e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2010


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 (State or other jurisdiction of incorporation or organization)		13-1911176 (I.R.S. Employer Identification No.)

714 Green Valley Road, Greensboro, North Carolina 27408-7018
(Address of principal executive offices) (Zip Code)

(336) 335-7000
(Registrant’s telephone number, including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) 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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 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 Exchange Act).

Yes o No þ


Class		Outstanding at October 22, 2010
Common stock, $0.01 par value		149,610,076 shares

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements.

LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS


	September 30,			December 31,
(In millions, except share and per share data)	2010			2009
	(Unaudited)
Assets:
Cash and cash equivalents	$	2,112		$	1,384
Accounts receivable, less allowances of $3 and $3		14			9
Other receivables		25			41
Inventories		311			281
Deferred income taxes		453			466
Other current assets		139			—

Total current assets		3,054			2,181
Plant and equipment, net		239			237
Prepaid pension assets		68			60
Deferred income taxes		46			48
Other assets		97			49

Total assets	$	3,504		$	2,575

Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	18		$	23
Accrued liabilities		401			318
Settlement costs		956			982
Income taxes		14			14

Total current liabilities		1,389			1,337
Long-term debt		1,816			722
Postretirement pension, medical and life insurance benefits		292			300
Other liabilities		45			129

Total liabilities		3,542			2,488

Commitments and Contingent Liabilities
Shareholders’ Equity (Deficit):
Preferred stock, $0.01 par value, authorized 10 million shares		¾			¾
Common stock:
Authorized—600 million shares; par value $0.01 per share
Issued—174 million and 174 million shares
Outstanding—151 million and 156 million shares		2			2
Additional paid-in capital		236			234
Earnings retained in the business		1,574			1,282
Accumulated other comprehensive loss		(109	)		(121	)
Treasury stock at cost, 24 million and 18 million shares		(1,741	)		(1,310	)

Total shareholders’ equity (deficit)		(38	)		87

Total liabilities and shareholders’ equity (deficit)	$	3,504		$	2,575

See Notes to Consolidated Condensed Financial Statements

LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)


										Accumu-						Total
										lated						Sharehold-
	Compre-				Additional		Earnings			Other						ers’
	hensive		Common		Paid-in		Retained in			Compre-			Treasury			Equity
	Income		Stock		Capital		the Business			hensive Loss			Shares			(Deficit)
	(In millions)
Balance, January 1, 2009			$	2	$	222	$	965		$	(158	)	$	(400	)	$	631

Comprehensive income:
Net income	$	706						706									706
Other comprehensive gains, pension liability, net of tax expense of $5		9									9						9

Comprehensive income	$	715

Dividends paid								(473	)								(473	)
Shares repurchased														(502	)		(502	)
Share-based compensation						10											10

Balance, September 30, 2009			$	2	$	232	$	1,198		$	(149	)	$	(902	)	$	381


Balance, January 1, 2010			$	2	$	234	$	1,282		$	(121	)	$	(1,310	)	$	87

Comprehensive income:
Net income	$	770						770									770
Other comprehensive gains, pension liability, net of tax expense of $6		12									12						12

Comprehensive income	$	782

Dividends paid								(478	)								(478	)
Shares repurchased														(431	)		(431	)
Share-based compensation						2											2

Balance, September 30, 2010			$	2	$	236	$	1,574		$	(109	)	$	(1,741	)	$	(38	)

See Notes to Consolidated Condensed Financial Statements

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LORILLARD, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)


	Nine Months Ended
	September 30,
(In millions)	2010			2009
Cash flows from operating activities:
Net income	$	770		$	706
Adjustments to reconcile net cash provided by/(used in) operating activities :
Depreciation and amortization		27			25
Pension, health and life insurance contributions		(25	)		(25	)
Pension, health and life insurance benefits expense		24			35
Deferred income taxes		12			¾
Share-based compensation		2			4
Changes in operating assets and liabilities:
Accounts and other receivables		(5	)		23
Inventories		(30	)		(42	)
Accounts payable and accrued liabilities		12			38
Settlement costs		(26	)		(89	)
Income taxes		(86	)		(84	)
Other assets		3			4
Other		¾			(10	)

Net cash provided by operating activities		678			585

Cash flows from investing activities:
Additions to plant and equipment		(28	)		(39	)

Net cash used in investing activities		(28	)		(39	)

Cash flows from financing activities:
Proceeds from issuance of long-term debt		1,000			750
Dividends paid		(478	)		(473	)
Shares repurchased		(431	)		(502	)
Debt issuance costs		(13	)		(5	)
Excess tax benefits from share-based arrangements		¾			7

Net cash provided by/(used in) financing activities		78			(223	)

Change in cash and cash equivalents		728			323
Cash and cash equivalents, beginning of year		1,384			1,191

Cash and cash equivalents, end of period	$	2,112		$	1,514


Cash paid for income taxes	$	532		$	478

Cash paid for interest, net of cash received from interest rate swaps of $12 in 2010	$	21		$	¾

See Notes to Consolidated Condensed Financial Statements

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LORILLARD, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

Overview. 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, Old Gold and Max with substantially all of its sales in the United States of America.

The consolidated condensed 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 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 was 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.

Subsequent to the issuance of the Company’s September 30, 2009 consolidated condensed financial statements included in Form 10-Q, filed on October 29, 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 were reflected on the consolidated condensed statement of cash flows as well as the condensed consolidating statement of cash flows for the nine months ended September 30, 2009.

Basis of Presentation. The accompanying unaudited consolidated condensed financial statements reflect all adjustments necessary to present fairly the financial position as of September 30, 2010 and December 31, 2009 and the consolidated income, shareholders’ equity (deficit) and cash flows for the three and nine months ended September 30, 2010 and 2009.

Results of operations for the three and nine months for each of the years reported herein are not necessarily indicative of results of operations of the entire year.

These consolidated condensed financial statements should be read in conjunction with the Consolidated Financial Statements and related Notes to Consolidated Financial Statements presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on February 25, 2010.

Recently adopted accounting pronouncements —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. ASC Subtopic 715-20 was effective for fiscal years ending after December 15, 2009.

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

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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, derivative 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 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 interim financial statements beginning with the second quarter 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 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 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 was 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.

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Lorillard adopted FASB ASU 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. ASU 2010-06 did not have a material impact on Lorillard’s financial position or results of operations.

Lorillard adopted FASB ASU 2010-09 “Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements.” ASU 2010-09 amends Topic 855 for SEC filers to eliminate the disclosure of the date through which subsequent events have been reviewed. The effective date was February 24, 2010. ASU 2010-09 did not have a material impact on Lorillard’s financial position or results of operations.

2. Inventories

Inventories are valued at the lower of cost, determined on a last-in, first-out (“LIFO”) basis, or market and consisted of the following:


	September 30,		December 31,
	2010		2009
	(In millions)
Leaf tobacco	$	245	$	236
Manufactured stock		62		41
Material and supplies		4		4

	$	311	$	281

If the average cost method of accounting was used, inventories would be greater by approximately $202 and $189 million at September 30, 2010 and December 31, 2009, respectively.

3. Plant and Equipment

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


	September 30,			December 31,
	2010			2009
	(In millions)
Land	$	3		$	3
Buildings		88			87
Equipment		565			563

Total		656			653
Accumulated depreciation		(417	)		(416	)

Plant and equipment, net	$	239		$	237

4. Other Assets

Other assets were as follows:


	September 30,		December 31,
	2010		2009
	(In millions)
Other investments	$	¾	$	15
Restricted cash		¾		13
Debt issuance costs		17		5
Interest rate swap		66		¾
Other prepaid assets		14		16

Total	$	97	$	49

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5. Accrued Liabilities

Accrued liabilities were as follows:


	September 30,		December 31,
	2010		2009
	(In millions)
Legal fees	$	29	$	21
Salaries and other compensation		23		16
Medical and other employee benefit plans		26		30
Consumer rebates		81		86
Sales promotion		20		21
Excise and other taxes		37		78
Litigation accrual		68		¾
Accrued bond interest		50		¾
Other accrued liabilities		67		66

Total	$	401	$	318

6. 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 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 as of September 30, 2010, were as follows:


	Level 1		Level 2		Level 3		Total
	(In millions)
Cash and Cash Equivalents:
Prime money market funds	$	2,112	$	¾	$	¾	$	2,112

Total cash and cash equivalents	$	2,112	$	¾	$	¾	$	2,112


Derivative Asset:
Interest rate swaps — fixed to floating rate	$	¾	$	66	$	¾	$	66

Total derivative instruments	$	¾	$	66	$	¾	$	66

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


	Level 1		Level 2		Level 3		Total
	(In millions)
Cash and Cash Equivalents:
Prime money market funds	$	1,384	$	¾	$	¾	$	1,384

Total cash and cash equivalents	$	1,384	$	¾	$	¾	$	1,384


Derivative Liability:
Interest rate swaps — fixed to floating rate	$	¾	$	28	$	¾	$	28

Total derivative instruments	$	¾	$	28	$	¾	$	28

There were no transfers between Level 1 and Level 2 for the twelve months ended December 31, 2009 or the nine months ended September 30, 2010.

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.

7. Credit Agreement

In March 2010, Lorillard Tobacco, the principal, wholly-owned operating subsidiary of the Company, entered into a $185 million revolving credit facility (“Revolver”) that expires March 26, 2013 and is guaranteed by the Company. Proceeds from the Revolver may be used for general corporate and working capital purposes. The interest rates on borrowings under the Revolver will be based on prevailing interest rates and, in part, upon the credit rating applicable to the Company’s senior unsecured long-term debt.

The Revolver requires that the Company maintain a ratio of debt to net income plus income taxes, interest expense, depreciation and amortization expense, any extraordinary losses, any non-cash expenses or losses and any losses on sales of assets outside of the ordinary course of business (“EBITDA”) of not more than 2.25 to 1 and a ratio of EBITDA to interest expense of not less than 3.0 to 1. In addition, the Revolver contains customary affirmative and negative covenants, including restrictions on liens and sale and leaseback transactions subject to a limited exception. The Revolver contains customary events of default, including upon a change in control that could result in the acceleration of all amounts and cancellation of all commitments outstanding, if any, under the Revolver.

There were no borrowings under the Revolver during the third quarter of 2010.

8. Long-Term Debt

Long-term debt, net of interest rate swaps, consisted of the following:


	September 30,		December 31,
	2010		2009
	(In millions)
2019 Notes – 8.125% Notes due 2019	$	816	$	722
2020 Notes – 6.875% Notes due 2020		750		¾
2040 Notes – 8.125% Notes due 2040		250		¾

Total long-term debt	$	1,816	$	722

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mental Indenture”). The first tranche was $750 million aggregate principal amount of 6.875% Notes due May 1, 2020 (the “2020 Notes”), and the second tranche was $250 million aggregate principal amount of 8.125% Notes due May 1, 2040 (the “2040 Notes”). 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 issuance will be used for general corporate purposes, which may include, among other things, the repurchase, redemption or retirement of securities including the Company’s common stock, acquisitions, additions to working capital and capital expenditures.

In June 2009, Lorillard Tobacco issued $750 million aggregate principal amount of 8.125% unsecured senior notes due June 23, 2019 (the “2019 Notes”) pursuant to an Indenture, dated June 23, 2009, and First Supplemental Indenture, dated June 23, 2009 (the “First Supplemental Indenture”). The 2019 Notes are unconditionally guaranteed on a senior unsecured basis by the Company. The interest rate payable on the 2019 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 2019 Notes below investment grade (Baa3 and BBB- for Moody’s and S&P, respectively).

Upon the occurrence of a change of control triggering event, Lorillard Tobacco will be required to make an offer to repurchase the 2019 Notes, 2020 Notes and 2040 Notes (together, 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 Indentures) 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. 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 September 30, 2010, the aggregate carrying value of the Notes was $1.82 billion and the fair value was $1.94 billion. 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 converting the interest rate payable on the 2019 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%. The variable rates were 4.881% and 4.856% as of September 30, 2010 and December 31, 2009, respectively. 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 and $18 million for the three and nine months ended September 30, 2010, respectively.

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 September 30, 2010 and December 31, 2009, the adjusted carrying amounts of the hedged debt outstanding were $816 million and $722 million, respectively and the amounts included in other assets and other liabilities were $66 million and $28 million, respectively.

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 cash settle them before their expiration date.

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10. Earnings Per Share

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
	(In millions)
Net Income	$	274	$	235	$	770	$	706


Weighted Average Shares Outstanding — Basic		151.33		163.58		152.63		166.42
Stock Options and Stock Appreciation Rights		.21		.14		.18		.13

Weighted Average Shares Outstanding — Diluted		151.54		163.72		152.81		166.55

Options to purchase 0.7 million and 0.6 million shares of common stock were excluded from the diluted earnings per share calculation because their effect would be anti-dilutive for the quarters ended September 30, 2010 and September 30, 2009, respectively.

11. Benefit Plans

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

Net periodic benefit cost components were as follows:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Pension Benefits	2010			2009			2010			2009
	(In millions)
Service cost	$	4		$	4		$	13		$	12
Interest cost		14			14			42			42
Expected return on plan assets		(17	)		(15	)		(51	)		(45	)
Amortization of net loss		2			4			5			11
Amortization of prior service cost		1			1			4			4

Net periodic benefit cost	$	4		$	8		$	13		$	24


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
Other Postretirement Benefits	2010		2009		2010			2009
	(In millions)
Service cost	$	1	$	1	$	3		$	3
Interest cost		3		3		9			9
Amortization of net loss		¾		¾		(1	)		(1	)

Net periodic benefit cost	$	4	$	4	$	11		$	11

Lorillard expects to contribute $19 million to its pension plans and $15 million to its other postretirement benefit plans in 2010, of which $15 million and $10 million were contributed to the pension and postretirement benefit plans as of September 30, 2010.

12. Share Repurchase Program

On August 20, 2010, Lorillard, Inc. announced that its Board of Directors had approved a new share repurchase program authorizing the Company to repurchase in the aggregate up to $1 billion of its outstanding common

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stock. Purchases by the Company under this program may be 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 will be funded from existing cash balances, including proceeds from the Company’s April 2010 issuance of the Notes (see Note 8 for a description of the Notes).

This program does not obligate the Company to acquire any particular amount of 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. The share repurchase program may be suspended, modified or discontinued at any time and has no set expiration date. During the third quarter of 2010, the Company repurchased approximately 1.1 million shares of its common stock at an average price of $81.10 per share, for a total of $91 million.

As of September 30, 2010, total shares repurchased under share repurchase programs authorized by the Board since the Separation were as follows:


				Number of
	Amount			Shares
Authorized	Authorized		Completed	Repurchased
	(In millions)			(In millions)
July 2008	$	400	October 2008	5.9
May 2009		250	July 2009	3.7
July 2009		750	January 2010	9.7
February 2010		250	May 2010	3.3
August 2010		1,000		1.1

Total	$	2,650		23.7

13. Consolidating Financial Information

The following sets forth the condensed consolidating balance sheets as of September 30, 2010 and December 31, 2009, condensed consolidating statements of income for the three and nine months ended September 30, 2010 and 2009, and condensed consolidating statements of cash flows for the nine months ended September 30, 2010 and 2009 for Lorillard Tobacco (herein referred to as “Issuer”) as Issuer of the Notes (see Note 8 for description of the Notes), the Company as parent guarantor (herein referred to as “Parent”), and all other non-guarantor subsidiaries of the Company and Lorillard Tobacco (“All Other Subsidiaries”). 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.

-12-

Condensed Consolidating Balance Sheets
September 30, 2010
(In millions)
(Unaudited)


							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Assets:
Cash and cash equivalents	$	201		$	1,353		$	558		$	¾		$	2,112
Accounts receivable, less allowances of $3		¾			14			¾			¾			14
Other receivables		¾			25			¾			¾			25
Inventories		¾			311			¾			¾			311
Deferred income taxes		¾			453			¾			¾			453
Other current assets		¾			124			15			¾			139

Total current assets		201			2,280			573			¾			3,054
Investment in subsidiaries		(217	)		619			¾			(402	)		¾
Plant and equipment, net		¾			239			¾			¾			239
Prepaid pension assets		¾			68			¾			¾			68
Deferred income taxes		(5	)		46			5			¾			46
Other assets		¾			97			¾			¾			97

Total assets	$	(21	)	$	3,349		$	578		$	(402	)	$	3,504


Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	¾		$	18		$	¾		$	¾		$	18
Accrued liabilities		17			470			(86	)		¾			401
Settlement costs		¾			956			¾			¾			956
Income taxes		¾			¾			14			¾			14

Total current liabilities		17			1,444			(72	)		¾			1,389

Long-term debt		¾			1,816			¾			¾			1,816
Postretirement pension, medical and life insurance benefits		¾			292			¾			¾			292
Other liabilities		¾			30			15			¾			45

Total liabilities		17			3,582			(57	)		¾			3,542


Shareholders’ Equity (Deficit):
Common stock		2			¾			¾			¾			2
Additional paid-in capital		236			278			214			(492	)		236
Earnings retained in the business		1,574			(402	)		421			(19	)		1,574
Accumulated other comprehensive loss		(109	)		(109	)		¾			109			(109	)
Treasury stock		(1,741	)		¾			¾			¾			(1,741	)

Total shareholders’ equity (deficit)		(38	)		(233	)		635			(402	)		(38	)

Total liabilities and shareholders’ equity (deficit)	$	(21	)	$	3,349		$	578		$	(402	)	$	3,504

-13-

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	$	¾		$	1,384
Accounts receivable, less allowances of $3		¾			9			¾		¾			9
Other receivables		¾			35			6		¾			41
Intercompany receivables		¾			¾			50		(50	)		¾
Inventories		¾			281			¾		¾			281
Deferred income taxes		¾			466			¾		¾			466

Total current assets		130			1,510			591		(50	)		2,181
Investment in subsidiaries		(20	)		581			¾		(561	)		¾
Plant and equipment, net		¾			237			¾		¾			237
Prepaid pension assets		¾			60			¾		¾			60
Deferred income taxes		(5	)		49			4		¾			48
Other assets		¾			34			15		¾			49

Total assets	$	105		$	2,471		$	610	$	(611	)	$	2,575


Liabilities and Shareholders’ Equity (Deficit):
Accounts and drafts payable	$	¾		$	23		$	¾	$	¾		$	23
Accrued liabilities		18			300			¾		¾			318
Intercompany payables		¾			50			¾		(50	)		¾
Settlement costs		¾			982			¾		¾			982
Income taxes		¾			14			¾		¾			14

Total current liabilities		18			1,369			¾		(50	)		1,337

Long-term debt		¾			722			¾		¾			722
Postretirement pension, medical and life insurance benefits		¾			300			¾		¾			300
Other liabilities		¾			116			13		¾			129

Total liabilities		18			2,507			13		(50	)		2,488


Shareholders’ Equity (Deficit):
Common stock		2			¾			¾		¾			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	)		¾		121			(121	)
Treasury stock		(1,310	)		¾			¾		¾			(1,310	)

Total shareholders’ equity (deficit)		87			(36	)		597		(561	)		87

Total liabilities and shareholders’ equity (deficit)	$	105		$	2,471		$	610	$	(611	)	$	2,575

-14-

Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 2010
(In millions)
(Unaudited)


						All			Total
						Other			Consolidating
	Parent		Issuer			Subsidiaries			Adjustments			Consolidated
Net sales (including excise taxes of $494)	$	¾	$	1,567		$	¾		$	¾		$	1,567
Cost of sales		¾		1,001			¾			¾			1,001


Gross profit		¾		566			¾			¾			566
Selling, general and administrative (1)		¾		345			(244	)		¾			101


Operating income		¾		221			244			¾			465
Investment income		¾		1			¾			¾			1
Interest expense		¾		(28	)		(1	)		¾			(29	)


Income before taxes		¾		194			243			¾			437
Income taxes		¾		73			90			¾			163
Equity in earnings of subsidiaries		274		153			¾			(427	)		¾


Net income	$	274	$	274		$	153		$	(427	)	$	274


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

Condensed Consolidating Statements of Income
For the Nine Months Ended September 30, 2010
(In millions)
(Unaudited)


						All			Total
						Other			Consolidating
	Parent		Issuer			Subsidiaries			Adjustments			Consolidated
Net sales (including excise taxes of $1,413)	$	¾	$	4,446		$	¾		$	¾		$	4,446
Cost of sales		¾		2,861			¾			¾			2,861


Gross profit		¾		1,585			¾			¾			1,585
Selling, general and administrative (1)		¾		992			(699	)		¾			293


Operating income		¾		593			699			¾			1,292
Investment income		¾		2			1			¾			3
Interest expense		¾		(63	)		(3	)		¾			(66	)


Income before taxes		¾		532			697			¾			1,229
Income taxes		¾		200			259			¾			459
Equity in earnings of subsidiaries		770		438			¾			(1,208	)		¾


Net income	$	770	$	770		$	438		$	(1,208	)	$	770


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

-15-

Condensed Consolidating Statements of Income
For the Three Months Ended September 30, 2009
(In millions)
(Unaudited)


						All			Total
						Other			Consolidating
	Parent		Issuer			Subsidiaries			Adjustments			Consolidated
Net sales (including excise taxes of $466)	$	¾	$	1,419		$	¾		$	¾		$	1,419
Cost of sales		¾		931			¾			¾			931


Gross profit		¾		488			¾			¾			488
Selling, general and administrative (1)		¾		253			(157	)		¾			96


Operating income		¾		235			157			¾			392
Investment income		¾		1			¾			¾			1
Interest expense		¾		(15	)		¾			¾			(15	)


Income before taxes		¾		221			157			¾			378
Income taxes		¾		86			57			¾			143
Equity in earnings of subsidiaries		235		100			¾			(335	)		¾


Net income	$	235	$	235		$	100		$	(335	)	$	235


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

Condensed Consolidating Statements of Income
For the Nine Months Ended September 30, 2009
(In millions)
(Unaudited)


							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Net sales (including excise taxes of $1,101)	$	¾		$	3,855		$	¾		$	¾		$	3,855
Cost of sales		¾			2,430			¾			¾			2,430


Gross profit		¾			1,425			¾			¾			1,425
Selling, general and administrative (1)		1			735			(454	)		¾			282


Operating income		(1	)		690			454			¾			1,143
Investment income		¾			3			1			¾			4
Interest expense		¾			(17	)		(1	)		¾			(18	)


Income before taxes		(1	)		676			454			¾			1,129
Income taxes		¾			258			165			¾			423
Equity in earnings of subsidiaries		707			289			¾			(996	)		¾


Net income	$	706		$	707		$	289		$	(996	)	$	706


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

-16-

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2010
(In millions)
(Unaudited)


							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	770		$	770		$	438		$	(1,208	)	$	770
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Equity income from subsidiaries		(770	)		(438	)		¾			1,208			¾
Depreciation and amortization		¾			27			¾			¾			27
Pension, health and life insurance contributions		¾			(25	)		¾			¾			(25	)
Pension, health and life insurance benefits expense		¾			24			¾			¾			24
Deferred income taxes		¾			13			(1	)		¾			12
Share-based compensation		2			¾			¾			¾			2
Changes in operating assets and liabilities:
Accounts and other receivables		¾			(5	)		¾			¾			(5	)
Inventories		¾			(30	)		¾			¾			(30	)
Accounts payable and accrued liabilities		(1	)		49			(36	)		¾			12
Settlement costs		¾			(26	)		¾			¾			(26	)
Income taxes		¾			(108	)		22			¾			(86	)
Other		¾			3			¾			¾			3
Return on investment in subsidiaries		979			400			¾			(1,379	)		¾

Net cash provided by operating activities		980			654			423			(1,379	)		678


Cash flows from investing activities:
Additions to plant and equipment		¾			(28	)		¾			¾			(28	)

Net cash used in investing activities		¾			(28	)		¾			¾			(28	)


Cash flows from financing activities:
Proceeds from issuance of long-term debt		¾			1,000			¾			¾			1,000
Dividends paid		(478	)		(979	)		(400	)		1,379			(478	)
Shares repurchased		(431	)		¾			¾			¾			(431	)
Debt issuance costs		¾			(13	)		¾			¾			(13	)

Net cash provided by/(used in) financing activities		(909	)		8			(400	)		1,379			78


Change in cash and cash equivalents		71			634			23			¾			728
Cash and cash equivalents, beginning of year		130			719			535			¾			1,384


Cash and cash equivalents, end of period	$	201		$	1,353		$	558		$	¾		$	2,112

-17-

Condensed Consolidating Statements of Cash Flows
For the Nine Months Ended September 30, 2009
(In millions)
(Unaudited)


							All			Total
							Other			Consolidating
	Parent			Issuer			Subsidiaries			Adjustments			Consolidated
Cash flows from operating activities:
Net income	$	706		$	707		$	289		$	(996	)	$	706
Adjustments to reconcile net income to net cash provided by operating activities:
Equity income from subsidiaries		(707	)		(289	)		¾			996			¾
Depreciation and amortization		¾			25			¾			¾			25
Pension, health and life insurance contributions		¾			(25	)		¾			¾			(25	)
Pension, health and life insurance benefits expense		¾			35			¾			¾			35
Deferred income taxes		¾			(3	)		3			¾			¾
Share-based compensation		¾			4			¾			¾			4
Changes in operating assets and liabilities:
Accounts and other receivables		¾			23			¾			¾			23
Inventories		¾			(42	)		¾			¾			(42	)
Accounts payable and accrued liabilities		17			27			(6	)		¾			38
Settlement costs		¾			(89	)		¾			¾			(89	)
Income taxes		¾			(84	)		¾			¾			(84	)
Other assets		¾			4			¾			¾			4
Other		¾			(10	)		¾			¾			(10	)
Return on investment in subsidiaries		1,224			350			¾			(1,574	)		¾

Net cash provided by/(used in) operating activities		1,240			633			286			(1,574	)		585


Cash flows from investing activities:
Return of capital		¾			100			¾			(100	)		¾
Additions to plant and equipment		¾			(39	)		¾			¾			(39	)

Net cash provided by/(used in) investing activities		¾			61			¾			(100	)		(39	)


Cash flows from financing activities:
Proceeds from issuance of long-term debt		¾			750			¾			¾			750
Dividends paid		(473	)		(1,224	)		(450	)		1,674			(473	)
Shares repurchased		(502	)		¾			¾			¾			(502	)
Debt issuance costs		¾			(5	)		¾			¾			(5	)
Excess tax benefits from share-based arrangements		¾			7			¾			¾			7

Net cash provided by/(used in) financing activities		(975	)		(472	)		(450	)		1,674			(223	)


Change in cash and cash equivalents		265			222			(164	)		¾			323
Cash and cash equivalents, beginning of year		19			566			606			¾			1,191


Cash and cash equivalents, end of period	$	284		$	788		$	442		$	¾		$	1,514

-18-

14. Legal Proceedings

Overview

As of October 20, 2010, 11,215 product liability cases are pending against cigarette manufacturers in the United States. Lorillard Tobacco is a defendant in 10,267 of these cases. Lorillard, Inc. is a co-defendant in 707 pending cases. A total of 7,586 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 in 2009. In addition to the product liability cases, Lorillard Tobacco and, in some instances, Lorillard, Inc., are defendants in Filter Cases and Tobacco-Related Antitrust Cases.

Pending cases against Lorillard are those in which Lorillard Tobacco or Lorillard, Inc. have been joined to the litigation by either receipt of service of process, or execution of a waiver thereof, and a dismissal order has not been entered with respect to Lorillard Tobacco or Lorillard, Inc. The table below lists the number of certain tobacco-related cases pending against Lorillard as of the dates listed. A description of each type of case follows the table.


	Total Number of Cases
	Pending against Lorillard as of
Type of Case	October 20, 2010
Conventional Product Liability Cases		35
Engle Progeny Cases⁽¹⁾		7,586
West Virginia Individual Personal Injury Cases		42
Flight Attendant Cases		2,593
Class Action Cases		6
Reimbursement Cases		5
Filter Cases		34
Tobacco-Related Antitrust Cases		1


⁽¹⁾		In November 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.

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. Lorillard Tobacco is a defendant in each of the Conventional Product Liability cases listed in the table above, and Lorillard, Inc. is a co-defendant in three of the Conventional Product Liability 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 each of the Engle Progeny Cases listed in the above table and Lorillard, Inc. is a co-defendant in 700 Engle Progeny Cases. Some of the Engle Progeny 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. It is possible that courts may sever remaining suits filed by multiple class members into separate individual cases.

West Virginia Individual Personal Injury Cases. In a 1999 administrative order, the West Virginia Supreme Court of Appeals transferred a group of cases brought by individuals who allege cancer or other health effects caused by smoking cigarettes, by smoking cigars, or by using smokeless tobacco products, to a single West Virginia court (the “West Virginia Individual Personal Injury Cases”). The plaintiffs’ claims alleging injury from smoking cigarettes have been consolidated for trial. The plaintiffs’ claims alleging injury from the use of other tobacco products have been severed from the consolidated cigarette claims and have not been consolidated for trial. Lorillard Tobacco is a defendant in each of the West Virginia Personal Injury Cases listed in the above table. Lorillard, Inc. is not a defendant in any of the West Virginia Individual Personal Injury Cases. The time for filing a case that could be consolidated for trial with the West Virginia Personal Injury Cases expired in 2000.

-19-

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 Flight Attendant Cases listed in the above table. Lorillard, Inc. is not a defendant in any of the Flight Attendant Cases. The time for filing Flight Attendant Cases expired in 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. Lorillard Tobacco is a defendant in each of the Class Action Cases listed in the above table, and Lorillard, Inc. is a co-defendant in two of the Class Action Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in additional Class Action Cases that are pending against other cigarette manufacturers, including approximately 35 “lights” Class Action Cases and four Class Action Cases that are based primarily on medical monitoring.

Reimbursement Cases. Reimbursement Cases are brought by or on behalf of entities seeking equitable relief and 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 Reimbursement Cases are pending against Lorillard Tobacco in the United States and one Reimbursement Case is pending in Israel. Lorillard, Inc. is a co-defendant in two of the Reimbursement Cases pending in the United States. Plaintiffs in the Reimbursement 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. (“Phillip Morris”), et al., that sought to recover profits earned by the defendants and other equitable relief. In August 2006, the trial court issued its final judgment and remedial order and granted injunctive and other equitable relief. The final judgment did not award monetary damages. In May 2009, the final judgment was largely affirmed by an appellate court. In June 2010, the U.S. Supreme Court denied review of the case. See “Reimbursement Cases” below.

Filter Cases. 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 33 of the 34 Filter Cases listed in the above table. Lorillard, Inc. is a co-defendant in two of the 33 Filter Cases that are pending against Lorillard Tobacco. Lorillard, Inc. is also a defendant in one additional Filter Case in which Lorillard Tobacco is not a defendant.

Tobacco-Related Antitrust Cases. A number of cases have been brought against cigarette manufacturers alleging that defendants conspired to set the price of cigarettes in violation of federal and state antitrust and unfair business practices statutes. In these cases, plaintiffs seek class certification on behalf of persons who purchased cigarettes directly or indirectly from one or more of the defendant cigarette manufacturers. Lorillard Tobacco is a defendant in the Tobacco-Related Antitrust Case in the table above. Lorillard, Inc. is not a defendant in any of these cases.

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 that may range 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.

-20-

Tobacco-Related Product Liability Litigation

Conventional Product Liability Cases

Since January 1, 2008, verdicts have been returned in four Conventional Product Liability Cases against cigarette manufactures. 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 trials. In one of the trials, the jury awarded actual damages. 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 these three matters. In a 2010 trial, a jury awarded actual damages and determined that the plaintiff was entitled to an award of punitive damages. The court will decide the amount of the punitive damages award, but it had not issued a verdict as of October 20, 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 since 2001. Punitive damages were paid to the smokers in five of these cases. Neither Lorillard Tobacco nor Lorillard, Inc. was a party to any of these matters.

As of October 20, 2010, trial was not underway in any Conventional Product Liability Case. One case in which Lorillard Tobacco is a defendant is scheduled for trial in November 2010. Lorillard, Inc. is not a defendant in this case. Additional Conventional Product Liability Cases are also scheduled for trial in 2010. Trial dates are subject to change.

Engle Progeny Cases

In 2006, the Florida Supreme Court issued a ruling in Engle v. R.J. Reynolds Tobacco Co., et al., 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. 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 first 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.

Some of the Engle Progeny Cases were filed on behalf of multiple plaintiffs. Various courts have entered orders severing the cases filed by multiple plaintiffs into separate actions. In 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 or children 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, including courts that have presided over Engle Progeny Cases that have been tried, 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 appeals, and some of these appeals are pending. In one of these appeals, the U.S. Court of Appeals for the Eleventh Circuit returned to a federal trial court for further consideration the question of how courts should apply the jury’s findings in favor of the plaintiffs in the first phase of the Engle trial. The Court of Appeals determined that, based on Florida law, plaintiffs in the Engle Progeny Cases are entitled to some use of those jury findings but that, on the basis of the appellate record, it was premature for the Court of Appeals to decide what use plaintiffs can make of these findings. The Court of Appeals did not address the

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question of the effect of federal due process limitations on the application of the jury findings on the basis that consideration of federal constitutional limitations was not necessary to its decision.

Lorillard Tobacco and Lorillard, Inc. are defendants in Engle Progeny Cases that have been placed on courts’ 2010 and 2011 trial calendars or in which specific trial dates have been set. 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 or 2011. It also is not possible to predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases for trial.

As of October 20, 2010, trial was underway in two Engle Progeny Cases. Lorillard Tobacco is a defendant in one of these cases, Rohr v. R.J. Reynolds Tobacco Company, et al., pending in the Circuit Court of Broward County, Florida. Lorillard, Inc. is not a defendant in this case. Rohr is being tried pursuant to a multi-phase trial plan. At the conclusion of the trial’s first phase, the jury determined that the decedent was a member of the Engle class. This determination allowed the trial to proceed to subsequent phases, and trial was ongoing as of October 20, 2010. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in the other case in which trial was proceeding as of October 20, 2010.

As of October 20, 2010, verdicts have been returned in 28 Engle Progeny Cases since the Florida Supreme Court issued its 2006 ruling that permitted members of the Engle class to bring individual lawsuits. Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in any of these trials. Juries awarded actual damages and punitive damages in 13 of the trials. The 13 punitive damages awards have totaled $455 million and have ranged from $270,000 to $244 million. In six of the trials, juries’ awards were limited to actual damages. In the nine remaining trials, juries found in favor of the defendants.

As of October 20, 2010, defendants were contesting, or were expected to contest, either by appeals or by post-trial motions, each of the 19 verdicts in which plaintiffs were awarded damages. None of the 19 Engle Progeny trials in which plaintiffs were awarded damages since the Florida Supreme Court’s 2006 decision had reached a final resolution as of October 20, 2010. In some of the trials decided in defendants’ favor, plaintiffs have filed motions challenging the verdicts. As of October 20, 2010, none of these motions had resulted in rulings in favor of the plaintiffs.

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. In March 2010, a Florida appellate court affirmed the jury’s verdict. The court denied defendants’ petitions for rehearing in May 2010, and the defendants have satisfied the judgment by paying the damages award.

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. The plaintiffs in three cases have challenged the constitutionality of the amended statute. As of October 20, 2010, the courts had not issued rulings in response to those motions.

West Virginia Individual Personal Injury Cases

The West Virginia Individual Personal Injury Cases pending brought by individuals who allege cancer or other health effects caused by smoking cigarettes, by smoking cigars, or by using smokeless tobacco products are in a single West Virginia court. A total of 648 West Virginia Individual Personal Injury Cases are pending. Most of the pending cases have been consolidated for trial. The order that consolidated the cases for trial, among other things, also limited the consolidation to those cases that were filed by September 2000. No additional West Virginia Personal Injury Cases may be consolidated for trial with this group.

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In September 2000, there were approximately 1,250 West Virginia Personal Injury Cases, and Lorillard Tobacco was named in all but a few of them. Plaintiffs in most of the cases alleged injuries from smoking cigarettes, and the claims alleging injury from smoking cigarettes have been consolidated for a multi-phase trial (the “IPIC Cases”). Approximately 600 IPIC Cases have been dismissed in their entirety. Lorillard Tobacco has been dismissed from approximately 610 additional IPIC Cases because those plaintiffs did not submit evidence that they had smoked a Lorillard Tobacco product. These additional IPIC Cases remain pending against other cigarette manufacturers and some or all of the dismissals of Lorillard Tobacco could be contested in subsequent appeals. As of October 20, 2010, Lorillard Tobacco is a defendant in 35 of the pending IPIC Cases. Lorillard, Inc. has not been a defendant in any of the IPIC Cases.

The court has severed from the IPIC Cases those claims alleging injury from the use of tobacco products other than cigarettes, including smokeless tobacco and cigars (the “Severed IPIC Claims”). The Severed IPIC Claims involve 29 plaintiffs. Twenty-seven of these plaintiffs have asserted both claims alleging that their injuries were caused by smoking cigarettes as well as claims alleging that their injuries were caused by using other tobacco products. The former claims will be considered during the consolidated trial of the IPIC Cases, while the latter claims are among the Severed IPIC Claims. Two plaintiffs have asserted only claims alleging that injuries were caused by using tobacco products other than cigarettes, and no part of their cases will be considered in the consolidated trial of the IPIC Cases. Lorillard Tobacco is a defendant in seven of the Severed IPIC Claims. Lorillard, Inc. is not a defendant in any of the Severed IPIC Claims.

The court has entered a trial plan for the IPIC Cases that calls for a multi-phase trial. The first phase of that trial is scheduled to begin on March 21, 2011. During 2010, the court attempted to begin trial of the IPIC cases two separate times. In both instances, the court suspended trial due to complications that arose during jury selection. As of October 20, 2010, the Severed IPIC Claims were not subject to a trial plan. None of the Severed IPIC Claims were scheduled for trial as of October 20, 2010. Trial dates are subject to change.

Flight Attendant Cases

Lorillard Tobacco and three other cigarette manufacturers are the defendants in each of the pending Flight Attendant Cases. 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 in 2000 and no additional cases in this category may be filed.

The judges who 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 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 October 20, 2010, none of the flight attendant cases are scheduled for trial. Trial dates are subject to change.

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Class Action Cases

Lorillard Tobacco is a defendant in six pending Class Action 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, 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 Louisiana Court of Appeal, Fourth Circuit, issued a decision in April 2010 (the “April 2010 Decision”) that modified the trial court’s 2008 amended final judgment. The April 2010 Decision reduced the judgment amount from approximately $264 million to approximately $242 million to fund a ten year, court-supervised smoking cessation program. The April 2010 Decision also changed the date on which the award of post-judgment interest will accrue from June 2004 to July 2008. Interest awarded by the amended final judgment will continue to accrue from July 2008 until the judgment either is paid or is reversed on appeal. As of October 20, 2010, judicial interest totaled approximately $29.7 million. Lorillard, Inc., which was a party to the case in the past, is no longer a defendant.

In its April 2010 Decision, the Court of Appeal expressly preserved defendants’ right to assert claims on unspent or surplus funds, should any such funds be present, at the conclusion of the ten-year smoking cessation program.

The Louisiana Supreme Court denied review of the petitions that were filed by the defendants and the plaintiffs. The U.S. Supreme Court has granted defendants’ application to stay execution of the amended final judgment until defendants’ petition for writ of certiorari to the U.S. Supreme Court is timely filed and is resolved. Defendants’ petition for writ of certiorari is due to be filed by December 2, 2010.

In 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, and whose claims accrued by September 1, 1988. In January 2008, the Louisiana Supreme Court denied plaintiffs’ and defendants’ separate petitions for review. In May 2008, U.S. Supreme Court denied defendants’ request that it review the case. The case was returned to the trial court, which subsequently entered an amended final judgment that ordered the defendants to pay approximately $264 million to fund the court-supervised smoking cessation program for the members of the certified class. The Court of Appeal’s April 2010 Decision was an appeal from this 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 was reclassified from other liabilities to accrued liabilities in the second quarter of 2010 on the consolidated balance sheets.

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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 Class Action Case pending against Lorillard Tobacco, Brown v. The American Tobacco Company, Inc., et al. (Superior Court, San Diego County, California, filed June 10, 1997), the California Supreme Court in 2009 vacated an order that had previously decertified a class and returned Brown to the trial court for further activity. The trial court has informed the parties that it believes the class previously certified in Brown has been reinstated as a result of the California Supreme Court’s ruling. The class previously certified in Brown is 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. The trial court also has ruled that it will permit plaintiffs to assert claims regarding the allegedly fraudulent marketing of “light” or “ultra-light” cigarettes. Trial in Brown has been scheduled for May 2011. Trial dates are subject to change. Lorillard, Inc. is not a defendant in Brown.

In another Class Action Case pending against Lorillard Tobacco, Cleary v. Philip Morris Incorporated, et al. (U.S. District Court, Northern District, Illinois, filed June 3, 1998), 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. In June 2010, the court dismissed plaintiffs’ remaining claims, and it entered final judgment in defendants’ favor. Plaintiffs have noticed an appeal from the final judgment, including the prior ruling that dismissed plaintiffs’ “lights” claims against Lorillard Tobacco, to the U.S. Court of Appeals for the Seventh Circuit. Lorillard, Inc. is not a defendant in Cleary.

In 2010, Lorillard Tobacco and Lorillard, Inc., were named as defendants in Calistro v. Altria Group, Inc., et al. (U.S. District Court, The Virgin Islands, filed July 7, 2010), in which plaintiffs seek medical monitoring on behalf of residents of The Virgin Islands who smoke cigarettes. Plaintiffs have dismissed both Lorillard Tobacco and Lorillard, Inc. from this case.

“Lights” Class Action Cases. Neither Lorillard Tobacco nor Lorillard, Inc. is a defendant in another approximately 35 Class Action 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 cases. In one of the “lights” Class Action Cases, Good v. Altria Group, Inc., et al., the U.S. Supreme Court ruled in December 2008 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. In 2009, the Judicial Panel on Multidistrict Litigation consolidated various federal court “lights” Class Action Cases pending against Philip Morris USA or Altria Group and transferred those cases to the U.S. District Court of Maine. As of October 20, 2010, 15 cases were part of that consolidated proceeding.

The Schwab Case. Lorillard Tobacco was a defendant in Schwab v. Philip Morris USA, Inc., et al. (U.S. District Court, Eastern District, New York, filed May 11, 2004). Plaintiffs in Schwab based their claims on defendants’ alleged violations of the 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 have been 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. In July 2010, the parties submitted to the U.S. District Court for the Eastern District of New York a stipulation of dismissal with prejudice, which concluded activity in Schwab.

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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. In one of the pending Reimbursement Cases, City of St. Louis [Missouri] v. American Tobacco Co., Inc., et al. (Circuit Court, City of St. Louis, Missouri, filed November 25, 1998), trial has been scheduled to begin in January 2011. Trial dates are subject to change. Lorillard Tobacco and Lorillard, Inc. are defendants in City of St. Louis. Plaintiffs are suing on behalf of approximately 40 Missouri hospitals.

U.S. Government Case. 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 final judgment and remedial order concluded a bench trial that began in September 2004. Lorillard Tobacco, other cigarette manufacturers, two parent companies and two trade associations were defendants in this action during trial. Lorillard, Inc. is not a party to this case.

In its 2006 final judgment and remedial order, 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”); 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; and from participating in the management or control of certain entities or their successors. 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. Lorillard Tobacco could incur costs in excess of $10 million to implement the final judgment and remedial order. The final judgment and remedial order also requires defendants, including Lorillard Tobacco, to make disclosures of disaggregated marketing data to the government, and to make document disclosures on a website and in a physical depository. The final judgment and remedial order prohibits each defendant that manufactures cigarettes, including Lorillard Tobacco, from selling any of its cigarette brands or certain elements of its business unless certain conditions are met.

The final judgment and remedial order has not yet been fully implemented. Following trial, the final judgment and remedial order was stayed because 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. 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 stayed its order that formally relinquished jurisdiction of defendants’ appeal pending the disposition of the petitions for writ of certiorari to the U.S. Supreme Court that were noticed by the defendants, the government and the intervenors. In June 2010, the U.S. Supreme Court denied all of the petitions for writ of certiorari. The case has been returned to the trial court for implementation of the Court of Appeals’ directions in its 2009 ruling and for entry of an amended final judgment.

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. The U.S. Supreme Court declined to address the decisions dismissing recovery of profits when it denied review of the government’s and the intervenors’ petitions.

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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 $324 million and $911 million for the three and nine months ended September 30, 2010, respectively, and $294 million and $848 million for the three and nine months ended September 30, 2009, 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 $10.4 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 and subsequent years 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 ended in 2005 as a result of an assessment imposed under a federal law, enacted in 2004, repealing the federal supply management program for tobacco growers. Under the law, tobacco quota holders and growers will be compensated with payments totaling $10.1 billion, funded by an assessment on tobacco manufacturers and importers. Payments under the law 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.

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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 33 Filter 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 $20.4 million in settlements to finally resolve approximately 90 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. In September 2008, a jury in the District Court of Bexar County, Texas, returned a verdict for Lorillard Tobacco in Young v. Lorillard Tobacco Company. Plaintiffs in the Young case did not pursue an appeal and that matter is concluded. In January 2010, a jury in the Superior Court of California, Los Angeles County, returned a verdict for Lorillard Tobacco in Cox v. Asbestos Corporation, Ltd., et al. Plaintiffs in the Cox case voluntarily dismissed Lorillard Tobacco from their appeal to the California Court of Appeals and the matter is concluded. As of October 20, 2010, nine 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. 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 Tobacco was a defendant in all but one of these indirect purchaser cases. Lorillard, Inc. was not named as a defendant in any of these 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, and subsequently dismissed as to all defendants.

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. As of October 20, 2010, the Court has not set dates 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 participating in the MSA. The plaintiff alleges that MSA participants, such as itself, 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 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 in January 2010. Thereafter, the plaintiff filed a notice of appeal to the federal Court of Appeals for the Sixth Circuit. As of October 20, 2010, no other filings have been made.

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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. 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. 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.

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 is 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 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our historical consolidated financial statements and the notes related to those financial statements included in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2010 (the “Form 10-Q”). In addition to historical information, the following discussion contains forward-looking statements based on current expectations that involve risks and uncertainties. Investors are cautioned not to place undue reliance on these forward-looking statements. Statements preceded by, followed by or that otherwise include the words “believe,” “expect,” “anticipate,” “intend,” “project,” “estimate,” “plan,” “may increase,” “may fluctuate” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and are not historical facts. 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 risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”), our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010 and those risk factors set forth in “Business Environment” below, in Part II, “Item 1A. Risk Factors” and elsewhere in this Form 10-Q. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless required by law. For any forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).

The terms “Lorillard,” “we,” “our” and “us” refer to Lorillard, Inc., a Delaware corporation, and its subsidiaries. The terms “Lorillard, Inc.” and the “Company” refer solely to the parent company and “Lorillard Tobacco” refers solely to Lorillard Tobacco Company, the principal subsidiary of Lorillard, Inc.

Overview

We are the third largest manufacturer of cigarettes in the United States. We were founded in 1760 and are the oldest continuously operating tobacco company in the United States. Newport, which is our flagship brand, is a menthol flavored premium cigarette brand and the top selling menthol and second largest selling cigarette brand overall in the United States based on gross units sold in the first nine months of 2010 and in the full year 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 cigarette brands include 43 different product offerings which vary in price, taste, flavor, length and packaging. In the United States and certain U.S. possessions and territories, we shipped 28.7 billion cigarettes in the first nine months of 2010 and 36.3 billion cigarettes for full year 2009. Our major trademarks outside of the United States were sold in 1977. We manufacture all of our cigarette products at our Greensboro, North Carolina facility.

Critical Accounting Policies and Estimates

For a description of the critical accounting policies that require the use of significant judgments and estimates by management, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 25, 2010.

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, including 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 3.4% from the twelve months ended September 30, 2000 through the twelve months ended September 30, 2010.

•

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 nine months ended September 30, 2010, 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 addition, the law established a Tobacco Products Scientific Advisory Committee (“TPSAC”) to, among other things, evaluate issues surrounding the use of menthol as a flavoring or ingredient in cigarettes. The TPSAC held meetings on March 30-31, 2010, July 15-16, 2010, September 27, 2010 and October 7, 2010 to consider the issues surrounding the use of menthol in cigarettes. We expect the TPSAC will have further meetings on the use of menthol in cigarettes, and TPSAC’s report and recommendations on menthol are currently due to the FDA in March 2011.

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. In January 2010, the district court issued an order (a) striking down the provisions

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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. In March 2010, both sides filed an appeal of the district court’s order to the Court of Appeals for the Sixth Circuit. While we believe there is established legal precedent supporting our claims, we cannot predict the outcome of any such appeal. Nor can we make any assurances that our 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. For the nine months ended September 30, 2010, the federal excise tax was $1.0066 per pack and combined state and local excise taxes ranged from $0.17 to $5.85 per pack. For the nine months ended September 30, 2010, excise tax increases ranging from $0.40 to $1.60 per pack were implemented in six states. On June 21, 2010, New York state legislature approved a $1.60 per pack state excise tax increase that was implemented on July 1, 2010. The federal excise tax on cigarettes increased 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 Lorillard’s selected industry and market share data for the three and nine months ended September 30, 2010 and 2009.

Selected Industry and Market Share Data (1)


	Three Months
	Ended						Nine Months Ended
	September 30,						September 30,
(Volumes in billions)	2010			2009			2010			2009
Lorillard total domestic unit volume		9.830			9.287			28.135			26.673
Industry total domestic unit volume		79.474			80.123			229.948			238.345

Lorillard’s share of the domestic market		12.4	%		11.6	%		12.2	%		11.2	%
Lorillard’s premium volume as a percentage of its domestic volume		85.2	%		88.0	%		86.6	%		89.2	%
Lorillard’s share of the premium market		15.1	%		14.5	%		15.1	%		14.1	%

Newport’s share of the domestic market		10.4	%		10.0	%		10.4	%		9.8	%
Newport’s share of the premium market		14.9	%		14.2	%		14.8	%		13.8	%
Total menthol segment market share for the industry		29.9	%		28.9	%		29.5	%		28.7	%
Total discount segment market share for the industry		30.2	%		29.5	%		29.7	%		29.2	%
Newport’s share of the menthol market		34.8	%		34.6	%		35.3	%		34.1	%
Newport’s share of Lorillard’s total volume(2)		84.2	%		86.6	%		85.4	%		87.8	%
Newport’s share of Lorillard’s net sales(2)		89.3	%		90.8	%		90.1	%		91.7	%


(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.

Results of Operations

Three and Nine Months Ended September 30, 2010 Compared to the Three and Nine Months Ended September 30, 2009


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(in millions)						(in millions)
Net sales (a)	$	1,567		$	1,419		$	4,446		$	3,855
Cost of sales (a) (b) (c)		1,001			931			2,861			2,430

Gross profit		566			488			1,585			1,425
Selling, general and administrative		101			96			293			282

Operating income		465			392			1,292			1,143
Investment income		1			1			3			4
Interest expense		(29	)		(15	)		(66	)		(18	)

Income before income taxes		437			378			1,229			1,129
Income taxes		163			143			459			423

Net income	$	274		$	235		$	770		$	706


(a)		Includes excise taxes of $494, $466, $1,413 and $1,101, respectively.

(b)		Includes $324, $294, $911 and $848 to accrue obligations under the State Settlement Agreements, respectively.

(c)		Includes $27, $29, $84 and $77 to accrue obligations under the Federal Assessment for Tobacco Growers, respectively.

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Three Months ended September 30, 2010 Compared to Three Months ended September 30, 2009

Net sales. Net sales increased by $148 million, or 10.4%, from $1.419 billion for the three months ended September 30, 2009 to $1.567 billion for the three months ended September 30, 2010. Net sales increased $101 million due to higher unit sales volume, $21 million due to higher average unit prices reflecting price increases in February and May 2010, and $26 million of lower sales promotion costs accounted for as a reduction of sales. Federal excise taxes are included in net sales and increased $30.83 per thousand cigarettes, or $0.62 per pack of 20 cigarettes, to $50.33 per thousand cigarettes, or $1.01 per pack of 20 cigarettes, effective April 1, 2009.

Both our total unit volume and domestic unit volume increased 5.8% for the three months ended September 30, 2010 compared to the corresponding period of 2009. Unit volume figures in this section are provided on a gross basis. Total Newport unit volume increased 2.8% and domestic Newport unit volume increased 2.9% for the three months ended September 30, 2010 compared to the corresponding period of 2009. Industry-wide domestic unit volume decreased an estimated 0.8% for the three months ended September 30, 2010 compared to the corresponding period of 2009. Industry shipments of premium brands comprised 69.8% of industry-wide domestic unit volume during the three months ended September 30, 2010 compared to 70.5% in the corresponding period of 2009.

Our total domestic wholesale market share increased by 0.8 share points during the third quarter of 2010 to 12.4% from 11.6% in the third quarter of 2009. Newport domestic wholesale market share increased 0.4 share points during the third quarter of 2010 to 10.4% from 10.0% in the third quarter of 2009.

Cost of sales. Cost of sales increased by $70 million, or 7.5%, from $931 million for the three months ended September 30, 2009 to $1.001 billion for the three months ended September 30, 2010. The increase in cost of sales is primarily due to higher sales volume ($35 million), higher expenses related to the State Settlement Agreements ($30 million) and higher Food and Drug Administration fees ($5 million). We recorded pre-tax charges for our obligations under the State Settlement Agreements of $324 million and $294 million for the three months ended September 30, 2010 and 2009, respectively, an increase of $30 million. The $30 million increase is due to the impact of higher unit sales ($15 million), the inflation adjustment ($9 million), and higher other expenses ($6 million).

Selling, general and administrative. Selling, general and administrative expenses increased $5 million to $101 million in the third quarter of 2010 compared to the third quarter of 2009 as a result of higher legal costs incurred in the current year.

Interest expense. Interest expense increased $14 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009, and reflects interest on the senior notes issued in the second quarter of 2009, net of the effect of interest rate swap agreements, and interest on the senior notes issued in the second quarter of 2010.

Income taxes. Income taxes increased $20 million or 14.0% from $143 million for the three months ended September 30, 2009 to $163 million in for the three months ended September 30, 2010. The change reflects primarily an increase in income before income taxes of $59 million, or 15.6%, offset partially by a decrease in the effective tax rate from 37.7% to 37.3% for the three months ended September 30, 2009 and 2010, respectively, driven by a statutory increase in the manufacturers’ deduction.

Nine Months ended September 30, 2010 Compared to Nine Months ended September 30, 2009

Net sales. Net sales increased by $591 million, or 15.3%, from $3.855 billion for the nine months ended September 30, 2009 to $4.446 billion for the nine months ended September 30, 2010. Net sales increased $287 million due to the increase in federal excise taxes effective April 1, 2009, $215 million due to higher unit sales volume, $52 million due to higher average unit prices reflecting price increases in February and March 2009 and February and May 2010 and by $37 million of lower sales promotion costs accounted for as a reduction of sales. Federal excise taxes are included in net sales and increased $30.83 per thousand cigarettes, or $0.62 per pack of 20 cigarettes, to $50.33 per thousand cigarettes, or $1.01 per pack of 20 cigarettes, effective April 1, 2009.

Our total unit volume increased 5.2% and domestic unit volume increased 5.5% for the nine months ended September 30, 2010 compared to the corresponding period of 2009. Unit volume figures in this section are provided

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on a gross basis. Total Newport unit volume increased 2.4% and domestic Newport unit volume increased 2.6% for the nine months ended September 30, 2010 compared to the corresponding period of 2009. Industry-wide domestic unit volume decreased an estimated 3.5% for the nine months ended September 30, 2010 compared to the corresponding period of 2009. Industry shipments of premium brands comprised 70.3% of industry-wide domestic unit volume during the nine months ended September 30, 2010 compared to 70.8% in the corresponding period of 2009.

Our total domestic wholesale market share increased by 1.0 share point during the nine months ended September 30, 2010 to 12.2% from 11.2% in the nine months ended September 30, 2009. Newport domestic wholesale market share increased by 0.6 share points during the nine months ended September 30, 2010 to 10.4% from 9.8% in the nine months ended September 30, 2009.

Cost of sales. Cost of sales increased by $431 million, or 17.7%, from $2.430 billion for the nine months ended September 30, 2009 to $2.861 billion for the nine months ended September 30, 2010. The increase in cost of sales is primarily due to the increase in federal excise taxes ($287 million), higher unit sales volume ($55 million), higher expenses related to the State Settlement Agreements ($63 million) and the Federal Assessment for Tobacco Growers ($7 million), and higher Food and Drug Administration fees ($19 million). We recorded pre-tax charges for our obligations under the State Settlement Agreements of $911 million and $848 million for the nine months ended September 30, 2010 and 2009, respectively, an increase of $63 million. The $63 million increase is due to higher unit sales ($44 million), the impact of the inflation adjustment ($24 million), partially offset by other adjustments ($5 million).

Selling, general and administrative. Selling, general and administrative expenses costs increased $11 million, or 3.9% in the first nine months of 2010 to $293 million compared to the first nine months of 2009 as a result of higher legal and administrative costs incurred in the current year.

Interest expense. Interest expense increased $48 million for the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009, and reflects interest on the senior notes issued in the second quarter of 2009, net of the effect of interest rate swap agreements, and interest on the senior notes issued in the second quarter of 2010.

Income taxes. Income taxes increased $36 million or 8.5% from $423 million for the nine months ended September 30, 2009 to $459 million in for the nine months ended September 30, 2010. The change reflects an increase in income before income taxes of $100 million in 2010, or 8.9%, offset partially by a decrease in the effective tax rate from 37.5% to 37.4% for the nine months ended September 30, 2009 and 2010, respectively. The decrease was driven by a statutory increase in the manufacturers deduction, offset partially by the unfavorable impact of the repeal of future tax deductions for Medicare Part D subsidies for retiree drug benefits pursuant to the health care reform legislation enacted during the first quarter of 2010.

Liquidity and Capital Resources

Our cash and cash equivalents of $2.112 billion at September 30, 2010 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 $678 million for the nine months ended September 30, 2010 compared to $585 million for the nine months ended September 30, 2009. The increased cash flow in 2010 primarily reflects higher net income and the timing of payments for State Settlement Agreements.

Cash flow from investing activities. Our cash flow from investing activities used cash of $39 million for the nine months ended September 30, 2009 compared to $28 million for the nine months ended September 30, 2010 for capital expenditures. The expenditures were primarily used for the modernization of manufacturing equipment. Our capital expenditures for the year ending December 31, 2010 are forecast to be between $45 million and $55 million.

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Cash flow from financing activities. Our cash flow from operations has exceeded our working capital and capital expenditure requirements during the first nine months of 2010. We paid cash dividends to our shareholders of $155 million on March 12, 2009 and June 12, 2009, $163 million on September 11, 2009, $155 million on March 11, 2010, $152 million on June 11, 2010 and $171 on September 10, 2010. During the nine months ended September 30, 2009 and 2010, we have repurchased shares totaling $502 million and $431 million, respectively, and we have received proceeds from the issuance of long-term debt totaling $750 million and $1 billion, respectively.

In March 2010, Lorillard Tobacco, the principal, wholly owned operating subsidiary of the Company, entered into a $185 million revolving credit facility (“Revolver”) that expires March 26, 2013 and is guaranteed by the Company. Proceeds from the Revolver may be used for general corporate and working capital purposes. The interest rates on borrowings under the Revolver will be based on prevailing interest rates and, in part, upon the credit rating applicable to the Company’s senior unsecured long-term debt.

There were no borrowings under the Revolver during the third quarter of 2010.

In April 2010, Lorillard Tobacco issued $1 billion of unsecured senior notes in two tranches pursuant to an Indenture, dated June 23, 2009, and the Second Supplemental Indenture, dated April 12, 2010 (the “Second Supplemental Indenture”). The first tranche was $750 million aggregate principal amount of 6.875% Notes due May 1, 2020 (the “2020 Notes”), and the second tranche was $250 million aggregate principal amount of 8.125% Notes due May 1, 2040 (the “2040 Notes”). 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 issuance will be used for general corporate purposes, which may include, among other things, the repurchase, redemption or retirement of securities including the Company’s common stock, acquisitions, additions to working capital and capital expenditures.

Upon the occurrence of a change of control triggering event, Lorillard Tobacco will be required to make an offer to repurchase the 2020 Notes and 2040 Notes (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 Second 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. 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.

During the third quarter of 2010, we repurchased approximately 1.1 million shares at a cost of $91 million under the $1 billion repurchase program announced on August 20, 2010. As of September 30, 2010, the maximum dollar value of shares that could yet be purchased under the program was $909 million.

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, capital expenditure anddebt service requirements. We cannot predict our cash requirements related to any future settlements or judgments, including cash required to post bond for any appeals, if necessary, and can make no assurance that we will be able to meet all of those requirements.

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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 which have had increases.

In April 2010, we paid $829 million under the State Settlement Agreements, primarily based on 2009 volume. In addition, in April 2010, we deposited $92 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 $92 million reduction is based upon the Original Participating Manufacturers collective loss of market share in 2007 and 2006. In April of 2009, 2008, 2007 and 2006, we had previously deposited $69 million, $72 million, $111 million and $109 million, respectively, in the same escrow account discussed above, which was based on a loss of market share in 2006, 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 the other Participating Manufacturers entered into with certain MSA states. This amount was then paid to the MSA states. We and the other Original Participating Manufacturers have the right to claim additional reductions of MSA payments in subsequent years under provisions of the MSA. In addition to the payments made in the first nine months of 2010, we anticipate the additional amount payable in 2010 will be approximately $175 million to $225 million, primarily based on 2010 estimated volume.

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Contractual Cash Payment Obligations

The following chart presents our contractual cash payment obligations as of September 30, 2010.


			Less than						More than
	Total		1 year		1-3 years		3-5 years		5 years
	(In millions)
Senior notes	$	1,750	$	¾	$	¾	$	¾	$	1,750
Interest payments related to notes		1,623		133		398		265		827
Tobacco leaf purchase obligations		262		238		24		¾		¾
Machinery purchase obligations		42		42		¾		¾		¾
Operating lease obligations		4		2		2		¾		¾

Total	$	3,681	$	415	$	424	$	265	$	2,577

In addition to the obligations presented in the table above, as of September 30, 2010, we believe that it is reasonably possible that payments of up to $0.3 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, is 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 $1.100 billion and $1.150 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.

Off-Balance Sheet Arrangements

None.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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 September 30, 2010, 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 its 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 major 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 2010 investments, would cause an increase or decrease in pretax income of approximately $16 million for the nine months ended September 30, 2010.

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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 by approximately $6 million for the nine months ended September 30, 2010.

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.

Item 4. 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 Securities Exchange Act of 1934, as amended, (the “Exchange Act”) as of the end of the period covered by this Form 10-Q. 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 Form 10-Q, 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.

Changes in Internal Control over Financial Reporting

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 quarter that has materially affected, or is likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Information about legal proceedings is set forth in Note 14, “Legal Proceedings and Commitments – Legal Proceedings,” in the Notes to Consolidated Condensed Financial Statements included in “Item 1. Financial Statements” of this Form 10-Q. Such information is incorporated by reference as if fully set forth herein.

Item 1A. Risk Factors

With the exception of the following, there have been no other material changes in our risk factors from those disclosed in Part I, Item 1A of our Form 10-K:

As of October 20, 2010, Lorillard Tobacco is a defendant in approximately 10,270 tobacco-related lawsuits, including approximately 707 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

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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 operations 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. In April 2010, the Louisiana Court of Appeal, Fourth Circuit, issued a decision that modified the trial court’s 2008 amended final judgment. The Court of Appeal’s decision reduced the judgment amount from approximately $264 million to approximately $242 million to fund a ten year, court-supervised smoking cessation program. The April 2010 decision also changed the date on which the award of post-judgment interest will accrue from June 2004 to July 2008. Interest awarded by the amended final judgment will continue to accrue from July 2008 until the judgment either is paid or is reversed on appeal. As of October 20, 2010, judicial interest totaled approximately $29.7 million. 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. Lorillard, Inc., which was a party to the case in the past, is no longer a defendant. The Louisiana Supreme Court denied review of the petitions that were filed by the defendants and the plaintiffs. The U.S. Supreme Court has granted defendants’ application to stay execution of the amended final judgment until defendants’ petition for writ of certiorari to the U.S. Supreme Court is timely filed and resolved. Defendants’ petition for writ of certiorari is due to be filed by December 2, 2010. It is not possible to predict the final outcome of this matter.

The judgment entered in the federal government’s reimbursement case, while not final in all respects, could impose significant financial burdens on us, could adversely affect future sales and profits and/or could restrict or limit our defenses in other litigation.

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. The remedial order, including the prohibitions on the use of the descriptors relating to low tar cigarettes, will likely negatively affect our future sales and profits.

In 2009, a three judge panel of the Court of Appeals upheld substantially all of the District Court’s final judgment and remedial order. In June 2010, the U.S. Supreme Court denied the parties’ petitions seeking review of the case.

The case has been returned to the U.S. District Court, District of Columbia for implementation of the Court of Appeals’ directions in its 2009 ruling and for entry of an amended final judgment. As of October 20, 2010, the trial court had not entered the amended final judgment.

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The 2006 final judgment and remedial order made many adverse findings regarding the conduct of the defendants. It is possible that the final opinion, final judgment and remedial order entered by the court could form the basis of allegations by the plaintiffs in other matters, or of additional judicial findings by other courts against cigarette manufacturers. It is possible that other courts could apply the findings in the United States of America case to restrict or otherwise limit our defenses in other litigation.

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 7,586 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 October 20, 2010, Lorillard Tobacco was a defendant in one Engle Progeny Case in which trial was underway, Rohr v. R.J. Reynolds Tobacco Company, et al., pending in the Circuit Court of Broward County, Florida. Lorillard, Inc. is not a defendant in this case. Rohr is being tried pursuant to a multi-phase trial plan. At the conclusion of the trial’s first phase, the jury determined that the decedent was a member of the Engle class. This determination allowed the trial to proceed to subsequent phases, and trial was ongoing as of October 20, 2010. In addition, Lorillard Tobacco and Lorillard, Inc. are defendants in Engle Progeny Cases that have been placed on courts’ 2010 or 2011 trial calendars or in which specific trial dates have been set. 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 or 2011. It also is not possible to predict whether some courts will implement procedures that consolidate multiple Engle Progeny Cases for trial.

As of October 20, 2010, verdicts have been returned in 28 Engle Progeny cases since the Florida Supreme Court issued its 2006 ruling. Neither Lorillard Tobacco nor Lorillard, Inc. was a defendant in any of these trials. Juries awarded actual damages and punitive damages in 13 of these trials. The punitive damages awards have totaled $455 million and have ranged from $270,000 to $244 million. In six of the trials, juries awarded only actual damages. In the nine other trials, juries found in favor of the defendants. In some of the trials decided in the defendants’ favor, plaintiffs have filed motions challenging the verdicts. It is not possible to predict the final outcome of this litigation.

FDA regulation of menthol in cigarettes and concerns that mentholated cigarettes may pose greater health risks could adversely affect our business.

Some plaintiffs and constituencies, including public health agencies, have claimed or expressed concerns that mentholated cigarettes may pose greater health risks than non-mentholated cigarettes, including concerns that mentholated cigarettes may make it easier to start smoking and harder to quit and may seek restrictions or a ban on the production and sale of mentholated cigarettes. Any ban or material limitation on the use of menthol in cigarettes would materially adversely affect our results of operations, cash flow and financial condition.

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In June 2009, the U.S. Congress passed, and the President signed into law, the Family Smoking Prevention and Tobacco Control Act (the “Act’) that includes a provision establishing a Tobacco Products Scientific Advisory Committee (“TPSAC”) to evaluate, among other things, “the impact of the use of menthol in cigarettes on the public health, including such use among children, African-Americans, Hispanics, and other racial and ethnic minorities.” In addition, the legislation permits the FDA to ban menthol upon a finding that such prohibition would be appropriate for the public health. The TPSAC held meetings on March 30-31, 2010, July 15-16, 2010, September 27, 2010 and October 7, 2010 to consider the issues surrounding the use of menthol in cigarettes. We expect the TPSAC will have further meetings on the use of menthol in cigarettes, and TPSAC’s report and recommendations on menthol are currently due to the FDA in March 2011.

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 materially adversely affect our sales, including sales of Newport. A ban or limitation on the use of menthol in cigarettes by the FDA would materially adversely affect our business.

Changes in laws, regulations and other requirements could adversely affect our business, results of operations or financial condition.

In addition to the regulation of our business by the FDA, our business, results of operations or financial condition could be adversely affected by new or future legal requirements imposed by legislative or regulatory initiatives, including but not limited to those relating to health care reform, climate change and environmental matters. For example, the health care reform legislation, which was signed into law in March 2010, resulted in the repeal of $2 million of future tax deductions for Medicare Part D subsidies for our retiree drug benefits and could impact our accounting for retiree medical benefits, employer-sponsored medical plans and related matters in future periods. However, the extent of that impact, if any, cannot be determined until regulations are promulgated and additional interpretations of the health care law are available. New legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent such requirements increase the prices of goods and services because of increased costs or reduced availability. We cannot predict whether such legislative or regulatory initiatives will result in significant changes to existing laws and regulations and/or whether any changes in such laws or regulations will have a material adverse affect on our business, results of operations or financial condition.

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

In the third quarter of 2010, the Company repurchased the following number of shares of its common stock:


							Approximate
					Total Number of		Dollar Value of
					Shares Purchased		Shares that
	Total		Average		as Part of		May Yet Be
	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
July 1, 2010—July 31, 2010		—		—		—		—
August 1, 2010—August 31, 2010		—		—		—	$	1,000
September 1, 2010—September 30, 2010		1.1	$	81.10		1.1		909

Total		1.1	$	81.10		1.1

The shares repurchased were acquired under a share repurchase program authorized by the Board of Directors on August 20, 2010 for a maximum of $1 billion. All repurchases were made in open market transactions. The Company records the repurchase of shares of common stock at cost based on the transaction date of the repurchase.

Item 3. Defaults Upon Senior Securities

None.

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Item 4. [Reserved]

Item 5. Other Information

None.

Item 6. 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., as of February 25, 2010, incorporated herein by reference to Exhibit 3.2 to our Current Report on Form 8-K filed (File No. 1-34097) on March 2, 2010

3.3		Certificate of Amendment of Certificate of Incorporation of Lorillard Tobacco Company and Certificate of Incorporation of Lorillard Tobacco Company, incorporated herein by reference to Exhibit 3.3 to Lorillard, Inc.’s Registration Statement on Form S-3 (File No. 333-159902) filed on June 11, 2009

3.4		Bylaws of Lorillard Tobacco Company, incorporated herein by reference to Exhibit 3.4 to Lorillard, Inc.’s Registration Statement on Form S-3 (File No. 333-159902) filed on June 11, 2009

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

4.4		Second Supplemental Indenture, dated April 12, 2010, 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 April 12, 2010

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

4.6		Form of 6.875% Senior Note due 2020 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 April 12, 2010

4.7		Form of 8.125% Senior Note due 2040 of Lorillard Tobacco Company, incorporated by reference of Exhibit 4.4 to our Current Report on Form 8-K (File No. 1-34097) filed on April 12, 2010

4.8		Form of Guarantee Agreement of Lorillard, Inc. for the 8.125% Senior Notes due 2019 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.4 to Lorillard, Inc.’s Current Report on Form 8-K filed on June 23, 2009

4.9		Form of Guarantee Agreement of Lorillard, Inc. for the 6.875% Senior Notes due 2020 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.5 to our Current Report on Form 8-K (File No. 1-34097) filed on April 12, 2010

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Exhibit
Number		Description
4.10		Form of Guarantee Agreement of Lorillard, Inc. for the 8.125% Senior Notes due 2040 of Lorillard Tobacco Company, incorporated by reference to Exhibit 4.6 to our Current Report on Form 8-K (File No. 1-34097) filed on April 12, 2010

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, incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K (File No. 1-34097) filed on March 2, 2009†*

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

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

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Exhibit
Number		Description
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 (File No. 1-34097) filed on August 7, 2008†

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 (File No. 1-34097) filed on July 10, 2008†

10.20		Amendment to Supply Agreement for Reconstituted Tobacco, dated 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, 2008 (File No. 1-34097) 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 for the quarter ended September 30, 2008 (File No. 1-34097) filed on November 4, 2008†

10.22		Form of Stock Option Award Certificate, incorporated herein by reference to Exhibit 10.22 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 (File No. 1-34097) filed on May 6, 2010†

10.23		Credit Agreement, dated March 26, 2010, among Lorillard Tobacco Company, as borrower, Lorillard, Inc., as parent guarantor, the lenders referred to therein, and JPMorgan Chase Bank, N.A., as Administrative Agent, incorporated herein by reference to Exhibit 10.1 to our Current Report on Form 8-K (File No. 1-34097) filed on March 26, 2010

10.24		Consulting Agreement between Lorillard, Inc. and Martin L. Orlowsky, dated August 12, 2010, incorporated herein by reference to Exhibit 10.2 to our Current Report on Form 8-K (File No. 1-34097) filed on August 12, 2010†

10.25		Offer Letter between Lorillard, Inc. and Murray S. Kessler, dated August 12, 2010, incorporated herein by reference to Exhibit 10.3 to our Current Report on Form 8-K (File No. 1-34097) filed on August 12, 2010†

10.26		Severance Agreement between Lorillard, Inc. and Murray S. Kessler, dated October 11, 2010†*

11.1		Statement regarding computation of earnings per share. (See Note 10 to the consolidated financial statements.)*

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)*

101.INS XBRL Instance Document**
101.SCH XBRL Taxonomy Extension Schema Document**
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document**

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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.

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LORILLARD, INC.
By:	/s/ Murray S. Kessler
	Name: Murray S. Kessler
	Title: President and Chief Executive Officer

By:	/s/ David H. Taylor
	Name: David H. Taylor
	Title:	Executive Vice President, Finance and Planning and Chief Financial Officer


	Page No.
PART I. FINANCIAL INFORMATION		1

Item 1. Financial Statements		1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3. Quantitative and Qualitative Disclosures about Market Risk		38

Item 4. Controls and Procedures		39

PART II. OTHER INFORMATION		39

Item 1. Legal Proceedings		39

Item 1A. Risk Factors		39

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		42

Item 3. Defaults Upon Senior Securities		42

Item 4. [Reserved]		43

Item 5. Other Information		43

Item 6. Exhibits		43

SIGNATURES		S-1
EX-10.26
EX-31.1
EX-31.2
EX-32.1
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