerto Rico by the Original Participating Manufacturers during the preceding year compared to the 1997 base year shipments. If volume has increased, the volume adjustment would increase the annual payment by the same percentage as the number of cigarettes shipped exceeds the 1997 base number. If volume has decreased, the volume adjustment would decrease the annual payment by 98.0% of the percentage reduction in volume. In addition, downward adjustments to the annual payments for changes in volume may, subject to specified conditions and exceptions, be reduced in the event of an increase in the Original Participating Manufacturers aggregate operating income from domestic sales of cigarettes over base year levels established in the State Settlement Agreements, adjusted for inflation. Any adjustments resulting from increases in operating income would be allocated among those Original Participating Manufacturers who have had increases.

During 2009, we paid $1.049 billion under the State Settlement Agreements, primarily based on 2008 volume. In addition, in April 2009, we deposited $69 million, in an interest-bearing escrow account in accordance with procedures established in the MSA pending resolution of a claim by us and the other Original Participating Manufacturers that they are entitled to reduce their MSA payments based on a loss of market share to non-participating manufacturers. Most of the states that are parties to the MSA are disputing the availability of the reduction and we believe that this dispute will ultimately be resolved by judicial and arbitration proceedings. Our $69 million reduction is based upon the Original Participating Manufacturers collective loss of market share in 2006. In April of 2008, 2007 and 2006, we had previously deposited $72 million, $111 million and $109 million, respectively, in the same escrow account discussed above, which

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was based on a loss of market share in 2005, 2004 and 2003 to non-participating manufacturers. In February 2009, we directed the transfer of $72 million from this account to the non-disputed account, related to the loss of market share in 2005, pursuant to an Agreement Concerning Arbitration that we and other Participating Manufacturers entered into with certain MSA states. This amount was then paid to the MSA states. We and other Original Participating Manufacturers have the right to claim additional reductions of MSA payments in subsequent years under provisions of the MSA.

Contractual Cash Payment Obligations

The following table presents the contractual cash payment obligations of Lorillard as of December 31, 2009:

									More
			Less Than						Than 5
	Total		1 Year		1-3 Years		3-5 Years		Years
	(In millions)
Senior notes	$	750	$	—	$	—	$	—	$	750
Interest payments related to notes		578		61		183		122		212
Tobacco leaf purchase obligations		213		183		30		—		—
Machinery purchase obligations		47		46		1		—		—
Operating lease obligations		4		2		2		—		—
Total	$	1,592	$	292	$	216	$	122	$	962

In addition to the obligations presented in the table above, as of December 31, 2009, we believe that it is reasonably possible that payments of up to $4 million may be made to various tax authorities in the next twelve months related to gross unrecognized tax benefits. We cannot make a reasonably reliable estimate of the amount of liabilities for unrecognized tax benefits that may result in cash settlements for periods beyond twelve months.

As previously discussed, we have entered into the State Settlement Agreements which impose a stream of future payment obligations on us and the other major U.S. cigarette manufacturers. Our portion of ongoing adjusted settlement payments, including fees to settling plaintiffs’ attorneys, are based on a number of factors which are described above. Our cash payment under the State Settlement Agreements in 2009 amounted to $1.118 billion and we estimate our cash payments in 2010 under the State Settlement Agreements will be between $1.125 billion and $1.175 billion, primarily based on 2009 estimated industry volume. Payment obligations are not incurred until the related sales occur and therefore are not reflected in the above table. Please see the discussion of the calculation of the Original Participating Manufacturers base payment obligations under the State Settlement Agreements under “— State Settlement Agreements” on page 37.

Off-Balance Sheet Arrangements — None.

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Item 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We invest in financial instruments that involve market risk. Our measure of market risk exposure represents an estimate of the change in fair value of our financial instruments. Market risk exposure is presented below for each class of financial instrument we held at December 31, 2009, assuming immediate adverse market movements of the magnitude described below. We believe that the rate of adverse market movement represents a measure of exposure to loss under hypothetically assumed adverse conditions. The estimated market risk exposure represents the hypothetical loss to future earnings and does not represent the maximum possible loss nor any expected actual loss, even under adverse conditions, because actual adverse fluctuations would likely differ. In addition, since our investment portfolio is subject to change based on our portfolio management strategy as well as in response to changes in the market, these estimates are not necessarily indicative of the actual results which may occur. The market risk exposure represents the potential loss in carrying value and pretax impact to future earnings caused by the hypothetical change in price.

Exposure to market risk is managed and monitored by senior management. Senior management approves our overall investment strategy and has the responsibility to ensure that the investment positions are consistent with that strategy with an acceptable level of risk.

Interest rate risk.  Our investments, which are included in cash and cash equivalents, consist of money market funds with financial institutions. Those investments are exposed to fluctuations in interest rates. A sensitivity analysis, based on a hypothetical 1% increase or decrease in interest rates on our average 2009 investments, would cause an increase or decrease in pre-tax income of approximately $14.5 million.

Our debt is denominated in US Dollars and has been issued at a fixed rate. In September 2009, we entered into interest rate swap agreements for a total notional amount of $750 million to hedge changes in fair value of the Notes due to changes in the designated benchmark interest rate. Changes in the fair value of the derivative are recorded in earnings along with offsetting adjustments to the carrying amount of the hedged debt. A sensitivity analysis, based on a hypothetical 1% change in LIBOR, would cause an increase or decrease in pretax income of approximately $7.5 million on an annualized basis for 2009.

Liquidity risk.  We may be forced to cash settle all or a portion of our derivative contracts before the expiration date if our debt rating is downgraded below Ba2 by Moody’s or BB by S&P. This could have a negative impact on our cash position. Early cash settlement would result in the timing of our hedge settlement not being matched to the cash settlement of the debt. See Note 9 for additional information on derivatives.

39

Item 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Financial Statements and Supplementary Data are comprised of the following sections:

	Page
	No.
Report of Independent Registered Public Accounting Firm	41
Consolidated Balance Sheets	42
Consolidated Statements of Income	43
Consolidated Statements of Shareholders’ Equity	44
Consolidated Statements of Cash Flows	45
Notes to Consolidated Financial Statements	46
EX-12.1
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-99.1
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

40

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lorillard, Inc.

Greensboro, North Carolina.

We have audited the accompanying consolidated balance sheets of Lorillard, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the financial statement schedule listed in the Index at Item 15. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of operations and cash flows for each of the three years in the period ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2010 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

February 25, 2010

41

LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31,
	2009			2008
	(In millions)
ASSETS:
Cash and cash equivalents	$	1,384		$	1,191
Accounts receivable, less allowances of $3 and $2		9			7
Other receivables		41			55
Inventories		281			255
Deferred income taxes		466			454
Total current assets		2,181			1,962
Plant and equipment, net		237			218
Prepaid pension assets		60			36
Deferred income taxes		48			71
Other assets		49			34
Total assets	$	2,575		$	2,321
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Accounts and drafts payable	$	23		$	30
Accrued liabilities		318			255
Settlement costs		982			974
Income taxes		14			14
Total current liabilities		1,337			1,273
Long-term debt		722			—
Postretirement pension, medical and life insurance benefits		300			317
Other liabilities		129			100
Total liabilities		2,488			1,690
Commitments and Contingent Liabilities
Shareholders’ Equity:
Preferred stock, $0.01 par value, authorized 10 million shares		—			—
Common stock:
Authorized — 600 million shares; par value — $.01 per share
Issued — 174 million and 174 million shares
Outstanding — 156 million and 168 million shares		2			2
Additional paid-in capital		234			222
Earnings retained in the business		1,282			965
Accumulated other comprehensive loss		(121	)		(158	)
Treasury stock at cost, 18 million and 6 million shares		(1,310	)		(400	)
Total shareholders’ equity		87			631
Total liabilities and shareholders’ equity	$	2,575		$	2,321

See Notes to Consolidated Financial Statements

42

LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Year Ended December 31,
	2009			2008			2007
	(In millions)
Net sales (including excise taxes of $1,547, $712 and $688)	$	5,233		$	4,204		$	3,969
Cost of sales		3,327			2,434			2,313
Gross profit		1,906			1,770			1,656
Selling, general and administrative		365			355			382
Operating income		1,541			1,415			1,274
Investment income		5			20			109
Interest expense		(27	)		(1	)		—
Income before income taxes		1,519			1,434			1,383
Income taxes		571			547			485
Net income	$	948		$	887		$	898
Earnings per share:
Basic	$	5.76		$	5.15		$	5.16
Diluted	$	5.76		$	5.15		$	5.16
Weighted average number of shares outstanding:
Basic		164.48			172.09			173.92
Diluted		164.62			172.21			173.92

See Notes to Consolidated Financial Statements

43

LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

												Accum-
												ulated
	Compre-								Earnings			Other						Total
	hensive					Additional			Retained			Compre-						Share-
	Income			Common		Paid-in			in the			hensive			Treasury			holders’
	(Loss)			Stock		Capital			Business			Loss			Stock			Equity
	(In millions)
Balance, January 1, 2007, as previously reported				$	—	$	215		$	1,179		$	(99	)	$	—		$	1,295
Par value adjustment, Lorillard common stock — 1.7 million to 1 stock split					2		(2	)											—
Cumulative effect from adoption of new accounting for income taxes										(25	)								(25	)
Balance, January 1, 2007, as adjusted					2		213			1,154			(99	)		—			1,270
Comprehensive income:
Net income	$	898								898									898
Other comprehensive gains, pension liability, net of tax expense of $6		11											11						11
Comprehensive income	$	909
Dividends paid										(1,170	)								(1,170	)
Share-based compensation							4												4
Balance, December 31, 2007				$	2	$	217		$	882		$	(88	)	$	—		$	1,013
Comprehensive income:
Net income	$	887								887									887
Other comprehensive losses, pension liability, net of tax benefit of $38		(70	)										(70	)					(70	)
Comprehensive income	$	817
Dividends paid										(804	)								(804	)
Shares repurchased																(400	)		(400	)
Share-based compensation							5												5
Balance, December 31, 2008				$	2	$	222		$	965		$	(158	)	$	(400	)	$	631
Comprehensive income:
Net income	$	948								948									948
Other comprehensive gains, pension liability, net of tax expense of $20		37											37						37
Comprehensive income	$	985
Dividends paid										(631	)								(631	)
Shares repurchased																(910	)		(910	)
Share-based compensation							12												12
Balance, December 31, 2009				$	2		234			1,282			(121	)		(1,310	)		87

See Notes to Consolidated Financial Statements

44

LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2009			2008			2007
	(In millions)
Cash flows from operating activities:
Net income	$	948		$	887		$	898
Adjustments to reconcile to net cash provided by (used in) operating activities:
Depreciation and amortization		32			32			40
Deferred income taxes		(9	)		72			(62	)
Share-based compensation		5			3			2
Gain on investments		—			—			(34	)
Amortization of marketable securities		—			—			(22	)
Pension, health and life insurance benefits expense		46			21			24
Pension, health and life insurance contributions		(37	)		(32	)		(31	)
Excess tax benefits from share-based arrangements		(1	)		—			—
Changes in operating assets and liabilities:
Accounts and other receivables		12			(38	)		6
Inventories		(26	)		(32	)		(40	)
Accounts payable and accrued liabilities		56			28			(20	)
Settlement costs		8			43			102
Income taxes		—			5			(44	)
Other assets		(4	)		9			(9	)
Litigation accrual		—			—			66
Other		7			(18	)		6
Net cash provided by operating activities		1,037			980			882
Cash flows from investing activities:
Purchases of investments		—			(1,050	)		(4,916	)
Proceeds from sales of investments		—			545			1,934
Proceeds from maturities of investments		—			750			3,400
Additions to plant and equipment		(51	)		(44	)		(51	)
Net cash provided by (used in) investing activities		(51	)		201			367
Cash flows from financing activities:
Dividends paid		(631	)		(804	)		(1,170	)
Shares repurchased		(910	)		(400	)		—
Proceeds from issuance of long-term debt		750			—			—
Debt issuance costs		(5	)		—			—
Proceeds from exercise of stock options		2			—			—
Excess tax benefits from share-based arrangements		1			4			3
Net cash used in financing activities		(793	)		(1,200	)		(1,167	)
Change in cash and cash equivalents		193			(19	)		82
Cash and cash equivalents, beginning of year		1,191			1,210			1,128
Cash and cash equivalents, end of year	$	1,384		$	1,191		$	1,210
Cash paid for income taxes	$	563		$	514		$	598
Cash paid for interest, net of interest rate swaps	$	28		$	—		$	—

See Notes to Consolidated Financial Statements

45

LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   Significant Accounting Policies

Basis of presentation — Lorillard, Inc., through its subsidiaries, is engaged in the manufacture and sale of cigarettes. Its principal products are marketed under the brand names of Newport, Kent, True, Maverick and Old Gold with substantially all of its sales in the United States of America.

The consolidated financial statements of Lorillard, Inc. (the “Company”), together with its subsidiaries (“Lorillard”), include the accounts of the Company and its subsidiaries after the elimination of intercompany accounts and transactions. The Company manages its operations on the basis of one operating and reportable segment through its principal subsidiary, Lorillard Tobacco Company (“Lorillard Tobacco”).

On May 7, 2008, the Company amended its certificate of incorporation to effect a 1,739,234.29 for 1 stock split of its 100 shares of Common Stock then outstanding. All common share and per share information has been retroactively adjusted for the periods presented.

On June 10, 2008, Loews Corporation (“Loews”) distributed 108,478,429 shares of common stock of the Company in exchange for and in redemption of all 108,478,429 outstanding shares of Loews’ Carolina Group stock, as described in the Registration Statement (File No. 333-149051) on Form S-4 filed with the Securities and Exchange Commission (the “SEC”) under the Securities act of 1933 as amended (the “Separation”). Pursuant to the terms of the Exchange Offer, described in the Registration Statement, on June 16, 2008, Loews accepted 93,492,857 shares of Loews common stock in exchange for 65,445,000 shares of the Company’s Common Stock. As a result of such distributions, Loews ceased to own any equity interest in the Company and the Company became an independent publicly held company.

Prior to the Separation, Lorillard was included in the Loews consolidated federal income tax return, and federal income tax liabilities were included on the balance sheet of Loews. Under the terms of the pre-Separation Tax Allocation Agreement between Lorillard and Loews, the Company made payments to, or was reimbursed by Loews for the tax effects resulting from its inclusion in Loews’ consolidated federal income tax return. In September 2009, Loews reimbursed Lorillard $14 million, which was recorded as a receivable in 2008, related to pre-Separation tax benefits and payments.

Subsequent to the issuance of the Company’s 2008 consolidated financial statements included in Form 8-K, filed on June 11, 2009, the Company determined that immaterial errors existed in the footnote disclosure containing the condensed consolidating statement of cash flows for the year ended December 31, 2008. The Issuer’s statement of cash flows for the year ended December 31, 2008 has been corrected to reflect $150 million return of capital, previously reported as a financing inflow, as an investing inflow. In addition, the statement of cash flows for All Other Subsidiaries for the same period has been corrected to properly include the $150 million payment to the Issuer, previously reported as return of capital outflow within financing activities, as a component of dividends paid also within financing activities. These immaterial errors did not impact operating cash flows for any consolidating entity and had no impact on the consolidated statement of cash flows for the year ended December 31, 2008.

Additionally, subsequent to the issuance of the Company’s 2008 and 2007 financial statements included in Form 8-K, filed on June 11, 2009, the Company amended the presentation of pension and postretirement cash inflows and outflows on the statement of cash flows by adding the lines “Pension, health and life insurance benefits expense” and “Pension, health and life insurance contributions” to enhance the disclosure of pension related activities. These changes have been reflected on the consolidated statement of cash flows as well as the consolidating statements of cash flows for the years ended December 31, 2008 and December 31, 2007.

Also, subsequent to the issuance of the Company’s 2008 consolidated financial statements included in Form 8-K, filed on June 11, 2009, the Company determined that immaterial errors existed in the consolidated statements of income for the years ended December 31, 2008 and 2007. The consolidated statement of income has been corrected to properly classify $6 million for each of the years ended December 31, 2008 and 2007,

46

LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

previously classified as selling, general and administrative costs, as cost of sales. Within the consolidating financial information footnote (Note 17), the correction of the error was reflected in the Issuer column.

Use of estimates — The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and related notes. Significant estimates in the consolidated financial statements and related notes include: (1) accruals for tobacco settlement costs, litigation, sales incentive programs, income taxes and share-based compensation, (2) the determination of discount and other rate assumptions for defined benefit pension and other postretirement benefit expenses and (3) the valuation of pension assets. Actual results could differ from those estimates.

Cash equivalents — Cash equivalents consist of short-term liquid investments with a maturity at date of purchase of 90 days or less. Interest and dividend income are included in investment income. The cost of securities sold is based on the specific identification method and transactions are recorded on the trade date.

Repurchase agreements — During 2009 and 2008, Lorillard loaned cash to unrelated parties, primarily major financial institutions through collateralized repurchase agreements. Borrowers are required to deposit treasury securities as collateral with Lorillard of at least 102% of the amount of cash loaned. The securities received as collateral by Lorillard are not reflected as assets of Lorillard as there exists no right to sell or repledge the collateral. There were no repurchase agreements outstanding at December 31, 2009 and $236 million outstanding at December 31, 2008.

Inventories — Inventories are valued at the lower of cost, determined on a last-in, first-out (“LIFO”) basis, or market. A significant portion of leaf tobacco on hand will not be sold or used within one year, due to the duration of the aging process. All inventory of leaf tobacco, including the portion that has an operating cycle that exceeds 12 months, is classified as a current asset and is generally consistent with recognized trade practice.

Depreciation — Buildings, machinery and equipment are depreciated for financial reporting purposes on the straight-line method over estimated useful lives of those assets of 40 years for buildings and 3 to 12 years for machinery and equipment.

Derivative agreements — In September 2009, Lorillard Tobacco entered into interest rate swap agreements, which the Company guaranteed, with a total notional amount of $750 million. The interest rate swap agreements qualify for hedge accounting and were designated as fair value hedges. Under the swap agreements, Lorillard Tobacco receives a fixed rate settlement and pays a variable rate settlement with the difference recorded in interest expense. Changes in the fair value of the swap agreements are recorded in other assets or other liabilities with an offsetting adjustment to the carrying amount of the hedged debt. See Note 9.

Accumulated other comprehensive income (loss)  — The components of accumulated other comprehensive income (loss) (“AOCI”) include the pension liability and any unrealized gains (losses) on available for sale investments, net of related taxes.

Revenue recognition — Revenue from product sales, net of sales incentives, is recognized at the time ownership of the goods transfers to customers and collectability is reasonably assured. Federal excise taxes are recognized on a gross basis, and are reflected in both net sales and cost of sales. Sales incentives include retail price discounts, coupons and retail display allowances and are recorded as a reduction of revenue based on amounts estimated as due to customers and consumers at the end of a period based primarily on use and redemption rates. Sales to one customer represented 26%, 26% and 24% of total sales of Lorillard in 2009, 2008 and 2007, respectively.

Cost of sales — Cost of sales includes federal excise taxes, leaf tobacco cost, wrapping and casing material, manufacturing labor and production salaries, wages and overhead, research and development costs, distribution, other manufacturing costs, State Settlement Agreement expenses, the federal assessment for

47

LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

tobacco growers, Food and Drug Administration fees, and promotional product expenses. Promotional product expenses include the cost, including excise taxes, of the free portion of “buy some get some free” promotions.

Advertising and marketing costs — Advertising costs are recorded as expense in the year incurred. Marketing and advertising costs that include such items as direct mail, advertising, agency fees and point of sale materials are included in selling, general and administrative expenses. Advertising expense was $40 million, $47 million and $50 million for the years ended December 31, 2009, 2008 and 2007, respectively.

Research and development costs — Research and development costs are recorded as expense as incurred, are included in cost of sales and amounted to $19 million, $20 million and $18 million for each of the years ended December 31, 2009, 2008 and 2007, respectively.

Tobacco settlement costs — Lorillard recorded pre-tax charges of $1.128 billion, $1.117 billion and $1.048 billion for the years ended December 31, 2009, 2008 and 2007, respectively, to accrue its obligations under the State Settlement Agreements (see Note 18). Lorillard’s portion of ongoing adjusted settlement payments and legal fees is based on its share of total domestic cigarette shipments in that year. Accordingly, Lorillard records its portion of ongoing adjusted settlement payments as part of cost of sales as the related sales occur. Payments are made annually and are generally due in April of the year following the accrual of costs. The settlement cost liability on the balance sheets represents the unpaid portion of the Company’s obligations under the State Settlement Agreements.

Share-Based compensation costs — Under the 2008 Incentive Compensation Plan, the fair market value of the exercise price per share is based on the closing price at the date of the grant. Share-based compensation expense is recognized net of an estimated forfeiture rate and for shares expected to vest, using a straight-line basis over the requisite service period of the award.

Legal costs and loss contingencies — Legal costs are expensed as incurred and amounted to $98 million, $80 million and $55 million for the years ended December 31, 2009, 2008 and 2007, respectively. Loss contingencies related to pending or threatened litigation are accrued as a charge to selling, general and administrative expense when both of the following conditions are met: (i) a determination that it is probable that an asset has been impaired or a liability has been incurred, and (ii) the amount of loss can be reasonably estimated. See Note 18 for a description of loss contingencies.

Income taxes — Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Judgment is required in determining income tax provisions and in evaluating tax positions. For uncertain tax positions to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Where applicable, interest related to uncertain tax positions is recognized in interest expense. Penalties, if incurred, are recognized as a component of income tax expense. Certain provisions of ASC 740 were effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening earnings retained in the business. A liability was recorded for unrecognized tax benefits of $25 million that was accounted for as a reduction to the January 1, 2007 balance of earnings retained in the business.

Recently adopted accounting pronouncements — Lorillard adopted FASB ASC Paragraph 260-10-45-60 “Participating Securities and the Two-Class Method.” ASC 260-10-45-60 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share. This interpretation was effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those years. The adoption of ASC 260-10-45-60 did not have a material impact on Lorillard’s financial position or results of operations.

48

LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Lorillard adopted FASB ASC Subtopic 715-20 “Employers’ Disclosures about Postretirement Benefit Plan Assets.” ASC Subtopic 715-20 requires disclosure of investment policies and strategies in narrative form. ASC Subtopic 715-20 also requires employer disclosure on the fair value of plan assets, including (a) the level in the fair value hierarchy, (b) a reconciliation of beginning and ending fair value balances for Level 3 assets and (c) information on inputs and valuation techniques. See Note 12 for related disclosure.

Lorillard adopted FASB ASC Topic 808 “Collaborative Arrangements.” ASC 808 defines a collaborative arrangement as an arrangement where the parties are active participants and have exposure to significant risks. Transactions with third parties should be classified in the financial statements in the appropriate category according to ASC Subtopic 605-45 “Principal Agent Considerations.” Payments between the partners of the collaborative agreement should be categorized based on the terms of the agreement, business operations and authoritative literature. ASC 808 was effective for fiscal years beginning after December 15, 2008. The adoption of ASC 808 did not have a material impact on Lorillard’s financial position or results of operations.

Lorillard adopted FASB ASC Section 815-10-50 “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” ASC 815-10-50 requires qualitative disclosures about the objectives and strategies for using derivatives; quantitative data about the fair value of, and gains and losses on, de rivative contracts; and details of credit-risk-related contingent features in hedged positions. ASC 815-10-50 also requires enhanced disclosure around derivative instruments in financial statements accounted for under ASC Subtopic 815-20, “Accounting for Derivative Instruments and Hedging Activities,” and how hedges affect an entity’s financial position, financial performance and cash flows. ASC 815-10-50 was effective for fiscal years and interim periods beginning after November 15, 2008. Lorillard adopted ASC 815-10-50 in September 2009. See Note 9 for related disclosure.

Lorillard adopted FASB ASC Topic 820 “Fair Value Measurements and Disclosures” on January 1, 2008, utilizing the one year deferral that was granted for the implementation of ASC 820 for all nonrecurring fair value measurements of non-financial assets and liabilities. The one year deferral expired on January 1, 2009. ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The adoption of ASC 820 did not have a material impact on Lorillard’s financial position or results of operations.

Lorillard adopted FASB ASC Section 820-10-35 “Determining the Fair Value of a Financial Asset When the Market for that Asset is Not Active.” ASC 820-10-35 clarifies the application of ASC 820 (described above) in a market that is not active. The effective date for ASC 820-10-35 was October 10, 2008. The adoption of ASC 820-10-35 did not have a material impact on Lorillard’s financial position or results of operations.

Lorillard adopted FASB ASC Section 820-10-35 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” ASC 820-10-35 includes factors for evaluating if a market has a significant decrease in the volume and level of activity. If there has been a decrease, then the entity must do further analysis of the transactions or quoted prices to determine if the transactions were orderly. The entity cannot ignore available information and should apply appropriate risk adjustments in the fair value calculation. The effective date was for interim periods ending after June 15, 2009. The adoption of ASC 820-10-35 did not have a material impact on Lorillard’s financial position or results of operations.

Lorillard adopted FASB ASC Section 825-10-65 “Interim Disclosures about Fair Value of Financial Instruments.” ASC 825-10-65 requires interim disclosures on the fair value of financial instruments. The effective date was for interim periods ending after June 15, 2009. The adoption of ASC 825-10-65 was reflected in our Form 10-Q filed for the second and third quarters of 2009.

Lorillard adopted FASB ASC Topic 855 “Subsequent Events,” which sets forth (1) the period after the balance sheet date during which management of a reporting entity shall evaluate events or transactions that

49

LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

may occur for potential recognition or disclosure in the financial statements, (2) the circumstances under which an entity shall recognize events or transactions occurring after the balance sheet date in its financial statements and (3) the disclosures that an entity shall make about events or transactions that occurred after the balance sheet date. ASC 855 applies to the accounting for and disclosure of subsequent events not addressed in other applicable generally accepted accounting principles (GAAP). ASC 855 was effective for financial statements issued for interim periods and fiscal years ending after June 15, 2009. The adoption of ASC 855 did not have a material impact on Lorillard’s financial position or results of operations. Lorillard has evaluated subsequent events through February 25, 2010, the date the consolidated financial statements were issued.

Lorillard adopted FASB ASU 2009-05 “Fair Value Measurements and Disclosures (Topic 820) — Measuring Liabilities at Fair Value.” Fair value of liabilities is defined as a price in an orderly transaction between market participants, but often liabilities are not transferred in the market due to significant restrictions. If a quoted price in an active market is available, it should be used and disclosed as a level 1 valuation. When that is not available, an entity can use either a) the quoted price of an identical liability when traded as an asset in an active or inactive market, b) the quoted price for similar liabilities traded as assets in an active market or c) a valuation technique, such as the income or present value approaches. No adjustments should be made for the existence of contractual restrictions that prevent transfer. The update is effective for the first period after the issue date of August 2009. ASU 2009-05 did not have a material impact on Lorillard’s financial position or results of operations.

Accounting pronouncements not yet adopted.  In January 2010, the FASB issued Accounting Standards Update 2010-04 “Accounting for Various Topics — Technical Corrections to SEC Paragraphs” effective upon the issue date of January 15, 2010. ASU 2010-04 contains various technical corrections to the Accounting Standards Codification for the SEC sections. Lorillard is evaluating the impact that adopting ASU 2010-04 will have on its financial position or results of operations.

In January 2010, the FASB issued Accounting Standards Update 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 establishes additional disclosures related to fair value. Transfers in and out of Level 1 and Level 2 and the reasons for the transfers must be disclosed. Level 3 purchases, sales, issuances and settlements should be presented separately rather than net. In addition, the level of disaggregation and input and valuation techniques need to be disclosed. The effective dates are periods beginning after December 15, 2010 for the Level 3 purchases, sales, issuances and settlements disclosure, and periods beginning after December 15, 2009 for all other provisions. Lorillard is evaluating the impact that adopting ASU 2010-06 will have on its financial position or results of operations.

In February 2010, the FASB issued Accounting Standards Update 2010-08 “Technical Corrections to Various Topics” effective upon the issue date of February 2, 2010. ASU 2010-08 contains various technical corrections to the Accounting Standards Codification including the glossary, Statement of Cash Flows, consolidations, embedded derivatives, and cash flow hedges. Lorillard is evaluating the impact that adopting ASU 2010-08 will have on its financial position or results of operations.

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LORILLARD, INC. AND SUBSIDIARIES

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2.   Inventories

Inventories are valued at the lower of cost, determined on a LIFO basis, or market and consisted of the following:

	December 31,
	2009		2008
	(In millions)
Leaf tobacco	$	236	$	208
Manufactured stock		41		42
Materials and supplies		4		5
	$	281	$	255

If the average cost method of accounting was used, inventories would be greater by approximately $189 million and $155 million at December 31, 2009 and 2008, respectively.

3.   Plant and Equipment

Plant and equipment is stated at historical cost and consisted of the following:

	December 31,
	2009			2008
	(In millions)
Land	$	3		$	3
Buildings		87			87
Equipment		563			532
Total		653			622
Accumulated depreciation		(416	)		(404	)
Plant and equipment-net	$	237		$	218

Depreciation and amortization expense was $32 million, $32 million and $40 million for 2009, 2008 and 2007, respectively.

4.   Other Assets

Other assets were as follows:

	December 31,
	2009		2008
	(In millions)
Other investments	$	15		15
Restricted cash		13		13
Debt issuance costs		5		—
Other prepaid assets		16		6
Total	$	49	$	34

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5.   Accrued Liabilities

Accrued liabilities were as follows:

	December 31,
	2009		2008
	(In millions)
Legal fees	$	21	$	21
Salaries and other compensation		16		21
Medical and other employee benefit plans		30		27
Consumer rebates		86		62
Sales promotion		21		23
Excise and other taxes		78		56
Other accrued liabilities		66		45
Total	$	318	$	255

6.   Commitments

Lorillard leases certain real estate and transportation equipment under various operating leases. Listed below are future minimum rental payments required under those operating leases with noncancelable terms in excess of one year.

	December 31, 2009
	(In millions)
2010	$	1.8
2011		1.4
2012		0.8
2013		0.2
2014		0.0
Net Minimum lease payments	$	4.2

Rental expense for all operating leases was $6 million, $6 million and $6 million for 2009, 2008 and 2007, respectively.

At December 31, 2009, Lorillard had contractual purchase obligations of approximately $47 million. These purchase obligations include agreements to purchase machinery. Future contractual purchase obligations at December 31, 2009 were as follows:

	2010		2011		2012		2013		2014
	(In millions)
Contractual purchase obligations	$	46	$	1	$	0	$	0	$	0

7.   Fair Value

Fair value is the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The following fair value hierarchy is

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LORILLARD, INC. AND SUBSIDIARIES

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used in selecting inputs, with the highest priority given to Level 1, as these are the most transparent or reliable:

•  Level 1 — Quoted prices for identical instruments in active markets.

•  Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable directly or indirectly.

•  Level 3 — Valuations derived from valuation techniques in which one or more significant inputs are unobservable.

Lorillard is responsible for the valuation process and as part of this process may use data from outside sources in establishing fair value. Lorillard performs due diligence to understand the inputs used or how the data was calculated or derived, and corroborates the reasonableness of external inputs in the valuation process.

Assets and liabilities measured at fair value on a recurring basis at December 31, 2009 were as follows:

(In millions)	Level 1		Level 2		Level 3		Total
			(In millions)
Cash and Cash Equivalents:
Prime money market funds	$	1,384	$	—	$	—	$	1,384
Total cash and cash equivalents	$	1,384	$	—	$	—	$	1,384
Derivative Liability:
Interest rate swaps — fixed to floating rate	$	—	$	28	$	—	$	28
Total derivative liability	$	—	$	28	$	—	$	28

The fair value of the money market funds, classified as Level 1, utilized quoted prices in active markets.

The fair value of the interest rate swaps, classified as Level 2, utilized a market approach model using the notional amount of the interest rate swap multiplied by the observable inputs of time to maturity and market interest rates. See Note 9 for additional information on the interest rate swaps.

8.   Long Term Debt

In June 2009, Lorillard Tobacco issued $750 million of 8.125% unsecured senior notes due June 23, 2019 (the “Notes”) pursuant to an Indenture, dated June 23, 2009, and First Supplemental Indenture, dated June 23, 2009 (the “Supplemental Indenture”). Lorillard Tobacco is the principal, wholly-owned operating subsidiary of the Company and the Notes are unconditionally guaranteed on a senior unsecured basis by the Company. The interest rate payable on the Notes is subject to incremental increases from 0.25% to 2.00% in the event either Moody’s Investors Services, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”) or both Moody’s and S&P downgrade the Notes below investment grade (Baa3 and BBB- for Moody’s and S&P, respectively).

In September 2009, Lorillard Tobacco entered into interest rate swap agreements, which the Company guaranteed, with a notional amount of $750 million to modify its exposure to interest rate risk by converting the interest rate payable on the Notes from a fixed rate to a floating rate based on LIBOR. See Note 9 for additional information on the interest rate swap agreements.

Upon the occurrence of a change of control triggering event, Lorillard Tobacco will be required to make an offer to repurchase the Notes at a price equal to 101% of the aggregate principal amount of the Notes, plus accrued interest. A “change of control triggering event” occurs when there is both a “change of control” (as defined in the Supplemental Indenture) and the Notes cease to be rated investment grade by both Moody’s and S&P within 60 days of the occurrence of a change of control or public announcement of the intention to effect

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a change of control. The Notes are not entitled to any sinking fund and are not redeemable prior to maturity. The Notes contain covenants that restrict liens and sale and leaseback transactions, subject to a limited exception. At December 31, 2009, the carrying value of the Notes was $722 million and the fair value was $826 million. The fair value of the Notes was based on market pricing.

9.   Derivative Instruments

In September 2009, Lorillard Tobacco entered into interest rate swap agreements, which the Company guaranteed, with a total notional amount of $750 million to modify its exposure to interest rate risk by effectively converting the interest rate payable on the Notes from a fixed rate to a floating rate. Under the agreements, Lorillard Tobacco receives interest based on a fixed rate of 8.125% and pays interest based on a floating one-month LIBOR rate plus a spread of 4.625%. As of December 31, 2009, the variable rate was 4.856%. The agreements expire in June 2019. The interest rate swap agreements qualify for hedge accounting and were designated as fair value hedges. Under the swap agreements, Lorillard Tobacco receives a fixed rate settlement and pays a variable rate settlement with the difference recorded in interest expense. That difference reduced interest expense by $6 million for 2009.

For derivatives designated as fair value hedges, which relate entirely to hedges of debt, changes in the fair value of the derivatives are recorded in other assets or other liabilities with an offsetting adjustment to the carrying amount of the hedged debt. At December 31, 2009, such adjustments decreased the carrying amount of debt outstanding by $28 million and increased other liabilities by $28 million in the consolidated condensed balance sheet.

If our debt rating is downgraded below Ba2 by Moody’s or BB by S&P, the swap agreements will terminate and we will be required to settle them in cash before their expiration date.

10.   Earnings Per Share

Basic and diluted earnings per share (“EPS”) were calculated using the following:

	Year Ended
	December 31,
	2009		2008		2007
			(In millions)
Net Earnings	$	948	$	887	$	898
Weighted Average Shares Outstanding — Basic		164.48		172.09		173.92
Stock Options and Stock Appreciation Rights		0.14		0.12		—
Weighted Average Shares Outstanding — Diluted		164.62		172.21		173.92

Options to purchase 1.1 million shares and 0.4 million shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the years ended December 31, 2009 and 2008, respectively.

Loews distributed its interest in the Company to holders of Loews’ Carolina Group stock and Loews’ common stock in a series of transactions which were completed on June 10, 2008 and June 16, 2008, respectively. The Company had 173,923,429 shares outstanding as of the Separation from Loews. All prior period EPS amounts were adjusted to reflect the new capital structure of the Company.

11.   Income Taxes

Prior to the Separation, Lorillard was included in the Loews consolidated federal income tax return, and federal income tax liabilities were included on the balance sheet of Loews. Under the terms of the pre-

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LORILLARD, INC. AND SUBSIDIARIES

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Separation Tax Allocation Agreement between Lorillard and Loews, Lorillard made payments to, or was reimbursed by Loews for the tax effects resulting from its inclusion in Loews’ consolidated federal income tax return. As of December 31, 2009, there were no tax obligations between Lorillard and Loews for periods prior to the Separation. Following the Separation, Lorillard and its eligible subsidiaries filed a stand alone consolidated federal income tax return.

The Separation Agreement imposes restrictions on Lorillard’s ability to engage in certain significant corporate transactions, for a period of two years, that could cause the Separation to become taxable to Loews. Lorillard, however, may undertake any such action if it first obtains a supplemental ruling from the IRS or an unqualified tax opinion of a nationally recognized law firm, in either case in form and substance reasonably acceptable to Loews, to the effect that the proposed transaction would not adversely affect the tax-free nature of the Separation. The Separation Agreement also requires Lorillard (and any successor entity) to indemnify Loews for any losses resulting from the failure of the Separation to qualify as a tax-free transaction (except if the failure to qualify is solely due to Loews’s fault). This indemnification obligation applies regardless of whether the action is restricted as described above, or whether Lorillard or a potential acquirer obtains a supplemental ruling or an opinion of counsel.

The Separation Agreement further provides for cooperation between Lorillard and Loews with respect to additional tax matters, including the exchange of information and the retention of records which may affect the income tax liability of the parties to the Separation Agreement.

Lorillard’s 2006 consolidated federal income tax return is subject to examination by the IRS. For 2007 and 2008, the IRS has invited Loews and its eligible subsidiaries to participate in the Compliance Assurance Process (“CAP”) which is a voluntary program for a limited number of large corporations. Loews and Lorillard, as an eligible subsidiary, agreed to participate. Under CAP, the IRS conducts a real-time audit and works contemporaneously with Lorillard to resolve any issues prior to the filing of the tax return. Lorillard’s participation in the CAP will end when the IRS approves Loews’ 2008 consolidated federal income tax return as filed.

During 2008, the IRS completed its examination of the 2007 Loews consolidated federal income tax return resulting in no changes being made to the reported tax on the return.

Lorillard adopted the uncertain tax provisions of ASC 740, “Income Taxes,” on January 1, 2007. As a result of this adoption, Lorillard recognized a decrease to beginning retained earnings on January 1, 2007 of $25 million. At December 31, 2009, 2008 and 2007 there were $18 million, $19 million and $21 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

(In millions)		2009			2008			2007
Balance at January 1	$	29		$	33		$	50
Additions for tax positions of prior years		9			2			3
Reductions for tax positions of prior years		(7	)		(3	)		(18	)
Additions based on tax positions related to the current year		20			5			8
Settlements		(10	)		(2	)		(7	)
Lapse of statute of limitations		(2	)		(6	)		(3	)
Balance at December 31	$	39		$	29		$	33

Lorillard recognizes interest accrued related to unrecognized tax benefits and tax refund claims in interest expense and recognizes penalties (if any) in income tax expense. During the years ended December 31, 2009, 2008 and 2007 Lorillard recognized an expense (benefit) of approximately ($1) million, $1 million and ($6) million in interest and penalties, respectively. Lorillard had accrued interest and penalties related to

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

unrecognized tax benefits of $11 million and $15 million at December 31, 2009 and December 31, 2008, respectively.

Due to the potential for resolution of certain tax examinations and the expiration of various statutes of limitation, it is reasonably possible that Lorillard’s gross unrecognized tax benefits balance may decrease by approximately $15 million in the next twelve months.

The Company and/or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, various states and city jurisdictions and one foreign jurisdiction. Lorillard’s consolidated federal income tax returns for years after 2005 are subject to IRS examination. With few exceptions, Lorillard’s state, local or foreign tax returns are subject to examination by taxing authorities for years after 2004.

The provision (benefit) for income taxes consisted of the following:

	Year Ended December 31,
	2009			2008		2007
	(In millions)
Current
Federal	$	469		$	398	$	470
State		111			78		77
Deferred
Federal		(6	)		58		(39	)
State		(3	)		13		(23	)
Total	$	571		$	547	$	485

Deferred tax assets (liabilities) are as follows:

	December 31,
	2009			2008
	(In millions)
Deferred tax assets:
Employee benefits	$	102		$	111
Settlement costs		421			416
State and local income taxes		12			14
Inventory capitalization		9			10
Litigation and legal		33			32
Other		6			−
Gross deferred tax assets		583			583
Deferred tax liabilities:
Depreciation		(37	)		(27	)
Federal effect of state deferred taxes		(32	)		(31	)
Gross deferred tax liabilities		(69	)		(58	)
Net deferred tax assets	$	514		$	525

Total income tax expense for the years ended December 31, 2009, 2008 and 2007 was different than the amounts of $531 million, $502 million and $484 million, computed by applying the statutory U.S. federal income tax rate of 35% to income before taxes for each of the years.

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A reconciliation between the statutory federal income tax rate and Lorillard’s effective income tax rate as a percentage of income is as follows:

	2009			2008			2007
Statutory rate		35.0	%		35.0	%		35.0	%
Increase (decrease) in rate resulting from:
State taxes		4.6			4.1			2.6
Domestic manufacturer’s deduction		(1.9	)		(1.3	)		(2.2	)
Other		(0.1	)		0.4			(0.3	)
Effective rate		37.6	%		38.2	%		35.1	%

12.   Retirement Plans

Lorillard has defined benefit pension, postretirement benefits, profit sharing and savings plans for eligible employees.

Pension and postretirement benefits — The Salaried Pension Plan provides benefits based on employees’ compensation and service. The Hourly Pension Plan provides benefits based on fixed amounts for each year of service. Lorillard also provides medical and life insurance benefits to eligible employees. Lorillard uses a December 31 measurement date for its plans.

Lorillard also provides certain senior level management employees with nonqualified, unfunded supplemental retirement plans. While these plans are unfunded, Lorillard has certain assets invested in an executive life insurance policy that are to be used to provide for certain of these benefits.

Weighted-average assumptions used to determine benefit obligations:

							Other
	Pension Benefits						Postretirement Benefits
	December 31,						December 31,
	2009			2008			2009			2008
Discount rate		6.0	%		6.3	%		6.0	%		6.3	%
Rate of compensation increase		4.8	%		5.0	%

Weighted-average assumptions used to determine net periodic benefit cost:

										Other Postretirement
	Pension Benefits									Benefits
	Year Ended December 31,									Year Ended December 31,
	2009			2008			2007			2009			2008			2007
Discount rate		6.3	%		6.0	%		5.8	%		6.3	%		6.0	%		5.8	%
Expected long-term return on plan assets		7.5	%		7.5	%		7.5	%
Rate of compensation increase		5.0	%		5.0	%		5.5	%

The expected long-term rate of return for Plan assets is determined based on widely-accepted capital market principles, long-term return analysis for global fixed income and equity markets and the active total return oriented portfolio management style. The methodology used to derive asset class risk/return estimates varies due to the nature of asset classes, the availability of historical data, implications from currency, and other factors. In many cases, where historical data is available, data is drawn from indices such as MSCI or G7 country data. For alternative asset classes where historical data may be insufficient or incomplete, estimates are based on long-term capital market conditions and/or asset class relationships. The expected rate of return

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LORILLARD, INC. AND SUBSIDIARIES

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for the Plan is based on the target asset allocation and return assumptions for each asset class. The estimated Plan return represents a nominal compound return which captures the effect of estimated asset class and market volatility.

	Other Postretirement
	Benefits
	Year Ended
	December 31,
	2009			2008
Assumed health care cost trend rates for other postretirement benefits:
Pre-65 health care cost trend rate assumed for next year		10.0	%		9.5	%
Post-65 health care cost trend rate assumed for next year		9.0	%		9.5	%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)		5.0	%		5.0	%
Year that the rate reaches the ultimate trend rate:
Pre-65		2020			2018
Post-65		2018			2018

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

	One Percentage Point
	Increase		Decrease
	(In millions)
Effect on total of service and interest cost	$	1	$	(1	)
Effect on postretirement benefit obligations		14		(12	)

Net periodic pension and other postretirement benefit costs include the following components:

										Other Postretirement
	Pension Benefits									Benefits
	Year Ended									Year Ended
	December 31,									December 31,
	2009			2008			2007			2009			2008			2007
	(In millions)
Service cost	$	17		$	17		$	17		$	4		$	4		$	4
Interest cost		56			54			52			12			12			12
Expected return on plan assets		(61	)		(70	)		(68	)		—			—			—
Amortization of unrecognized net loss (gain)		15			1			2			(1	)		(1	)		—
Amortization of unrecognized prior service cost		5			5			5			(1	)		—			—
Net periodic benefit cost	$	32		$	7		$	8		$	14		$	15		$	16

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The following provides a reconciliation of benefit obligations, plan assets and funded status of the pension and postretirement plans:

							Other
							Postretirement
	Pension Benefits						Benefits
	December 31,						December 31,
	2009			2008			2009			2008
	(In millions)
Change in benefit obligation:
Benefit obligation at January 1	$	927		$	937		$	196		$	213
Service cost		17			17			4			4
Interest cost		56			54			12			12
Plan participants’ contributions		—			—			5			5
Amendments		4			2			—			—
Actuarial (gain) loss		18			(24	)		8			(18	)
Benefits paid from plan assets		(60	)		(59	)		(20	)		(21	)
Medicare Part D Drug Subsidy		—			—			1			1
Benefit obligation at December 31		962			927			206			196
Change in plan assets:
Fair value of plan assets at January 1		829			955			—			—
Actual return on plan assets		129			(83	)		—			—
Employer contributions		23			16			14			16
Plan participants’ contributions		—			—			6			5
Benefits paid from plan assets		(60	)		(59	)		(20	)		(21	)
Fair value of plan assets at December 31		921			829			—			—
Funded status		(41	)	$	(98	)	$	(206	)	$	(196	)
Amounts recognized in the balance sheets consist of:
Noncurrent assets		60		$	30		$	—		$	—
Current liabilities		—			—			(13	)		(13	)
Noncurrent liabilities		(101	)		(128	)		(193	)		(183	)
Net amount recognized	$	(41	)	$	(98	)	$	(206	)	$	(196	)
Net actuarial (gain) loss	$	(50	)	$	129		$	8		$	(18	)
Recognized actuarial gain (loss)		(15	)		(1	)		1			1
Prior service cost		4			2			—			—
Recognized prior service (cost)		(5	)		(5	)		—			—
Total recognized other comprehensive (loss) income	$	(66	)	$	125		$	9		$	(17	)
Total recognized net periodic benefit cost and other	$	(34	)	$	132		$	24		$	(3	)

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LORILLARD, INC. AND SUBSIDIARIES

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Information for pension plans with an accumulated benefit obligation in excess of plan assets consisted of the following:

	Pension Benefits
	December 31,
	2009		2008
	(In millions)
Projected benefit obligation	$	517	$	492
Accumulated benefit obligation		464		440
Fair value of plan assets		416		364

The general principles guiding the investment of the Plan assets are embodied in the Employee Retirement Income Security Act of 1974 (“ERISA”). These principles include discharging Lorillard’s investment responsibilities for the exclusive benefit of Plan participants and in accordance with the “prudent expert” standards and other ERISA rules and regulations. Investment objectives for Lorillard’s pension Plan assets are to optimize the long-term return on Plan assets while maintaining an acceptable level of risk, to diversify assets among asset classes and investment styles, and to maintain a long-term focus.

In 2009, Lorillard conducted an asset/liability study to determine the optimal strategic asset allocation to meet the Plan’s projected long-term benefit obligations and desired funding status. The Plan is managed using a Liability Driven Investment (“LDI”) framework which focuses on achieving the Plan’s return goals while assuming a reasonable level of funded status volatility.

Based on this LDI framework the asset allocation has two primary components. The first component of the asset allocation is the “hedging portfolio” which uses the Plan’s fixed income portfolio to hedge a portion of the interest rate risk associated with the Plan’s liabilities, thereby reducing the Plan’s expected funded status volatility. The second component is the “growth/equity portfolio” which is designed to enhance portfolio returns. The growth portfolio is broadly diversified across the following asset classes; Global Equities, Long Short Equities, Absolute Return Hedge Funds, Private Equity (including growth equity, buyouts, and other illiquid assets deigned to enhance returns), and Private Real Assets. Alternative investments, including hedge funds, are used judiciously to enhance risk adjusted long-term returns while improving portfolio diversification. Derivatives may be used to gain market exposure in an efficient and timely manner. Investment risk is measured and monitored on an ongoing basis through annual liability measurements, periodic asset/liability studies, and quarterly investment portfolio reviews.

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The pension plans asset allocations were:

	Asset Allocation as of		Allocation as of
	12/31/09		12/31/08
	(%)		(%)
Asset Class
U.S. Equity		13.9		10.2
Global ex U.S. Equity		10.9		5.5
Emerging Markets Equity		2.9		1.2
Absolute Return Hedge Funds		11.6		11.5
Equity Hedge Funds		12.4		5.1
Private Equity		6.7		5.9
Private Real Assets		0.8		0.5
Fixed Income		39.8		47.2
Cash Equivalents		1.0		12.9
Total		100.0		100.0

Fair Value Measurements — The following table presents our plan assets using the fair value hierarchy as of December 31, 2009. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs. Level 3 includes fair values estimated using significant non-observable inputs.

	Total		Level 1		Level 2		Level 3
	(In millions)
Asset Class:
U.S. Equity	$	128	$	59	$	38	$	31
Global ex U.S. Equity		100		−		100		−
Emerging Markets Equity		27				27		−
Absolute Return Hedge Funds		107		−		26		81
Equity Hedge Funds		115		−		57		58
Private Equity		62		−		−		62
Private Real Assets		7		−		−		7
Fixed Income		366		366		−		−
Cash Equivalents		9		−		9		−
Total	$	921	$	425	$	257	$	239

Equity securities are primarily valued using a market approach based on the quoted market prices of identical instruments.

Hedge funds are primarily based on NAV’s calculated by the fund and are not publicly available.

Private equity valuations are reported by the fund manager and are based on the valuation of underlying investments, which include inputs such as cost, operating results, discounted future cash flows and market based comparable data.

Real estate values are reported by the fund manager and are based on valuation of the underlying investments, which include inputs such as cost, discounted future cash flows, independent appraisals and market based on comparable data.

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Fixed income securities are primarily valued using a market approach with inputs that include broker quotes in a non-active market.

Cash equivalents are primarily held in registered money market funds which are valued using a market approach based on the quoted market prices of identical instruments.

The following table presents a reconciliation of Level 3 assets held during the year ended December 31, 2009.

	January 1,		Net Realized		Net Purchases,			Net Transfers	December 31,
	2009		Unrealized		Issuances and			Into/(Out of)	2009
	Balance		Gains/(Losses)		Settlements			Level 3	Balance
US Equity		−		6		25				31
Absolute Return Hedge Funds		119		31		(69	)			81
Equity Hedge Funds		40		9		9				58
Private Equity		47		13		2				62
Private Real Assets		4		−		3				7

The table below presents the estimated amounts to be recognized from accumulated other comprehensive income into net periodic benefit cost during 2010.

			Other
	Pension		Postretirement
	Benefits		Benefits
	(In millions)
Amortization of (gain) loss recognition	$	7	$	—
Amortization of prior service cost		5		—
Total estimated amounts to be recognized	$	12	$	—

Lorillard projects expected future minimum benefit payments as follows.

					Less
			Other		Medicare
			Postretirement		Drug
Expected future benefit payments	Pension Benefits		Benefit Plans		Subsidy		Net
	(In millions)
2010	$	64	$	15	$	1	$	14
2011		70		16		1		15
2012		68		17		1		16
2013		69		18		2		16
2014		71		18		2		16
2015 — 2019		370		94		3		91
	$	712	$	178	$	10	$	168

Lorillard expects to contribute $15 million to its pension plans and $15 million to its other postretirement benefit plans in 2010.

Profit Sharing — Lorillard has a Profit Sharing Plan for hourly employees. Lorillard’s contributions under this plan are based on Lorillard’s performance with a maximum contribution of 15% of participants’ earnings. Contributions for 2009, 2008 and 2007 were $9 million, $9 million and $9 million, respectively.

Savings Plan — Lorillard sponsors an Employees Savings Plan for salaried employees. Lorillard provides a matching contribution of 100% of the first 3% of pay contributed and 50% of the next 2% of pay contributed

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

by employees. Lorillard contributions for 2009, 2008 and 2007 were $4 million, $4 million and $4 million, respectively.

13.   Share-Based Compensation

Stock Option Plan — On June 10, 2008, Lorillard separated from Loews, and all of the outstanding equity awards granted from the Carolina Group 2002 Stock Option Plan (the “Carolina Group Plan”) were converted on a one-for-one basis to equity awards granted from the Lorillard Inc. 2008 Incentive Compensation Plan (the “Lorillard Plan”) with the same terms and conditions. In May 2008, Lorillard’s sole shareholder and Board of Directors approved the Lorillard Plan in connection with the issuance of the Company’s Common Stock for the benefit of certain Lorillard employees. The aggregate number of shares of the Company’s Common Stock for which options, stock appreciation rights (“SARs”) or restricted stock may be granted under the Lorillard Plan is 3,714,825 shares, of which 714,825 were outstanding Carolina Group stock options converted to the Lorillard Plan; and the maximum number of shares of Lorillard Common Stock with respect to which options or SARs may be granted to any individual in any calendar year is 500,000 shares. The exercise price per share may not be less than the fair value of the Company’s Common Stock on the date of the grant. Generally, options and SARs vest ratably over a four-year period and expire ten years from the date of grant. The fair value of the awards immediately after the Separation did not exceed the fair value of the awards immediately before the Separation, as measured in accordance with the provisions of ASC Topic 718, and no incremental compensation expense was recorded as a result of the modification of the Carolina Group awards.

A summary of the stock option and SAR transactions for the Carolina Group Plan from January 1, 2008 through June 10, 2008 follows:

	2008
				Weighted
				Average
	Number of			Exercise
	Awards			Price
Awards outstanding, January 1		628,328		$	49.78
Granted		111,000			79.03
Exercised		(24,503	)		34.78
Awards outstanding, June 10, 2008		714,825		$	42.93
Awards exercisable, June 10, 2008		307,303		$	32.51
Shares available for grant, June 10, 2008		249,500

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the stock option and SAR transactions for the Lorillard Plan for the post-separation period from June 11, 2008 to December 31, 2008 and from January 1, 2009 to December 31, 2009 follows:

	2009					2008
				Weighted					Weighted
				Average					Average
	Number of			Exercise		Number of			Exercise
	Awards			Price		Awards			Price
Awards outstanding at January 1, 2009 and June 11, 2008		814,950		$	57.21		714,825		$	42.93
Granted		810,421			70.59		111,000			69.94
Exercised		(100,186	)		37.74		(10,875	)		31.00
Awards outstanding, December 31		1,525,185					814,950
Awards exercisable, December 31		399,240					296,425
Shares available for grant, December 31		2,726,243					2,884,943

The following table summarizes information about stock options and SARs outstanding in connection with the Lorillard Plan at December 31, 2009:

	Awards Outstanding						Awards Vested
			Weighted		Weighted				Weighted
			Average		Average				Average
	Number of		Remaining		Exercise		Number of		Exercise
Range of exercise prices	Shares		Contractual Life		Price		Shares		Price
$20.00 — 34.99		120,445		4.2	$	27.85		120,445	$	27.85
35.00 — 49.99		107,128		5.7	$	42.74		82,622	$	41.46
50.00 — 64.99		318,573		8.2	$	59.35		66,435	$	57.27
65.00 — 79.99		670,944		8.6	$	71.89		90,866	$	74.12
80.00 — 84.30		308,095		8.6	$	81.05		38,872	$	82.04

During the period January 1, 2009 to December 31, 2009, Lorillard awarded SARs totaling 810,421 shares. In accordance with the Lorillard Plan, Lorillard has the ability to settle SARs in shares or cash and has the intention to settle in shares. The SARs balance at December 31, 2009 was 1,362,615 shares.

The weighted average remaining contractual term of awards outstanding and vested as of December 31, 2009, was 7.97 years and 5.89 years, respectively. The aggregate intrinsic value of awards outstanding and vested at December 31, 2009 was $23 million and $11 million, respectively. The total intrinsic value of awards exercised during the year ended December 31, 2009 was $4 million.

Lorillard recorded stock-based compensation expense of $4 million, $3 million, and $2 million related to the Lorillard Plan during 2009, 2008, and 2007 respectively. The related income tax benefits recognized were $2 million, $1 million and $1 million for 2009, 2008 and 2007, respectively. At December 31, 2009, the compensation cost related to nonvested awards not yet recognized was $10 million, and the weighted average period over which it is expected to be recognized is 2.77 years.

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The fair value of granted options and SARs for the Lorillard Plan was estimated at the grant date using the Black-Scholes pricing model with the following assumptions and results:

Year Ended December 31,	2009			2008			2007
Expected dividend yield		5.5	%		3.9	%		2.5	%
Expected volatility		30.5	%		34.0	%		23.3	%
Weighted average risk-free interest rate		2.3	%		2.9	%		4.6	%
Expected holding period (in years)		5.0			5.0			5.0
Weighted average fair value of awards	$	11.08		$	17.18		$	16.68

The expected dividend yield is based on the current dividend rate and the price of the Company’s Common Stock over the most recent period. The expected volatility is based upon the volatility of the Company’s Common Stock over the most recent period and the expected life of the applicable stock options. The risk-free interest rate is based upon the interest rate on U.S. Treasury securities with maturities that correspond with the expected life of the applicable stock options. The expected holding period is estimated based upon historical exercise data for previously awarded options, taking into consideration the vesting period and contractual lives of the applicable options. Compensation expense is net of an estimated forfeiture rate based on historical experience with similar options.

Restricted Stock Plan — As part of the Lorillard Plan mentioned above, restricted stock may be granted to employees (“Employees”) and/or non-employee directors (“Directors”) annually. The restricted stock is included as part of the shares available for grant shown above. The restricted stock was granted based on the per share closing price of the Company’s Common Stock on the date of the grant.

Lorillard may grant shares of restricted stock to Employees and/or Directors, giving them in most instances all of the rights of stockholders, except that they may not sell, assign, pledge or otherwise encumber such shares for a vesting period of three years for Employees or one year for Directors (“Restriction Period”). Such shares are subject to forfeiture if certain conditions are not met.

The fair value of the restricted shares at the date of grant is amortized to expense ratably over the Restriction Period. Lorillard recorded pre-tax expense related to restricted stock for the years ended December 31, 2009 and 2008 of $2 million and $0.1 million, respectively. The deferred tax benefit recorded related to this expense for the years ended December 31, 2009 and 2008 were $0.6 million and $0.02 million, respectively. The unamortized expense related to restricted stock was $4 million at December 31, 2009, and the weighted average period over which it is expected to be recognized is 2.13 years.

Restricted stock activity was as follows for the years ended December 31, 2009 and 2008:

	2009					2008
				Weighted-				Weighted-
				Average				Average
				Grant Date				Grant Date
	Number of			Fair Value		Number of		Fair Value
	Awards			per Share		Awards		per Share
Balance at January 1,		4,057					—
Granted		89,433		$	60.06		4,057	$	67.94
Vested		(4,057	)				—
Forfeited		—					—
Balance at December 31,		89,433					4,057

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14.   Share Repurchase Programs

In July 2008, the Board of Directors authorized the repurchase of up to $400 million of the Company’s common stock, which was completed on October 10, 2008. The number of shares repurchased under this program were 5.9 million shares.

In May 2009, the Board of Directors authorized the repurchase of up to $250 million of the Company’s common stock, which was completed on July 28, 2009. The number of shares repurchased under this program were 3.7 million shares.

In July 2009, the Board of Directors authorized the repurchase of up to $750 million of the Company’s common stock. Purchases under this program were made from time to time at prevailing market prices in open market purchases, privately negotiated transactions, block purchases or otherwise, as determined by the Company’s management. The repurchases were funded from existing cash balances, including proceeds from the Company’s June 2009 issuance of the Notes. See Note 8 for a description of the Notes.

As of December 31, 2009, the Company repurchased 8.6 million shares of its common stock for $660 million at an average price of $76.59 per share with $90 million the maximum remaining dollar value of shares that could be purchased under the program. As of January 19, 2010, the Company completed this repurchase program after repurchasing an additional 1.1 million shares at an average price of $78.36 per share. The total number of shares repurchased under the above programs were 19.3 million shares.

15.   Related Party Transactions

Lorillard was a party to individual services agreements (the “Agreements”) with Loews through June 9, 2008. Under the Agreements, Loews performed certain administrative, technical and ministerial services. Those services included internal auditing, cash management, advice and assistance in preparation of tax returns and obtaining insurance coverage. Under the Agreements, the Company was required to reimburse Loews for (i) actual costs incurred (such as salaries, employee benefits and payroll taxes) of the Loews personnel providing such services and (ii) all out-of-pocket expenses related to the provision of such services. Those Agreements were terminated on June 10, 2008 with the Separation from Loews. The Company was charged approximately $100,000 and $800,000 for the support functions during the years ended December 31, 2008 and 2007, respectively. The Company believes, if these services were provided by an independent third party, the cost incurred would not differ materially.

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

16.   Quarterly Financial Data (Unaudited)

	December 31		September 30		June 30		March 31
	(In millions)
2009 Quarter Ended
Net sales	$	1,378	$	1,419	$	1,519	$	917
Gross profit		481		488		552		383
Net income		242		235		286		184
Net income per share	$	1.52	$	1.44	$	1.71	$	1.09
Basic weighted average number of shares outstanding		158.72		163.58		167.66		168.07
Diluted weighted average number of shares outstanding		158.89		163.72		167.79		168.18
2008 Quarter Ended
Net sales	$	1,088	$	1,125	$	1,070	$	921
Gross profit		493		470		441		365
Net income		258		237		217		174
Net income per share	$	1.54	$	1.38	$	1.25	$	1.00
Basic weighted average number of shares outstanding		168.19		172.37		173.92		173.92
Diluted weighted average number of shares outstanding		168.29		172.49		173.92		173.92

17.   Consolidating Financial Information

In June 2009, Lorillard Tobacco issued Notes, which are unconditionally guaranteed by the Company, as primary obligor, for the payment and performance of Lorillard Tobacco’s obligation in connection therewith.

The following sets forth the condensed consolidating balance sheets as of December 31, 2009 and 2008, condensed consolidating statements of income for the years ended December 31, 2009, 2008 and 2007, and condensed consolidating statements of cash flows for the years ended December 31, 2009, 2008 and 2007 for the Company as parent guarantor (herein referred to as “Parent”), Lorillard Tobacco (herein referred to as “Issuer”) and all other non-guarantor subsidiaries of the Company and Lorillard Tobacco. These condensed consolidating financial statements were prepared in accordance with Rule 3-10 of SEC Regulation S-X, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.” Lorillard accounts for investments in these subsidiaries under the equity method of accounting.

67

LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheets

December 31, 2009

(In millions)

							All		Total
							Other		Consolidating
	Parent			Issuer			Subsidiaries		Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	130		$	719		$	535	$	—		$	1,384
Accounts receivable, less allowances of $3		—			9			—		—			9
Other receivables		—			35			6		—			41
Intercompany receivables		—			—			50		(50	)		—
Inventories		—			281			—		—			281
Deferred income taxes		—			466			—		—			466
Total current assets		130			1,510			591		(50	)		2,181
Investment in subsidiaries		(20	)		581			—		(561	)		—
Plant and equipment		—			237			—		—			237
Prepaid pension assets		—			60			—		—			60
Deferred income taxes		(5	)		49			4		—			48
Other assets		—			34			15		—			49
Total assets	$	105		$	2,471		$	610	$	(611	)	$	2,575
Liabilities and Shareholders’ Equity:
Accounts and drafts payable	$	—		$	23		$	—	$	—		$	23
Accrued liabilities		18			300			—		—			318
Intercompany payables		—			50			—		(50	)		—
Settlement costs		—			982			—		—			982
Income taxes		—			14			—		—			14
Total current liabilities		18			1,369			—		(50	)		1,337
Long-term debt		—			722			—		—			722
Postretirement pension, medical and life insurance benefits		—			300			—		—			300
Other liabilities		—			116			13		—			129
Total liabilities		18			2,507			13		(50	)		2,488
Shareholders’ Equity:
Common stock		2			—			—		—			2
Additional paid-in capital		234			276			214		(490	)		234
Earnings retained in the business		1,282			(191	)		383		(192	)		1,282
Accumulated other comprehensive loss		(121	)		(121	)		—		121			(121	)
Treasury stock		(1,310	)		—			—		—			(1,310	)
Total shareholders’ equity		87			(36	)		597		(561	)		87
Total liabilities and shareholders’ equity	$	105		$	2,471		$	610	$	(611	)	$	2,575

68

LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Balance Sheets

December 31, 2008

(In millions)

							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	19		$	565		$	607		$	—		$	1,191
Accounts receivable, less allowances of $2		—			7			—			—			7
Other receivables		—			53			2			—			55
Inventories		—			255			—			—			255
Deferred income taxes		—			454			—			—			454
Total current assets		19			1,334			609			—			1,962
Investment in subsidiaries		617			641			—			(1,258	)		—
Plant and equipment		—			218			—			—			218
Prepaid pension assets		—			36			—			—			36
Deferred income taxes		(5	)		71			5			—			71
Other assets		—			19			15			—			34
Total assets	$	631		$	2,319		$	629		$	(1,258	)	$	2,321
Liabilities and Shareholders’ Equity:
Accounts and drafts payable	$	—		$	30		$	—		$	—		$	30
Accrued liabilities		—			304			(49	)		—			255
Settlement costs		—			974			—			—			974
Income taxes		—			14			—			—			14
Total current liabilities		—			1,322			(49	)		—			1,273
Postretirement pension, medical and life insurance benefits		—			317			—			—			317
Other liabilities		—			82			18			—			100
Total liabilities		—			1,721			(31	)		—			1,690
Shareholders’ Equity:
Common stock		2			—			—			—			2
Additional paid-in capital		222			263			315			(578	)		222
Earnings retained in the business		965			493			345			(838	)		965
Accumulated other comprehensive loss		(158	)		(158	)		—			158			(158	)
Treasury stock		(400	)		—			—			—			(400	)
Total shareholders’ equity		631			598			660			(1,258	)		631
Total liabilities and shareholders’ equity	$	631		$	2,319		$	629		$	(1,258	)	$	2,321

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Income

For the Year Ended December 31, 2009

(In millions)

							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Net sales (including excise taxes of $1,547)	$	—		$	5,233		$	—		$	—		$	5,233
Cost of sales		—			3,327			—			—			3,327
Gross profit		—			1,906			—			—			1,906
Selling, general and administrative(1)		1			969			(605	)		—			365
Operating income		(1	)		937			605			—			1,541
Investment income		—			4			1			—			5
Interest expense		—			(26	)		(1	)		—			(27	)
Income before taxes		(1	)		915			605			—			1,519
Income taxes		—			354			217			—			571
Equity in earnings of subsidiaries		949			388			—			(1,337	)		—
Net income	$	948		$	949		$	388		$	(1,337	)	$	948

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

Condensed Consolidating Statements of Income

For the Year Ended December 31, 2008

(In millions)

							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Net sales (including excise taxes of $712)	$	—		$	4,204		$	—		$	—		$	4,204
Cost of sales		—			2,434			—			—			2,434
Gross profit		—			1,770			—			—			1,770
Selling, general and administrative(1)		1			922			(568	)		—			355
Operating income		(1	)		848			568			—			1,415
Investment income		2			11			7			—			20
Interest expense		—			(1	)		—			—			(1	)
Income before taxes		1			858			575			—			1,434
Income taxes		(1	)		342			206			—			547
Equity in earnings of subsidiaries		885			369			—			(1,254	)		—
Net income	$	887		$	885		$	369		$	(1,254	)	$	887

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Income

For the Year Ended December 31, 2007

(In millions)

						All			Total
						Other			Consolidating
	Parent		Issuer			Subsidiaries			Adjustments			Consolidated
Net sales (including excise taxes of $688)	$	—	$	3,969		$	—		$	—		$	3,969
Cost of sales		—		2,313			—			—			2,313
Gross profit		—		1,656			—			—			1,656
Selling, general and administrative(1)		—		917			(535	)		—			382
Operating income		—		739			535			—			1,274
Investment income		10		33			66			—			109
Interest expense		—		(1	)		1			—			—
Income before taxes		10		771			602			—			1,383
Income taxes		3		280			202			—			485
Equity in earnings of subsidiaries		891		399			—		$	(1,290	)		—
Net income	$	898	$	890		$	400		$	(1,290	)	$	898

(1) Includes intercompany royalties between Issuer and other subsidiaries of a corresponding amount.

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LORILLARD, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2009
(In millions)

							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	948		$	949		$	388		$	(1,337	)	$	948
Adjustments to reconcile net income to net cash provided by operating activities:
Equity income from subsidiaries		(949	)		(388	)		—			1,337			—
Depreciation and amortization		—			32			—			—			32
Deferred income taxes		—			(10	)		1			—			(9	)
Share-based compensation		—			5			—			—			5
Pension, health and life insurance benefits expense		—			46			—			—			46
Pension, health and life insurance contributions		—			(37	)		—			—			(37	)
Excess tax benefits from share-based arrangements		—			(1	)		—			—			(1	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			16			(4	)		—			12
Inventories		—			(26	)		—			—			(26	)
Accounts payable and accrued liabilities		18			39			(1	)		—			56
Settlement costs		—			8			—			—			8
Other assets		—			(4	)		—			—			(4	)
Other		—			13			(6	)		—			7
Return on investment in subsidiaries		1,635			350			—			(1,985	)		—
Net cash provided by (used in) operating activities		1,652			992			378			(1,985	)		1,037
Cash flows from investing activities:
Return of capital		—			100			—			(100	)		—
Additions to plant and equipment		—			(51	)		—			—			(51	)
Net cash provided by (used in) investing activities		—			49			—			(100	)		(51	)
Cash flows from financing activities:
Dividends paid		(631	)		(1,635	)		(450	)		2,085			(631	)
Shares repurchased		(910	)		—			—			—			(910	)
Proceeds from issuance of long-term debt		—			750			—			—			750
Debt issuance costs		—			(5	)		—			—			(5	)
Proceeds from exercise of stock options		—			2			—			—			2
Excess tax benefits from share-based arrangements		—			1			—			—			1
Net cash provided by (used in) financing activities		(1,541	)		(887	)		(450	)		2,085			(793	)
Change in cash and cash equivalents		111			154			(72	)		—			193
Cash and cash equivalents, beginning of year		19			565			607			—			1,191
Cash and cash equivalents, end of period	$	130		$	719		$	535		$	—		$	1,384

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2008
(In millions)

							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	887		$	885		$	369		$	(1,254	)	$	887
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		—			32			—			—			32
Deferred income taxes		—			72			—			—			72
Share-based compensation		—			3			—			—			3
Gain on investments		—			(1	)		1			—			—
Pension, health and life insurance benefits expense		—			21			—			—			21
Pension, health and life insurance contributions		—			(32	)		—			—			(32	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			(38	)		—			—			(38	)
Inventories		—			(32	)		—			—			(32	)
Accounts payable and accrued liabilities		—			36			(8	)		—			28
Settlement costs		—			43			—			—			43
Income taxes		2			3			—			—			5
Other assets		—			9			—			—			9
Other		—			(18	)		—			—			(18	)
Return on investment in subsidiaries		270			212			—			(482	)		—
Net cash provided by (used in) operating activities		1,159			1,195			362			(1,736	)		980
Cash flows from investing activities:
Purchases of investments		—			(550	)		(500	)		—			(1,050	)
Proceeds from sales of investments		—			50			495			—			545
Proceeds from maturities of investments		—			500			250			—			750
Return of capital		—			150			—			(150	)		—
Additions to plant and equipment		—			(44	)		—			—			(44	)
Net cash provided by investing activities		—			106			245			(150	)		201
Cash flows from financing activities:
Dividends paid		(804	)		(1,156	)		(730	)		1,886			(804	)
Shares repurchased		(400	)		—			—			—			(400	)
Excess tax benefits from share-based arrangements		—			4			—			—			4
Net cash used in financing activities		(1,204	)		(1,152	)		(730	)		1,886			(1,200	)
Change in cash and cash equivalents		(45	)		149			(123	)		—			(19	)
Cash and cash equivalents, beginning of year		64			416			730			—			1,210
Cash and cash equivalents, end of period	$	19		$	565		$	607		$	—		$	1,191

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Condensed Consolidating Statements of Cash Flows
For the Year Ended December 31, 2007
(In millions)

							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	898		$	890		$	400		$	(1,290	)	$	898
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		—			40			—			—			40
Deferred income taxes		(1	)		(61	)		—			—			(62	)
Share-based compensation		—			2			—			—			2
Gain on investments		—			—			(34	)		—			(34	)
Amortization of marketable securities		(4	)		(5	)		(13	)		—			(22	)
Pension, health and life insurance benefits expense		—			24			—			—			24
Pension, health and life insurance contributions		—			(31	)		—			—			(31	)
Changes in operating assets and liabilities:
Accounts and other receivables		—			5			1			—			6
Inventories		—			(40	)		—			—			(40	)
Accounts payable and accrued liabilities		—			(23	)		3			—			(20	)
Settlement costs		—			102			—			—			102
Income taxes		(2	)		(35	)		(7	)		—			(44	)
Other assets		—			2			(11	)		—			(9	)
Litigation accrual		—			66			—			—			66
Other		—			6			—			—			6
Return on investment in subsidiaries		149			(78	)		—			(71	)		—
Net cash provided by (used in) operating activities		1,040			864			339			(1,361	)		882
Cash flows from investing activities:
Purchases of investments		(617	)		(1,195	)		(3,104	)		—			(4,916	)
Proceeds from sales of investments		471			248			1,215			—			1,934
Proceeds from maturities of investments		300			950			2,150			—			3,400
Additions to plant and equipment		—			(51	)		—			—			(51	)
Net cash provided by investing activities		154			(48	)		261			—			367
Cash flows from financing activities:
Dividends paid		(1,170	)		(1,040	)		(321	)		1,361			(1,170	)
Excess tax benefits from share-based arrangements		—			3			—			—			3
Net cash used in financing activities		(1,170	)		(1,037	)		(321	)		1,361			(1,167	)
Change in cash and cash equivalents		24			(221	)		279			—			82
Cash and cash equivalents, beginning of year		40			637			451			—			1,128
Cash and cash equivalents, end of period	$	64		$	416		$	730		$	—		$	1,210

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18.   Legal Contingencies

Tobacco Related Product Liability Litigation

As of February 22, 2010, approximately 11,235 product liability cases are pending against cigarette manufacturers in the United States. Lorillard Tobacco is a defendant in approximately 10,275 of these cases. Lorillard, Inc. is a co-defendant in approximately 710 cases. Approximately 7,600 of these lawsuits are Engle Progeny Cases, described below, which include approximately 4,400 Engle Progeny claims initially asserted in a small number of multi-plaintiff actions that were severed into separate lawsuits by one Florida federal court during 2009.

The pending product liability cases are composed of the types of cases listed below. Pending cases are those in which the Lorillard, Inc. or Lorillard Tobacco have been joined to the litigation by either receipt of service of process, or execution of a waiver thereof, and no final, non-appealable judgment has been entered.

Conventional Product Liability Cases.  Conventional Product Liability Cases are brought by individuals who allege cancer or other health effects caused by smoking cigarettes, by using smokeless tobacco products, by addiction to tobacco, or by exposure to environmental tobacco smoke. As of February 22, 2010, approximately 140 cases are pending against cigarette manufacturers, including approximately 30 cases against Lorillard Tobacco. Lorillard, Inc. is a co-defendant in three cases.

Engle Progeny Cases.  Engle Progeny Cases are brought by individuals who purport to be members of the decertified Engle class. These cases are pending in a number of Florida courts. Lorillard Tobacco is a defendant in approximately 7,600 Engle Progeny Cases. Lorillard, Inc. is a co-defendant in approximately 700 cases. Some of the cases have been filed on behalf of multiple class members. The time period for filing Engle Progeny Cases expired in January 2008 and no additional cases may be filed.

West Virginia Individual Personal Injury Cases.  West Virginia Individual Personal Injury Cases are brought by individuals who allege cancer or other health effects caused by smoking cigarettes, by using smokeless tobacco products, or by addiction to cigarette smoking. The cases are pending in a single West Virginia court and have been consolidated for trial. Lorillard Tobacco is a defendant in approximately 50 of the 700 pending cases that are part of this proceeding. Lorillard, Inc. is not a defendant in any of these cases. The first phase of an anticipated three-phase trial of these consolidated cases is scheduled to begin on June 1, 2010.

Flight Attendant Cases.  Flight Attendant Cases are brought by non-smoking flight attendants alleging injury from exposure to environmental smoke in the cabins of aircraft. Plaintiffs in these cases may not seek punitive damages for injuries that arose prior to January 15, 1997. Lorillard Tobacco is a defendant in each of the approximately 2,600 pending Flight Attendant Cases. Lorillard, Inc. is not a defendant in any of these cases. The time for filing Flight Attendant Cases expired during 2000 and no additional cases in this category may be filed.

Class Action Cases.  Class Action Cases are purported to be brought on behalf of large numbers of individuals for damages allegedly caused by smoking. Eight of these cases are pending against Lorillard Tobacco. Lorillard, Inc. is a co-defendant in two of these eight cases. One of the eight cases asserts claims on behalf of purchasers of “light” cigarettes. Lorillard, Inc. is not a defendant in this case. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in the approximately 40 additional “lights” class actions that are pending against other cigarette manufacturers.

Reimbursement Cases.  Reimbursement Cases are brought by or on behalf of entities who seek reimbursement of expenses incurred in providing health care to individuals who allegedly were injured by smoking. Plaintiffs in these cases have included the U.S. federal government, U.S. state and local governments, foreign governmental entities, hospitals or hospital districts, American Indian tribes, labor unions, private companies and private citizens. Four such cases are pending against Lorillard Tobacco and other cigarette

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manufacturers in the United States and one such case is pending in Israel. Lorillard, Inc. is a co-defendant in two of the cases pending in the United States. Plaintiffs in the case in Israel have attempted to assert claims against Lorillard, Inc.

Included in this category is the suit filed by the federal government, United States of America v. Philip Morris USA, Inc., et al., that sought return of profits and injunctive relief. In August 2006, the trial court issued its verdict and granted injunctive relief. The verdict did not award monetary damages. In May 2009, the verdict was largely affirmed by an appellate court. In February 2010, the parties petitioned the U.S. Supreme Court to review the case. See “— Reimbursement Cases” below.

Filter Cases.  In addition to the above, Filter Cases are brought by individuals, including former employees of Lorillard Tobacco, who seek damages resulting from their alleged exposure to asbestos fibers that were incorporated into filter material used in one brand of cigarettes manufactured by Lorillard Tobacco for a limited period of time ending more than 50 years ago. Lorillard Tobacco is a defendant in 31 such cases, including two cases in which Lorillard, Inc. is a co-defendant. Lorillard, Inc. is also a defendant in an additional Filter Case, in which Lorillard Tobacco is not a defendant.

In addition, Lorillard Tobacco and Lorillard, Inc. were named as defendants in one case in which it is alleged that a fire caused by a Lorillard cigarette led to an individual’s death. That matter was dismissed during February 2010 but the deadline for plaintiff to pursue an appeal had not expired as of February 22, 2010.

Plaintiffs assert a broad range of legal theories in these cases, including, among others, theories of negligence, fraud, misrepresentation, strict liability, breach of warranty, enterprise liability (including claims asserted under the federal Racketeering Influenced and Corrupt Organizations Act (“RICO”)), civil conspiracy, intentional infliction of harm, injunctive relief, indemnity, restitution, unjust enrichment, public nuisance, claims based on antitrust laws and state consumer protection acts, and claims based on failure to warn of the harmful or addictive nature of tobacco products.

Plaintiffs in most of the cases seek unspecified amounts of compensatory damages and punitive damages, although some seek damages ranging into the billions of dollars. Plaintiffs in some of the cases seek treble damages, statutory damages, disgorgement of profits, equitable and injunctive relief, and medical monitoring, among other damages.

Conventional Product Liability Cases

As of February 22, 2010, approximately 140 cases are pending against cigarette manufacturers in the United States. Lorillard Tobacco is a defendant in approximately 30 of these cases. Lorillard, Inc. is a co-defendant in three of the pending cases.

Since January 1, 2008, verdicts have been returned in three cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in any of these trials. Juries found in favor of the plaintiffs in each of these three trials. In one of the trials, the jury awarded actual damages. The two other cases were re-trials ordered by appellate courts in which juries were permitted to consider only the amount of punitive damages to award. Both of these trials resulted in punitive damages verdicts that awarded the plaintiffs $1.5 million in one of the cases and $13.8 million in the other Appeals are pending in two of the matters. In the third case, the deadline for the defendant to pursue an appeal had not expired as of February 22, 2010. In rulings addressing cases tried in earlier years, some appellate courts have reversed verdicts returned in favor of the plaintiffs while other judgments that awarded damages to smokers have been affirmed on appeal. Manufacturers have exhausted their appeals and have been required to pay damages to plaintiffs in eleven individual cases in recent years. Punitive damages were paid to the smokers in five of the eleven cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a party to these eleven matters.

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As of February 22, 2010, trial was not underway in any of the Conventional Product Liability Cases. Some cases are scheduled for trial in 2010, including some in which Lorillard Tobacco is a defendant. Trial dates are subject to change.

Engle Progeny Cases

In 2006, the Florida Supreme Court issued a ruling in a case that had been certified as a class action on behalf of Florida residents, and survivors of Florida residents, who were injured or died from medical conditions allegedly caused by addiction to smoking, the case of Engle v. R.J. Reynolds Tobacco Co., et al. During a three-phase trial, a Florida jury awarded actual damages to three individuals and approximately $145 billion in punitive damages to the certified class. In its 2006 decision, the Florida Supreme Court vacated the punitive damages award, determined that the case could not proceed further as a class action and ordered decertification of the class. The Florida Supreme Court also reinstated the actual damages awards to two of the three individuals whose claims were heard during the one phase of the Engle trial. These two awards totaled $7 million, and both verdicts were paid in February 2008. Lorillard Tobacco’s payment to these two individuals, including interest, totaled approximately $3 million.

The Florida Supreme Court’s 2006 ruling also permitted Engle class members to file individual actions, including claims for punitive damages. The court further held that these individuals are entitled to rely on a number of the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial. The time period for filing Engle Progeny Cases expired in January 2008 and no additional cases may be filed. In 2009, the Florida Supreme Court rejected a petition that sought to extend the time for purported class members to file an additional lawsuit.

Lorillard Tobacco is a defendant in approximately 7,600 cases filed by individuals who allege they or their decedents were members of the Engle class. Lorillard, Inc. is a co-defendant in approximately 700 of the pending cases. Some of the suits are on behalf of multiple plaintiffs. Various courts have entered orders severing the cases filed by multiple plaintiffs into separate actions. During 2009, one Florida federal court entered orders that severed the claims of approximately 4,400 Engle Progeny plaintiffs, initially asserted in a small number of multi-plaintiff actions, into separate lawsuits. In some cases, spouses of alleged former class members have also brought derivative claims.

The Engle Progeny Cases are pending in various Florida state and federal courts. Some of these courts have issued rulings that address whether these individuals are entitled to rely on a number of the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial. Some of these decisions have led to pending petitions for appeal. The U.S. Court of Appeals for the Eleventh Circuit is reviewing trial court rulings determining how courts should apply the Florida Supreme Court’s ruling regarding the Engle jury’s first phase verdict. In another case, an intermediate appellate court denied a plaintiff’s request to immediately certify an appeal to the Florida Supreme Court.

Lorillard Tobacco is a defendant in several Engle Progeny Cases that have been placed on courts’ 2010 trial calendars or in which specific 2010 trial dates have been set. Lorillard, Inc. is a defendant in some of these cases. Trial schedules are subject to change and it is not possible to predict how many of the cases pending against Lorillard Tobacco or Lorillard, Inc. will be tried during 2010. It also is not possible to predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases for trial. One of the cases scheduled for trial in 2010 involves the claims of three plaintiffs.

As of February 22, 2010, trial was underway in one of the Engle Progeny Cases.

Verdicts have been returned in eleven Engle Progeny Cases since the Florida Supreme Court issued its 2006 ruling that permitted members of the Engle class to bring individual lawsuits. Juries awarded actual damages and punitive damages in four of the trials. The four punitive damages awards were $2 million, $5 million, $25 million and $244 million. In four of the trials, juries’ awards were limited to actual damages.

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In the three other trials, juries found in favor of the defendants that the plaintiffs were not former Engle class members. As of February 22, 2010, appeals were on file in six of the cases in which plaintiffs were awarded damages, and defendants’ post-trial motions were pending in two of the cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in these eleven trials.

In a case tried prior to the Florida Supreme Court’s 2006 decision permitting members of the Engle class to bring individual lawsuits, one Florida court allowed the plaintiff to rely at trial on certain of the Engle jury’s findings. That trial resulted in a verdict for the plaintiffs in which they were awarded approximately $25 million in actual damages. Neither Lorillard Tobacco nor Lorillard, Inc. was a party to this case. The defendants in this case are pursuing an appeal of the judgment, which was not entered until 2008.

In June 2009, Florida amended the security requirements for a stay of execution of any judgment during the pendency of appeal in Engle Progeny Cases. The amended statute provides for the amount of security for individual Engle Progeny Cases to vary within prescribed limits based on the number of adverse judgments that are pending on appeal at a given time. The required security decreases as the number of appeals increases to ensure that the total security posted or deposited does not exceed $200 million in the aggregate. This amended statute applies to all judgments entered on or after June 16, 2009 and expires on December 31, 2012.

West Virginia Individual Personal Injury Cases

The proceeding known as “West Virginia Individual Personal Injury Cases” consolidates for trial in a single West Virginia court a number of cases that have been filed against cigarette manufacturers, including Lorillard Tobacco. The order that consolidated the cases, among other things, permitted only those cases filed by September 2000 to participate in the consolidated trial. As a result, no additional cases may be part of this proceeding.

Approximately 1,250 cases initially were part of this proceeding, and Lorillard Tobacco was named in all but a few of them. Lorillard, Inc. has not been a defendant in any of these cases. More than 500 of the cases have been dismissed in their entirety. Lorillard Tobacco has been dismissed from approximately 650 additional cases because those plaintiffs did not submit evidence that they had smoked a Lorillard Tobacco product. These 650 additional cases remain pending against other cigarette manufacturers and some or all the dismissals of Lorillard Tobacco could be contested in subsequent appeals noticed by the plaintiffs.

Approximately 700 cases are pending. Lorillard Tobacco is a defendant in approximately 50 of the pending cases. The court has entered a trial plan that calls for a multi-phase trial. The first phase of trial is scheduled to begin on June 1, 2010. Trial dates are subject to change.

Flight Attendant Cases

Approximately 2,600 Flight Attendant Cases are pending. Lorillard Tobacco and three other cigarette manufacturers are the defendants in each of these matters. Lorillard, Inc. is not a defendant in any of these cases. These suits were filed as a result of a settlement agreement by the parties, including Lorillard Tobacco, in Broin v. Philip Morris Companies, Inc., et al. (Circuit Court, Miami-Dade County, Florida, filed October 31, 1991), a class action brought on behalf of flight attendants claiming injury as a result of exposure to environmental tobacco smoke. The settlement agreement, among other things, permitted the plaintiff class members to file these individual suits. These individuals may not seek punitive damages for injuries that arose prior to January 15, 1997. The period for filing Flight Attendant Cases expired during 2000 and no additional cases in this category may be filed.

The judges that have presided over the cases that have been tried have relied upon an order entered in October 2000 by the Circuit Court of Miami-Dade County, Florida. The October 2000 order has been construed by these judges as holding that the flight attendants are not required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover

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damages. The court further ruled that the trials of these suits are to address whether the plaintiffs’ alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of damages to be awarded.

Lorillard Tobacco was a defendant in each of the eight flight attendant cases in which verdicts have been returned. Defendants have prevailed in seven of the eight trials. In one of the seven cases in which a defense verdict was returned, the court granted plaintiff’s motion for a new trial and, following appeal, the case has been returned to the trial court for a second trial. The six remaining cases in which defense verdicts were returned are concluded. In the single trial decided for the plaintiff, French v. Philip Morris Incorporated, et al., the jury awarded $5.5 million in damages. The court, however, reduced this award to $500,000. This verdict, as reduced by the trial court, was affirmed on appeal and the defendants have paid the award. Lorillard Tobacco’s share of the judgment in this matter, including interest, was approximately $60,000.

As of February 22, 2010, none of the flight attendant cases are scheduled for trial. Trial dates are subject to change.

Class Action Cases

Lorillard Tobacco is a defendant in eight pending cases. Lorillard, Inc. is a co-defendant in two of these cases. In most of the pending cases, plaintiffs seek class certification on behalf of groups of cigarette smokers, or the estates of deceased cigarette smokers, who reside in the state in which the case was filed.

Cigarette manufacturers, including Lorillard Tobacco and Lorillard, Inc., have defeated motions for class certification in a total of 36 cases, 13 of which were in state court and 23 of which were in federal court. Motions for class certification have also been ruled upon in some of the “lights” cases or in other class actions to which neither Lorillard Tobacco nor Lorillard, Inc. was a party. In some of these cases, courts have denied class certification to the plaintiffs, while classes have been certified in other matters.

The Scott Case.  In one of the class actions pending against Lorillard Tobacco, Scott v. The American Tobacco Company, et al.  (District Court, Orleans Parish, Louisiana, filed May 24, 1996), the members of the class have been awarded damages. The defendants, including Lorillard Tobacco, have noticed an appeal from this award to the Louisiana Court of Appeal, Fourth Circuit. The court heard the appeal in September 2009, but had not issued a ruling as of February 22, 2010. The appeal is from the amended final judgment entered by the District Court in July 2008 that ordered defendants to pay approximately $264 million to fund a court-supervised cessation program for the members of the certified class. The amended final judgment also awards post-judgment judicial interest that will continue to accrue from June 2004 until the judgment either is paid or is reversed on appeal. As of February 22, 2010, judicial interest totaled approximately $107 million. Lorillard, Inc., which was a party to the case in the past, is no longer a defendant in Scott.

During 1997, Scott was certified a class action on behalf of certain cigarette smokers resident in the State of Louisiana who desire to participate in medical monitoring or smoking cessation programs and who began smoking prior to September 1, 1988, or who began smoking prior to May 24, 1996 and allege that defendants undermined compliance with the warnings on cigarette packages.

Trial in Scott was heard in two phases. At the conclusion of the first phase in July 2003, the jury rejected medical monitoring, the primary relief requested by plaintiffs, and returned sufficient findings in favor of the class to proceed to a Phase II trial on plaintiffs’ request for a statewide smoking cessation program. Phase II of the trial, which concluded in May 2004, resulted in an award of $591 million to fund cessation programs for Louisiana smokers.

In February 2007, the Louisiana Court of Appeal reduced the amount of the award by approximately $328 million; struck an award of prejudgment interest, which totaled approximately $440 million as of December 31, 2006; and limited class membership to individuals who began smoking by September 1, 1988,

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and whose claims accrued by September 1, 1988. In January 2008, the Louisiana Supreme Court denied plaintiffs’ and defendants’ separate petitions for review. The U.S. Supreme Court denied defendants’ request that it review the case in May 2008. The case was returned to the trial court, which subsequently entered the amended final judgment. The defendants, including Lorillard Tobacco, have appealed the amended final judgment.

Should the amended final judgment be sustained on appeal, Lorillard Tobacco’s share of that judgment, including the award of post-judgment interest, has not been determined. In the fourth quarter of 2007, Lorillard, Inc. recorded a pretax provision of approximately $66 million for this matter which was included in selling, general and administrative expenses on the consolidated statements of income and in other liabilities on the consolidated balance sheets.

The parties filed a stipulation in the trial court agreeing that an article of Louisiana law required that the amount of the bond for the appeal be set at $50 million for all defendants collectively. The parties further agreed that the plaintiffs have full reservations of rights to contest in the trial court the sufficiency of the bond on any grounds. Defendants collectively posted a surety bond in the amount of $50 million, of which Lorillard Tobacco secured 25%, or $12.5 million, which is classified as restricted cash within other assets on the consolidated balance sheet. While Lorillard Tobacco believes the limitation on the appeal bond amount is valid as required by Louisiana law, in the event of a successful challenge the amount of the appeal bond could be set as high as 150% of the judgment and judicial interest combined. If such an event occurred, Lorillard Tobacco’s share of the appeal bond has not been determined.

Other Class Action Cases.  In one of the cases pending against Lorillard Tobacco, Brown v. The American Tobacco Company, Inc., et al.  (Superior Court, San Diego County, California, filed June 10, 1997), the court initially certified the case as a class action but it subsequently granted defendants’ motion for class decertification. During 2009, the California Supreme Court vacated the class decertification order and Brown has been returned to the trial court for further activity. While it is not possible to predict future developments in Brown, a new class certification order could be entered. The class previously certified in Brown was composed of residents of California who smoked at least one of defendants’ cigarettes between June 10, 1993 and April 23, 2001 and who were exposed to defendants’ marketing and advertising activities in California.

“Lights” Class Actions.  Cigarette manufacturers are defendants in another group of cases in which plaintiffs’ claims are based on the allegedly fraudulent marketing of “light” or “ultra-light” cigarettes. Classes have been certified in some of these matters. In one of the pending “lights” cases, Good v. Altria Group, Inc., et al., the U.S. Supreme Court ruled that neither the Federal Cigarette Labeling and Advertising Act nor the Federal Trade Commission’s regulation of cigarettes’ tar and nicotine disclosures preempts (or bars) some of plaintiffs’ claims. Lorillard Tobacco is a defendant in one class action in which plaintiffs claims are limited to purchasers of “light” cigarettes, Schwab v. Philip Morris USA, Inc., et al., which is discussed below. In another case, Cleary v. Philip Morris Incorporated, et al., a court allowed plaintiffs to amend their complaint in an existing class action to assert claims on behalf of a subclass of individuals who purchased “light” cigarettes from the defendants, but it subsequently dismissed the “light” cigarettes claims asserted against Lorillard Tobacco. As of February 22, 2010, the deadline for plaintiffs to appeal this ruling had not expired. Lorillard, Inc. is not a party to any of the purported “lights” class actions.

Approximately 40 additional purported “lights” class actions are pending against other cigarette manufacturers. During 2009, the Judicial Panel on Multidistrict Litigation consolidated various federal court “lights” class actions pending against Philip Morris USA or Altria Group and transferred those cases to the U.S. District Court of Maine. As of February 22, 2010, 14 cases were part of the consolidated proceeding. None of the cases pending against Lorillard Tobacco or Lorillard, Inc. are part of the consolidated proceeding.

The Schwab Case.  In the case of Schwab v. Philip Morris USA, Inc., et al. (U.S. District Court, Eastern District, New York, filed May 11, 2004), plaintiffs base their claims on defendants’ alleged violations of the

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RICO statute in the manufacture, marketing and sale of “light” cigarettes. Plaintiffs estimated damages to the class in the hundreds of billions of dollars. Any damages awarded to the plaintiffs based on defendants’ violation of the RICO statute would be trebled. In September 2006, the court granted plaintiffs’ motion for class certification and certified a nationwide class action on behalf of purchasers of “light” cigarettes. In March 2008, the Second Circuit Court of Appeals reversed the class certification order and ruled that the case may not proceed as a class action. Schwab has been returned to the U.S. District Court for the Eastern District of New York for further proceedings, but the future activity in this matter, if any, is not known. Lorillard, Inc. is not a party to this case.

Reimbursement Cases

Lorillard Tobacco is a defendant in the four Reimbursement Cases that are pending in the U.S. and it has been named as a party to a case in Israel. Lorillard, Inc. is a co-defendant in two of the four cases pending in the U.S. Plaintiffs in the case in Israel have attempted to assert claims against Lorillard, Inc.

U.S. Federal Government Action.  In August 2006, the U.S. District Court for the District of Columbia issued its final judgment and remedial order in the federal government’s reimbursement suit (United States of America v. Philip Morris USA, Inc., et al., U.S. District Court, District of Columbia, filed September 22, 1999). The verdict concluded a bench trial that began in September 2004. Lorillard Tobacco, other cigarette manufacturers, two parent companies and two trade associations are defendants in this action. Lorillard, Inc. is not a party to this case.

In its 2006 verdict, the court determined that the defendants, including Lorillard Tobacco, violated certain provisions of the RICO statute, that there was a likelihood of present and future RICO violations, and that equitable relief was warranted. The government was not awarded monetary damages. The equitable relief included permanent injunctions that prohibit the defendants, including Lorillard Tobacco, from engaging in any act of racketeering, as defined under RICO; from making any material false or deceptive statements concerning cigarettes; from making any express or implied statement about health on cigarette packaging or promotional materials (these prohibitions include a ban on using such descriptors as “low tar,” “light,” “ultra-light,” “mild” or “natural”); and from making any statements that “low tar,” “light,” “ultra-light,” “mild” or “natural” or low-nicotine cigarettes may result in a reduced risk of disease. The final judgment and remedial order also requires the defendants, including Lorillard Tobacco, to make corrective statements on their websites, in certain media, in point-of-sale advertisements, and on cigarette package “inserts” concerning: the health effects of smoking; the addictiveness of smoking; that there are no significant health benefits to be gained by smoking “low tar,” “light,” “ultra-light,” “mild” or “natural” cigarettes; that cigarette design has been manipulated to ensure optimum nicotine delivery to smokers; and that there are adverse effects from exposure to secondhand smoke. If the final judgment and remedial order are not modified or vacated on appeal, the costs to Lorillard Tobacco for compliance could exceed $10 million.

Following trial, the defendants, the government and several intervenors noticed appeals to the Circuit Court of Appeals for the District of Columbia. In May 2009, a three judge panel upheld substantially all of the District Court’s final judgment and remedial order. Defendants received a stay of the judgment and remedial order from the Court of Appeals that remained in effect while the appeal was pending. In September 2009, the Court of Appeals denied defendants’ rehearing petitions as well as their motion to vacate those statements in the appellate ruling that address defendants’ marketing of “low tar” or “lights” cigarettes, to vacate those parts of the trial court’s judgment on that issue, and to remand the case with instructions to deny as moot the government’s allegations and requested relief regarding “lights” cigarettes. The Court of Appeals has stayed its order that formally relinquishes jurisdiction of defendants’ appeal pending the filing and disposition of the government’s and the defendants’ petitions for writ of certiorari to the U.S. Supreme Court. As of February 22, 2010, the U.S. Supreme Court has not announced whether it will grant review of any of the petitions for writ of certiorari that were filed on February 19, 2010 by Lorillard Tobacco, the other defendants, the federal government and the intervenors.

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While trial was underway, the Court of Appeals ruled that plaintiff may not seek to recover profits earned by the defendants. Prior to trial, the government had claimed that it was entitled to approximately $280 billion from the defendants for its claim to recover profits earned by the defendants. Recovery of profits may be considered by the U.S. Supreme Court in the pending appeal.

Settlement of State Reimbursement Litigation

On November 23, 1998, Lorillard Tobacco, Philip Morris Incorporated, Brown & Williamson Tobacco Corporation and R.J. Reynolds Tobacco Company (the “Original Participating Manufacturers”) entered into the Master Settlement Agreement (“MSA”) with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Commonwealth of the Northern Mariana Islands to settle the asserted and unasserted health care cost recovery and certain other claims of those states. These settling entities are generally referred to as the “Settling States.” The Original Participating Manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota, which together with the MSA are referred to as the “State Settlement Agreements.”

The State Settlement Agreements provide that the agreements are not admissions, concessions or evidence of any liability or wrongdoing on the part of any party, and were entered into by the Original Participating Manufacturers to avoid the further expense, inconvenience, burden and uncertainty of litigation. Lorillard recorded pretax charges for its obligations under the State Settlement Agreements of $280 million and $1,128 million for the three and twelve months ended December 31, 2009, respectively, and $263 million and $1,117 million for the three and twelve months ended December 31, 2008, respectively. Lorillard’s portion of ongoing adjusted settlement payments and legal fees is based on its share of domestic cigarette shipments in the year preceding that in which the payment is due. Accordingly, Lorillard records its portions of ongoing adjusted settlement payments as part of cost of manufactured products sold as the related sales occur.

The State Settlement Agreements require that the domestic tobacco industry make annual payments of $9.4 billion, subject to adjustment for several factors, including inflation, market share and industry volume. In addition, the domestic tobacco industry is required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million, as well as an additional amount of up to $125 million in each year through 2008. These payment obligations are the several and not joint obligations of each settling defendant.

The State Settlement Agreements also include provisions relating to significant advertising and marketing restrictions, public disclosure of certain industry documents, limitations on challenges to tobacco control and underage use laws, and other provisions. Lorillard Tobacco and the other Original Participating Manufacturers have notified the States that they intend to seek an adjustment in the amount of payments made in 2003 pursuant to a provision in the MSA that permits such adjustment if the companies can prove that the MSA was a significant factor in their loss of market share to companies not participating in the MSA and that the States failed to diligently enforce certain statutes passed in connection with the MSA. If the Original Participating Manufacturers are ultimately successful, any adjustment would be reflected as a credit against future payments by the Original Participating Manufacturers under the agreement.

From time to time, lawsuits have been brought against Lorillard Tobacco and other participating manufacturers to the MSA, or against one or more of the states, challenging the validity of the MSA on certain grounds, including as a violation of the antitrust laws. See “— MSA-Related Antitrust Suit” below.

In addition, in connection with the MSA, the Original Participating Manufacturers entered into an agreement to establish a $5.2 billion trust fund payable between 1999 and 2010 to compensate the tobacco growing communities in 14 states (the “Trust”). Payments to the Trust will no longer be required as a result of an assessment imposed under a new federal law repealing the federal supply management program for tobacco growers. Under the new law, enacted in October 2004, tobacco quota holders and growers will be compensated

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

with payments totaling $10.1 billion, funded by an assessment on tobacco manufacturers and importers. Payments to qualifying tobacco quota holders and growers commenced in 2005.

Lorillard believes that the State Settlement Agreements will materially adversely affect its cash flows and operating income in future years. The degree of the adverse impact will depend, among other things, on the rates of decline in domestic cigarette sales in the premium price and discount price segments, Lorillard’s share of the domestic premium price and discount price cigarette segments, and the effect of any resulting cost advantage of manufacturers not subject to significant payment obligations under the State Settlement Agreements.

Filter Cases

In addition to the above, claims have been brought against Lorillard Tobacco and Lorillard, Inc. by individuals who seek damages resulting from their alleged exposure to asbestos fibers that were incorporated into filter material used in one brand of cigarettes manufactured by Lorillard Tobacco for a limited period of time ending more than 50 years ago. Lorillard Tobacco is a defendant in 31 such cases. Lorillard, Inc. is a defendant in three Filter Cases, including two that also name Lorillard Tobacco. Since January 1, 2008, Lorillard Tobacco has paid, or has reached agreement to pay, a total of approximately $12.9 million in settlements to finally resolve approximately 60 claims. The related expense was recorded in selling, general and administrative expenses on the consolidated statements of income. Since January 1, 2008, verdicts have been returned in two Filter Cases. During September 2008, a jury in the District Court of Bexar County, Texas, returned a verdict for Lorillard Tobacco in the case of Young v. Lorillard Tobacco Company. Plaintiffs in the Young case did not pursue an appeal and that matter is concluded. During January 2010, a jury in the Superior Court of California, Los Angeles County, returned a verdict for Lorillard Tobacco in the case of Cox v. Asbestos Corporation, Ltd., et al. In the case of Cox, the deadline for plaintiffs to pursue an appeal had not expired as of February 22, 2010. As of February 22, 2010, ten of the Filter Cases were scheduled for trial. Trial dates are subject to change.

Tobacco-Related Antitrust Cases

Indirect Purchaser Suits.  Approximately 30 antitrust suits were filed in 2000 and 2001 on behalf of putative classes of consumers in various state courts against cigarette manufacturers, including Lorillard Tobacco. The suits all alleged that the defendants entered into agreements to fix the wholesale prices of cigarettes in violation of state antitrust laws which permit indirect purchasers, such as retailers and consumers, to sue under price fixing or consumer fraud statutes. More than 20 states permit such suits. Lorillard, Inc. was not named as a defendant in any of these cases. Lorillard Tobacco was a defendant in all but one of these indirect purchaser cases. Three indirect purchaser suits, in New York, Florida and Michigan, thereafter were dismissed by courts in those states, and the plaintiffs withdrew their appeals. The actions in all other states, except for New Mexico and Kansas, were voluntarily dismissed. The New Mexico suit was thereafter dismissed as to Lorillard Tobacco.

In the Kansas case, the District Court of Seward County certified a class of Kansas indirect purchasers in 2002. In July 2006, the Court issued an order confirming that fact discovery was closed, with the exception of privilege issues that the Court determined, based on a Special Master’s report, justified further fact discovery. In October 2007, the Court denied all of the defendants’ privilege claims, and the Kansas Supreme Court thereafter denied a petition seeking to overturn that ruling. Discovery currently is ongoing. No date has been set by the Court for dispositive motions and trial.

MSA-Related Antitrust Suit.  In October 2008, Lorillard Tobacco was named as a defendant in an action filed in the Western District of Kentucky, Vibo Corporation, Inc. d/b/a/ General Tobacco v. Conway, et al. The suit alleges that the named defendants, which include 52 state and territorial attorneys general and 19 tobacco manufacturers, violated the federal Sherman Antitrust Act of 1890 (the “Sherman Act”) by entering into and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

participating in the MSA. The plaintiff alleges that MSA participants, like it, that were not in existence when the MSA was executed in 1998 but subsequently became participants, are unlawfully required to pay significantly more sums to the states than companies that joined the MSA within 90 days after its execution. In addition to the Sherman Act claim, plaintiff has raised a number of constitutional claims against the states. Plaintiff seeks a declaratory judgment in its favor on all claims, an injunction against the continued enforcement of the MSA, treble damages against the tobacco manufacturer defendants, including Lorillard Tobacco and other manufacturer defendants, and damages and injunctive relief against the states, including contract recession and restitution. In December 2008, the court dismissed the complaint against all defendants, including Lorillard Tobacco. The court entered its final judgment dismissing the suit on January 6, 2010. The plaintiff filed a notice of appeal to the federal Court of Appeals for the Sixth Circuit. To date, no further filings have been made.

Defenses

Each of Lorillard Tobacco and Lorillard, Inc. believes that it has valid defenses to the cases pending against it as well as valid bases for appeal should any adverse verdicts be returned against either of them. As of February 22, 2010, Lorillard Tobacco was a defendant in approximately 10,275 pending product liability cases, and Lorillard, Inc. was a co-defendant in approximately 710 of these cases. While Lorillard Tobacco and Lorillard, Inc. intend to defend vigorously all tobacco products liability litigation, it is not possible to predict the outcome of any of this litigation. Litigation is subject to many uncertainties. Plaintiffs have prevailed in several cases, as noted above. It is possible that one or more of the pending actions could be decided unfavorably as to Lorillard Tobacco, Lorillard, Inc. or the other defendants. Lorillard Tobacco and Lorillard, Inc. may enter into discussions in an attempt to settle particular cases if either believe it is appropriate to do so.

Neither Lorillard Tobacco nor Lorillard, Inc. can predict the outcome of pending litigation. Some plaintiffs have been awarded damages from cigarette manufacturers at trial. While some of these awards have been overturned or reduced, other damages awards have been paid after the manufacturers have exhausted their appeals. These awards and other litigation activities against cigarette manufacturers continue to receive media attention. In addition, health issues related to tobacco products also continue to receive media attention. It is possible, for example, that the 2006 verdict in United States of America v. Philip Morris USA, Inc., et al., which made many adverse findings regarding the conduct of the defendants, including Lorillard Tobacco, could form the basis of allegations by other plaintiffs or additional judicial findings against cigarette manufacturers, including giving collateral estoppel effect to those adverse findings. In addition, the ruling in Good v. Altria Group, Inc., et al. could result in further “lights” litigation. Any such developments could have an adverse effect on the ability of Lorillard Tobacco or Lorillard, Inc. to prevail in smoking and health litigation and could influence the filing of new suits against Lorillard Tobacco or Lorillard, Inc. Lorillard Tobacco and Lorillard, Inc. also cannot predict the type or extent of litigation that could be brought against either of them, or against other cigarette manufacturers, in the future.

Lorillard records provisions in the consolidated financial statements for pending litigation when it determines that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. Except for the impact of the State Settlement Agreements and Scott as described above, management is unable to make a meaningful estimate of the amount or range of loss that could result from an unfavorable outcome of material pending litigation and, therefore, no material provision has been made in the consolidated financial statements for any unfavorable outcome. It is possible that Lorillard’s results of operations or cash flows in a particular quarterly or annual period or its financial position could be materially adversely affected by an unfavorable outcome or settlement of certain pending litigation.

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Indemnification Obligations

In connection with the Separation Lorillard entered into a separation agreement with Loews (the “Separation Agreement”) and agreed to indemnify Loews and its officers, directors, employees and agents against all costs and expenses arising out of third party claims (including, without limitation, attorneys’ fees, interest, penalties and costs of investigation or preparation for defense), judgments, fines, losses, claims, damages, liabilities, taxes, demands, assessments and amounts paid in settlement based on, arising out of or resulting from, among other things, Loews’ ownership of or the operation of Lorillard and its assets and properties, and its operation or conduct of its businesses at any time prior to or following the Separation (including with respect to any product liability claims).

Loews is a defendant in three pending product liability cases. One of these is a Reimbursement Case in Israel and two are purported Class Action Cases on file in U.S. courts. Lorillard Tobacco also is a defendant in each of the three product liability cases in which Loews is involved. Pursuant to the Separation Agreement, Lorillard will be required to indemnify Loews for the amount of any losses and any legal or other fees with respect to such cases.

Other Litigation

Lorillard is also party to other litigation arising in the ordinary course of business. The outcome of this other litigation will not, in the opinion of management, materially affect Lorillard’s results of operations or equity.

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Item 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A.   CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a — 15 under the Exchange Act as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this annual report, our disclosure controls and procedures (as defined in Rule 13a — 15(e) under the Exchange Act) are effective, in all material respects, to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with accounting principles generally accepted in the United States (“GAAP”). The effectiveness of any system of internal control over financial reporting is subject to inherent limitations, including the exercise of judgment in designing, implementing, operating and evaluating our internal control over financial reporting. Because of these inherent limitations, internal control over financial reporting cannot provide absolute assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that our internal control over financial reporting may become inadequate because of changes in conditions or other factors, or that the degree of compliance with the policies or procedures may deteriorate.

Management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2009 as required under Section 404 of the Sarbanes-Oxley Act of 2002. Management’s assessment of the effectiveness of our internal control over financial reporting was conducted using the criteria in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management reviewed the results of its assessment with the Audit Committee of our Board of Directors. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2009.

The effectiveness of our internal control over financial reporting as of December 31, 2009 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm, as stated in their attestation report included herein.

Changes in Internal Control over Financial Reporting

During 2009, we implemented internal controls relating to the issuance of our Notes and interest rate swap agreements. Other than as noted above, no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during our most recent fiscal year that has materially affected, or is likely to materially affect, our internal control over financial reporting.

86

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Lorillard, Inc.

Greensboro, North Carolina.

We have audited the internal control over financial reporting of Lorillard, Inc. and Subsidiaries (the “Company”) as of December 31, 2009 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended December 31, 2009 of the Company and our report dated February 25, 2010 expressed an unqualified opinion on those consolidated financial statements and financial statement schedule.

/s/ Deloitte & Touche LLP

Charlotte, North Carolina

February 25, 2010

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Item 9B.   OTHER INFORMATION

None.

PART III

Item 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required by this item is contained in our proxy statement for our 2010 Annual Meeting of Shareholders to be held on May 20, 2010, to be filed pursuant to Section 14 of the Exchange Act, and is incorporated herein by reference.

Item 11.   EXECUTIVE COMPENSATION

The information required by this item is contained in our proxy statement for our 2009 Annual Meeting of Shareholders to be held on May 20, 2010, to be filed pursuant to Section 14 of the Exchange Act, and is incorporated herein by reference.

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by this item is contained in our proxy statement for our 2010 Annual Meeting of Shareholders to be held on May 20, 2010, to be filed pursuant to Section 14 of the Exchange Act, and is incorporated herein by reference.

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item is contained in our proxy statement for our 2010 Annual Meeting of Shareholders to be held on May 20, 2010, to be filed pursuant to Section 14 of the Exchange Act, and is incorporated herein by reference.

Item 14.   PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is contained in our proxy statement for our 2010 Annual Meeting of Shareholders to be held on May 20, 2010, to be filed pursuant to Section 14 of the Exchange Act, and is incorporated herein by reference.

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PART IV

Item 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  Listing of Documents

(1) Financial Statements

The Company’s Consolidated Financial Statements included in Item 8 hereof, as required at December 31, 2009 and December 31, 2008, and for the periods ended December 31, 2009, December 31, 2008 and December 31, 2007, consist of the following:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Cash Flows

Consolidated Statements of Shareholders’ Equity

Notes to Consolidated Financial Statements

(2) Financial Statement Schedule

Financial Statement Schedule of the Company appended hereto, as required for the periods ended December 31, 2009, December 31, 2008 and December 31, 2007, consists of the following:

Valuation and Qualifying Accounts

(3) Exhibits

Exhibit
Number			Description
	3	.1	Amended and Restated Certificate of Incorporation of Lorillard, Inc., incorporated herein by reference to Exhibit 3.1 to our Current Report on Form 8-K (File No. 1-34097) filed on June 12, 2008
	3	.2	Amended and Restated Bylaws of Lorillard, Inc., incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K filed (File No. 1-34097) on June 12, 2008
	4	.1	Specimen certificate for shares of common stock of Lorillard, Inc., incorporated herein by reference to Exhibit 4.1 to our Amended Registration Statement on Form S-4 (File No. 333-149051) filed on May 9, 2008
	4	.2	Indenture, dated June 23, 2009, among Lorillard Tobacco Company, Lorillard, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009
	4	.3	First Supplemental Indenture, dated June 23, 2009, among Lorillard Tobacco Company, Lorillard, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee, incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009
	4	.5	Form of 8.125% Senior Note due 2019 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K (File No. 1-34097) filed on June 23, 2009
	10	.1	Separation Agreement between Loews Corporation and Lorillard, Inc., Lorillard Tobacco Company, Lorillard Licensing Company, LLC, One Park Media Services, Inc. and Plisa, S.A., incorporated herein by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q (File No. 1-34097) filed on August 7, 2008
	10	.2	Amended and Restated Employment Agreement between Lorillard, Inc. and Martin L. Orlowsky, dated December 19, 2008†*
	10	.3	Comprehensive Settlement Agreement and Release with the State of Florida to settle and resolve with finality all present and future economic claims by the State and its subdivisions relating to the use of or exposure to tobacco products, incorporated herein by reference to Exhibit 10 to Loews’s Report on Form 8-K (File No. 1-6541) filed September 5, 1997

89

Exhibit
Number			Description
	10	.4	Comprehensive Settlement Agreement and Release with the State of Texas to settle and resolve with finality all present and future economic claims by the State and its subdivisions relating to the use of or exposure to tobacco products, incorporated herein by reference to Exhibit 10 to Loews’s Report on Form 8-K (File No. 1-6541) filed February 3, 1998
	10	.5	State of Minnesota Settlement Agreement and Stipulation for Entry of Consent Judgment to settle and resolve with finality all claims of the State of Minnesota relating to the subject matter of this action which have been or could have been asserted by the State, incorporated herein by reference to Exhibit 10.1 to Loews’s Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998
	10	.6	State of Minnesota Consent Judgment relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.2 to Loews’s Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998
	10	.7	State of Minnesota Settlement Agreement and Release relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.3 to Loews’s Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998
	10	.8	State of Minnesota State Escrow Agreement relating to the settlement of tobacco litigation, incorporated herein by reference to Exhibit 10.6 to Loews’s Report on Form 10-Q for the quarter ended March 31, 1998 (File No. 1-6541) filed May 15, 1998
	10	.9	Stipulation of Amendment to Settlement Agreement and For Entry of Agreed Order, dated July 2, 1998, regarding the settlement of the State of Mississippi health care cost recovery action, incorporated herein by reference to Exhibit 10.1 to Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed August 14, 2008
	10	.10	Mississippi Fee Payment Agreement, dated July 2, 1998, regarding the payment of attorneys’ fees, incorporated herein by reference to Exhibit 10.2 to Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed August 14, 2008
	10	.11	Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated July 24, 1998, regarding the settlement of the Texas health care cost recovery action, incorporated herein by reference to Exhibit 10.4 to Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed on August 14, 2008
	10	.12	Texas Fee Payment Agreement, dated July 24, 1998, regarding the payment of attorneys’ fees, incorporated herein by reference to Exhibit 10.5 to Loews’s Report on Form 10-Q for the quarter ended June 30, 1998 (File No. 1-6541) filed on August 14, 2008
	10	.13	Stipulation of Amendment to Settlement Agreement and For Entry of Consent Decree, dated September 11, 1998, regarding the settlement of the Florida health care cost recovery action, incorporated herein by reference to Exhibit 10.1 to Loews’s Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 1-6541) filed November 17, 2008
	10	.14	Florida Fee Payment Agreement, dated September 11, 1998, regarding the payment of attorneys’ fees, incorporated herein by reference to Exhibit 10.2 to Loews’s Report on Form 10-Q for the quarter ended September 30, 1998 (File No. 1-6541) filed November 17, 2008
	10	.15	Master Settlement Agreement with 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa and the Northern Marianas to settle the asserted and unasserted health care cost recovery and certain other claims of those states, incorporated herein by reference to Exhibit 10 to Loews’s Current Report on Form 8-K (File No. 1-6541) filed November 25, 1998
	10	.16	Form of Assignment and Assumption of Services Agreement, dated as of April 1, 2008, by and between R.J. Reynolds Tobacco Company and R.J. Reynolds Global Products, Inc., with a joinder by Lorillard Tobacco Company, incorporated herein by reference to Exhibit 10.17 to our Amended Registration Statement on Form S-4 (File No. 333-149051) filed on March 26, 2008
	10	.17	Lorillard, Inc. 2008 Incentive Compensation Plan, incorporated herein by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 filed on August 7, 2008†

90

Exhibit
Number			Description
	10	.18	Form of Lorillard, Inc. indemnification agreement for directors and executive officers, incorporated herein by reference to Exhibit 10.19 to our Amended Registration Statement on Form S-4 (File No. 333-149051) filed on May 9, 2008†
	10	.19	Form of Severance Agreement for named executive officers, incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K filed on July 10, 2008†
	10	.20	Amendment to Supply Agreement for Reconstituted Tobacco, dated as of October 30, 2008, by and between R.J. Reynolds Tobacco Company and Lorillard Tobacco Company, incorporated herein by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 filed on November 4, 2008#
	10	.21	Form of Stock Appreciation Rights Award Certificate, incorporated herein by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q filed on November 4, 2008†
	11	.1	Statement regarding computation of earnings per share. (See Note 7 to the consolidated financial statements.)*
	12	.1	Computation of Ratio of Earnings to Fixed Charges*
	21	.1	Subsidiaries of Lorillard, Inc.*
	23	.1	Consent of Independent Registered Public Accounting Firm*
	23	.2	Consent of Management Science Associates, Inc., incorporated herein by reference to Exhibit 23.2 to our Annual Report on Form 10-K for the year ended December 31, 2008 filed on March 2, 2009.
	31	.1	Certification by the Chief Executive Officer of Lorillard, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a)*
	31	.2	Certification by the Chief Financial Officer of Lorillard, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a)*
	32	.1	Certification by the Chief Executive Officer and Chief Financial Officer of Lorillard, Inc. pursuant to 18 U.S.C. Section 1350 (as adopted by Section 906 of the Sarbanes-Oxley Act of 2002)*
	99	.1	Certain Litigation Matters*
	101	.INS	XBRL Instance Document**
	101	.SCH	XBRL Taxonomy Extension Schema Document**
	101	.CAL	XBRL Taxonomy Extension Calculation Linkbase Document**
	101	.LAB	XBRL Taxonomy Extension Label Linkbase Document**
	101	.PRE	XBRL Taxonomy Extension Presentation Linkbase Document**
	101	.DEF	XBRL Taxonomy Extension Definition Linkbase Document**

*	Filed herewith.
**	Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.
#	Confidential treatment has been granted for certain portions of this exhibit pursuant to an order under the Exchange Act of 1934, as amended, which portions have been omitted and filed separately with the Securities and Exchange Commission.
†	Management or compensatory plan or arrangement required to be filed pursuant to Item 601(b)(10) of Regulation S-K.

91

Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 25, 2010.

LORILLARD, INC.

By:  /s/  MARTIN L. ORLOWSKY

Name:     Martin L. Orlowsky

Title:  Chairman, President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Annual Report on Form 10-K has been signed by the following persons in the capacities indicated on February 25, 2010. The undersigned hereby constitute and appoint Martin L. Orlowsky, David H. Taylor and Ronald S. Milstein, and each of them, their true and lawful agents and attorneys-in-fact with full power and authority in said agents and attorneys-in-fact, and in any one or more of them, to sign for the undersigned and in their respective names as directors and officers of Lorillard, Inc., any amendment or supplement hereto. The undersigned hereby confirm all acts taken by such agents and attorney-in-fact, or any one or more of them, as herein authorized.

Signature	Title
/s/  MARTIN L. ORLOWSKY Martin L. Orlowsky	Chairman, President and Chief Executive Officer (Principal Executive Officer)
/s/  DAVID H. TAYLOR David H. Taylor	Director and Executive Vice President, Finance and Planning and Chief Financial Officer (Principal Financial Officer)
/s/  THOMAS R. STAAB Thomas R. Staab	Senior Vice President, Finance and Chief Accounting Officer, (Principal Accounting Officer)
/s/  ROBERT C. ALMON Robert C. Almon	Director
/s/  VIRGIS W. COLBERT Virgis W. Colbert	Director
/s/  DAVID E. R. DANGOOR David E. R. Dangoor	Director
/s/  KIT D. DIETZ Kit D. Dietz	Director
/s/  RICHARD W. ROEDEL Richard W. Roedel	Director
/s/  NIGEL TRAVIS Nigel Travis	Director

92

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS OF LORILLARD, INC. AND SUBSIDIARIES

Column A	Column B		Column C				Column D		Column E
			Additions
	Balance at		Charged to		Charged				Balance at
	Beginning		Costs and		to Other				End of
Description	of Period		Expenses		Accounts		Deductions(1)		Period
	(In millions)
For the Year Ended December 31, 2009
Deducted from assets:
Allowance for discounts	$	—	$	175	$	—	$	174	$	1
Allowance for doubtful accounts		2		—	$	—		—		2
	$	2	$	175	$	—	$	174	$	3
For the Year Ended December 31, 2008
Deducted from assets:
Allowance for discounts	$	—	$	145	$	—	$	145	$	—
Allowance for doubtful accounts		2		—	$	—		—		2
Total	$	2	$	145	$	—	$	145	$	2
For the Year Ended December 31, 2007
Deducted from assets:
Allowance for discounts	$	—	$	138	$	—	$	138	$	—
Allowance for doubtful accounts		2		—	$	—		—		2
Total	$	2	$	138	$	—	$	138	$	2

(1) Discounts allowed.

93

EX-12.1

Exhibit 12.1

LORILLARD, INC. AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(In millions)

	Year Ended December 31,
	2009		2008		2007		2006		2005
Earnings from continuing operations before income taxes	$	1,519	$	1,434	$	1,383	$	1,344	$	1,151
Add:
Fixed Charges		27		—		—		—		—
Earnings available for fixed charges	$	1,546	$	1,434	$	1,383	$	1,344	$	1,151
Fixed Charges:
Interest expense, net of interest rate swaps:	$	27	$	—	$	—	$	—	$	—
Fixed Charges	$	27	$	—	$	—	$	—	$	—
Ratio of earnings to fixed charges		57.3		n/m		n/m		n/m		n/m

EX-21.1

Exhibit 21.1

LORILLARD, INC.

Subsidiaries of the Registrant

As of December 31, 2009

	Organized Under	Percentage Owned
Name of Subsidiary	Laws of	by Lorillard, Inc.
Lorillard Tobacco Company	Delaware		100	%
Lorillard Licensing Company LLC	North Carolina		100	%
One Park Media Services, Inc.	Delaware		100	%

          The names of certain subsidiaries which, if considered as a single subsidiary, would not constitute a “significant subsidiary” as any defined in Regulation S-X, have been omitted.

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

          We consent to the incorporation by reference in Registration Statement No. 333-151595 on Form S-8 and Registration Statement No. 333-159902 on Form S-3 of our reports dated February 25, 2010, relating to the consolidated financial statements and financial statement schedule of Lorillard, Inc. and Subsidiaries (the “Company”) and the effectiveness of the Company’s internal control over financial reporting as of December 31, 2009, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2009.

/s/Deloitte & Touche LLP
Charlotte, North Carolina

February 25, 2010

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Martin L. Orlowsky, certify that:

          1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 of Lorillard, Inc.:

          2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

          3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

          4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

          b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

          c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

          d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

          5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

          a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

          b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2010
By:	/s/ Martin L. Orlowsky Martin L. Orlowsky
	Chairman, President and Chief
	Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, David H. Taylor, certify that:

          1. I have reviewed this annual report on Form 10-K for the year ended December 31, 2009 of Lorillard, Inc.:

          2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

          3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

          4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

          a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

          b. Designed such internal control over financial reporting, or caused such internal control over financials reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

          c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

          d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

          5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

          a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

          b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 25, 2010
By:	/s/ David H. Taylor David H. Taylor
	Director, Executive Vice President,
	Finance and Planning and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL
OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     In connection with the annual report on Form 10-K of Lorillard, Inc. (the “Company”) for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Martin L. Orlowsky, as Chief Executive Officer of the Company, and David H. Taylor, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Martin L. Orlowsky
Name:	Martin L. Orlowsky
Title:	Chairman, President and Chief Executive
	Officer (Principal Executive Officer)
Date:	February 25, 2010
/s/ David H. Taylor
Name:	David H. Taylor
Title:	Director and Executive Vice President,
	Finance and Planning and Chief Financial
	Officer (Principal Financial Officer)
Date:	February 25, 2010

EX-99.1

Exhibit 99.1

Certain Litigation Matters

Class Action Cases:

     The following Class Action Cases were pending against Lorillard Tobacco Company (“Lorillard Tobacco”) as of December 31, 2009, through February 22, 2010:

• Willard Brown v. The American Tobacco Company, et al. (Superior Court, San Diego County, California, filed June 10, 1997).

• Cleary v. Philip Morris Incorporated, et al. (Circuit Court, Cook County, Illinois, filed June 3, 1998).

• Cypret v. The American Tobacco Company, et al. (Circuit Court, Jackson County, Missouri, filed May 5, 1999). Lorillard, Inc. is also a defendant in the case.

• Parsons v. AC&S Inc., et al. (Circuit Court, Ohio County, West Virginia, filed February 27, 1998).

• Peoples v. Reynolds American, Inc., et al. (U.S. District Court, Northern District, Georgia, filed November 17, 2008).

• Schwab v. Philip Morris USA, Inc., et al. (U.S. District Court, Eastern District, New York, filed May 11, 2004).

• Scott v. The American Tobacco Company, et al. (District Court, Orleans Parish, Louisiana, filed May 24, 1996).

• Young v. The American Tobacco Company, Inc., et al. (District Court, Orleans Parish, Louisiana, filed November 12, 1997). Lorillard, Inc. is a defendant in the case.

Reimbursement Cases:

     The following Reimbursement Cases were pending against Lorillard Tobacco as of December 31, 2009, through February 22, 2010:

• City of St. Louis [Missouri] v. American Tobacco Co., Inc., et al. (Circuit Court, City of St. Louis, Missouri, filed November 25, 1998). Approximately 40 Missouri hospitals or hospital districts also are plaintiffs in this matter. Lorillard, Inc. is also a defendant in the case.

• Crow Creek Sioux Tribe v. The American Tobacco Company, et al. (Tribal Court, Crow Creek Sioux Tribe, filed September 14, 1997). Lorillard, Inc. is also a defendant in the case.

• National Committee to Preserve Social Security and Welfare v. Philip Morris USA, et al. (U.S. District Court, Eastern District, New York, filed May 20, 2008).

• United States of America v. Philip Morris Incorporated, et al. (U.S. District Court, District of Columbia, filed September 22, 1999).

     In addition, a Reimbursement Case has been filed outside the U.S.:

• Clalit Health Services v. Philip Morris Inc., et al. (District Court, Jerusalem, Israel).

1

Antitrust Claims:

     The following Antitrust Cases were pending against Lorillard Tobacco as of December 31, 2009, through February 22, 2010:

• Smith v. Philip Morris, et al. (District Court, Seward County, Kansas, filed February 7, 2000).

• Vibo Corporation, Inc. d/b/a/ General Tobacco v. Conway, et al. (U.S. District Court, Western District, Kentucky, filed October 28, 2008).

2