10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

OR

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

For the transition period from              to             

Commission file number 1-8940

Altria Group, Inc.

(Exact name of registrant as specified in its charter)

Virginia	13-3260245
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
120 Park Avenue, New York, New York	10017
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code    (917) 663-4000

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

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

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

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

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

At October 31, 2007, there were 2,106,319,958 shares outstanding of the registrant’s common stock, par value $0.33 1/3 per share.

ALTRIA GROUP, INC.

TABLE OF CONTENTS

		Page No.
PART I -	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets at September 30, 2007 and December 31, 2006	3 – 4
	Condensed Consolidated Statements of Earnings for the Nine Months Ended September 30, 2007 and 2006	5
	Three Months Ended September 30, 2007 and 2006	6
	Condensed Consolidated Statements of Stockholders’ Equity for the Year Ended December 31, 2006 and the Nine Months Ended September 30, 2007	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006	8 – 9
	Notes to Condensed Consolidated Financial Statements	10 – 47
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48 – 86
Item 4.	Controls and Procedures	87
PART II -	OTHER INFORMATION
Item 1.	Legal Proceedings	88
Item 1A.	Risk Factors	88 – 90
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	90
Item 6.	Exhibits	91
Signature		92

-2-

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in millions of dollars)

(Unaudited)

	September 30, 2007		December 31, 2006
ASSETS
Consumer products
Cash and cash equivalents	$	7,309	$	4,781
Receivables (less allowances of $17 in 2007 and 2006)		2,523		2,808
Inventories:
Leaf tobacco		4,241		4,383
Other raw materials		1,228		1,109
Finished product		3,463		3,188
		8,932		8,680
Current assets of discontinued operations				7,647
Other current assets		1,983		2,236
Total current assets		20,747		26,152
Property, plant and equipment, at cost		16,171		14,882
Less accumulated depreciation		8,097		7,301
		8,074		7,581
Goodwill		6,700		6,197
Other intangible assets, net		1,874		1,908
Prepaid pension assets		1,287		761
Investment in SABMiller		3,911		3,674
Long-term assets of discontinued operations				48,805
Other assets		2,693		2,402
Total consumer products assets		45,286		97,480
Financial services
Finance assets, net		6,376		6,740
Other assets		66		50
Total financial services assets		6,442		6,790
TOTAL ASSETS	$	51,728	$	104,270

See notes to condensed consolidated financial statements.

Continued

-3-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Continued)

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

(Unaudited)

	September 30, 2007			December 31, 2006
LIABILITIES
Consumer products
Short-term borrowings	$	512		$	420
Current portion of long-term debt		3,973			648
Accounts payable		1,166			1,414
Accrued liabilities:
Marketing		863			824
Taxes, except income taxes		3,869			3,620
Employment costs		639			849
Settlement charges		3,681			3,552
Other		1,651			1,641
Income taxes		1,242			782
Dividends payable		1,588			1,811
Current liabilities of discontinued operations					9,866
Total current liabilities		19,184			25,427
Long-term debt		3,040			6,298
Deferred income taxes		1,649			1,391
Accrued pension costs		554			541
Accrued postretirement health care costs		1,937			2,009
Long-term liabilities of discontinued operations					19,629
Other liabilities		2,185			2,658
Total consumer products liabilities		28,549			57,953
Financial services
Long-term debt		500			1,119
Deferred income taxes		5,185			5,530
Other liabilities		255			49
Total financial services liabilities		5,940			6,698
Total liabilities		34,489			64,651
Contingencies (Note 11)
STOCKHOLDERS’ EQUITY
Common stock, par value $0.33 1/3 per share (2,805,961,317 shares issued)		935			935
Additional paid-in capital		6,839			6,356
Earnings reinvested in the business		33,822			59,879
Accumulated other comprehensive losses		(836	)		(3,808	)
		40,760			63,362
Less cost of repurchased stock (700,278,240 shares in 2007 and 708,880,389 shares in 2006)		(23,521	)		(23,743	)
Total stockholders’ equity		17,239			39,619
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	51,728		$	104,270

See notes to condensed consolidated financial statements.

-4-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)

	For the Nine Months Ended September 30,
	2007			2006
Net revenues	$	55,572		$	51,024
Cost of sales		12,499			11,704
Excise taxes on products		26,774			23,670
Gross profit		16,299			15,650
Marketing, administration and research costs		5,751			5,703
Italian antitrust charge					61
Asset impairment and exit costs		545			123
(Recoveries) provision (from) for airline industry exposure		(214	)		103
Amortization of intangibles		18			17
Operating income		10,199			9,643
Interest and other debt expense, net		187			325
Earnings from continuing operations before income taxes, and equity earnings and minority interest, net		10,012			9,318
Provision for income taxes		3,234			2,540
Earnings from continuing operations before equity earnings and minority interest, net		6,778			6,778
Equity earnings and minority interest, net		195			145
Earnings from continuing operations		6,973			6,923
Earnings from discontinued operations, net of income taxes and minority interest		625			2,140
Net earnings	$	7,598		$	9,063
Per share data:
Basic earnings per share:
Continuing operations	$	3.32		$	3.32
Discontinued operations		0.30			1.02
Net earnings	$	3.62		$	4.34
Diluted earnings per share:
Continuing operations	$	3.30		$	3.29
Discontinued operations		0.29			1.02
Net earnings	$	3.59		$	4.31
Dividends declared	$	2.30		$	2.46

See notes to condensed consolidated financial statements.

-5-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(in millions of dollars, except per share data)

(Unaudited)

	For the Three Months Ended September 30,
	2007			2006
Net revenues	$	19,207		$	17,642
Cost of sales		4,325			4,022
Excise taxes on products		9,243			8,229
Gross profit		5,639			5,391
Marketing, administration and research costs		1,907			1,961
Asset impairment and exit costs		28			68
Recoveries from airline industry exposure		(7	)
Amortization of intangibles		6			6
Operating income		3,705			3,356
Interest and other debt expense, net		11			59
Earnings from continuing operations before income taxes, and equity earnings and minority interest, net		3,694			3,297
Provision for income taxes		1,117			1,125
Earnings from continuing operations before equity earnings and minority interest, net		2,577			2,172
Equity earnings and minority interest, net		56			42
Earnings from continuing operations		2,633			2,214
Earnings from discontinued operations, net of income taxes and minority interest					661
Net earnings	$	2,633		$	2,875
Per share data:
Basic earnings per share:
Continuing operations	$	1.25		$	1.06
Discontinued operations					0.32
Net earnings	$	1.25		$	1.38
Diluted earnings per share:
Continuing operations	$	1.24		$	1.05
Discontinued operations					0.31
Net earnings	$	1.24		$	1.36
Dividends declared	$	0.75		$	0.86

See notes to condensed consolidated financial statements.

-6-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

for the Year Ended December 31, 2006 and

the Nine Months Ended September 30, 2007

(in millions of dollars, except per share data)

(Unaudited)

								Accumulated Other Comprehensive Earnings (Losses)
	Common Stock		Addi- tional Paid-in Capital		Earnings Reinvested in the Business			Currency Translation Adjustments			Other			Total			Cost of Repurchased Stock			Total Stock- holders’ Equity
Balances, January 1, 2006	$	935	$	6,061	$	54,666		$	(1,317	)	$	(536	)	$	(1,853	)	$	(24,102	)	$	35,707
Comprehensive earnings:
Net earnings						12,022															12,022
Other comprehensive earnings (losses), net of income taxes:
Currency translation adjustments									1,220						1,220						1,220
Additional minimum pension liability												233			233						233
Change in fair value of derivatives accounted for as hedges												(11	)		(11	)					(11	)
Other												(11	)		(11	)					(11	)
Total other comprehensive earnings																					1,431
Total comprehensive earnings																					13,453
Initial adoption of FASB Statement No. 158, net of income taxes												(3,386	)		(3,386	)					(3,386	)
Exercise of stock options and issuance of other stock awards				295		145												359			799
Cash dividends declared ($3.32 per share)						(6,954	)														(6,954	)
Balances, December 31, 2006		935		6,356		59,879			(97	)		(3,711	)		(3,808	)		(23,743	)		39,619
Comprehensive earnings:
Net earnings						7,598															7,598
Other comprehensive earnings (losses),   net of income taxes:
Currency translation adjustments									344						344						344
Change in net loss and prior service cost												512			512						512
Change in fair value of derivatives accounted for as hedges												7			7						7
Total other comprehensive earnings																					863
Total comprehensive earnings																					8,461
Adoption of FIN 48 and FAS 13-2						711															711
Exercise of stock options and issuance of other stock awards (1)				483														222			705
Cash dividends declared ($2.30 per share)						(4,846	)														(4,846	)
Spin-off of Kraft Foods Inc.						(29,520	)		89			2,020			2,109						(27,411	)
Balances, September 30, 2007	$	935	$	6,839	$	33,822		$	336		$	(1,172	)	$	(836	)	$	(23,521	)	$	17,239

(1) Includes $179 million increase to additional paid-in capital for the reimbursement from Kraft for Altria stock awards. See Note 1.

Total comprehensive earnings were $2,564 million and $2,999 million, respectively, for the quarters ended September 30, 2007 and 2006, and $9,999 million for the first nine months of 2006.

See notes to condensed consolidated financial statements.

-7-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in millions of dollars)

(Unaudited)

	For the Nine Months Ended September 30,
	2007			2006
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
Earnings from continuing operations - Consumer products	$	6,763		$	6,835
- Financial services		210			88
Earnings from discontinued operations, net of income taxes and minority interest		625			2,140
Net earnings		7,598			9,063
Impact of earnings from discontinued operations, net of income taxes and minority interest		(625	)		(2,140	)
Adjustments to reconcile net earnings to operating cash flows:
Consumer products
Depreciation and amortization		704			685
Deferred income tax provision (benefit)		148			(240	)
Equity earnings and minority interest, net		(195	)		(145	)
U.S. tobacco headquarters relocation charges, net of cash paid		(1	)		(1	)
Escrow bond for the Price U.S. tobacco case					1,850
Asset impairment and exit costs, net of cash paid		392			57
Income tax reserve reversal					(1,006	)
Cash effects of changes, net of the effects from acquired and divested companies:
Receivables, net		(41	)		48
Inventories		91			(253	)
Accounts payable		(75	)		(132	)
Income taxes		86			80
Accrued liabilities and other current assets		(291	)		274
U.S. tobacco accrued settlement charges		129			(158	)
Pension plan contributions		(83	)		(367	)
Pension provisions and postretirement, net		226			320
Other		353			489
Financial services
Deferred income tax benefit		(253	)		(295	)
Provision for airline industry exposure					103
Other		(39	)		116
Net cash provided by operating activities, continuing operations		8,124			8,348
Net cash provided by operating activities, discontinued operations		161			2,796
Net cash provided by operating activities		8,285			11,144

See notes to condensed consolidated financial statements.

Continued

-8-

Altria Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(in millions of dollars)

(Unaudited)

	For the Nine Months Ended September 30,
	2007			2006
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
Consumer products
Capital expenditures	$	(924	)	$	(814	)
Purchases of businesses, net of acquired cash		(426	)
Proceeds from sales of businesses		4			85
Other		66			46
Financial services
Investments in finance assets		(4	)		(13	)
Proceeds from finance assets		363			339
Net cash used in investing activities, continuing operations		(921	)		(357	)
Net cash provided by investing activities, discontinued operations		26			69
Net cash used in investing activities		(895	)		(288	)
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
Consumer products
Net issuance (repayment) of short-term borrowings		78			(1,957	)
Long-term borrowings by PMI		1,110
Long-term debt repaid		(1,230	)		(2,136	)
Financial services
Long-term debt repaid		(617	)		(1,015	)
Dividends paid on Altria Group, Inc. common stock		(5,069	)		(5,012	)
Issuance of Altria Group, Inc. common stock		357			421
Kraft Foods Inc. dividends paid to Altria Group, Inc.		728			1,005
Other		(196	)		(283	)
Net cash used in financing activities, continuing operations		(4,839	)		(8,977	)
Net cash used in financing activities, discontinued operations		(176	)		(2,556	)
Net cash used in financing activities		(5,015	)		(11,533	)
Effect of exchange rate changes on cash and cash equivalents:
Continuing operations		164			84
Discontinued operations		1			30
Cash and cash equivalents, continuing operations:
Increase (decrease)		2,528			(902	)
Balance at beginning of period		4,781			5,942
Balance at end of period	$	7,309		$	5,040

See notes to condensed consolidated financial statements.

-9-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1. Basis of Presentation and Kraft Spin-Off

Basis of Presentation

The interim condensed consolidated financial statements of Altria Group, Inc. and subsidiaries (“Altria Group, Inc.”) are unaudited. It is the opinion of Altria Group, Inc.’s management that all adjustments necessary for a fair statement of the interim results presented have been reflected therein. All such adjustments were of a normal recurring nature. Net revenues and net earnings for any interim period are not necessarily indicative of results that may be expected for the entire year. Throughout this Form 10-Q, the term “Altria Group, Inc.” refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies and the term “ALG” refers solely to the parent company.

These statements should be read in conjunction with the consolidated financial statements and related notes, which appear in Altria Group, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 3, 2007. This Form 8-K revised certain information disclosed in Altria Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006 in order to reflect Kraft Foods Inc. (“Kraft”) as a discontinued operation and to reflect the change in reportable segments, both of which are discussed further below.

Balance sheet accounts are segregated by two broad types of businesses. Consumer products assets and liabilities are classified as either current or non-current, whereas financial services assets and liabilities are unclassified, in accordance with respective industry practices.

On March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft on a pro-rata basis to Altria Group, Inc. stockholders in a tax-free distribution. For further discussion, please refer to the Kraft Spin-Off discussion below. Altria Group, Inc. has reflected the results of Kraft prior to the distribution date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to Kraft were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2006.

The products of ALG’s subsidiaries include cigarettes and other tobacco products sold in the United States by Philip Morris USA Inc. (“PM USA”) and outside the United States by Philip Morris International Inc. (“PMI”). Beginning with the second quarter of 2007, Altria Group, Inc. revised its reportable segments to reflect PMI’s operations by geographic region. Altria Group, Inc.’s revised segments, which are reflected in these financial statements, are U.S. tobacco; European Union; Eastern Europe, Middle East and Africa; Asia; Latin America; and Financial Services. Accordingly, prior period segment results have been revised.

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

Kraft Spin-Off

On March 30, 2007 (the “Distribution Date”), Altria Group, Inc. distributed all of its remaining interest in Kraft on a pro-rata basis to Altria Group, Inc. stockholders of record as of the close of business on March 16, 2007 (the “Record Date”) in a tax-free distribution. The distribution ratio was 0.692024 of a share of Kraft for each share of Altria Group, Inc. common stock outstanding. Altria Group, Inc. stockholders received cash in lieu of fractional shares of Kraft. Following the distribution, Altria Group, Inc. does not own any shares of Kraft. During the second quarter of 2007, Altria Group, Inc. adjusted its quarterly dividend to $0.69 per share, so that its stockholders who retained their Altria Group, Inc. and Kraft shares would receive, in the aggregate, the same

-10-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

dividend rate as before the distribution. In August 2007, Altria Group, Inc. increased its quarterly dividend to $0.75 per share.

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

• a new Kraft option to acquire the number of shares of Kraft Class A common stock equal to the product of (a) the number of Altria Group, Inc. options held by such person on the Distribution Date and (b) the distribution ratio of 0.692024 mentioned above; and

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

The new Kraft option has an exercise price equal to the Kraft market price at the time of the distribution ($31.66) multiplied by the Option Conversion Ratio, which represents the exercise price of the original Altria Group, Inc. option divided by the Altria Group, Inc. market price immediately before the distribution ($87.81). The reduced exercise price of the adjusted Altria Group, Inc. option is determined by multiplying the Altria Group, Inc. market price immediately following the distribution ($65.90) by the Option Conversion Ratio.

Holders of Altria Group, Inc. restricted stock or stock rights awarded prior to January 31, 2007, retained their existing award and received restricted stock or stock rights of Kraft Class A common stock. The amount of Kraft restricted stock or stock rights awarded to such holders was calculated using the same formula set forth above with respect to new Kraft options. All of the restricted stock and stock rights will vest at the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria Group, Inc. stock rights awarded on January 31, 2007, did not receive restricted stock or stock rights of Kraft. Rather, they received additional stock rights of Altria Group, Inc. to preserve the intrinsic value of the original award.

To the extent that employees of the remaining Altria Group, Inc. received Kraft stock options, Altria Group, Inc. reimbursed Kraft in cash for the Black-Scholes fair value of the stock options received. To the extent that Kraft employees held Altria Group, Inc. stock options, Kraft reimbursed Altria Group, Inc. in cash for the Black-Scholes fair value of the stock options. To the extent that holders of Altria Group, Inc. stock rights received Kraft stock rights, Altria Group, Inc. paid to Kraft the fair value of the Kraft stock rights less the value of projected forfeitures. Based upon the number of Altria Group, Inc. stock awards outstanding at the Distribution Date, the net amount of these reimbursements resulted in a payment of $179 million from Kraft to Altria Group, Inc. in April 2007. The reimbursement from Kraft is reflected as an increase to the additional paid-in capital of Altria Group, Inc. on the September 30, 2007 condensed consolidated balance sheet.

Kraft was previously included in the Altria Group, Inc. consolidated federal income tax return, and federal income tax contingencies were recorded as liabilities on the balance sheet of ALG. As part of the intercompany account settlement discussed below, ALG reimbursed Kraft in cash for these liabilities, which as of March 30, 2007, were approximately $305 million, plus pre-tax interest of $63 million. ALG also reimbursed Kraft in cash for the federal income tax consequences of the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) (approximately $70 million plus pre-tax interest of $14 million). See Note 12. Income Taxes for a discussion of the FIN 48 adoption and the Tax Sharing Agreement between Altria Group, Inc. and Kraft.

-11-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

A subsidiary of ALG previously provided Kraft with certain services at cost plus a 5% management fee. After the Distribution Date, Kraft undertook these activities, and any remaining limited services provided to Kraft will cease in 2007. All intercompany accounts were settled in cash within 30 days of the Distribution Date. The settlement of the intercompany accounts (including the amounts discussed above related to stock awards and tax contingencies) resulted in a net payment from Kraft to ALG of $85 million in April 2007.

The distribution resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $27.4 billion on the Distribution Date.

PMI Spin-Off

On August 29, 2007, Altria Group, Inc.’s Board of Directors announced its intention to pursue the tax-free spin-off of PMI to Altria Group, Inc.’s stockholders. The Board of Directors anticipates that it will be in a position to finalize its decision and announce the precise timing of the spin-off at its regularly scheduled meeting on January 30, 2008. In addition to a final determination by Altria Group, Inc.’s Board of Directors, the spin-off will be subject to the receipt of a favorable ruling from the U.S. Internal Revenue Service, the receipt of an opinion of tax counsel and the effectiveness of a registration statement with the Securities and Exchange Commission, as well as the execution of several intercompany agreements and finalization of other matters.

Note 2. Asset Impairment and Exit Costs:

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

		For the Nine Months Ended September 30,				For the Three Months Ended September 30,
		2007		2006		2007		2006
		(in millions)
Separation program	U.S. tobacco	$	293	$	—	$	10	$	—
Separation program	European Union		101		78		13		56
Separation program	Eastern Europe, Middle East and Africa		12
Separation program	Asia		22		7		2		6
Separation program	Latin America		18
Separation program	General corporate		17		33				3
Total separation programs			463		118		25		65
Asset impairment	U.S. tobacco		35
Asset impairment	European Union				3				3
Asset impairment	General corporate				2
Total asset impairments			35		5				3
Spin-off fees	General corporate		47				3
Asset impairment and exit costs		$	545	$	123	$	28	$	68

-12-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The movement in the asset impairment and exit cost liabilities for Altria Group, Inc. for the nine months ended September 30, 2007 was as follows:

	Severance			Asset write-downs			Other			Total
	(in millions)
Liability balance, January 1, 2007	$	131		$	—		$	—		$	131
Charges		431			35			79			545
Cash spent		(105	)					(48	)		(153	)
Charges against assets					(35	)					(35	)
Currency/other		2						(31	)		(29	)
Liability balance, September 30, 2007	$	459		$	—		$	—		$	459

Manufacturing Optimization Program

In June 2007, Altria Group, Inc. announced plans by its tobacco subsidiaries to optimize worldwide cigarette production by moving U.S.-based cigarette production for non-U.S. markets to PMI facilities in Europe. Due to declining U.S. cigarette volume, as well as PMI’s decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. PMI is expected to shift sourcing of approximately 57 billion cigarettes from U.S. manufacturing to PMI facilities in Europe by the third quarter of 2008 and PM USA will close its Cabarrus manufacturing facility by the end of 2010.

As a result of this program, from 2007 through 2011, PM USA expects to incur total pre-tax charges of approximately $670 million, comprised of accelerated depreciation of $143 million (including the above mentioned asset impairment charge of $35 million recorded for the nine months ended September 30, 2007), employee separation costs of $353 million and other charges of $174 million, primarily related to the relocation of employees and equipment, net of estimated gains on sales of land and buildings. Approximately $440 million, or 66% of the total pre-tax charges, will result in cash expenditures. PM USA recorded an initial pre-tax asset impairment and exit cost charge for the program of $318 million or $0.10 per diluted share in the second quarter of 2007 related primarily to employee separation programs. During the third quarter of 2007, PM USA recorded pre-tax asset impairment and exit cost charges for the program of $10 million related to employee separation programs. In addition, during the third quarter of 2007, PM USA incurred $12 million of pre-tax implementation costs associated with the program. These costs were primarily related to accelerated depreciation and were reflected as cost of sales on the condensed consolidated statements of earnings. Additional pre-tax charges of approximately $35 million are expected during the remainder of 2007.

Philip Morris International Asset Impairment and Exit Costs

During 2007, 2006 and 2005, PMI announced plans for the streamlining of various administrative functions and operations. These plans resulted in the announced closure or partial closure of 9 production facilities through September 30, 2007. As a result of these announcements, PMI recorded pre-tax charges of $153 million and $15 million during the nine months and three months ended September 30, 2007, respectively, and $88 million and $65 million during the nine months and three months ended September 30, 2006, respectively. These pre-tax charges primarily related to severance costs. Additional pre-tax charges of approximately $47 million are expected during the remainder of 2007. The 2006 third quarter charges included $51 million of costs related to PMI’s Munich factory closure.

Cash payments related to exit costs at PMI were $89 million and $16 million for the nine months and three months ended September 30, 2007, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $170 million.

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The streamlining of these various functions and operations is expected to result in the elimination of approximately 2,400 positions. As of September 30, 2007, approximately 1,800 of these positions have been eliminated.

Corporate Asset Impairment and Exit Costs

General corporate charges primarily related to investment banking fees associated with the Kraft spin-off in 2007 and charges related to the streamlining of various corporate functions in 2007 and 2006.

Note 3. Benefit Plans:

Altria Group, Inc. sponsors noncontributory defined benefit pension plans covering substantially all U.S. employees. Pension coverage for employees of ALG’s non-U.S. subsidiaries is provided, to the extent deemed appropriate, through separate plans, many of which are governed by local statutory requirements. In addition, ALG and its U.S. subsidiaries provide health care and other benefits to substantially all retired employees. Health care benefits for retirees outside the United States are generally covered through local government plans.

Pension Plans

Components of Net Periodic Benefit Cost

Net periodic pension cost consisted of the following:

	U.S. Plans						Non-U.S. Plans
	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Service cost	$	80		$	89		$	101		$	94
Interest cost		229			215			96			84
Expected return on plan assets		(316	)		(297	)		(159	)		(121	)
Amortization:
Net loss		78			114			21			18
Prior service cost		7			11			4			4
Other		31			5
Net periodic pension cost	$	109		$	137		$	63		$	79

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

	U.S. Plans						Non-U.S. Plans
	For the Three Months Ended September 30,						For the Three Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Service cost	$	26		$	31		$	33		$	32
Interest cost		76			73			32			28
Expected return on plan assets		(105	)		(97	)		(54	)		(40	)
Amortization:
Net loss		28			40			7			6
Prior service cost		1			5			2			1
Other		7
Net periodic pension cost	$	33		$	52		$	20		$	27

Other, above, was due primarily to curtailment losses and an early retirement program related to PM USA’s announced closure of its Cabarrus, North Carolina manufacturing facility in 2007, and a workforce reduction program within Altria corporate headquarters in 2006. In conjunction with the 2007 curtailment, as of June 30, 2007, Altria Group, Inc. remeasured its benefit obligation and plan assets for its U.S. pension plans. This remeasurement resulted in an increase in prepaid pension assets of approximately $500 million and a corresponding increase, net of income taxes, to stockholders’ equity.

Employer Contributions

Altria Group, Inc. presently makes, and plans to make, contributions, to the extent that they are tax deductible and do not generate an excise tax liability, in order to maintain plan assets in excess of the accumulated benefit obligation of its funded U.S. and non-U.S. plans. Employer contributions of $27 million and $56 million were made to U.S. plans and non-U.S. plans, respectively, during the nine months ended September 30, 2007. Currently, Altria Group, Inc. anticipates making additional contributions during the remainder of 2007 of approximately $5 million to its U.S. plans and approximately $45 million to its non-U.S. plans, based on current tax law. However, these estimates are subject to change as a result of changes in tax and other benefit laws, as well as asset performance significantly above or below the assumed long-term rate of return on pension assets, or changes in interest rates.

Postretirement Benefit Plans

Net postretirement health care costs consisted of the following:

	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Service cost	$	36		$	42		$	12		$	15
Interest cost		93			91			30			30
Amortization:
Net loss		25			27			8			9
Prior service cost		(6	)		(3	)		(2	)		(2	)
Other		(4	)		3
Net postretirement health care costs	$	144		$	160		$	48		$	52

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Other, above, was due primarily to curtailment gains related to PM USA’s announced closure of its Cabarrus, North Carolina manufacturing facility in 2007 and a workforce reduction program within Altria corporate headquarters in 2006.

Note 4. Goodwill and Other Intangible Assets, net:

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

	Goodwill				Other Intangible Assets, net
	September 30, 2007		December 31, 2006		September 30, 2007		December 31, 2006
U.S. tobacco	$	—	$	—	$	281	$	281
European Union		1,394		1,307		66		65
Eastern Europe, Middle East and Africa		685		657		164		164
Asia		4,117		3,778		1,303		1,339
Latin America		504		455		60		59
Total	$	6,700	$	6,197	$	1,874	$	1,908

Intangible assets were as follows (in millions):

	September 30, 2007				December 31, 2006
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Non-amortizable intangible assets	$	1,539			$	1,566
Amortizable intangible assets		401	$	66		388	$	46
Total intangible assets	$	1,940	$	66	$	1,954	$	46

Non-amortizable intangible assets substantially consist of brand names from PMI’s 2005 acquisition of a business in Indonesia. Amortizable intangible assets consist primarily of certain trademark licenses and non-compete agreements. Pre-tax amortization expense for intangible assets during the nine months ended September 30, 2007 and 2006, was $18 million and $17 million, respectively, and $6 million for the three months ended September 30, 2007 and 2006. Amortization expense for each of the next five years is estimated to be $25 million or less, assuming no additional transactions occur that require the amortization of intangible assets.

Goodwill is due primarily to PMI’s acquisitions in Indonesia, Greece, Serbia, Colombia and Pakistan. The movement in goodwill and gross carrying amount of intangible assets from December 31, 2006, is as follows (in millions):

	Goodwill		Intangible Assets
Balance at December 31, 2006	$	6,197	$	1,954
Changes due to:
Currency		33		(14	)
Acquisitions		437
Other		33
Balance at September 30, 2007	$	6,700	$	1,940

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The increase in goodwill from acquisitions is primarily related to the preliminary allocation of the purchase price for PMI’s acquisition in Pakistan. The allocation is based upon preliminary estimates and assumptions and is subject to revision when appraisals are finalized, which will be completed in the first quarter of 2008.

During the first quarter of 2007, Altria Group, Inc. completed its annual review of goodwill and intangible assets, and no charges resulted from this review.

Note 5. Financial Instruments:

During the nine months and three months ended September 30, 2007 and 2006, ineffectiveness related to fair value hedges and cash flow hedges was not material. Altria Group, Inc. is hedging forecasted transactions for periods not exceeding the next fifteen months and expects gains of approximately $19 million reported in accumulated other comprehensive earnings (losses) to be reclassified to the consolidated statement of earnings within the next twelve months.

Within currency translation adjustments at September 30, 2007 and 2006, Altria Group, Inc. recorded gains of $2 million, net of income taxes, and losses of $134 million, net of income taxes, respectively, which represented effective hedges of net investments.

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

	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2007			2006			2007		2006
	(in millions)
Gain at beginning of period	$	13		$	24		$	8	$	17
Derivative (gains) losses transferred to earnings		(38	)		(51	)		3		(33	)
Change in fair value		45			6			11		(5	)
Kraft spin-off		2
Gain (loss) as of September 30	$	22		$	(21	)	$	22	$	(21	)

Note 6. Acquisitions:

On July 18, 2007, PMI announced that it had reached an agreement in principle to acquire an additional 30% stake in its Mexican tobacco business from its joint venture partner, Grupo Carso, S.A.B. de C.V. (“Grupo Carso”). PMI currently holds a 50% stake in its Mexican tobacco business and this transaction would bring PMI’s stake to 80%. Grupo Carso would retain a 20% stake in the business. The transaction has a value of approximately $1.1 billion and was completed on November 1, 2007.

During the first quarter of 2007, PMI acquired an additional 50.2% stake in a Pakistan cigarette manufacturer, Lakson Tobacco Company Limited (“Lakson Tobacco”), and completed a mandatory tender offer for the remaining shares, which increased PMI’s total ownership interest in Lakson Tobacco from 40% to approximately 98%, for $388 million. The effect of this acquisition was not material to Altria Group, Inc.’s consolidated financial position, results of operations or operating cash flows in any of the periods presented.

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 7. Divestitures:

Discontinued Operations:

As further discussed in Note 1. Basis of Presentation and Kraft Spin-Off, on March 30, 2007, Altria Group, Inc. completed the spin-off of all of its remaining interest in Kraft on a pro-rata basis to Altria Group, Inc. stockholders in a tax-free distribution. Altria Group, Inc. stockholders received 0.692024 of a share of Kraft for every share of Altria Group, Inc. common stock outstanding. Altria Group, Inc. stockholders received cash in lieu of fractional shares of Kraft. The distribution was accounted for as a dividend and as such resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $27.4 billion on March 30, 2007.

Altria Group, Inc. has reflected the results of Kraft prior to the distribution date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to Kraft were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2006.

Summarized financial information for discontinued operations for the nine months and three months ended September 30, 2007 and 2006 were as follows (in millions):

	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2007			2006			2007		2006
Net revenues	$	8,586		$	24,985		$	—	$	8,243
Earnings before income taxes and minority interest	$	1,059		$	3,175		$	—	$	1,223
Provision for income taxes		(356	)		(735	)				(473	)
Minority interest in earnings from discontinued operations, net		(78	)		(300	)				(89	)
Earnings from discontinued operations, net of income taxes and minority interest	$	625		$	2,140		$	—	$	661

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Summarized assets and liabilities of discontinued operations as of December 31, 2006 were as follows (in millions):

	December 31, 2006
Assets:
Cash and cash equivalents	$	239
Receivables, net		3,262
Inventories		3,506
Other current assets		640
Current assets of discontinued operations		7,647
Property, plant and equipment, net		9,693
Goodwill		27,038
Other intangible assets, net		10,177
Prepaid pension assets		1,168
Other assets		729
Long-term assets of discontinued operations		48,805
Liabilities:
Short-term borrowings		1,715
Current portion of long-term debt		1,418
Accounts payable		2,602
Accrued liabilities		3,980
Income taxes		151
Current liabilities of discontinued operations		9,866
Long-term debt		7,081
Deferred income taxes		3,930
Accrued pension costs		1,022
Accrued postretirement health care costs		3,014
Minority interest		3,109
Other liabilities		1,473
Long-term liabilities of discontinued operations		19,629
Net Assets	$	26,957

Note 8. Stock Plans:

In connection with the Kraft spin-off, Altria Group, Inc. employee stock options were modified through the issuance of Kraft employee stock options and the adjustment of the stock option exercise prices for the Altria Group, Inc. awards. For each employee stock option outstanding the aggregate intrinsic value of the option immediately after the spin-off was not greater than the aggregate intrinsic value of the option immediately before the spin-off. Due to the fact that the Black-Scholes fair values of the awards immediately before and immediately after the spin-off were equivalent, as measured in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), no incremental compensation expense was recorded as a result of the modification of the Altria Group, Inc. awards.

-19-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In January 2007, Altria Group, Inc. issued 1.7 million rights to receive shares of stock to eligible U.S.-based and non-U.S. employees. Restrictions on these rights lapse in the first quarter of 2010. The market value per right was $87.36 on the date of grant. Recipients of these Altria Group, Inc. stock rights did not receive restricted stock or stock rights of Kraft upon the Kraft spin-off. Rather, they received approximately 0.6 million additional stock rights of Altria Group, Inc. to preserve the intrinsic value of the original award.

During the nine months ended September 30, 2007, 2.1 million shares of restricted stock and rights to receive shares of stock vested. The total fair value of restricted stock and rights vested during the nine months ended September 30, 2007 was $183 million. The grant date fair value per share of these awards was $55.46 (prior to any adjustment for the Kraft spin-off).

Note 9. Earnings Per Share:

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

	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2007		2006		2007		2006
	(in millions)
Earnings from continuing operations	$	6,973	$	6,923	$	2,633	$	2,214
Earnings from discontinued operations		625		2,140				661
Net earnings	$	7,598	$	9,063	$	2,633	$	2,875
Weighted average shares for basic EPS		2,100		2,086		2,103		2,090
Plus incremental shares from assumed conversions:
Restricted stock and stock rights		2		3		2		3
Stock options		13		15		12		14
Weighted average shares for diluted EPS		2,115		2,104		2,117		2,107

For the nine months and three months ended September 30, 2007, there were no antidilutive stock options. For the nine months and three months ended September 30, 2006, the number of stock options excluded from the calculation of weighted average shares for diluted EPS because their effects were antidilutive was immaterial.

Note 10. Segment Reporting:

The products of ALG’s subsidiaries include cigarettes and other tobacco products sold in the United States by PM USA and outside of the United States by PMI. PMI’s operations are organized and managed by geographic region. Another subsidiary of ALG, PMCC, maintains a portfolio of leveraged and direct finance leases.

As discussed in Note 1. Basis of Presentation and Kraft Spin-Off, Altria Group, Inc. revised its reportable segments. Beginning with the second quarter of 2007, Altria Group, Inc.’s reportable segments are U.S. tobacco; European Union; Eastern Europe, Middle East and Africa; Asia; Latin America; and Financial Services.

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

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

Segment data were as follows:

	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Net revenues:
U.S. tobacco	$	13,998		$	13,938		$	4,944		$	4,830
European Union		20,253			18,248			6,832			6,458
Eastern Europe, Middle East and Africa		9,205			7,716			3,312			2,607
Asia		8,351			7,667			2,814			2,586
Latin America		3,639			3,183			1,274			1,052
Total International tobacco		41,448			36,814			14,232			12,703
Financial Services		126			272			31			109
Net revenues	$	55,572		$	51,024		$	19,207		$	17,642
Earnings from continuing operations before income taxes, and equity earnings and minority interest, net:
Operating companies income:
U.S. tobacco	$	3,429		$	3,687		$	1,295		$	1,270
European Union		3,256			2,735			1,151			955
Eastern Europe, Middle East and Africa		1,911			1,639			710			582
Asia		1,412			1,456			514			449
Latin America		333			395			143			133
Total International tobacco		6,912			6,225			2,518			2,119
Financial Services		332			138			33			101
Amortization of intangibles		(18	)		(17	)		(6	)		(6	)
General corporate expenses		(456	)		(390	)		(135	)		(128	)
Operating income		10,199			9,643			3,705			3,356
Interest and other debt expense, net		(187	)		(325	)		(11	)		(59	)
Earnings from continuing operations before income taxes, and equity earnings and minority interest, net	$	10,012		$	9,318		$	3,694		$	3,297

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

• Asset Impairment and Exit Costs – See Note 2. Asset Impairment and Exit Costs, for a breakdown of asset impairment and exit costs by segment.

-21-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

• Recoveries/Provision from/for Airline Industry Exposure – During the nine months and three months ended September 30, 2007, PMCC recorded pre-tax gains of $214 million and $7 million, respectively, on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down. During the second quarter of 2006, PMCC increased its allowance for losses by $103 million, due to continuing issues within the airline industry.

• Italian Antitrust Charge – During the first quarter of 2006, PMI recorded a $61 million charge related to an Italian antitrust action. This charge was included in the operating companies income of the European Union segment.

Note 11. Contingencies:

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

Overview of Tobacco-Related Litigation

Types and Number of Cases

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

The table below lists the number of certain tobacco-related cases pending in the United States against PM USA and, in some instances, ALG or PMI, as of November 1, 2007, December 31, 2006 and December 31, 2005, and a page-reference to further discussions of each type of case.

-22-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Type of Case	Number of Cases Pending as of November 1, 2007	Number of Cases Pending as of December 31, 2006	Number of Cases Pending as of December 31, 2005	Page References
Individual Smoking and Health Cases (1)	123	196	228	33
Smoking and Health Class Actions and Aggregated Claims Litigation (2)	10	10	9	33-34
Health Care Cost Recovery Actions	3	5	4	34-39
Lights/Ultra Lights Class Actions	17	20	24	39-42
Tobacco Price Cases	2	2	2	42
Cigarette Contraband Cases	0	0	1	43

(1) Does not include 2,622 cases brought by flight attendants seeking compensatory damages for personal injuries allegedly caused by exposure to environmental tobacco smoke (“ETS”). The flight attendants allege that they are members of an ETS smoking and health class action, which was settled in 1997. The terms of the court-approved settlement in that case allow class members to file individual lawsuits seeking compensatory damages, but prohibit them from seeking punitive damages. Also, does not include nine individual smoking and health cases brought against certain retailers that are indemnitees of PM USA. Additionally, does not include 189 individual smoking and health cases brought by or on behalf of 993 plaintiffs in Florida following the decertification of the Engle case discussed below.

(2) Includes as one case the aggregated claims of 923 individuals (of which 536 individuals have claims against PM USA) that are proposed to be tried in a single proceeding in West Virginia. The West Virginia Supreme Court of Appeals has ruled that the United States Constitution does not preclude a trial in two phases in this case. Issues related to defendants’ conduct, plaintiffs’ entitlement to punitive damages and a punitive damages multiplier, if any, would be determined in the first phase. The second phase would consist of individual trials to determine liability, if any, and compensatory damages. Defendants have renewed their motion for review of the trial plan with the West Virginia Supreme Court of Appeals.

There are also a number of other tobacco-related actions pending outside the United States against PMI and its affiliates and subsidiaries, including an estimated 134 individual smoking and health cases as of November 1, 2007 (Argentina (58), Australia (2), Brazil (54), Chile (9), Costa Rica (1), Greece (1), Italy (4), the Philippines (1), Poland (3) and Scotland (1)), compared with approximately 133 such cases on December 31, 2006, and approximately 132 such cases on December 31, 2005. In addition, in Italy, 2,023 cases are pending in the Italian equivalent of small claims court where damages are limited to €2,000 per case, and three cases are pending in Finland and one in Israel against defendants that are indemnitees of a subsidiary of PMI.

-23-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In addition, as of November 1, 2007, there were three smoking and health putative class actions pending outside the United States against PMI or its affiliates in Brazil (2) and Israel (1) compared with two such cases on December 31, 2006, and two such cases on December 31, 2005. Seven health care cost recovery actions are pending in Nigeria (4), Israel (1), Canada (1) and Spain (1), against PMI or its affiliates, and two Lights/Ultra Lights class actions are pending in Israel. PM USA is also a named defendant in the smoking and health putative class action in Israel, a “Lights” class action in Israel and health care cost recovery actions in Israel and Canada.

Also, as of November 1, 2007, there were nine “public civil actions” pending outside the Untied States against PMI or its affiliates in Argentina (1), Brazil (3), Colombia (4), and Turkey (1) compared with three such actions on December 31, 2006, and one such action on December 31, 2005. Public civil actions are claims filed either by an individual, or a public or private entity, seeking to protect a variety of collective or individual rights. Plaintiffs in these cases seek various forms of relief including injunctive relief such as banning cigarettes, descriptors, smoking in certain places and advertising, as well as implementing communication campaigns and reimbursement of medical expenses incurred by public or private institutions.

Pending and Upcoming Trials

On October 31, 2007, the jury in the Whiteley case found that plaintiffs are not entitled to punitive damages against PM USA. A trial in a flight attendant case began on October 29, 2007. In addition, as of November 1, 2007, 7 individual smoking and health cases against PM USA are scheduled for trial through the end of 2008. Cases against other tobacco companies are also scheduled for trial through the end of 2008. Trial dates are subject to change.

Recent Trial Results

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

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

Of the 17 cases in which verdicts were returned in favor of plaintiffs, eight have reached final resolution. A verdict against defendants in a health care cost recovery case has been reversed and all claims were dismissed with prejudice. In addition, a verdict against defendants in a purported Lights class action in Illinois has been reversed and the case has been dismissed with prejudice. After exhausting all appeals, PM USA has paid six judgments totaling $71,826,707, and interest totaling $33,806,665.

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

-24-

Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
May 2007	California/ Whiteley	Individual Smoking and Health	Approximately $2.5 million in compensatory damages against PM USA and the other defendant in the case, as well as $250,000 in punitive damages against the other defendant in the case.	In July 2007, the trial court granted plaintiff’s motion for a limited retrial against PM USA on the question of whether plaintiffs are entitled to punitive damages against PM USA, and if so, the amount. On October 31, 2007, the jury found that plaintiffs are not entitled to punitive damages against PM USA.
August 2006	District of Columbia/ United States of America	Health Care Cost Recovery	Finding that defendants, including ALG and PM USA, violated the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (RICO). No monetary damages assessed, but court made specific findings and issued injunctions. See Federal Government’s Lawsuit, below.	Defendants filed notices of appeal to the United States Court of Appeals in September 2006 and the Department of Justice filed its notice of appeal in October. In October 2006, a three-judge panel of the Court of Appeals stayed implementation of the trial court’s remedies order pending its review of the decision. In March 2007, the trial court denied in part and granted in part defendants’ post-trial motion for clarification of portions of the court’s remedial order. Briefing of the parties’ consolidated appeal is scheduled to conclude in May 2008. See Federal Government’s Lawsuit, below.
March 2005	New York/ Rose	Individual Smoking and Health	$3.42 million in compensatory damages against two defendants, including PM USA, and $17.1 million in punitive damages against PM USA.	PM USA’s appeal is pending.

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
May 2004	Louisiana/ Scott	Smoking and Health Class Action	Approximately $590 million against all defendants, including PM USA, jointly and severally, to fund a 10- year smoking cessation program.	In June 2004, the state trial court entered judgment in the amount of the verdict of $590 million, plus prejudgment interest accruing from the date the suit commenced. As of February 15, 2007, the amount of prejudgment interest was approximately $444 million. PM USA’s share of the verdict and prejudgment interest has not been allocated. Defendants, including PM USA, appealed. In February 2007, the Louisiana Court of Appeal upheld the class certification and finding of liability, but reduced the judgment by $312 million and vacated the award of prejudgment interest. The Court of Appeal also remanded the case to the trial court with instructions to further reduce the remaining $279 million judgment to eliminate amounts awarded to any individual who began smoking after the Louisiana Product Liability Act became effective on September 1, 1988. In March 2007, the Louisiana Court of Appeal rejected defendants’ motion for rehearing and clarification. Plaintiffs and defendants have filed petitions for writ of certiorari with the Louisiana Supreme Court. See Scott Class Action below.

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
March 2003	Illinois/ Price	Lights/Ultra Lights Class Action	$7.1005 billion in compensatory damages and $3 billion in punitive damages against PM USA.	In December 2005, the Illinois Supreme Court reversed the trial court’s judgment in favor of the plaintiffs and remanded the case to the trial court with instructions to dismiss the case against PM USA. In May 2006, the Illinois Supreme Court rejected the plaintiffs’ motion for rehearing. In November 2006, the United States Supreme Court denied plaintiffs’ petition for writ of certiorari and in December 2006, the trial court dismissed the case with prejudice. In May 2007, the trial court granted plaintiffs’ motion to certify certain questions to the Illinois Fifth District Appellate Court, and plaintiffs petitioned the Fifth District to review the certified questions. In May 2007, PM USA filed applications for a supervisory order and writ of mandamus with the Illinois Supreme Court seeking an order compelling the lower courts to deny plaintiffs’ motion to vacate and/or withhold final judgment. The Illinois appellate court stayed the plaintiffs’ appeal until the related matters pending before the Illinois Supreme Court are resolved. In August 2007, the Illinois Supreme Court granted PM USA’s motion for supervisory order, and the trial court dismissed plaintiffs’ motion to vacate or withhold final judgment.
October 2002	California/ Bullock	Individual Smoking and Health	$850,000 in compensatory damages and $28 billion in punitive damages against PM USA.	In December 2002, the trial court reduced the punitive damages award to $28 million. In April 2006, the California Court of Appeal affirmed the $28 million punitive damage award. See discussion (1) below.

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
June 2002	Florida/ Lukacs	Individual Smoking and Health	$37.5 million in compensatory damages against all defendants, including PM USA.	In March 2003, the trial court reduced the damages award to $24.86 million. PM USA’s share of the damages award is approximately $6 million. The court has not yet entered the judgment on the jury verdict. In January 2007, defendants petitioned the trial court to set aside the jury’s verdict and dismiss plaintiffs’ punitive damages claim. On August 1, 2007, the trial court deferred ruling on plaintiff’s motion for entry of judgment until after the United States Supreme Court’s review of Engle is complete and after further submissions by the parties. If a judgment is entered in this case, PM USA intends to appeal.
March 2002	Oregon/ Schwarz	Individual Smoking and Health	$168,500 in compensatory damages and $150 million in punitive damages against PM USA.	In May 2002, the trial court reduced the punitive damages award to $100 million. In May 2006, the Oregon Court of Appeals affirmed the compensatory damages verdict, reversed the award of punitive damages and remanded the case to the trial court for a second trial to determine the amount of punitive damages, if any. In June 2006, plaintiff petitioned the Oregon Supreme Court to review the portion of the Court of Appeals’ decision reversing and remanding the case for a new trial on punitive damages. In October 2006, the Oregon Supreme Court announced that it would hold this petition in abeyance until the United States Supreme Court decided the Williams case discussed below. In February 2007, the United States Supreme Court vacated the punitive damages judgment in Williams and remanded the case to the Oregon Supreme Court for proceedings consistent with its decision. The parties have submitted their briefs to the Oregon Supreme Court setting forth their respective views on how the Williams decision impacts the plaintiff’s pending petition for review.

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
July 2000	Florida/ Engle	Smoking and Health Class Action	$145 billion in punitive damages against all defendants, including $74 billion against PM USA.	In July 2006, the Florida Supreme Court ordered that the punitive damages award be vacated, that the class approved by the trial court be decertified, that certain Phase I trial court findings be allowed to stand as against the defendants in individual actions that individual former class members may bring within one year of the issuance of the mandate, compensatory damage awards totaling approximately $6.9 million to two individual class members be reinstated and that a third former class member’s claim was barred by the statute of limitations. In December 2006, the Florida Supreme Court denied all motions by the parties for rehearing but issued a revised opinion. In January 2007, the Florida Supreme Court issued the mandate from its revised December opinion and defendants filed a motion with the Florida Third District Court of Appeal requesting the court’s review of legal errors previously raised but not ruled upon. This motion was denied in February 2007. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the Third District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court. On October 1, 2007, the United States Supreme Court denied defendants’ petition. See “Engle Class Action” below. On October 26, 2007, defendants filed a motion for rehearing of the United States Supreme Court’s denial of their petition for certiorari. As of November 1, 2007, 189 individual smoking and health cases have been

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Date	Location of Court/ Name of Plaintiff	Type of Case	Verdict	Post-Trial Developments
				brought by or on behalf of 993 plaintiffs in Florida following the Florida Supreme Court’s decertification decision.
March 1999	Oregon/ Williams	Individual Smoking and Health	$800,000 in compensatory damages, $21,500 in medical expenses and $79.5 million in punitive damages against PM USA.	See discussion (2) below.

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

(2) Williams: The trial court reduced the punitive damages award to $32 million, and PM USA and plaintiff appealed. In June 2002, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. Following the Oregon Supreme Court’s refusal to hear PM USA’s appeal, PM USA recorded a provision of $32 million in connection with this case and petitioned the United States Supreme Court for further review. In October 2003, the United States Supreme Court set aside the Oregon appellate court’s ruling and directed the Oregon court to reconsider the case in light of the 2003 State Farm decision by the United States Supreme Court, which limited punitive damages. In June 2004, the Oregon Court of Appeals reinstated the $79.5 million punitive damages award. In February 2006, the Oregon Supreme Court affirmed the Court of Appeals’ decision. Following this decision, PM USA recorded an additional provision of approximately $20 million in interest charges related to this case. The United States Supreme Court granted PM USA’s petition for writ of certiorari in May 2006. In February 2007, the United States Supreme Court vacated the $79.5 million punitive damages award, holding that the United States Constitution prohibits basing punitive damages awards on harm to non-parties. The Court also found that states must assure that appropriate procedures are in place so that juries are provided with proper legal guidance as to the constitutional limitations on awards of punitive damages. Accordingly, the Court remanded the case to the Oregon Supreme Court for further proceedings consistent with this decision. On September 11, 2007, the Oregon Supreme Court heard oral arguments on the impact of the United States Supreme Court’s decision on this case.

In addition to the cases discussed above, in October 2003, a three-judge appellate panel in Brazil reversed a lower court’s dismissal of an individual smoking and health case and ordered PMI’s Brazilian affiliate to pay plaintiff approximately $256,000 and other unspecified damages. PMI’s Brazilian affiliate appealed. In

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December 2004, the three-judge panel’s decision was vacated by an en banc panel of the appellate court, which upheld the trial court’s dismissal of the case. The case is currently on appeal to the Superior Court.

With respect to certain adverse verdicts currently on appeal, excluding amounts relating to the Engle case, as of September 30, 2007, PM USA has posted various forms of security totaling approximately $193 million, the majority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. The cash deposits are included in other assets on the consolidated balance sheets.

Engle Class Action

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

In May 2001, the trial court approved a stipulation providing that execution of the punitive damages component of the Engle judgment will remain stayed against PM USA and the other participating defendants through the completion of all judicial review. As a result of the stipulation, PM USA placed $500 million into a separate interest-bearing escrow account that, regardless of the outcome of the judicial review, will be paid to the court and the court will determine how to allocate or distribute it consistent with Florida Rules of Civil Procedure. In July 2001, PM USA also placed $1.2 billion into an interest-bearing escrow account, which will be returned to PM USA should it prevail in the judicial review. (The $1.2 billion escrow account is included in the September 30, 2007 and December 31, 2006 consolidated balance sheets as other assets. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recorded as earned, in interest and other debt expense, net, in the consolidated statements of earnings.) In connection with the stipulation, PM USA recorded a $500 million pre-tax charge in its consolidated statement of earnings for the quarter ended March 31, 2001. In May 2003, the Florida Third District Court of Appeal reversed the judgment entered by the trial court and instructed the trial court to order the decertification of the class. Plaintiffs petitioned the Florida Supreme Court for further review.

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

In August 2006, PM USA sought rehearing from the Florida Supreme Court on parts of its July 2006 opinion, including the ruling (described above) that certain jury findings have res judicata effect in subsequent individual trials timely brought by Engle class members. The rehearing motion also asked, among other things, that legal errors that were raised but not expressly ruled upon in the Third District Court of Appeal or in the Florida Supreme Court now be addressed. Plaintiffs also filed a motion for rehearing in August 2006 seeking

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clarification of the applicability of the statute of limitations to non-members of the decertified class. In December 2006, the Florida Supreme Court refused to revise its July 2006 ruling, except that it revised the set of Phase I findings entitled to res judicata effect by excluding finding (v) listed above (relating to agreement to misrepresent information), and added the finding that defendants sold or supplied cigarettes that, at the time of sale or supply, did not conform to the representations of fact made by defendants. On January 11, 2007, the Florida Supreme Court issued the mandate from its revised opinion. Defendants then filed a motion with the Florida Third District Court of Appeal requesting that the court address legal errors that were previously raised by defendants but have not yet been addressed either by the Third District or by the Florida Supreme Court. In February 2007, the Third District Court of Appeal denied defendants’ motion. In May 2007, defendants’ motion for a partial stay of the mandate pending the completion of appellate review was denied by the District Court of Appeal. In May 2007, defendants filed a petition for writ of certiorari with the United States Supreme Court. On October 1, 2007, the United States Supreme Court denied defendants’ petition. On October 26, 2007, defendants filed a motion for rehearing of the United States Supreme Court’s denial of defendants’ petition for certiorari.

It is currently unknown how many members of the decertified class will file individual claims by January 10, 2008, as required by the Florida Supreme Court’s decision. Since the Florida Supreme Court ruling, 189 cases have been served upon PM USA or other defendants asserting individual claims on or on behalf of 993 plaintiffs based upon the ruling. Some of these cases have been removed from various Florida state courts to the federal district courts in Florida, while others were filed in federal court. In July 2007, PM USA and other defendants requested that the multi-district litigation panel order the transfer of all such cases pending in the federal courts, as well as any other Engle progeny cases that may be filed, to the Middle District of Florida for pretrial coordination. The panel is scheduled to hear this application in November 2007. In October 2007, attorneys for plaintiffs filed a motion to consolidate all pending and future cases filed in the state trial court in Hillsborough County.

Scott Class Action

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

In June 2004, the court entered judgment, which awarded plaintiffs the approximately $590 million jury award plus prejudgment interest accruing from the date the suit commenced. As of February 15, 2007, the amount of prejudgment interest was approximately $444 million. PM USA’s share of the jury award and prejudgment interest has not been allocated. Defendants, including PM USA, appealed. Pursuant to a stipulation of the parties, the trial court entered an order setting the amount of the bond at $50 million for all defendants in accordance with an article of the Louisiana Code of Civil Procedure, and a Louisiana statute (the “bond cap law”) fixing the amount of security in civil cases involving a signatory to the MSA (as defined below). Under the terms of the stipulation, plaintiffs reserve the right to contest, at a later date, the sufficiency or amount of the bond on any grounds including the applicability or constitutionality of the bond cap law. In September 2004, defendants collectively posted a bond in the amount of $50 million.

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

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of prejudgment interest, which totaled approximately $444 million as of February 15, 2007; and ruled that the only class members who are eligible to participate in the smoking cessation program are those who began smoking before, and whose claims accrued by, September 1, 1988. As a result, the Louisiana Court of Appeal remanded for proceedings consistent with its opinion, including further reduction of the amount of the award based on the size of the new class. In March 2007, the Louisiana Court of Appeal rejected defendants’ motion for rehearing and clarification. Plaintiffs and defendants have filed petitions for writ of certiorari with the Louisiana Supreme Court.

Smoking and Health Litigation

Overview

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

Smoking and Health Class Actions

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

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

In addition to the cases brought in the United States, three smoking and health class actions have been brought against tobacco industry participants, including certain PMI subsidiaries in Brazil (2) and Israel (1). In one class action in Brazil, a consumer organization is seeking damages for smokers and former smokers, and injunctive relief. The trial court found in favor of the plaintiff in February 2004. The court awarded R$1,000 (currently approximately U.S. $500) per smoker per full year of smoking for moral damages plus interest at the rate of 1% per month, as of the date of the ruling. Actual damages are to be assessed in a second phase of the case. The size of the class is currently unknown. Defendants appealed the decision to the Sao Paulo Court of Appeals and the case, including the judgment, is currently stayed pending appeal. In addition, the defendants filed a constitutional appeal to the Federal Supreme Court on the basis that the consumer association does not have standing to bring the lawsuit. Both appeals are pending.

There are currently pending two purported class actions against PM USA brought in New York (Caronia, filed in January 2006 in the United States District Court for the Eastern District of New York) and Massachusetts (Donovan, filed in March 2007 in the United States District Court for the District of Massachusetts) on behalf of each state’s respective residents who: are age 50 or older; have smoked the Marlboro brand for 20 pack-years

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or more; and have neither been diagnosed with lung cancer nor are under examination by a physician for suspected lung cancer. Plaintiffs in these cases seek to impose liability under various product-based causes of action and the creation of a court-supervised program providing members of the purported class Low Dose CT Scanning in order to identify and diagnose lung cancer. Neither claim seeks punitive damages. Plaintiffs’ motion for class certification is pending in Caronia.

Health Care Cost Recovery Litigation

Overview

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

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

Defenses raised include lack of proximate cause, remoteness of injury, failure to state a valid claim, lack of benefit, adequate remedy at law, “unclean hands” (namely, that plaintiffs cannot obtain equitable relief because they participated in, and benefited from, the sale of cigarettes), lack of antitrust standing and injury, federal preemption, lack of statutory authority to bring suit, and statutes of limitations. In addition, defendants argue that they should be entitled to “set off” any alleged damages to the extent the plaintiffs benefit economically from the sale of cigarettes through the receipt of excise taxes or otherwise. Defendants also argue that these cases are improper because plaintiffs must proceed under principles of subrogation and assignment. Under traditional theories of recovery, a payor of medical costs (such as an insurer) can seek recovery of health care costs from a third party solely by “standing in the shoes” of the injured party. Defendants argue that plaintiffs should be required to bring any actions as subrogees of individual health care recipients and should be subject to all defenses available against the injured party.

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

In March 1999, in the first health care cost recovery case to go to trial, an Ohio jury returned a verdict in favor of defendants on all counts. In addition, a $17.8 million verdict against defendants (including $6.8 million against PM USA) was reversed in a health care cost recovery case in New York, and all claims were dismissed with prejudice in February 2005 (Blue Cross/Blue Shield). The trial in the health care cost recovery case brought by the City of St. Louis, Missouri and approximately 50 Missouri hospitals, in which PM USA and ALG are defendants, is scheduled to begin in February 2010.

Individuals and associations have also sued in purported class actions or as private attorneys general under the Medicare As Secondary Payer statute to recover from defendants Medicare expenditures allegedly incurred for

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the treatment of smoking-related diseases. Cases brought in New York (Mason), Florida (Glover) and Massachusetts (United Seniors Association) have been dismissed by federal courts, and plaintiffs’ appealed in United Seniors Association. In August 2007, the United States Court of Appeals for the First Circuit affirmed the district court’s dismissal in United Seniors Association.

In addition to the cases brought in the United States, health care cost recovery actions have also been brought against tobacco industry participants, including PM USA, PMI and certain PMI subsidiaries in Israel (1), the Marshall Islands (1 dismissed), Canada (1), France (1 dismissed), Spain (1) and Nigeria (4) and other entities have stated that they are considering filing such actions. In September 2005, in the case in Canada, the Canadian Supreme Court ruled that legislation passed in British Columbia permitting the lawsuit is constitutional, and, as a result, the case which had previously been dismissed by the trial court was permitted to proceed. PM USA, PMI and other defendants’ challenge to the British Columbia court’s exercise of jurisdiction was rejected by the Court of Appeals of British Columbia and, in April 2007, the Supreme Court of Canada denied review of that decision. Several other provinces in Canada have enacted similar legislation or are in the process of enacting similar legislation.

Settlements of Health Care Cost Recovery Litigation

In November 1998, PM USA and certain other United States tobacco product manufacturers entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas to settle asserted and unasserted health care cost recovery and other claims. PM USA and certain other United States tobacco product manufacturers had previously settled similar claims brought by Mississippi, Florida, Texas and Minnesota (together with the MSA, the “State Settlement Agreements”). The State Settlement Agreements require that the original participating manufacturers make substantial annual payments in the following amounts (excluding future annual payments, if any, under the National Tobacco Grower Settlement Trust discussed below), subject to adjustments for several factors, including inflation, market share and industry volume: 2007, $8.4 billion and thereafter, $9.4 billion each year. In addition, the original participating manufacturers are required to pay settling plaintiffs’ attorneys’ fees, subject to an annual cap of $500 million.

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

Possible Adjustments in MSA Payments for 2003, 2004 and 2005

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

In these proceedings, an independent economic consulting firm jointly selected by the MSA parties is required to determine whether the disadvantages of the MSA were a “significant factor” contributing to the collective loss of market share for the year in question. If the firm determines that the disadvantages of the MSA were such a “significant factor,” each state may avoid a downward adjustment to its share of the participating manufacturers annual payments for that year by establishing that it diligently enforced a qualifying escrow statute during the entirety of that year. Any potential downward adjustment would then be reallocated to those states that do not establish such diligent enforcement. PM USA believes that the MSA’s arbitration clause

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requires a state to submit its claim to have diligently enforced a qualifying escrow statute to binding arbitration before a panel of three former federal judges in the manner provided for in the MSA. A number of states have taken the position that this claim should be decided in state court on a state-by-state basis.

In March of 2006, an independent economic consulting firm determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers’ collective loss of market share for the year 2003. In February 2007, this same firm determined that the disadvantages of the MSA were a significant factor contributing to the participating manufacturers’ collective loss of market share for the year 2004. As of October 2007, PM USA is also participating in another such proceeding before the same economic consulting firm to determine whether the disadvantages of the MSA were a significant factor contributing to the participating manufacturers’ collective loss of market share for the year 2005. The economic consulting firm is expected to render its final determination on the significant factor issue for 2005 sometime in February 2008. Following the economic consulting firm’s determination with respect to 2003, thirty-eight states filed declaratory judgment actions in state courts seeking a declaration that the state diligently enforced its escrow statute during 2003. The OPMs and other MSA-participating manufacturers have responded to these actions by filing motions to compel arbitration in accordance with the terms of the MSA, including filing motions to compel arbitration in eleven MSA states and territories that have not filed declaratory judgment actions. Courts in over 45 states have ruled that the question of whether a state diligently enforced its escrow statute during 2003 is subject to arbitration and only one state court ruling to the contrary currently stands, and it remains subject to appeal. Many of these rulings, including the one ruling against arbitration, remain subject to appeal or further review. Additionally, Ohio filed a declaratory judgment action in state court with respect to the 2004 diligent enforcement issue. The action has been stayed pending the decision about the 2003 payments.

The availability and the precise amount of any NPM Adjustment for 2003 and 2004 will not be finally determined until 2008 or thereafter. The availability and the precise amount of any NPM Adjustment for 2005 will not be finally determined until late 2008 or thereafter. There is no certainty that the OPMs and other MSA-participating manufacturers will ultimately receive any adjustment as a result of these proceedings. If the OPMs do receive such an adjustment through these proceedings, the adjustment would be allocated among the OPMs pursuant to the MSA’s provisions, and PM USA’s share would likely be applied as a credit against a future MSA payment.

National Grower Settlement Trust

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

In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA provides for the elimination of the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the buy-out, which is estimated at approximately $9.5 billion, is being paid over 10 years by manufacturers and importers of each kind of tobacco product. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. The quota buy-out payments offset already scheduled payments to the NTGST. FETRA also obligated manufacturers and importers of tobacco products to cover any losses (up to $500 million) that the government incurred on the disposition of tobacco pool stock accumulated under the previous tobacco price support program. PM USA has paid $138 million for its share of the tobacco pool stock losses. ALG does not

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Notes to Condensed Consolidated Financial Statements

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currently anticipate that the quota buy-out will have a material adverse impact on its consolidated results in 2007 and beyond.

Other MSA-Related Litigation

In June 2004, a putative class of California smokers filed a complaint against PM USA and the MSA’s other “Original Participating Manufacturers” (“OPMs”) seeking damages from the OPMs for post-MSA price increases and an injunction against their continued compliance with the MSA’s terms. The complaint alleges that the MSA and related legislation protect the OPMs from competition in a manner that violates federal and state antitrust and consumer protection laws. The complaint also names the California Attorney General as a defendant and seeks to enjoin him from enforcing California’s Escrow Statute. In March 2005, the United States District Court for the Northern District of California granted defendants’ motion to dismiss the case. On September 26, 2007, the United States Court of Appeals for the Ninth Circuit affirmed the dismissal.

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

In another action, the United States Court of Appeals for the Fifth Circuit reversed a trial court’s dismissal of challenges to MSA-related legislation in Louisiana under the First and Fourteenth Amendments to the United States Constitution. The case will now proceed to motions for summary judgment and, if necessary, a trial. Summary judgment proceedings in another challenge to Louisiana’s participation in the MSA and its MSA-related legislation may begin in mid-2008. Yet another proceeding has been initiated before an international arbitration tribunal under the provisions of the North American Free Trade Agreement. Appeals from trial court decisions holding that plaintiffs have failed either to make allegations establishing a claim for relief or to submit evidence supporting those allegations are currently, or will soon be, pending before the United States Court of Appeals for the Eighth and Tenth Circuits. The United States Court of Appeals for the Sixth Circuit has affirmed the dismissal of two similar challenges.

Federal Government’s Lawsuit

In 1999, the United States government filed a lawsuit in the United States District Court for the District of Columbia against various cigarette manufacturers, including PM USA, and others, including ALG, asserting claims under three federal statutes, the Medical Care Recovery Act (“MCRA”), the Medicare Secondary Payer (“MSP”) provisions of the Social Security Act and the civil provisions of RICO. Trial of the case ended in June 2005. The lawsuit sought to recover an unspecified amount of health care costs for tobacco-related illnesses allegedly caused by defendants’ fraudulent and tortious conduct and paid for by the government under various federal health care programs, including Medicare, military and veterans’ health benefits programs, and the Federal Employees Health Benefits Program. The complaint alleged that such costs total more than $20 billion annually. It also sought what it alleged to be equitable and declaratory relief, including disgorgement of profits

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which arose from defendants’ allegedly tortious conduct, an injunction prohibiting certain actions by the defendants, and a declaration that the defendants are liable for the federal government’s future costs of providing health care resulting from defendants’ alleged past tortious and wrongful conduct. In September 2000, the trial court dismissed the government’s MCRA and MSP claims, but permitted discovery to proceed on the government’s claims for relief under the civil provisions of RICO.

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

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

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

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

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

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

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

• defendants falsely denied that they intentionally marketed to youth;

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

• defendants suppressed scientific research.

The court did not impose monetary penalties on the defendants, but ordered the following relief: (i) an injunction against “committing any act of racketeering” relating to the manufacturing, marketing, promotion, health consequences or sale of cigarettes in the United States; (ii) an injunction against participating directly or indirectly in the management or control of the Council for Tobacco Research, the Tobacco Institute, or the

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Center for Indoor Air Research, or any successor or affiliated entities of each; (iii) an injunction against “making, or causing to be made in any way, any material false, misleading, or deceptive statement or representation or engaging in any public relations or marketing endeavor that is disseminated to the United States public and that misrepresents or suppresses information concerning cigarettes”; (iv) an injunction against conveying any express or implied health message through use of descriptors on cigarette packaging or in cigarette advertising or promotional material, including “lights,” “ultra lights” and “low tar,” which the court found could cause consumers to believe a cigarette brand is less hazardous than another brand; (v) the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “light” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke; (vi) the disclosure on defendants’ public document websites and in the Minnesota document repository of all documents produced to the government in the lawsuit or produced in any future court or administrative action concerning smoking and health until 2021, with certain additional requirements as to documents withheld from production under a claim of privilege or confidentiality; (vii) the disclosure of disaggregated marketing data to the government in the same form and on the same schedule as defendants now follow in disclosing such data to the Federal Trade Commission, for a period of ten years; (viii) certain restrictions on the sale or transfer by defendants of any cigarette brands, brand names, formulas or cigarette businesses within the United States; and (ix) payment of the government’s costs in bringing the action.

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

Lights/Ultra Lights Cases

Overview

Plaintiffs in these class actions (some of which have not been certified as such), allege, among other things, that the uses of the terms “Lights” and/or “Ultra Lights” constitute deceptive and unfair trade practices, common law fraud, or RICO violations, and seek injunctive and equitable relief, including restitution and, in certain cases, punitive damages. These class actions have been brought against PM USA and, in certain instances, ALG and PMI or its subsidiaries, on behalf of individuals who purchased and consumed various brands of cigarettes, including Marlboro Lights, Marlboro Ultra Lights, Virginia Slims Lights and Superslims, Merit Lights and Cambridge Lights. Defenses raised in these cases include lack of misrepresentation, lack of causation, injury, and damages, the statute of limitations, express preemption by the Federal Cigarette Labeling and Advertising Act and implied preemption by the policies and directives of the Federal Trade Commission, non-liability under state statutory provisions exempting conduct that complies with federal regulatory directives, and the First Amendment. Seventeen cases are pending in Arkansas (2), Delaware (1), Florida (1), Illinois (1), Maine (1), Massachusetts (1), Minnesota (1), Missouri (1), New Hampshire (1), New Jersey (1), New Mexico (1), New York (1), Oregon (1), Tennessee (1), and West Virginia (2). In addition, there are two cases pending in Israel. Other entities have stated that they are considering filing such actions against ALG, PMI, and PM USA.

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

To date, 10 courts in 11 cases have refused to certify class actions, reversed prior class certification decisions or have entered judgment in favor of PM USA. Trial courts in Arizona, Kansas, New Mexico, Oregon and Washington have refused to certify a class, an appellate court in Florida has overturned class certification by a trial court, the Ohio Supreme Court has overturned class certifications in two cases, the United States Court of Appeals for the Fifth Circuit has dismissed a purported Lights class action brought in Louisiana federal court (Sullivan) on the grounds that plaintiffs’ claims were preempted by the Federal Cigarette Labeling and Advertising Act, a federal trial court in Maine has dismissed a purported class action on federal preemption grounds (Good), plaintiffs voluntarily dismissed an action in a federal trial court in Michigan after the court dismissed claims asserted under the Michigan Unfair Trade and Consumer Protection Act, and the Supreme Court of Illinois has overturned a judgment in favor of a plaintiff class in the Price case, which is discussed below. The United States Court of Appeals for the First Circuit vacated the district court’s grant of PM USA’s motion for summary judgment in the Good case on federal preemption grounds and remanded the case to district court. The district court has stayed proceedings pending the ruling of the United States Supreme Court on defendant’s anticipated petition for a writ of certiorari, which was filed on October 26, 2007. An intermediate appellate court in Oregon and the Supreme Court in Washington have denied plaintiffs’ motions for interlocutory review of the trial courts’ refusals to certify a class. Plaintiffs in the Oregon case failed to appeal by the deadline for doing so and the trial court subsequently entered judgment against plaintiffs on the ground of express preemption under the Federal Cigarette Labeling and Advertising Act. Plaintiffs in the case in Washington voluntarily dismissed the case with prejudice. Plaintiffs in the New Mexico case renewed their motion for class certification. Plaintiffs in the Florida case have petitioned the Florida Supreme Court for further review, and the Supreme Court has ordered briefing on why its Engle opinion should not control the decision in that case.

Trial courts have certified classes against PM USA in Massachusetts (Aspinall), Minnesota (Curtis), Missouri (Craft) and New York (Schwab). PM USA has appealed or otherwise challenged these class certification orders, and the appeals in Aspinall and Schwab are pending. In addition, the United States Supreme Court has reversed the trial and appellate courts’ rulings denying plaintiffs’ motion to remand the case to state trial court in a purported Lights class action brought in Arkansas (Watson). Developments in these cases include:

• Watson: In June 2007, the United States Supreme Court reversed the lower court rulings that denied plaintiffs’ motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants’ contention that the case must be tried in federal court under the “federal officer” statute. The case has been remanded to the state trial court in Arkansas.

• Aspinall: In August 2004, the Massachusetts Supreme Judicial Court affirmed the class certification order. In April 2006, plaintiffs filed a motion to redefine the class to include all persons who after November 25, 1994 purchased packs or cartons of Marlboro Lights cigarettes in Massachusetts that displayed the legend “Lower Tar & Nicotine” (the original class definition did not include a reference to lower tar and nicotine). In August 2006, the trial court denied PM USA’s motion for summary judgment based on the state consumer protection statutory exemption and federal preemption. On motion of the parties, the trial court has subsequently reported its decision to deny summary judgment to the appeals court for review and the trial court proceedings are stayed pending completion of the appellate review. Motions for direct appellate review with the Massachusetts Supreme Judicial Court were granted in April 2007.

• Curtis: In April 2005, the Minnesota Supreme Court denied PM USA’s petition for interlocutory review of the trial court’s class certification order. In September 2005, PM USA removed Curtis to federal court based on the Eighth Circuit’s decision in Watson, which upheld the removal of a Lights case to federal court based on the federal officer jurisdiction of the Federal Trade Commission. In February 2006, the federal court denied plaintiffs’ motion to remand the case to state court. The case was stayed pending the outcome of Dahl v. R. J. Reynolds Tobacco Co., which was argued before the United States Court of Appeals for the Eighth Circuit in December 2006. In February 2007, the United States Court of Appeals for the Eighth Circuit issued its ruling in Dahl, and reversed the federal district court’s denial of plaintiffs’ motion to remand that case to the state trial court. On October 17, 2007, the district court remanded the Curtis case to state court.

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Notes to Condensed Consolidated Financial Statements

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• Craft: In August 2005, a Missouri Court of Appeals affirmed the class certification order. In September 2005, PM USA removed Craft to federal court based on the Eighth Circuit’s decision in Watson. In March 2006, the federal trial court granted plaintiffs’ motion and remanded the case to the Missouri state trial court. In May 2006, the Missouri Supreme Court declined to review the trial court’s class certification decision. Trial has been set for January 2009.

• Schwab: In September 2005, the trial court granted in part defendants’ motion for partial summary judgment dismissing plaintiffs’ claims for equitable relief and denied a number of plaintiffs’ motions for summary judgment. In November 2005, the trial court ruled that the plaintiffs would be permitted to calculate damages on an aggregate basis and use “fluid recovery” theories to allocate them among class members. In September 2006, the trial court denied defendants’ summary judgment motions and granted plaintiffs’ motion for certification of a nationwide class of all United States residents that purchased cigarettes in the United States that were labeled “light” or “lights” from the first date defendants began selling such cigarettes until the date trial commences. The court also declined to certify the order for interlocutory appeal, declined to stay the case and ordered jury selection to begin in January 2007, with trial scheduled to begin immediately after the jury is impaneled. In October 2006, a single judge of the United States Court of Appeals for the Second Circuit granted PM USA’s petition for a temporary stay of pre-trial and trial proceedings pending disposition of the petitions for stay and interlocutory review by a three-judge panel of the Court of Appeals. In November 2006, the Second Circuit granted interlocutory review of the trial court’s class certification order and stayed the case before the trial court pending the appeal. Oral argument was heard on July 10, 2007.

In addition to these cases, in December 2005, in the Miner case which was pending at that time in the United States District Court for the Western District of Arkansas, plaintiffs moved for certification of a class composed of individuals who purchased Marlboro Lights or Cambridge Lights brands in Arkansas, California, Colorado, and Michigan. PM USA’s motion for summary judgment based on preemption and the Arkansas statutory exemption is pending. Following the filing of this motion, plaintiffs moved to voluntarily dismiss Miner without prejudice, which PM USA opposed. The court then stayed the case pending the United States Supreme Court’s decision on a petition for writ of certiorari in the Watson case discussed above. In July 2007, the case was remanded to a state trial court in Arkansas. In August 2007, plaintiffs renewed their motion for class certification. In October 2007, the court denied PM USA’s motion to dismiss on procedural grounds and the court entered a case management order. In addition, plaintiffs’ motions for class certification are pending in cases in New Jersey and Tennessee.

The Price Case

Trial in the Price case commenced in state court in Illinois in January 2003, and in March 2003, the judge found in favor of the plaintiff class and awarded approximately $7.1 billion in compensatory damages and $3 billion in punitive damages against PM USA. In April 2003, the judge reduced the amount of the appeal bond that PM USA must provide and ordered PM USA to place a pre-existing 7.0%, $6 billion long-term note from ALG to PM USA in an escrow account with an Illinois financial institution. (Since this note is the result of an intercompany financing arrangement, it does not appear on the consolidated balance sheets of ALG.) The judge’s order also required PM USA to make cash deposits with the clerk of the Madison County Circuit Court in the following amounts: beginning October 1, 2003, an amount equal to the interest earned by PM USA on the

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ALG note ($210 million every six months), an additional $800 million in four equal quarterly installments between September 2003 and June 2004 and the payments of principal on the note, which are due in April 2008, 2009 and 2010. Plaintiffs appealed the judge’s order reducing the bond. In July 2003, the Illinois Fifth District Court of Appeals ruled that the trial court had exceeded its authority in reducing the bond. In September 2003, the Illinois Supreme Court upheld the reduced bond set by the trial court and announced it would hear PM USA’s appeal on the merits without the need for intermediate appellate court review. In December 2005, the Illinois Supreme Court reversed the trial court’s judgment in favor of the plaintiffs and remanded the case to the trial court with instructions that the case be dismissed. In May 2006, the Illinois Supreme Court denied plaintiffs’ motion for rehearing. In June 2006, the Illinois Supreme Court ordered the return to PM USA of approximately $2.2 billion being held in escrow to secure the appeal bond in the case and terminated PM USA’s obligations to pay administrative fees to the Madison County Clerk. In November 2006, the United States Supreme Court denied plaintiffs’ petition for writ of certiorari and, in December 2006, the Circuit Court of Madison County entered final judgment in favor of PM USA and dismissed the case with prejudice. In December 2006, the pre-existing 7.0%, $6 billion long-term note from ALG to PM USA that was in escrow pending the outcome of plaintiffs’ petition for writ of certiorari to the United States Supreme Court was returned to PM USA. Plaintiffs filed a motion to vacate or withdraw the Price decision based upon the United States Supreme Court’s grant of the petition for writ of certiorari in the Watson case discussed above. In May 2007, the trial court granted plaintiffs’ motion to certify certain questions to the Illinois Fifth District Appellate Court, and plaintiffs petitioned the Fifth District to review the certified questions. In May 2007, PM USA filed applications for writ of prohibition and writ of mandamus with the Illinois Supreme Court seeking an order compelling the lower courts to deny plaintiffs’ motion to vacate and/or withhold final judgment. In June 2007, the appellate court granted PM USA’s motion to stay plaintiffs’ appeal pending resolution of related matters before the Illinois Supreme Court. In August 2007, the Illinois Supreme Court granted PM USA’s motion for supervisory order and the trial court dismissed plaintiff’s motion to vacate or withhold final judgment.

Certain Other Tobacco-Related Litigation

Tobacco Price Cases: As of November 1, 2007, two cases were pending in Kansas and New Mexico in which plaintiffs allege that defendants, including PM USA and PMI, conspired to fix cigarette prices in violation of antitrust laws. ALG and PMI are defendants in the case in Kansas. Plaintiffs’ motions for class certification have been granted in both cases. In February 2005, the New Mexico Court of Appeals affirmed the class certification decision. In June 2006, defendants’ motion for summary judgment was granted in the New Mexico case. Plaintiffs in the New Mexico case have appealed.

Wholesale Leaders Cases: In June 2003, certain wholesale distributors of cigarettes filed suit in Tennessee against PM USA seeking to enjoin the PM USA “2003 Wholesale Leaders” (“WL”) program that became available to wholesalers in June 2003. The complaint alleges that the WL program constitutes unlawful price discrimination and is an attempt to monopolize. In addition to an injunction, plaintiffs seek unspecified monetary damages, attorneys’ fees, costs and interest. The states of Tennessee and Mississippi intervened as plaintiffs in this litigation. In August 2003, the trial court issued a preliminary injunction, subject to plaintiffs posting a bond in the amount of $1 million, enjoining PM USA from implementing certain discount terms with respect to the sixteen wholesale distributor plaintiffs, and PM USA appealed. In September 2003, the United States Court of Appeals for the Sixth Circuit granted PM USA’s motion to stay the injunction pending PM USA’s expedited appeal. In January 2004, Tennessee filed a motion to dismiss its complaint, and its complaint was dismissed without prejudice in March 2004. In August 2005, the trial court granted PM USA’s motion for summary judgment, dismissed the case, and dissolved the preliminary injunction. Plaintiffs appealed to the United States Court of Appeals for the Sixth Circuit. In February 2007, the Sixth Circuit affirmed the trial court’s grant of PM USA’s motion for summary judgment. Plaintiffs filed a petition for writ of certiorari with the United States Supreme Court seeking review of the Sixth Circuit’s decision, which was denied on October 1, 2007.

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Cigarette Contraband Cases: In May 2000 and August 2001, various departments of Colombia and the European Community and 10 Member States filed suits in the United States against ALG and certain of its subsidiaries, including PM USA and PMI, and other cigarette manufacturers and their affiliates, alleging that defendants sold to distributors cigarettes that would be illegally imported into various jurisdictions. In February 2002, the federal district court granted defendants’ motions to dismiss the actions. In January 2004, the United States Court of Appeals for the Second Circuit affirmed the dismissals of the cases based on the common law Revenue Rule, which bars a foreign government from bringing civil claims in U.S. courts for the recovery of lost taxes. It is possible that future litigation related to cigarette contraband issues may be brought. In this regard, ALG believes that Canadian authorities are contemplating a legal proceeding based on an investigation of ALG entities relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s.

Cases Under the California Business and Professions Code: In June 1997 and July 1998, two suits (Brown and Daniels) were filed in California state court alleging that domestic cigarette manufacturers, including PM USA and others, have violated California Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices. Class certification was granted in both cases as to plaintiffs’ claims that class members are entitled to reimbursement of the costs of cigarettes purchased during the class periods and injunctive relief. In September 2002, the court granted defendants’ motion for summary judgment as to all claims in one of the cases (Daniels), and plaintiffs appealed. In October 2004, the California Fourth District Court of Appeal affirmed the trial court’s ruling, and also denied plaintiffs’ motion for rehearing. In February 2005, the California Supreme Court agreed to hear plaintiffs’ appeal. In August 2007, the California Supreme Court affirmed the dismissal of the Daniels class action on federal preemption grounds. In September 2004, the trial court in the other case granted defendants’ motion for summary judgment as to plaintiffs’ claims attacking defendants’ cigarette advertising and promotion and denied defendants’ motion for summary judgment on plaintiffs’ claims based on allegedly false affirmative statements. Plaintiffs’ motion for rehearing was denied. In March 2005, the court granted defendants’ motion to decertify the class based on a recent change in California law, which, in two July 2006 opinions, the California Supreme Court ruled applicable to pending cases. Plaintiffs’ motion for reconsideration of the order that decertified the class was denied, and plaintiffs have appealed. In September 2006, an intermediate appellate court affirmed the trial court’s order decertifying the class in Brown. In November 2006, the California Supreme Court accepted review of the appellate court’s decision.

In May 2004, a lawsuit (Gurevitch) was filed in California state court on behalf of a purported class of all California residents who purchased the Merit brand of cigarettes since July 2000 to the present alleging that defendants, including PM USA, violated California’s Business and Professions Code Sections 17200 and 17500 regarding unfair, unlawful and fraudulent business practices, including false and misleading advertising. The complaint also alleges violations of California’s Consumer Legal Remedies Act. Plaintiffs seek injunctive relief, disgorgement, restitution, and attorneys’ fees. In July 2005, defendants’ motion to dismiss was granted; however, plaintiffs’ motion for leave to amend the complaint was also granted, and plaintiffs filed an amended complaint in September 2005. In October 2005, the court stayed this action pending the California Supreme Court’s rulings on two cases not involving PM USA. In July 2006, the California Supreme Court issued rulings in the two cases and held that a recent change in California law known as Proposition 64, which limits the ability to bring a lawsuit to only those plaintiffs who have “suffered injury in fact” and “lost money or property” as a result of defendant’s alleged statutory violations, properly applies to pending cases. In September 2006, the stay was lifted and defendants filed their demurrer to plaintiffs’ amended complaint. In March 2007, the court, without ruling on the demurrer, again stayed the action pending rulings from the California Supreme Court in another case involving Proposition 64 that is relevant to PM USA’s demurrer.

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Certain Other Actions

IRS Challenges to PMCC Leases: The IRS concluded its examination of ALG’s consolidated tax returns for the years 1996 through 1999, and issued a final Revenue Agent’s Report (“RAR”) on March 15, 2006. The RAR disallowed benefits pertaining to certain PMCC leveraged lease transactions for the years 1996 through 1999. Altria Group, Inc. has agreed with all conclusions of the RAR, with the exception of the disallowance of benefits pertaining to several PMCC leveraged lease transactions for the years 1996 through 1999. PMCC will continue to assert its position regarding these leveraged lease transactions and contest approximately $150 million of tax and net interest assessed and paid with regard to them. The IRS may in the future challenge and disallow more of PMCC’s leveraged leases based on Revenue Rulings, an IRS Notice and subsequent case law addressing specific types of leveraged leases (lease-in/lease-out (“LILO”) and sale-in/lease-out (“SILO”) transactions). PMCC believes that the position and supporting case law described in the RAR, Revenue Rulings and the IRS Notice are incorrectly applied to PMCC’s transactions and that its leveraged leases are factually and legally distinguishable in material respects from the IRS’s position. PMCC and ALG intend to vigorously defend against any challenges based on that position through litigation. In this regard, on October 16, 2006, PMCC filed a complaint in the U.S. District Court for the Southern District of New York to claim refunds for a portion of these tax payments and associated interest. However, should PMCC’s position not be upheld, PMCC may have to accelerate the payment of significant amounts of federal income tax and significantly lower its earnings to reflect the recalculation of the income from the affected leveraged leases, which could have a material effect on the earnings and cash flows of Altria Group, Inc. in a particular fiscal quarter or fiscal year. PMCC considered this matter in its adoption of FASB Interpretation No. 48 and FASB Staff Position No. FAS 13-2.

It is possible that there could be adverse developments in pending cases. An unfavorable outcome or settlement of pending tobacco related litigation could encourage the commencement of additional litigation. Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 42 states now limit the dollar amount of bonds or require no bond at all.

ALG and its subsidiaries record provisions in the consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of the loss can be reasonably estimated. Except as discussed elsewhere in this Note 11, Contingencies: (i) management has not concluded that it is probable that a loss has been incurred in any of the pending tobacco-related cases; (ii) management is unable to estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases; and (iii) accordingly, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.

It is possible that PM USA’s or Altria Group, Inc.’s consolidated results of operations, cash flows or financial position could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, management believes the litigation environment has substantially improved. ALG and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, ALG and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of ALG’s stockholders to do so.

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Notes to Condensed Consolidated Financial Statements

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Third-Party Guarantees

At September 30, 2007, Altria Group, Inc.’s third-party guarantees, which are primarily related to excise taxes and divestiture activities, were $69 million, of which $64 million have no specified expiration dates. The remainder expire through 2011, with none expiring through September 30, 2008. Altria Group, Inc. is required to perform under these guarantees in the event that a third party fails to make contractual payments or achieve performance measures. Altria Group, Inc. has a liability of $22 million on its condensed consolidated balance sheet at September 30, 2007, relating to these guarantees. In the ordinary course of business, certain subsidiaries of ALG have agreed to indemnify a limited number of third parties in the event of future litigation.

Note 12. Income Taxes:

Altria Group, Inc. accounts for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Under SFAS No. 109, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Significant judgment is required in determining income tax provisions and in evaluating tax positions.

In the third quarter of 2007, Altria Group, Inc. recorded net tax benefits of $55 million related to the reversal of tax reserves and associated interest resulting from an expiration of the statute of limitations and $42 million related to the reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany.

Altria Group, Inc.’s U.S. subsidiaries join in the filing of a U.S. federal consolidated income tax return. The U.S. federal statute of limitations remains open for the year 2000 and onward with years 2000 to 2003 currently under examination by the Internal Revenue Service (“IRS”). Foreign and U.S. state jurisdictions have statutes of limitations generally ranging from 3 to 5 years. Years still open to examination by foreign tax authorities in major jurisdictions include Germany (2002 onward), Indonesia (2000 onward), Russia (2005 onward), and Switzerland (2005 onward). Altria Group, Inc. is currently under examination in various U.S. state and foreign jurisdictions.

On January 1, 2007, Altria Group, Inc. adopted the provisions of FIN 48. The Interpretation prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As a result of the January 1, 2007 adoption of FIN 48, Altria Group, Inc. lowered its liability for unrecognized tax benefits by $1,021 million. This resulted in an increase to stockholders’ equity of $857 million ($835 million, net of minority interest), a reduction of Kraft’s goodwill of $85 million and a reduction of federal deferred tax benefits of $79 million.

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Notes to Condensed Consolidated Financial Statements

(Unaudited)

Unrecognized tax benefits and Altria Group, Inc.’s consolidated liability for contingent income taxes, interest and penalties were as follows:

	January 1, 2007			September 30, 2007
	(in millions)
Unrecognized tax benefits - Altria Group, Inc.	$	434		$	377
Unrecognized tax benefits - Kraft		619			270
Unrecognized tax benefits		1,053			647
Accrued interest and penalties		292			257
Tax credits and other indirect benefits		(104	)		(124	)
Liability for tax contingencies	$	1,241		$	780

The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at January 1, 2007 was $848 million, with the remaining $205 million affecting deferred taxes. The amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate at September 30, 2007 was $265 million, along with $112 million affecting deferred taxes and the remainder of $270 million affecting the receivable from Kraft discussed below.

Altria Group, Inc.’s unrecognized tax benefits decreased to $647 million as of September 30, 2007, principally due to the spin-off of Kraft, expiration of statutes of limitations and audit closures in U.S. state and foreign jurisdictions. Under the Tax Sharing Agreement between Altria Group, Inc. and Kraft, Kraft is responsible for its own pre-spin-off tax obligations. However, due to regulations governing the U.S. federal consolidated tax return, Altria Group, Inc. remains severally liable for Kraft’s pre-spin-off federal taxes. As a result, Altria Group, Inc. continues to include $270 million of Kraft’s unrecognized tax benefits in its liability for uncertain tax positions, and a corresponding receivable from Kraft of $270 million is included in other assets.

Altria Group, Inc. recognizes accrued interest and penalties associated with uncertain tax positions as part of the tax provision. As of January 1, 2007, Altria Group, Inc. had $292 million of accrued interest and penalties of which approximately $125 million related to Kraft. The accrued interest and penalties decreased to $257 million at September 30, 2007, principally as a result of the Kraft spin-off, expiration of statutes of limitations and audit closures in U.S. state and foreign jurisdictions. This amount includes $82 million of Kraft federal interest for which Kraft is responsible under the Tax Sharing Agreement. A corresponding receivable from Kraft is included in other assets.

It is reasonably possible that within the next 12 months certain U.S. state and foreign examinations will be resolved, which could result in a decrease in unrecognized tax benefits and interest and penalties of up to $90 million and $30 million, respectively.

Altria Group, Inc. adopted the provisions of FASB Staff Position No. FAS 13-2, “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” effective January 1, 2007. This Staff Position requires the revenue recognition calculation to be reevaluated if there is a revision to the projected timing of income tax cash flows generated by a leveraged lease. The adoption of this Staff Position by Altria Group, Inc. resulted in a reduction to stockholders’ equity of $124 million as of January 1, 2007.

The IRS concluded its examination of Altria Group, Inc.’s consolidated tax returns for the years 1996 through 1999, and issued a final Revenue Agents Report (“RAR”) on March 15, 2006. Altria Group, Inc. agreed with the RAR, with the exception of certain leasing matters discussed below. Consequently, in March 2006, Altria Group, Inc. recorded non-cash tax benefits of $1.0 billion, which principally represented the reversal of tax reserves following the issuance of and agreement with the RAR. Altria Group, Inc. reimbursed $337 million in

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Altria Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

cash to Kraft for its portion of the $1.0 billion in tax benefits, as well as pre-tax interest of $46 million. The amounts related to Kraft were reclassified to income from discontinued operations. The tax reversal resulted in an increase to earnings from continuing operations of $631 million for the nine months ended September 30, 2006.

Altria Group, Inc. has agreed with all conclusions of the RAR, with the exception of the disallowance of benefits pertaining to several PMCC leveraged lease transactions for the years 1996 through 1999. PMCC will continue to assert its position regarding these leveraged lease transactions and contest approximately $150 million of tax and net interest assessed and paid with regard to them. The IRS may in the future challenge and disallow more of PMCC’s leveraged leases based on Revenue Rulings, an IRS Notice and subsequent case law addressing specific types of leveraged leases (lease-in/lease-out (“LILO”) and sale-in/lease-out (“SILO”) transactions). PMCC believes that the position and supporting case law described in the RAR, Revenue Rulings and the IRS Notice are incorrectly applied to PMCC’s transactions and that its leveraged leases are factually and legally distinguishable in material respects from the IRS’s position. PMCC and ALG intend to vigorously defend against any challenges based on that position through litigation. In this regard, on October 16, 2006, PMCC filed a complaint in the U.S. District Court for the Southern District of New York to claim refunds for a portion of these tax payments and associated interest. However, should PMCC’s position not be upheld, PMCC may have to accelerate the payment of significant amounts of federal income tax and significantly lower its earnings to reflect the recalculation of the income from the affected leveraged leases, which could have a material effect on the earnings and cash flows of Altria Group, Inc. in a particular fiscal quarter or fiscal year. PMCC considered this matter in its adoption of FIN 48 and FASB Staff Position No. FAS 13-2.

Note 13. New Accounting Standard:

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” which will be effective for financial statements issued for fiscal years beginning after November 15, 2007. This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Altria Group, Inc. anticipates that the adoption of this statement will not have a material impact on its financial statements.

Note 14. Subsequent Event:

On November 1, 2007, Altria Group, Inc. announced that it entered into an agreement to acquire 100% of John Middleton, Inc., a leading manufacturer of machine-made large cigars, for $2.9 billion in cash. The net cost of the acquisition, after deducting approximately $700 million in present value tax benefits arising from the terms of the transaction, is $2.2 billion. The transaction is expected to be completed by the end of 2007, subject to the necessary regulatory approvals.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Description of the Company

Throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations, the term “Altria Group, Inc.” refers to the consolidated financial position, results of operations and cash flows of the Altria family of companies and the term “ALG” refers solely to the parent company. ALG’s wholly-owned subsidiaries, Philip Morris USA Inc. (“PM USA”) and Philip Morris International Inc. (“PMI”), are engaged in the manufacture and sale of cigarettes and other tobacco products. The operations of PMI are organized and managed by geographic region. Philip Morris Capital Corporation (“PMCC”), another wholly-owned subsidiary, maintains a portfolio of leveraged and direct finance leases. In addition, ALG held a 28.6% economic and voting interest in SABMiller plc (“SABMiller”) at September 30, 2007. ALG’s access to the operating cash flows of its subsidiaries consists of cash received from the payment of dividends and interest, and the repayment of amounts borrowed from ALG by its subsidiaries.

On August 29, 2007, the Board of Directors of Altria Group, Inc. announced its intention to pursue the spin-off of PMI to Altria Group, Inc.’s stockholders. The Board of Directors anticipates that it will be in a position to finalize its decision and announce the precise timing of the spin-off at its regularly scheduled meeting on January 30, 2008. In addition to a final determination by the Board of Directors, the spin-off of PMI will be subject to the receipt of a favorable ruling from the U.S. Internal Revenue Service, the receipt of an opinion of tax counsel, the effectiveness of a registration statement with the U.S. Securities and Exchange Commission (“SEC”), as well as the execution of several inter-company agreements and the finalization of other matters. On September 27, 2007, PMI filed with the SEC a preliminary registration statement on Form 10 in preparation for its potential spin-off from Altria Group, Inc. In addition, Altria Group, Inc. submitted a private letter ruling request to the U.S. Internal Revenue Service.

Altria Group, Inc. has announced its intention to close its New York headquarters should the spin-off of PMI occur and to sell its headquarters building. The closure of this facility would result in future severance charges while its sale is anticipated to result in a gain.

Kraft Spin-Off

On March 30, 2007 (the “Distribution Date”), Altria Group, Inc. distributed all of its remaining interest (88.9%) in Kraft Foods Inc. (“Kraft”) on a pro rata basis to Altria Group, Inc. stockholders of record as of the close of business on March 16, 2007 (the “Record Date”) in a tax-free distribution. The distribution ratio was 0.692024 of a share of Kraft for each share of Altria Group, Inc. common stock outstanding. Altria Group, Inc. stockholders received cash in lieu of fractional shares of Kraft. Following the distribution, Altria Group, Inc. does not own any shares of Kraft. During the second quarter of 2007, Altria Group, Inc. adjusted its quarterly dividend to $0.69 per share, so that its stockholders who retained their Altria Group, Inc. and Kraft shares would receive, in the aggregate, the same dividend rate as before the distribution. In August 2007, Altria Group, Inc. increased its quarterly dividend to $0.75 per share.

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

• a new Kraft option to acquire the number of shares of Kraft Class A common stock equal to the product of (a) the number of Altria Group, Inc. options held by such person on the Distribution Date and (b) the distribution ratio of 0.692024 mentioned above; and

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

The new Kraft option has an exercise price equal to the Kraft market price at the time of the distribution ($31.66) multiplied by the Option Conversion Ratio, which represents the exercise price of the original Altria Group, Inc. option divided by the Altria Group, Inc. market price immediately before the distribution ($87.81). The reduced exercise price of the adjusted Altria Group, Inc. option is determined by multiplying the Altria Group, Inc. market price immediately following the distribution ($65.90) by the Option Conversion Ratio.

Holders of Altria Group, Inc. restricted stock or stock rights awarded prior to January 31, 2007, retained their existing award and received restricted stock or stock rights of Kraft Class A common stock. The amount of Kraft restricted stock or stock rights awarded to such holders was calculated using the same formula set forth above with respect to new Kraft options. All of the restricted stock and stock rights will vest at the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria Group, Inc. stock rights awarded on January 31, 2007, did not receive restricted stock or stock rights of Kraft. Rather, they received additional stock rights of Altria Group, Inc. to preserve the intrinsic value of the original award.

To the extent that employees of the remaining Altria Group, Inc. received Kraft stock options, Altria Group, Inc. reimbursed Kraft in cash for the Black-Scholes fair value of the stock options received. To the extent that Kraft employees held Altria Group, Inc. stock options, Kraft reimbursed Altria Group, Inc. in cash for the Black-Scholes fair value of the stock options. To the extent that holders of Altria Group, Inc. stock rights received Kraft stock rights, Altria Group, Inc. paid to Kraft the fair value of the Kraft stock rights less the value of projected forfeitures. Based upon the number of Altria Group, Inc. stock awards outstanding at the Distribution Date, the net amount of these reimbursements resulted in a payment of $179 million from Kraft to Altria Group, Inc. in April 2007. The reimbursement from Kraft is reflected as an increase to the additional paid-in capital of Altria Group, Inc. on the September 30, 2007 condensed consolidated balance sheet.

Kraft was previously included in the Altria Group, Inc. consolidated federal income tax return, and federal income tax contingencies were recorded as liabilities on the balance sheet of ALG. As part of the intercompany account settlement discussed below, ALG reimbursed Kraft in cash for these liabilities, which as of March 30, 2007, were approximately $305 million, plus pre-tax interest of $63 million ($41 million after taxes). ALG also reimbursed Kraft in cash for the federal income tax consequences of the adoption of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”) (approximately $70 million plus pre-tax interest of $14 million, $9 million after taxes). See Note 12. Income Taxes for a discussion of the FIN 48 adoption and the Tax Sharing Agreement between Altria Group, Inc. and Kraft.

A subsidiary of ALG previously provided Kraft with certain services at cost plus a 5% management fee. After the Distribution Date, Kraft undertook these activities, and any remaining limited services provided to Kraft will cease in 2007. All intercompany accounts were settled in cash within 30 days of the Distribution Date. The settlement of the intercompany accounts (including the amounts discussed above related to stock awards and tax contingencies) resulted in a net payment from Kraft to ALG of $85 million in April 2007.

The distribution resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $27.4 billion on the Distribution Date.

Altria Group, Inc. has reflected the results of Kraft prior to the Distribution Date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to Kraft were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2006.

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Other

Beginning with the second quarter of 2007, Altria Group, Inc. revised its reportable segments to reflect PMI’s operations by geographic region. Altria Group, Inc.’s revised segments are U.S. tobacco; European Union; Eastern Europe, Middle East and Africa; Asia; Latin America; and Financial Services. Accordingly, prior period segment results have been revised.

Executive Summary

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

Consolidated Operating Results for the Nine Months Ended September 30, 2007 – The changes in Altria Group, Inc.’s earnings from continuing operations and diluted earnings per share (“EPS”) from continuing operations for the nine months ended September 30, 2007, from the nine months ended September 30, 2006, were due primarily to the following (in millions, except per share data):

	Earnings from Continuing Operations			Diluted EPS from Continuing Operations
For the nine months ended September 30, 2006	$	6,923		$	3.29
2006 Italian antitrust charge		61			0.03
2006 Asset impairment and exit costs		80			0.04
2006 Interest on tax reserve transfers to Kraft		29			0.01
2006 Tax items		(631	)		(0.30	)
2006 Provision for airline industry exposure		66			0.03
Subtotal 2006 items		(395	)		(0.19	)
2007 Asset impairment, exit and implementation costs		(367	)		(0.17	)
2007 Recoveries from airline industry exposure		137			0.06
2007 Interest on tax reserve transfers to Kraft		(50	)		(0.02	)
2007 Tax items		97			0.05
Subtotal 2007 items		(183	)		(0.08	)
Currency		212			0.10
Change in tax rate		63			0.03
Higher shares outstanding		—			(0.02	)
Operations		353			0.17
For the nine months ended September 30, 2007	$	6,973		$	3.30

Adjusted for the 2006 and 2007 items listed above, diluted EPS for the nine months ended September 30, 2007 of $3.38 increased 9.0% from $3.10 in 2006 and earnings from continuing operations for the nine months ended September 30, 2007 of $7,156 million increased 9.6% from $6,528 million in 2006.

See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.

Asset Impairment, Exit and Implementation Costs – In June 2007, Altria Group, Inc. announced plans by its tobacco subsidiaries to optimize worldwide cigarette production by moving U.S.-based cigarette production for non-U.S. markets to PMI facilities in Europe. Due to declining U.S. cigarette volume, as well as PMI’s decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. From 2007 through 2011, PM USA expects to incur total pre-tax asset impairment, exit and implementation charges of

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approximately $670 million for the program, including $340 million incurred through September 30, 2007 ($218 million after taxes). During the first nine months of 2007 and 2006, PMI recorded pre-tax asset impairment and exit costs of $153 million ($111 million after taxes) and $88 million ($57 million after taxes), respectively. In addition, during the first nine months of 2007 and 2006, pre-tax asset impairment and exit costs of $64 million ($38 million after taxes) and $35 million ($23 million after taxes), respectively, were recorded for general corporate purposes. For further details, see Note 2 to the Condensed Consolidated Financial Statements and the Tobacco Business Environment section of the following Discussion and Analysis.

Italian Antitrust Charge – During the first quarter of 2006, PMI recorded a $61 million charge related to an Italian antitrust action.

Recoveries/Provision from/for Airline Industry Exposure – During the nine months ended September 30, 2007, PMCC recorded a pre-tax gain of $214 million ($137 million after taxes) on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down. During the second quarter of 2006, PMCC increased its allowance for losses by $103 million ($66 million after taxes), due to continuing issues within the airline industry.

Currency – The favorable currency impact is due primarily to the weakness of the U.S. dollar versus the euro, Russian ruble and the Turkish lira, partially offset by the strength of the U.S. dollar versus the Japanese yen.

Income Taxes – Altria Group, Inc.’s income tax rate increased 5.0 percentage points to 32.3%. The 2007 tax rate includes favorable tax adjustments of $97 million, due primarily to the reversal of tax reserves no longer required and a reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany. The 2006 tax rate includes $631 million of non-cash tax benefits, principally representing the reversal of tax reserves after the U.S. Internal Revenue Service (“IRS”) concluded its examination of Altria Group, Inc.’s consolidated tax returns for the years 1996 through 1999 in the first quarter of 2006.

Interest on Tax Reserve Transfers to Kraft – As further discussed in Note 1. Basis of Presentation and Kraft Spin-Off, and Note 12. Income Taxes, the interest on tax reserves transferred to Kraft is related to the spin-off and the adoption of FIN 48 in 2007 and the conclusion of an IRS audit in 2006.

Shares Outstanding – Higher shares outstanding during the nine months ended September 30, 2007, primarily reflects exercises of employee stock options (which become outstanding when exercised) and the incremental share impact of stock options outstanding.

Continuing Operations – The increase in earnings from continuing operations was due primarily to the following:

• Higher Eastern Europe, Middle East and Africa income, reflecting higher pricing and higher volume/mix, partially offset by higher marketing, administration and research costs;

• Higher European Union income, reflecting higher pricing and lower marketing, administration and research costs, partially offset by lower volume/mix; and

• Higher U.S. tobacco income, reflecting lower marketing, administration and research costs, and lower wholesale promotional allowance rates, partially offset by lower volume and higher ongoing resolution costs;

partially offset by:

• Lower financial services income (after excluding the impact of the recoveries/provision from/for airline industry exposure), reflecting lower gains from asset management activity and lower lease revenues.

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Consolidated Operating Results for the Three Months Ended September 30, 2007 – The changes in Altria Group, Inc.’s earnings from continuing operations and diluted EPS from continuing operations for the three months ended September 30, 2007, from the three months ended September 30, 2006, were due primarily to the following (in millions, except per share data):

	Earnings from Continuing Operations			Diluted EPS from Continuing Operations
For the three months ended September 30, 2006	$	2,214		$	1.05
2006 Asset impairment and exit costs		43			0.02
2007 Asset impairment, exit and implementation costs		(26	)		(0.02	)
2007 Recoveries from airline industry exposure		4
2007 Tax items		97			0.05
Subtotal 2007 items		75			0.03
Currency		91			0.04
Change in tax rate		50			0.02
Operations		160			0.08
For the three months ended September 30, 2007	$	2,633		$	1.24

Adjusted for the 2006 and 2007 items listed above, diluted EPS for the quarter ended September 30, 2007 of $1.21 increased 13.1% from $1.07 in 2006 and earnings from continuing operations for the quarter ended September 30, 2007 of $2,558 million increased 13.3% from $2,257 million in 2006.

See discussion of events affecting the comparability of statement of earnings amounts in the Consolidated Operating Results section of the following Discussion and Analysis.

Asset Impairment, Exit and Implementation Costs – During the third quarter of 2007, PM USA recorded pre-tax asset impairment, exit and implementation charges of $22 million ($13 million after taxes) related to the announced closure of its Cabarrus, North Carolina manufacturing facility. During the third quarter of 2007 and 2006, PMI recorded pre-tax asset impairment and exit costs of $15 million ($11 million after taxes) and $65 million ($41 million after taxes), respectively. In addition, during the third quarter of 2007 and 2006, pre-tax asset impairment and exit costs of $3 million ($2 million after taxes) were recorded for general corporate purposes. For further details, see Note 2 to the Condensed Consolidated Financial Statements and the Tobacco Business Environment section of the following Discussion and Analysis.

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

Currency – The favorable currency impact is due primarily to the weakness of the U.S. dollar versus the euro, Turkish lira and Russian ruble, partially offset by the strength of the U.S. dollar versus the Japanese yen.

Income Taxes – Altria Group, Inc.’s income tax rate decreased 3.9 percentage points to 30.2%. The 2007 tax rate includes favorable tax adjustments of $97 million, due primarily to the reversal of tax reserves no longer required and a reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany.

Continuing Operations – The increase in earnings from continuing operations was due primarily to the following:

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• Higher Eastern Europe, Middle East and Africa income, reflecting higher pricing and higher volume/mix, partially offset by higher marketing, administration and research costs;

• Higher Asia income, reflecting higher pricing and lower marketing, administration and research costs, partially offset by unfavorable volume/mix;

• Higher European Union income, reflecting higher pricing and lower marketing, administration and research costs, partially offset by lower volume/mix; and

• Higher U.S. tobacco income, reflecting lower wholesale promotional allowance rates, and lower marketing, administration and research costs, partially offset by higher ongoing resolution costs and lower volume;

partially offset by:

• Lower financial services income (after excluding the impact of the recoveries from airline industry exposure), reflecting lower gains from asset management activity and lower lease revenues.

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

2007 Forecasted Results – On October 17, 2007, Altria Group, Inc. raised its forecast for reported 2007 full-year diluted earnings per share from continuing operations to a range of $4.20 to $4.25 versus its previously announced range of $4.05 to $4.10, reflecting a lower tax rate ($0.08 per share), favorable currency ($0.04 per share) and improved results at PMI ($0.03 per share). The revised forecast includes charges of $0.17 per share, which are $0.07 per share lower due mainly to the above-mentioned favorable tax items, versus $0.24 per share in charges in the previous forecast. Both the revised and previous forecasts include $0.06 per share for cash recoveries at PMCC, which were recorded in the first half of 2007. The forecast excludes Kraft, which is accounted for as a discontinued operation in 2007, reflecting the distribution of Kraft shares. The forecast also excludes the impact of the increased ownership interest in PMI’s Mexican tobacco business and the recently announced acquisition of John Middleton, Inc. The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast.

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Discussion and Analysis

Consolidated Operating Results

See pages 82-86 for a discussion of Cautionary Factors That May Affect Future Results.

	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2007			2006			2007			2006
	(in millions)
Net revenues:
U.S. tobacco	$	13,998		$	13,938		$	4,944		$	4,830
European Union		20,253			18,248			6,832			6,458
Eastern Europe, Middle East and Africa		9,205			7,716			3,312			2,607
Asia		8,351			7,667			2,814			2,586
Latin America		3,639			3,183			1,274			1,052
Total International tobacco		41,448			36,814			14,232			12,703
Financial Services		126			272			31			109
Net revenues	$	55,572		$	51,024		$	19,207		$	17,642
Operating income:
Operating companies income:
U.S. tobacco	$	3,429		$	3,687		$	1,295		$	1,270
European Union		3,256			2,735			1,151			955
Eastern Europe, Middle East and Africa		1,911			1,639			710			582
Asia		1,412			1,456			514			449
Latin America		333			395			143			133
Total International tobacco		6,912			6,225			2,518			2,119
Financial Services		332			138			33			101
Amortization of intangibles		(18	)		(17	)		(6	)		(6	)
General corporate expenses		(456	)		(390	)		(135	)		(128	)
Operating income	$	10,199		$	9,643		$	3,705		$	3,356

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

The following events that occurred during the nine months ended September 30, 2007 and 2006, affected the comparability of statement of earnings amounts.

• Income Taxes – The IRS concluded its examination of Altria Group, Inc.’s consolidated tax returns for the years 1996 through 1999, and issued a final Revenue Agent’s Report (“RAR”) on March 15, 2006. Consequently, in March 2006, Altria Group, Inc. recorded non-cash tax benefits of approximately $1.0 billion, which principally represented the reversal of tax reserves following the issuance of and agreement with the RAR. Altria Group, Inc. reimbursed $337 million in cash to Kraft for its portion of the $1.0 billion in tax benefits, as well as pre-tax interest of $46 million. The amounts related to Kraft were reclassified to

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income from discontinued operations. The tax reversal resulted in an increase to earnings from continuing operations of $631 million for the first quarter of 2006. During 2007, Altria Group, Inc.’s tax rate includes favorable tax adjustments of $97 million, due primarily to the reversal of tax reserves no longer required and a reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany.

• Italian Antitrust Charge – During the first quarter of 2006, PMI recorded a $61 million charge related to an Italian antitrust action. This charge was included in the operating companies income of the European Union segment.

• Asset Impairment and Exit Costs – For the nine months and three months ended September 30, 2007 and 2006, pre-tax asset impairment and exit costs consisted of the following:

		For the Nine Months Ended September 30,				For the Three Months Ended September 30,
		2007		2006		2007		2006
		(in millions)
Separation program	U.S. tobacco	$	293	$	—	$	10	$	—
Separation program	European Union		101		78		13		56
Separation program	Eastern Europe, Middle East and Africa		12
Separation program	Asia		22		7		2		6
Separation program	Latin America		18
Separation program	General corporate		17		33				3
Total separation programs			463		118		25		65
Asset impairment	U.S. tobacco		35
Asset impairment	European Union				3				3
Asset impairment	General corporate				2
Total asset impairments			35		5				3
Spin-off fees	General corporate		47				3
Asset impairment and exit costs		$	545	$	123	$	28	$	68

Manufacturing Optimization Program

In June 2007, Altria Group, Inc. announced plans by its tobacco subsidiaries to optimize worldwide cigarette production by moving U.S.-based cigarette production for non-U.S. markets to PMI facilities in Europe. Due to declining U.S. cigarette volume, as well as PMI’s decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. PMI is expected to shift sourcing of approximately 57 billion cigarettes from U.S. manufacturing to PMI facilities in Europe by the third quarter of 2008 and PM USA will close its Cabarrus manufacturing facility by the end of 2010.

As a result of this program, from 2007 through 2011, PM USA expects to incur total pre-tax charges of approximately $670 million, comprised of accelerated depreciation of $143 million (including the above mentioned asset impairment charge of $35 million recorded for the nine months ended September 30, 2007), employee separation costs of $353 million and other charges of $174 million, primarily related to the relocation of employees and equipment, net of estimated gains on sales of land and buildings. Approximately $440 million, or 66% of the total pre-tax charges, will result in cash expenditures. PM USA

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recorded an initial pre-tax asset impairment and exit cost charge for the program of $318 million or $0.10 per diluted share in the second quarter of 2007 related primarily to employee separation programs. During the third quarter of 2007, PM USA recorded pre-tax asset impairment and exit cost charges for the program of $10 million related to employee separation programs. In addition, during the third quarter of 2007, PM USA incurred $12 million of pre-tax implementation costs associated with the program. These costs were primarily related to accelerated depreciation and were reflected as cost of sales on the condensed consolidated statements of earnings. Additional charges of approximately $35 million are expected during the remainder of 2007.

Philip Morris International Asset Impairment and Exit Costs

During 2005, 2006 and 2007, PMI announced plans for the streamlining of various administrative functions and operations. These plans resulted in the announced closure or partial closure of 9 production facilities through September 30, 2007. As a result of these announcements, PMI recorded pre-tax charges of $153 million and $15 million during the nine months and three months ended September 30, 2007, respectively, and $88 million and $65 million during the nine months and three months ended September 30, 2006, respectively. These pre-tax charges primarily related to severance costs. Additional pre-tax charges of approximately $47 million are expected during the remainder of 2007. The 2006 third quarter charges included $51 million of costs related to PMI’s Munich factory closure.

Cash payments related to exit costs at PMI were $89 million and $16 million for the nine months and three months ended September 30, 2007, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $170 million.

The streamlining of these various functions and operations is expected to result in the elimination of approximately 2,400 positions. As of September 30, 2007, approximately 1,800 of these positions have been eliminated.

Corporate Asset Impairment and Exit Costs

General corporate charges primarily related to investment banking fees associated with the Kraft spin-off in 2007 and charges related to the streamlining of various corporate functions in 2007 and 2006.

• Recoveries/Provision from/for Airline Industry Exposure – During the nine months and three months ended September 30, 2007, PMCC recorded pre-tax gains of $214 million and $7 million, respectively, on the sale of its ownership interests and bankruptcy claims in certain leveraged lease investments in aircraft, which represented a partial recovery, in cash, of amounts that had been previously written down. During the second quarter of 2006, PMCC increased its allowance for losses by $103 million, due to continuing issues within the airline industry.

• Discontinued Operations – As more fully discussed in Note 1. Basis of Presentation and Kraft Spin-Off, and Note 7. Divestitures, on March 30, 2007, Altria Group, Inc. distributed all of its remaining interest in Kraft on a pro-rata basis to Altria Group, Inc. stockholders in a tax-free distribution. Altria Group, Inc. has reflected the results of Kraft prior to the distribution date as discontinued operations on the condensed consolidated statements of earnings and the condensed consolidated statements of cash flows. The assets and liabilities related to Kraft were reclassified and reflected as discontinued operations on the condensed consolidated balance sheet at December 31, 2006.

Consolidated Results of Operations for the Nine Months Ended September 30, 2007

The following discussion compares consolidated operating results for the nine months ended September 30, 2007, with the nine months ended September 30, 2006.

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Net revenues, which include excise taxes billed to customers, increased $4.5 billion (8.9%). Excluding excise taxes, net revenues increased $1.4 billion (5.3%), due primarily to the favorable impact of currency and higher revenues from the Eastern Europe, Middle East and Africa segment, the U.S. tobacco segment, the Latin America segment and the European Union segment, and the impact of the 2007 acquisition in Pakistan, partially offset by lower revenues from the financial services segment.

Operating income increased $556 million (5.8%), due primarily to higher operating results from the Eastern Europe, Middle East and Africa segment, the European Union segment and the U.S. tobacco segment; an increase at PMCC due to cash recoveries in 2007 from assets which had previously been written down versus a provision in 2006 for its airline industry exposure; the favorable impact of currency; and the 2006 Italian antitrust charge. These items were partially offset by higher charges for asset impairment, exit and implementation costs.

Currency movements increased net revenues by $2,369 million ($806 million, after excluding the impact of currency movements on excise taxes) and operating income by $321 million. These increases were due primarily to the weakness versus prior year of the U.S. dollar against the euro, Russian ruble and the Turkish lira, partially offset by the strength of the U.S. dollar against the Japanese yen.

Interest and other debt expense, net, of $187 million decreased $138 million, due primarily to lower debt levels, partially offset by higher interest on tax reserve transfers to Kraft.

Altria Group, Inc.’s income tax rate increased 5.0 percentage points to 32.3%. The 2007 tax rate includes favorable tax adjustments of $97 million, due primarily to the reversal of tax reserves no longer required and a reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany. The 2006 tax rate includes $631 million of non-cash tax benefits, principally representing the reversal of tax reserves after the U.S. IRS concluded its examination of Altria Group, Inc.’s consolidated tax returns for the years 1996 through 1999 in the first quarter of 2006.

Equity earnings and minority interest, net, was $195 million for the nine months ended September 30, 2007, compared with $145 million for the nine months ended September 30, 2006. The change primarily reflected higher equity earnings from SABMiller.

Earnings from continuing operations of $7.0 billion increased $50 million (0.7%), due primarily to higher operating income and lower interest and other debt expense, net, mostly offset by the reversal of tax reserves in 2006. Diluted EPS from continuing operations of $3.30 increased by 0.3%. Basic EPS from continuing operations of $3.32 was equal to the prior year.

Earnings from discontinued operations, net of income taxes and minority interest (which represent the results of Kraft prior to the spin-off), decreased $1.5 billion (70.8%).

Net earnings of $7.6 billion decreased $1.5 billion (16.2%). Diluted and basic EPS from net earnings of $3.59 and $3.62, respectively, decreased by 16.7% and 16.6%, respectively.

Consolidated Results of Operations for the Three Months Ended September 30, 2007

The following discussion compares consolidated operating results for the three months ended September 30, 2007, with the three months ended September 30, 2006.

Net revenues, which include excise taxes billed to customers, increased $1.6 billion (8.9%). Excluding excise taxes, net revenues increased $551 million (5.9%), due primarily to the favorable impact of currency, higher revenues from the U.S. tobacco segment and the Eastern Europe, Middle East and Africa segment, and the impact of the 2007 acquisition in Pakistan.

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Operating income increased $349 million (10.4%), due primarily to higher operating results from the Eastern Europe, Middle East and Africa segment, the Asia segment, the European Union segment and the U.S. tobacco segment, and the favorable impact of currency, partially offset by lower operating results from the financial services segment.

Currency movements increased net revenues by $861 million ($258 million, after excluding the impact of currency movements on excise taxes) and operating income by $138 million. These increases were due primarily to the weakness versus prior year of the U.S. dollar against the euro, Turkish lira and Russian ruble, partially offset by the strength of the U.S. dollar against the Japanese yen.

Interest and other debt expense, net, of $11 million decreased $48 million, due primarily to lower debt levels.

Altria Group, Inc.’s income tax rate decreased 3.9 percentage points to 30.2%. The 2007 tax rate includes favorable tax adjustments of $97 million, due primarily to the reversal of tax reserves no longer required and a reduction of deferred tax liabilities resulting from future lower tax rates enacted in Germany.

Earnings from continuing operations of $2.6 billion increased $419 million (18.9%), due primarily to higher operating income and the favorable tax adjustments in 2007. Diluted and basic EPS from continuing operations of $1.24 and $1.25, respectively, increased by 18.1% and 17.9%, respectively.

Earnings from discontinued operations, net of income taxes and minority interest (which represent the results of Kraft prior to the spin-off), were $661 million for the third quarter of 2006.

Net earnings of $2.6 billion decreased $242 million (8.4%). Diluted and basic EPS from net earnings of $1.24 and $1.25, respectively, decreased by 8.8% and 9.4%, respectively.

Operating Results by Business Segment

Tobacco

Business Environment

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

The tobacco industry, both in the United States and abroad, faces a number of challenges that may adversely affect the business, volume, results of operations, cash flows and financial position of PM USA, PMI and ALG. These challenges, which are discussed below and in the Cautionary Factors That May Affect Future Results section, include:

• pending and threatened litigation and bonding requirements as discussed in Note 11. Contingencies (“Note 11”);

• competitive disadvantages related to price increases in the United States attributable to the settlement of certain tobacco litigation;

• actual and proposed excise tax increases worldwide as well as changes in tax structures in foreign markets;

• the sale of counterfeit cigarettes by third parties;

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

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

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

• the outcome of proceedings and investigations, and the potential assertion of claims, relating to contraband shipments of cigarettes;

• governmental investigations;

• actual and proposed requirements regarding the use and disclosure of cigarette ingredients and other proprietary information;

• actual and proposed restrictions on imports in certain jurisdictions outside the United States;

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

• possible tobacco regulation and legislation in the United States that could put PMI at a competitive disadvantage;

• governmental and private bans and restrictions on smoking;

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

• governmental requirements setting ignition propensity standards for cigarettes; and

• actual and proposed tobacco legislation and regulation both inside and outside the United States.

In the ordinary course of business, PM USA and PMI are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.

Excise Taxes: Cigarettes are subject to substantial excise taxes in the United States and to substantial taxation abroad. Significant increases in cigarette-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States, the Member States of the European Union (the “EU”) and in other foreign jurisdictions. Legislation has been passed by the United States Congress that would increase the federal excise tax on cigarettes by $0.61 a pack. The President has stated his intention to veto this legislation. It is not possible to predict whether such legislation will become law. In addition, in certain jurisdictions, PMI’s products are subject to tax structures that discriminate against premium priced products and manufactured cigarettes and to inconsistent rulings and interpretations on complex methodologies to determine excise and other tax burdens.

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

Minimum Retail Selling Price Laws: Several EU Member States have enacted laws establishing a minimum retail selling price for cigarettes and, in some cases, other tobacco products. The European Commission has commenced infringement proceedings against these Member States, claiming that minimum retail selling price systems infringe EU law. In March 2007, the European Commission announced that it was bringing an action against France in the European Court of Justice on the ground that France’s minimum retail selling price system infringes EU law. On July 2, 2007, the European Commission announced that it has formally called upon Austria, Ireland and Italy to amend their legislation setting minimum retail selling prices for cigarettes. The

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announcement further stated that if these Member States do not respond satisfactorily to this request within two months of the announcement, the Commission may refer the matters to the European Court of Justice. If the European Commission’s actions are successful, they could adversely impact excise tax levels and/or price gaps in those markets.

Tar and Nicotine Test Methods and Brand Descriptors: A number of governments and public health organizations throughout the world have determined that the existing standardized machine-based methods for measuring tar and nicotine yields do not provide useful information about tar and nicotine deliveries and that such results are misleading to smokers. For example, in the 2001 publication of Monograph 13, the U.S. National Cancer Institute (“NCI”) concluded that measurements based on the Federal Trade Commission (“FTC”) standardized method “do not offer smokers meaningful information on the amount of tar and nicotine they will receive from a cigarette” or “on the relative amounts of tar and nicotine exposure likely to be received from smoking different brands of cigarettes.” Thereafter, the FTC issued a press release indicating that it would be working with the NCI to determine what changes should be made to its testing method to “correct the limitations” identified in Monograph 13. In 2002, PM USA petitioned the FTC to promulgate new rules governing the use of existing standardized machine-based methodologies for measuring tar and nicotine yields and descriptors. That petition remains pending. In addition, the World Health Organization (“WHO”) has concluded that these standardized measurements are “seriously flawed” and that measurements based upon the current standardized methodology “are misleading and should not be displayed.” The International Organization for Standardization (“ISO”) established a working group, chaired by the WHO, to propose a new measurement method that would more accurately reflect human smoking behavior.

PM USA and PMI have supported the concept of supplementing the ISO test method with a more intensive method, which PM USA and PMI believe would better illustrate the wide variability in the delivery of tar, nicotine and carbon monoxide, depending on how an individual smokes a cigarette. The working group has issued a final report proposing two alternative smoking methods. Currently, ISO is in the process of deciding whether to begin further development of the two methods or to wait for additional guidance from the Conference of the Parties. The working group has issued a final report proposing two alternative smoking methods. Currently, ISO is in the process of deciding whether to begin further development of the two methods or to wait for additional guidance from the Conference of the Parties, the governing body of the FCTC as described below.

In light of public health concerns about the limitations of current machine measurement methodologies, governments and public health organizations have increasingly challenged the use of descriptors — such as “light,” “mild,” and “low tar” — that are based on measurements produced by those methods. For example, the Scientific Advisory Committee of the WHO concluded that descriptors such as “light, ultra-light, mild and low tar” are “misleading terms” and should be banned. In 2003, the WHO proposed the Framework Convention on Tobacco Control (“FCTC”), a treaty that requires signatory nations to adopt and implement measures to ensure that descriptive terms do not create “the false impression that a particular tobacco product is less harmful than other tobacco products.” Such terms “may include ‘low tar,’ ‘light,’ ‘ultra-light,’ or ‘mild.’” Many countries prohibit or are in the process of prohibiting descriptors such as “lights.” In most countries where descriptors are banned, tar, nicotine and carbon monoxide yields are still required to be printed on packs of cigarettes. PMI advocates that where descriptors are banned, governments should also prohibit the printing of tar, nicotine and carbon monoxide yields on packs of cigarettes. See Note 11, which describes pending litigation concerning the use of brand descriptors. As discussed in Note 11, in August 2006, a federal trial court entered judgment in favor of the United States government in its lawsuit against various cigarette manufacturers and others, including PM USA and ALG, and enjoined the defendants from using brand descriptors, such as “lights,” “ultra-lights” and “low tar.” In October 2006, the Court of Appeals stayed enforcement of the judgment pending its review of the trial court’s decision.

Food and Drug Administration (“FDA”) Regulations: In February 2007, bipartisan legislation was introduced in the United States Senate and House of Representatives that, if enacted, would grant the FDA broad authority to regulate the design, manufacture and marketing of tobacco products and disclosures of related information. This legislation would also grant the FDA the authority to address counterfeit and contraband tobacco products

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and would impose fees to pay for the cost of regulation and other matters. ALG and PM USA support this legislation. On August 1, 2007, the Senate Health, Education, Labor and Pensions Committee approved a revised version of this legislation. Whether Congress will grant the FDA broad authority over tobacco products, and the precise nature of that authority if granted, cannot be predicted.

Tobacco Quota Buy-Out: In October 2004, the Fair and Equitable Tobacco Reform Act of 2004 (“FETRA”) was signed into law. FETRA provides for the elimination of the federal tobacco quota and price support program through an industry-funded buy-out of tobacco growers and quota holders. The cost of the buy-out is approximately $9.5 billion and is being paid over 10 years by manufacturers and importers of each kind of tobacco product. The cost is being allocated based on the relative market shares of manufacturers and importers of each kind of tobacco product. The quota buy-out payments will offset already scheduled payments to the National Tobacco Grower Settlement Trust (the “NTGST”), a trust fund established in 1999 by four of the major domestic tobacco product manufacturers to provide aid to tobacco growers and quota holders. Manufacturers and importers of tobacco products are also obligated to cover any losses (up to $500 million) that the government may incur on the disposition of tobacco pool stock accumulated under the previous tobacco price support program. PM USA has paid $138 million for its share of the tobacco pool stock losses. For a discussion of the NTGST, see Note 11. Altria Group, Inc. does not anticipate that the quota buy-out will have a material adverse impact on its consolidated results in 2007 and beyond.

The WHO’s Framework Convention on Tobacco Control (“FCTC”): The FCTC entered into force on February 27, 2005. As of August 2007, 148 countries, as well as the European Community, have become parties to the FCTC. The FCTC is the first international public health treaty and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. The treaty recommends (and in certain instances, requires) signatory nations to enact legislation that would, among other things:

• establish specific actions to prevent youth smoking;

• restrict and/or eliminate all tobacco product advertising, marketing, promotions and sponsorships;

• initiate public education campaigns to inform the public about the health consequences of smoking and the benefits of quitting;

• implement regulations imposing product testing, disclosure and performance standards;

• impose package warning requirements;

• adopt measures that would eliminate cigarette smuggling and counterfeit cigarettes;

• restrict smoking in public places;

• implement fiscal policies (tax and price increases);

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

• phase out duty-free tobacco sales; and

• encourage litigation against tobacco product manufacturers.

In addition, some of the proposals currently under consideration by the Conference of the Parties, the governing body of the FCTC, could have the potential to substantially restrict the ability of PM USA and PMI to manufacture and market their products. It is not possible to predict the outcome of regulations under consideration.

Ingredient Disclosure Laws: Jurisdictions inside and outside the United States have enacted or proposed legislation or regulations that would require cigarette manufacturers to disclose to the government and, in some instances, publicly the ingredients used in the manufacture of cigarettes and, in certain cases, to provide toxicological information. In some jurisdictions, governments have prohibited the use of certain ingredients, and proposals have been discussed to further prohibit or limit the use of ingredients. Under an EU tobacco product directive, tobacco companies are now required to disclose ingredients and toxicological information to each Member State. In implementing the EU tobacco product directive, the Netherlands has issued a decree that would require tobacco companies to disclose the ingredients used in each brand of cigarettes, including quantities used. PMI and other tobacco companies filed an action to contest this decree on the grounds of lack

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of protection of proprietary information. In December 2005, the District Court of the Hague agreed with the tobacco companies that certain information required to be disclosed under the decree constitutes proprietary trade secrets. However, the court also held that the companies’ interests in protecting their trade secrets must be balanced against the public’s right to information about the ingredients in tobacco products. The court therefore upheld the decree and instructed the government to weigh the public’s interests against the companies’ interests, in implementing the ingredient disclosure requirements in the decree. In March 2006, PMI, the government and others appealed these decisions. Concurrently, while pursuing this appeal, PMI is discussing with the relevant authorities the appropriate implementation of the EU tobacco product directive in the Netherlands and throughout the EU.

Restrictions and Bans on the Use of Ingredients: Some governments have prohibited the use of certain ingredients and propose further prohibitions or limits. For example, the Conference of the Parties is considering guidelines providing detailed product regulation requirements that are likely to include standards for the use of tobacco product ingredients, including flavorings. PM USA and PMI support regulations requiring all manufacturers to determine that the use of ingredients does not increase the inherent toxicity in cigarette smoke.

Bans and Restrictions on Advertising, Marketing, Promotions and Sponsorships: For many years, countries have imposed partial or total bans on tobacco advertising, marketing and promotion. The FCTC calls for a “comprehensive ban on advertising, promotion and sponsorship” and requires governments that have no constitutional constraints to ban all forms of advertising. Where constitutional constraints exist, the FCTC requires governments to restrict or ban radio, television, print media, other media, including the internet, and sponsorships of international events within 5 years. The FCTC also requires disclosure of expenditures on advertising, promotion and sponsorship that are not prohibited. Some public health groups have called for bans of product displays and for generic packaging. PM USA and PMI oppose complete bans on advertising, but support limitations on marketing, provided that the limitations are within constitutional constraints and manufacturers are able to communicate appropriately with adult smokers.

Health Warning Requirements: Many countries require substantial health warnings on cigarette packs. In the EU, for example, health warnings cover 30% of the front and 40% of the back of cigarette packs. The FCTC requires health warnings that cover, at a minimum, 30% of the front and back of the pack. However, the treaty recommends warnings covering 50% of the front and back of the pack. PM USA and PMI support health warning requirements and defer to the governments on the content of the warnings. In countries where health warnings are not required, PMI places them on packaging voluntarily in the official language or languages of the country. For example, PMI is voluntarily placing health warnings in many African countries in official local languages and occupying 30% of the front and back of the pack. PM USA and PMI do not support warning sizes that deprive them of the ability to use their distinctive trademarks and pack designs which differentiate their products from those of their competitors.

Health Effects of Smoking and Exposure to Environmental Tobacco Smoke (“ETS”): Reports with respect to the health risks of cigarette smoking have been publicized for many years, including most recently in a June 2006 United States Surgeon General report on ETS entitled “The Health Consequences of Involuntary Exposure to Tobacco Smoke.” Many countries have restricted smoking in public places. The pace and scope of public smoking bans has increased significantly, particularly in the EU, where Italy, Ireland, the UK, France, Finland and Sweden have banned virtually all indoor public smoking. Other countries around the world have adopted or are likely to adopt substantial public smoking restrictions. Some public health groups have called for, and some municipalities have adopted or proposed, bans on smoking in outdoor places, and some tobacco control groups have advocated banning smoking in cars with minors in them. The FCTC requires parties to the treaty to adopt restrictions on public smoking, and the Conference of Parties has proposed guidelines on regulations which are based on the premise that any exposure to ETS is harmful and call for total bans in all indoor public places, defines “indoor” broadly, and rejects any exemptions based on type of venue (e.g., nightclubs). On private place smoking, such as cars and homes, the guidelines call for increased education on the risk of exposure to ETS.

It is not possible to predict the results of ongoing scientific research or the types of future scientific research into the health risks of tobacco exposure. Although most regulation of ETS exposure to date has been done at

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the local level through bans in public establishments, the State of California is in the process of regulating ETS exposure in the ambient air at the state level. In January 2006, the California Air Resources Board (“CARB”) listed ETS as a toxic air contaminant under state law. CARB is now required to consider the adoption of appropriate control measures utilizing “best available control technology” in order to reduce public exposure to ETS in outdoor air to the “lowest level achievable.” In addition, in June 2006, the California Office of Environmental Health Hazard Assessment (“OEHHA”) listed ETS as a contaminant known to the State of California to cause reproductive toxicity. Consequently, under California Proposition 65, businesses employing 10 or more persons must post warning signs in certain areas stating that ETS is known to the State of California to be a reproductive toxicant.

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

PM USA and PMI each have established websites that include, among other things, the views of public health authorities on smoking, disease causation in smokers, addiction and ETS. These sites reflect PM USA’s and PMI’s agreement with the medical and scientific consensus that cigarette smoking is addictive, and causes lung cancer, heart disease, emphysema and other serious diseases in smokers. The websites advise smokers, and those considering smoking, to rely on the messages of public health authorities in making all smoking-related decisions. The website addresses are www.philipmorrisusa.com and www.philipmorrisinternational.com. The information on PM USA’s and PMI’s websites is not, and shall not be deemed to be, a part of this document or incorporated into any filings ALG makes with the Securities and Exchange Commission.

Testing and Reporting of Other Smoke Constituents: In addition to tar, nicotine and carbon monoxide, public health authorities have classified between 45 and 70 other smoke constituents as potential causes of tobacco-related diseases. Several countries require manufacturers to provide by-brand yields of these constituents. The FCTC requires signatory nations to adopt and implement guidelines for “testing and measuring the contents and emissions of tobacco products.” PM USA and PMI measure most of these constituents for their product research and development purposes, and support such regulation. However, the capacity to conduct by-brand testing on a global basis does not exist today, and the cost of by-brand annual testing would be significant.

Ceilings on Tar, Nicotine, Carbon Monoxide and Other Smoke Constituents: A number of countries and the EU have established maximum yields of tar, nicotine and/or carbon monoxide, as measured by the ISO standard test method. As discussed above, public health authorities have questioned whether reducing machine-measured tar, nicotine and carbon monoxide yields results in meaningful reductions in risk. Further, some public health groups have questioned the appropriateness of imposing nicotine ceilings per cigarette.

To date, no country has adopted ceilings for other smoke constituents. However, in June 2007, the panel advising the Conference of the Parties issued a report that recommends limiting specific smoke constituents. The advisory panel stated that ceilings do not have to be based on proof of benefit, but only on a showing that “the substance be known to be harmful and that processes exist for its diminution or removal.” The advisory panel proposed ceilings on tobacco specific nitrosamines, or TSNA, smoke constituents unique to tobacco, based on data showing that there is a wide variation in TSNA yields across brands. The advisory panel stated that the levels of the TSNAs are “higher in air-cured/processed Burley tobacco than in flue-cured bright tobacco” and that levels of TSNAs are much lower in markets where the predominant brands are Virginia cigarettes, such as Australia and Canada, as opposed to markets, such as the EU, where American blended cigarettes are predominantly sold. The recommended ceilings are “the lower of the median values for a sample of international brands or the median for the brands for the country implementing the regulation.” It is not possible to predict whether or when this recommendation will be endorsed by the Conference of the Parties and implemented by governments.

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Reduced Cigarette Ignition Propensity Legislation: Legislation or regulation requiring cigarettes to meet reduced ignition propensity standards is being considered in many states, at the federal and local levels and in jurisdictions outside the United States. New York State implemented ignition propensity standards in June 2004. To date, the same standards have been enacted by twenty-one other states, effective as follows: Vermont (May 2006), California (January 2007), Oregon (April 2007), New Hampshire (October 2007), Illinois (January 2008), Maine (January 2008), Massachusetts (January 2008), Kentucky (April 2008), Montana (May 2008), Alaska (August 2008), New Jersey (June 2008), Maryland (July 2008), Utah (July 2008), Connecticut (July 2008), Rhode Island (August 2008), Delaware (January 2009), Iowa (January 2009), Minnesota (January 2009), Texas (January 2009), Louisiana (August 2009) and North Carolina (January 2010). Similar legislation has been enacted in Canada and is being considered in several other countries, notably Australia and several Member States of the EU. The European Commission expects to propose ignition propensity standards in the fall of 2007. PM USA supports the enactment of federal legislation mandating a uniform and technically feasible national standard for reduced ignition propensity cigarettes that would preempt state standards and apply to all cigarettes sold in the United States. Similarly, PMI believes that reduced ignition propensity standards should be uniform, technically feasible, and applied to all manufacturers.

Illicit Trade: Regulatory measures and related governmental actions to prevent the illicit manufacture and trade of tobacco products are being considered by a number of jurisdictions. Article 15 of the FCTC requires parties to the treaty to take steps to eliminate all forms of illicit trade, including counterfeiting, and states that national, regional and global agreements on this issue are “essential components of tobacco control.” The Conference of the Parties has announced that it is working on a protocol on illicit trade to be negotiated in 2008 and proposed in 2009. According to a draft template, topics that the protocol will address include:

• licensing schemes for participants in the tobacco business, measures to eliminate money laundering and the development of an international system that enables the tracking and tracing of tobacco products;

• the implementation of laws governing record keeping and internet sales of tobacco products;

• the criminalization of participation in illicit trade in various forms;

• obligations for tobacco manufacturers to control their supply chain with penalties for those that fail to do so;

• programs to increase the capacity of law enforcement bodies; and

• programs to increase cooperation and technical assistance with respect to investigation and prosecutions and the sharing of information.

PM USA and PMI support strict regulations and enforcement measures to prevent all forms of illicit trade in tobacco products. They agree that manufacturers should implement monitoring systems of their sales and distribution practices, and that where appropriately confirmed, manufacturers should stop supplying vendors who have knowingly engaged in illicit trade. For example, PM USA is engaged in a number of initiatives to help prevent contraband trade in cigarettes, including: enforcement of PM USA wholesale and retail trade policies on trade in contraband cigarettes and Internet/remote sales; engagement with and support of law enforcement and regulatory agencies; litigation to protect the Company’s trademarks; and support for federal and state legislation. PM USA’s legislative initiatives to address contraband trade in cigarettes are designed to better control and protect the legitimate channels of distribution, impose more stringent penalties for the violation of laws and provide additional tools for law enforcement.

PMI Cooperation Agreements to Combat Illicit Trade of Cigarettes: PMI has entered into agreements with several governments to combat the illicit trade of cigarettes and may continue to do so. In July 2004, PMI entered into an agreement with the European Commission (acting on behalf of the European Community) and 10 Member States of the EU that provides for broad cooperation with European law enforcement agencies on

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anti-contraband and anti-counterfeit efforts. To date, 26 of the 27 Member States have signed the agreement. The agreement resolves all disputes between the European Community and the Member States that signed the agreement, on the one hand, and PMI and certain affiliates, on the other hand, relating to these issues. Under the terms of the agreement, PMI will make 13 payments over 12 years. In the second quarter of 2004, PMI recorded a pre-tax charge of $250 million for the initial payment. The agreement calls for payments of approximately $150 million on the first anniversary of the agreement (this payment was made in July 2005), approximately $100 million on the second anniversary (this payment was made in July 2006), and approximately $75 million each year thereafter for 10 years, each of which is to be adjusted based on certain variables, including PMI’s market share in the EU in the year preceding payment. PMI will record these payments as an expense in cost of sales when product is shipped. PMI is also responsible to pay the excise taxes, VAT and customs duties on qualifying product seizures of up to 90 million cigarettes and is subject to payments of five times the applicable taxes and duties if product seizures exceed 90 million cigarettes in a given year. To date, PMI’s payments related to product seizures have been immaterial.

State Settlement Agreements: As discussed in Note 11, during 1997 and 1998, PM USA and other major domestic tobacco product manufacturers entered into agreements with states and various United States jurisdictions settling asserted and unasserted health care cost recovery and other claims. These settlements require PM USA to make substantial annual payments. The settlements also place numerous restrictions on PM USA’s business operations, including prohibitions and restrictions on the advertising and marketing of cigarettes. Among these are prohibitions of outdoor and transit brand advertising; payments for product placement; and free sampling (except in adult-only facilities). Restrictions are also placed on the use of brand name sponsorships and brand name non-tobacco products. The State Settlement Agreements also place prohibitions on targeting youth and the use of cartoon characters. In addition, the State Settlement Agreements require companies to affirm corporate principles directed at reducing underage use of cigarettes; impose requirements regarding lobbying activities; mandate public disclosure of certain industry documents; limit the industry’s ability to challenge certain tobacco control and underage use laws; and provide for the dissolution of certain tobacco-related organizations and place restrictions on the establishment of any replacement organizations.

Other Legislation or Governmental Initiatives: Legislative and regulatory initiatives affecting the tobacco industry have been adopted or are being considered in a number of countries and jurisdictions. In 2001, the EU adopted a directive on tobacco product regulation requiring EU Member States to implement regulations that reduce maximum permitted levels of tar, nicotine and carbon monoxide yields; require manufacturers to disclose ingredients and toxicological data; and require cigarette packs to carry health warnings covering no less than 30% of the front panel and no less than 40% of the back panel. The directive also gives Member States the option of introducing graphic warnings as of 2005; requires tar, nicotine and carbon monoxide data to cover at least 10% of the side panel; and prohibits the use of texts, names, trademarks and figurative or other signs suggesting that a particular tobacco product is less harmful than others. All 27 EU Member States have implemented the directive.

The European Commission has issued guidelines for optional graphic warnings on cigarette packaging that Member States may apply as of 2005. Graphic warning requirements have also been proposed or adopted in a number of other jurisdictions. In 2003, the EU adopted a directive prohibiting radio, press and Internet tobacco marketing and advertising, which has now been implemented in most EU Member States. Tobacco control legislation addressing the manufacture, marketing and sale of tobacco products has been proposed or adopted in numerous other jurisdictions.

In the United States in recent years, various members of federal and state governments have introduced legislation that would subject cigarettes to various regulations; restrict or eliminate the use of descriptors such as “lights” or “ultra lights;” establish educational campaigns relating to tobacco consumption or tobacco control programs, or provide additional funding for governmental tobacco control activities; further restrict the advertising of cigarettes; require additional warnings, including graphic warnings, on packages and in advertising; eliminate or reduce the tax deductibility of tobacco advertising; provide that the Federal Cigarette Labeling and Advertising Act and the Smoking Education Act not be used as a defense against liability under

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state statutory or common law; and allow state and local governments to restrict the sale and distribution of cigarettes. In addition, legislation and regulation inside the United States could put PMI at a disadvantage vis a vis its international competitors.

It is not possible to predict what, if any, additional legislation, regulation or other governmental action will be enacted or implemented relating to the manufacturing, advertising, sale or use of cigarettes, or the tobacco industry generally. It is possible, however, that legislation, regulation or other governmental action could be enacted or implemented in the United States and in other countries and jurisdictions that might materially affect the business, volume, results of operations and cash flows of PM USA or PMI and ultimately their parent, ALG.

Governmental Investigations: From time to time, ALG and its subsidiaries are subject to governmental investigations on a range of matters. In this regard, ALG believes that Canadian authorities are contemplating a legal proceeding based on an investigation of ALG entities relating to allegations of contraband shipments of cigarettes into Canada in the early to mid-1990s. ALG and its subsidiaries cannot predict the outcome of this investigation or whether additional investigations may be commenced.

Manufacturing Optimization Program

In June 2007, Altria Group, Inc. announced plans by its tobacco subsidiaries to optimize worldwide cigarette production by moving U.S.-based cigarette production for non-U.S. markets to PMI facilities in Europe. Due to declining U.S. cigarette volume, as well as PMI’s decision to re-source its production, PM USA will close its Cabarrus, North Carolina manufacturing facility and consolidate manufacturing for the U.S. market at its Richmond, Virginia manufacturing center. PMI is expected to shift sourcing of approximately 57 billion cigarettes from U.S. manufacturing to PMI facilities in Europe by the third quarter of 2008 and PM USA will close its Cabarrus, North Carolina manufacturing facility by the end of 2010.

As a result of this program, from 2007 through 2011, PM USA expects to incur total pre-tax charges of approximately $670 million, comprised of accelerated depreciation of $143 million, employee separation costs of $353 million and other charges of $174 million, primarily related to the relocation of employees and equipment, net of estimated gains on sales of land and buildings. Approximately $440 million, or 66% of the total pre-tax charges, will result in cash expenditures. PM USA recorded an initial pre-tax asset impairment and exit cost charge for the program of $318 million or $0.10 per diluted share in the second quarter of 2007 related primarily to employee separation programs. During the third quarter of 2007, PM USA recorded pre-tax asset impairment and exit cost charges for the program of $10 million related to employee separation programs. In addition, during the third quarter of 2007, PM USA incurred $12 million of pre-tax implementation costs associated with the program. These costs were primarily related to accelerated depreciation and were reflected as cost of sales on the condensed consolidated statements of earnings. Additional charges of approximately $35 million are expected during the remainder of 2007. In addition, the program will entail capital expenditures of approximately $230 million at PM USA and $50 million at PMI.

The program is expected to generate pre-tax cost savings beginning in 2008, with total estimated annual cost savings of approximately $335 million by 2011, of which $179 million will be realized by PMI and $156 million by PM USA.

Philip Morris International Asset Impairment and Exit Costs

During 2005, 2006 and 2007, PMI announced plans for the streamlining of various administrative functions and operations. These plans resulted in the announced closure or partial closure of 9 production facilities through September 30, 2007. As a result of these announcements, PMI recorded pre-tax charges of $153 million and $15 million during the nine months and three months ended September 30, 2007, respectively, and $88 million and $65 million during the nine months and three months ended September 30, 2006, respectively. These pre-tax charges primarily related to severance costs. Additional pre-tax charges of approximately $47 million are expected during the remainder of 2007. The 2006 third quarter charges included $51 million of costs related to PMI’s Munich factory closure.

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Cash payments related to exit costs at PMI were $89 million and $16 million for the nine months and three months ended September 30, 2007, respectively. Future cash payments for exit costs incurred to date are expected to be approximately $170 million.

The streamlining of these various functions and operations is expected to result in the elimination of approximately 2,400 positions. As of September 30, 2007, approximately 1,800 of these positions have been eliminated. These actions generated pre-tax cost savings beginning in 2005, with cumulative estimated annual cost savings of approximately $210 million expected by the end of 2007, of which $130 million are incremental savings in 2007.

Acquisitions

On November 1, 2007, Altria Group, Inc. announced that it entered into an agreement to acquire 100% of John Middleton, Inc., a leading manufacturer of machine-made large cigars, for $2.9 billion in cash. The net cost of the acquisition, after deducting approximately $700 million in present value tax benefits arising from the terms of the transaction, is $2.2 billion. The transaction is expected to be completed by the end of 2007, subject to the necessary regulatory approvals. The acquisition, which will be financed with existing cash, is expected to be modestly accretive to Altria’s 2008 earnings.

On July 18, 2007, PMI announced that it had reached an agreement in principle to acquire an additional 30% stake in its Mexican tobacco business from its joint venture partner, Grupo Carso, S.A.B. de C.V. (“Grupo Carso”). PMI currently holds a 50% stake in its Mexican tobacco business and this transaction would bring PMI’s stake to 80%. Grupo Carso would retain a 20% stake in the business. The transaction has a value of approximately $1.1 billion and was completed on November 1, 2007. The transaction is expected to increase Altria’s annualized net earnings by approximately $0.03 per share in 2008.

During the first quarter of 2007, PMI acquired an additional 50.2% stake in a Pakistan cigarette manufacturer, Lakson Tobacco Company Limited (“Lakson Tobacco”), and completed a mandatory tender offer for the remaining shares, which increased PMI’s total ownership interest in Lakson Tobacco from 40% to approximately 98%, for $388 million. The effect of this acquisition was not material to Altria Group, Inc.’s consolidated financial position, results of operations or operating cash flows in any of the periods presented.

Operating Results – Nine Months Ended September 30, 2007

The following discussion compares tobacco operating results for the nine months ended September 30, 2007, with the nine months ended September 30, 2006.

	For the Nine Months Ended September 30,
	Net Revenues				Operating Companies Income
	2007		2006		2007		2006
	(in millions)
U.S. tobacco	$	13,998	$	13,938	$	3,429	$	3,687
European Union		20,253		18,248		3,256		2,735
Eastern Europe, Middle East and Africa		9,205		7,716		1,911		1,639
Asia		8,351		7,667		1,412		1,456
Latin America		3,639		3,183		333		395
Total tobacco	$	55,446	$	50,752	$	10,341	$	9,912

U.S. tobacco. PM USA’s net revenues, which include excise taxes billed to customers, increased $60 million (0.4%). Excluding excise taxes, net revenues increased $158 million (1.4%) to $11.4 billion, due primarily to

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lower wholesale promotional allowance rates and higher list prices ($683 million), partially offset by lower volume ($533 million).

Operating companies income decreased $258 million (7.0%), due primarily to lower volume ($358 million) and the 2007 pre-tax charges for asset impairment, exit and implementation costs related to the announced closing of the Cabarrus, North Carolina cigarette manufacturing facility ($340 million), partially offset by lower marketing, administration and research costs ($278 million) and lower wholesale promotional allowance rates, net of higher ongoing resolution costs ($171 million).

PM USA’s shipment volume was 133.3 billion units, a decrease of 3.5% or 4.8 billion units, reflecting an overall decline in industry volume. In the premium segment, PM USA’s shipment volume decreased 3.1%. Marlboro shipment volume decreased 2.9 billion units (2.6%) to 110.1 billion units. In the discount segment, PM USA’s shipment volume also decreased, with Basic shipment volume down 8.0% to 10.1 billion units.

The following table summarizes PM USA’s cigarette volume performance by brand for the nine months ended September 30, 2007 and 2006:

	For the Nine Months Ended September 30,
	2007	2006
	(in billion units)
Marlboro	110.1	113.0
Parliament	4.4	4.5
Virginia Slims	5.4	5.7
Basic	10.1	11.0
Focus on Four Brands	130.0	134.2
Other	3.3	3.9
Total PM USA	133.3	138.1

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

	For the Nine Months Ended September 30,
	2007		2006
Marlboro	41.0	%	40.6	%
Parliament	1.9		1.8
Virginia Slims	2.2		2.3
Basic	4.1		4.2
Focus on Four Brands	49.2		48.9
Other	1.3		1.5
Total PM USA	50.5	%	50.4	%

Effective December 18, 2006, PM USA reduced its wholesale promotional allowance on its Focus on Four brands by $1.00 per carton, from $5.00 to $4.00, and increased the price of its other brands by $1.00 per carton. Effective February 12, 2007, PM USA increased the price of its other brands by $9.95 per thousand cigarettes or $1.99 per carton. Effective September 10, 2007, PM USA reduced its wholesale promotional allowances on Marlboro, Parliament and Basic by $0.50 per carton, from $4.00 to $3.50, and Virginia Slims by $2.00 per carton, from $4.00 to $2.00. In addition, PM USA raised the price on its other brands by $2.50 per thousand cigarettes or $0.50 per carton effective September 10, 2007.

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PM USA cannot predict future long-term changes or rates of change in U.S. tobacco industry volume, the relative sizes of the premium and discount segments or its shipment or retail market share; however, it believes that its results may be materially adversely affected by the items discussed under the caption “Tobacco — Business Environment.”

European Union. Net revenues, which include excise taxes billed to customers, increased $2.0 billion (11.0%). Excluding excise taxes, net revenues increased $643 million (10.5%) to $6.7 billion, due primarily to favorable currency ($534 million) and price increases ($294 million), partially offset by lower volume/mix ($185 million).

Operating companies income increased $521 million (19.0%), due primarily to favorable currency ($294 million), price increases ($294 million), lower marketing, administration and research costs ($78 million) and the Italian antitrust charge in 2006 ($61 million), partially offset by lower volume/mix ($165 million), higher pre-tax charges for asset impairment and exit costs ($20 million) and higher fixed manufacturing costs ($17 million).

In the European Union, PMI’s cigarette volume decreased 0.9%, due to declines in the Czech Republic, France, Germany and Poland, partially offset by gains in the Baltic States, Hungary, Italy and Spain. PMI’s cigarette market share in the European Union remained at 39.4%, with increases in Austria, the Baltic States, Denmark, Finland, France, Hungary, Italy, the Netherlands, Portugal and Sweden, offset by declines in Belgium, the Czech Republic, Germany, Poland, the Slovak Republic, Switzerland and the United Kingdom.

In Italy, the total cigarette market was down 0.9%. PMI’s cigarette shipment volume increased 0.9% and market share in Italy increased 0.8 share points to 54.5%, driven by Chesterfield, Diana, Merit and Philip Morris.

In Germany, PMI’s cigarette volume declined 5.5%. The total cigarette market in Germany declined 2.7%, following the October 2006 tax-driven price increase. PMI’s cigarette market share declined 1.0 share point to 36.1%, reflecting a 38.4% volume decline in the vending channel. The vending channel accounted for 14.5% of total industry volume for the nine months ended September 30, 2007, a decline from 22.9% in the comparative period last year reflecting a reduction in the number of vending machines due to new regulations that require electronic age verification. PMI’s share of the vending channel at 49.8% is greater than its overall market share, and as a consequence, PMI has been adversely impacted by this development. PMI expects the volume share of the vending channel to gradually improve. Marlboro share was down 3.1 share points to 25.4%, due primarily to the increase of the low-price segment and shrinkage in the vending channel. L&M continued to grow strongly, adding 2.5 share points to reach 4.7%.

In Spain, the total cigarette market declined 0.4%. PMI’s shipment volume increased 1.7%, due mainly to the favorable timing of shipments. PMI’s market share declined 0.2 share points to 32.0%, primarily reflecting declines in Marlboro, following a price increase.

In France, shipment volume decreased 3.6%, due primarily to a lower market following the August 2007 excise tax-driven price increase. Market share increased 0.3 share points to 42.9%, driven by the Philip Morris brand.

In Poland, the total cigarette market declined 2.2% due to consumer price sensitivity following significant tax-driven price increases. PMI’s shipment volume was down 4.2% and market share decreased 0.5 share points to 39.5%, driven mainly by the continuing decline of PMI’s low price brands and brands in the declining low-price 70mm segment.

Eastern Europe, Middle East and Africa. Net revenues, which include excise taxes billed to customers, increased $1.5 billion (19.3%). Excluding excise taxes, net revenues increased $545 million (12.7%) to $4.8 billion, due primarily to favorable currency ($210 million), price increases ($196 million) and higher volume/mix ($139 million).

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Operating companies income increased $272 million (16.6%), due primarily to price increases and lower costs ($202 million), higher volume/mix ($95 million) and favorable currency ($65 million), partially offset by higher marketing, administration and research costs ($63 million), higher fixed manufacturing costs ($15 million) and pre-tax charges for asset impairment and exit costs in 2007 ($12 million).

In Eastern Europe, Middle East and Africa, volume increased 0.7%, driven by gains in Algeria, Bulgaria, Egypt and Ukraine, partially offset by declines in Russia and Turkey.

In Russia, shipments were down 3.3%, due largely to L&M and local low-price brands. This decline was partially offset by higher shipments and market share of higher-margin international brands, Marlboro, Parliament and Chesterfield.

In Turkey, shipments declined 3.3% and market share declined 2.2 share points to 40.5%, due to the February 2007 tax-driven retail price increase. Volume declines in low-priced L&M and Bond Street were partially offset by growth in Lark and Parliament.

In Ukraine, shipments grew 4.7% and share rose 0.6 share points to 33.6%, driven by continued consumer up-trading to premium brands, particularly Marlboro and Chesterfield.

In Egypt, improved economic conditions and increased tourism continued to fuel the growth of the total cigarette industry and premium brands. PMI’s shipments rose 24.1% and share advanced 2.0 share points to 12.2%, driven by L&M and Merit.

In Algeria, shipments increased, driven by an improved distribution network and the timing of shipments.

In Bulgaria, shipments increased, driven by PMI’s market entry in July 2006 as well as higher sales of Marlboro following price repositioning, and portfolio expansion following the lifting of import duties in January 2007.

Asia. Net revenues, which include excise taxes billed to customers, increased $684 million (8.9%). Excluding excise taxes, net revenues increased $94 million (2.2%) to $4.3 billion, due primarily to price increases ($108 million), the Lakson Tobacco acquisition ($80 million) and favorable currency ($45 million), partially offset by lower volume/mix ($139 million).

Operating companies income decreased $44 million (3.0%), due primarily to lower volume/mix ($122 million), unfavorable currency ($36 million), higher marketing, administration and research costs ($25 million, including $30 million for a distributor termination in Indonesia) and higher pre-tax charges for asset impairment and exit costs ($15 million), partially offset by price increases ($108 million), lower fixed manufacturing costs ($34 million) and the Lakson Tobacco acquisition ($9 million).

In Asia, volume increased 8.5%, reflecting the acquisition in Pakistan. Excluding this acquisition, volume in Asia was down 2.6%, due primarily to lower volume in Japan and the Philippines, partially offset by gains in Korea and Indonesia.

In Japan, the total market declined 5.4%, driven by the July 1, 2006 tax-driven price increase. Market share in Japan decreased 0.2 share point to 24.4%. PMI’s shipments in Japan were down 9.3%.

In Korea, shipments increased 17.7%, due primarily to the performance of Parliament and Marlboro, driven by new line extensions, including Marlboro Filter Plus and Parliament 0.3mg. Market share in Korea increased 1.2 share points to 9.7% with Marlboro market share up 0.9 share points to 4.2%.

In Indonesia, the total market increased 2.2% due mainly to the growth of the low price segment. Consequently, PMI shipment volume rose 1.6%. Market share decreased 0.1 share point to 28.0%.

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Latin America. Net revenues, which include excise taxes billed to customers, increased $456 million (14.3%). Excluding excise taxes, net revenues increased $150 million (11.8%) to $1.4 billion, due primarily to price increases ($80 million), the acquisition of the Dominican Republic cigarette business ($39 million), favorable currency ($17 million) and favorable volume/mix ($14 million).

Operating companies income decreased $62 million (15.7%), due primarily to the divestiture of the Dominican Republic beer business ($45 million), higher marketing, administration and research costs ($30 million), pre-tax charges for asset impairment and exit costs in 2007 ($18 million) and lower volume/mix, partially offset by price increases, net of higher costs ($48 million).

In Latin America, volume decreased 1.3%, driven by declines in Colombia, the Dominican Republic and Mexico, partially offset by gains in Argentina.

In Argentina, the total market was up 1.2%, while PMI shipments grew 5.7% and share was up 2.9 share points, due mainly to the Philip Morris brand.

In the Dominican Republic, shipment volume declined 23.5%, reflecting a lower total market following price increases in January and February 2007 to partially compensate for a very significant excise tax increase imposed on cigarettes in January 2007. Market share declined 0.8 share points to 77.4%, due primarily to Marlboro.

In Mexico, PMI shipments declined 4.0%, reflecting increased trade purchases in the fourth quarter of 2006 ahead of the January 2007 tax increase, and the market decline due to lower consumption following the January 2007 tax-driven price increase. However, market share rose 1.2 share points to 64.0%, driven by Marlboro, Benson & Hedges and Delicados.

Operating Results – Three Months Ended September 30, 2007

The following discussion compares tobacco operating results for the three months ended September 30, 2007, with the three months ended September 30, 2006.

	For the Three Months Ended September 30,
	Net Revenues				Operating Companies Income
	2007		2006		2007		2006
	(in millions)
U.S. tobacco	$	4,944	$	4,830	$	1,295	$	1,270
European Union		6,832		6,458		1,151		955
Eastern Europe, Middle East and Africa		3,312		2,607		710		582
Asia		2,814		2,586		514		449
Latin America		1,274		1,052		143		133
Total tobacco	$	19,176	$	17,533	$	3,813	$	3,389

U.S. tobacco. PM USA’s net revenues, which include excise taxes billed to customers, increased $114 million (2.4%). Excluding excise taxes, net revenues increased $125 million (3.2%) to $4.0 billion, due primarily to lower wholesale promotional allowance rates ($167 million), partially offset by lower volume ($46 million).

Operating companies income increased $25 million (2.0%), due primarily to lower marketing, administration and research costs ($85 million), partially offset by lower volume ($31 million), the 2007 pre-tax charges for asset impairment, exit and implementation costs related to the announced closing of the Cabarrus, North Carolina cigarette manufacturing facility ($22 million) and higher ongoing resolution costs, net of lower wholesale promotional allowance rates ($10 million).

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PM USA’s shipment volume was 47.1 billion units, a decrease of 1.0% or 0.5 billion units, but was estimated to be down approximately 3% when adjusted for changes in trade inventories and calendar differences. During the third quarter of 2007, PM USA estimates that total cigarette industry volume declined between 3% and 4%, and for the full year 2007 PM USA is maintaining its prior estimate of a 3% to 4% decline in total cigarette industry volume. In the premium segment, PM USA’s shipment volume decreased 0.5%; however, Marlboro shipment volume increased 0.1 billion units (0.2%) to 39.1 billion units. In the discount segment, PM USA’s shipment volume also decreased, with Basic shipment volume down 8.4% to 3.5 billion units.

The following table summarizes PM USA’s cigarette volume performance by brand for the three months ended September 30, 2007 and 2006:

	For the Three Months Ended September 30,
	2007	2006
	(in billion units)
Marlboro	39.1	39.0
Parliament	1.5	1.5
Virginia Slims	1.9	2.0
Basic	3.5	3.8
Focus on Four Brands	46.0	46.3
Other	1.1	1.3
Total PM USA	47.1	47.6

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

	For the Three Months Ended September 30,
	2007		2006
Marlboro	41.1	%	40.6	%
Parliament	1.9		1.8
Virginia Slims	2.2		2.3
Basic	4.0		4.2
Focus on Four Brands	49.2		48.9
Other	1.4		1.5
Total PM USA	50.6	%	50.4	%

European Union. Net revenues, which include excise taxes billed to customers, increased $374 million (5.8%). Excluding excise taxes, net revenues increased $144 million (6.7%) to $2.3 billion, due primarily to favorable currency ($144 million) and price increases ($116 million), partially offset by lower volume/mix ($116 million).

Operating companies income increased $196 million (20.5%), due primarily to price increases ($116 million), favorable currency ($100 million), lower pre-tax charges for asset impairment and exit costs ($46 million) and lower marketing, administration and research costs ($22 million), partially offset by lower volume/mix ($91 million).

In the European Union, PMI’s cigarette volume decreased 4.8%, due mainly to declines in the Czech Republic, France, Germany and Poland. PMI’s cigarette market share in the European Union declined 0.6 share points to 39.1%. The total market declined 3.8%, due largely to the impact of tax-driven price increases, particularly in the Czech Republic, Germany, Poland and the United Kingdom.

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In the Czech Republic, the total cigarette market was down 9.2%, due to the timing of trade purchases. PMI’s shipment volume declined 22.6% and market share of 49.3% was down 8.5 share points. PMI implemented tax-driven price increases in the second quarter, while most competitive brands, particularly at the low end, followed in the third quarter. This placed PMI’s brands at a temporary price disadvantage and was the main cause of the significant market share loss. PMI expects to recover a large part of this loss in the fourth quarter of 2007.

In France, the total market declined 3.9%, due to the impact of higher pricing. PMI’s market share of 42.0% declined 0.5 share points and shipments decreased 5.5%.

In Germany, the cigarette market declined 5.7%, due to a tax-driven price increase in the fourth quarter of 2006. PMI’s cigarette shipments in Germany were down 9.0% and its cigarette market share declined 1.3 share points to 35.2%, driven by consumer downtrading to the low price segment and an increase in a key competitor’s trade inventory. Marlboro share declined 3.1 share points to 24.1%, due to the decline of the vending segment and the previously mentioned trade inventory increase. L&M share grew 2.4 share points to reach 5.3%.

In Italy, the total cigarette market was down 0.9%. PMI’s cigarette shipment volume increased 0.6% and its market share in Italy increased 0.6 share points to 54.7%, driven by Merit, Chesterfield and Philip Morris.

In Poland, PMI’s cigarette shipment volume declined 16.1%. Consumer price sensitivity following significant tax-driven price increases resulted in a total market decline of 10.5% and PMI’s market share was down 2.6 share points to 38.0%, due primarily to declines of its low price brands, as well as its local 70mm brands. However, PMI’s profitability increased significantly due to higher pricing.

In Spain, PMI’s cigarette shipments increased 1.8%. The total cigarette market in Spain declined 0.6%, while PMI’s market share of 32.7% rose 0.4 share points, driven by Chesterfield and L&M.

Eastern Europe, Middle East and Africa. Net revenues, which include excise taxes billed to customers, increased $705 million (27.0%). Excluding excise taxes, net revenues increased $213 million (14.3%) to $1.7 billion, due primarily to favorable currency ($99 million), price increases ($81 million), and higher volume/mix ($33 million).

Operating companies income increased $128 million (22.0%), due primarily to price increases ($81 million), favorable currency ($44 million) and higher volume/mix ($32 million), partially offset by higher marketing, administration and research costs ($19 million).

In Eastern Europe, Middle East and Africa, volume increased 0.3%, driven by gains in Algeria, Bulgaria, Egypt, Lebanon and Ukraine, mostly offset by the unfavorable timing of shipments in Kuwait and lower volume in Russia, Serbia and worldwide duty-free.

In Egypt, shipment volume increased 21.1%. The total market rose 6.4% in Egypt, while PMI’s market share grew 2.6 share points to 14.2%, due to the continued strength of L&M.

In Russia, shipment volume was down 1.0%, due to unfavorable distributor inventory movements following consolidation to a single distributor. Market share rose 0.2 share points to 26.6%, as share gains for Marlboro, Parliament and Virginia Slims were mostly offset by a share decline for L&M.

In Serbia, PMI’s shipments were down 10.6%, due to the continued decline of local brands, and market share was down 2.0 share points to 52.1%. However, PMI’s market share increased for its international brands, driven by Marlboro and Bond Street. Market share for Marlboro rose slightly and its share of the premium segment increased.

In Ukraine, shipment volume grew 3.5% and share increased 0.6 share points to 34.0%, driven by consumer uptrading to Marlboro, Parliament and Chesterfield.

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In Algeria, shipments increased, driven by an improved distribution network and the timing of shipments.

In Bulgaria, shipments increased, driven by PMI’s market entry in July 2006 as well as higher sales of Marlboro following price repositioning, and portfolio expansion following the lifting of import duties in January 2007.

Asia. Net revenues, which include excise taxes billed to customers, increased $228 million (8.8%). Excluding excise taxes, net revenues increased $75 million (5.5%) to $1.4 billion, due primarily to favorable pricing ($56 million) and the Lakson Tobacco acquisition ($32 million), partially offset by lower volume/mix ($10 million).

Operating companies income increased $65 million (14.5%), due primarily to favorable pricing and lower costs ($73 million) and lower marketing, administration and research costs ($18 million), partially offset by lower volume/mix ($23 million) and unfavorable currency ($9 million).

In Asia, volume increased 9.6%, due to acquisition volume in Pakistan and gains in Korea, partially offset by volume declines in Indonesia, Malaysia and Thailand. Excluding acquired volume, shipment volume in Asia declined 1.3%.

In Indonesia, the total cigarette market was essentially flat. PMI’s market share was down 0.6 share points to 28.0%, reflecting the decline of A Mild and Dji Sam Soe due to a temporary stick-price disadvantage versus low price competition, partially offset by the growth of Marlboro, which gained 0.5 share points to 4.3%. PMI shipment volume declined 1.9%, although Marlboro shipments rose 20.7%, driven by improved marketing and distribution and the July 2007 Marlboro kretek launch.

In Japan, the total cigarette market was up 16.4%, due to a favorable comparison with the third quarter of 2006, which was depressed by trade inventory depletions following the July 2006 excise tax-driven price increase. Consequently, PMI’s in-market sales were up 13.4%, but market share declined 0.6 share points to 24.3%, due mainly to Lark. Marlboro share of 10.1% was essentially flat. Cigarette shipment volume was flat, as higher in-market sales were offset by unfavorable inventory movements.

In Korea, the total market was down 3.2%, while PMI’s shipments rose 10.0% and market share increased 1.3 share points to 9.9%. Parliament and Marlboro continued to gain share, driven by recent new line extensions, including Marlboro Filter Plus.

Latin America. Net revenues, which include excise taxes billed to customers, increased $222 million (21.1%). Excluding excise taxes, net revenues increased $72 million (17.2%) to $490 million, due primarily to price increases ($27 million), favorable currency ($18 million), the acquisition of the Dominican Republic cigarette business ($16 million) and favorable volume/mix ($11 million).

Operating companies income increased $10 million (7.5%), due primarily to price increases, net of higher costs ($12 million) and lower marketing, administration and research costs ($8 million), partially offset by the divestiture of the Dominican Republic beer business ($14 million).

In Latin America, volume declined 1.5%, due mainly to declines in Brazil and Colombia, partially offset by growth in Argentina.

In Argentina, the total cigarette market grew 1.7%. PMI’s shipment volume grew 5.0% and market share increased 2.2 share points to 69.7%, due mainly to Marlboro and the Philip Morris brand.

In Brazil, the total market declined 0.9% and PMI’s market share declined 0.2 share points to 12.0%. However, Marlboro share grew 0.2 share points to 5.9%. PMI’s shipments were down 2.8%.

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In Colombia, PMI shipment volume declined 17.6%, due primarily to distributor inventory distortions. However, PMI expects volume to recover in the fourth quarter of 2007.

In Mexico, the total cigarette market declined 1.9%, due to lower consumption following the January 2007 tax-driven price increase. PMI market share was up 1.6 share points to 65.5%, due primarily to Marlboro and Benson & Hedges.

Financial Services

Business Environment

In 2003, PMCC shifted its strategic focus and is no longer making new investments but is instead focused on managing its existing portfolio of finance assets in order to maximize gains and generate cash flow from asset sales and related activities. Accordingly, PMCC’s operating companies income will fluctuate over time as investments mature or are sold. During the first nine months of 2007 and 2006, PMCC received proceeds from asset sales, maturities and bankruptcy recoveries of $363 million and $339 million, respectively, and recorded gains of $268 million and $127 million, respectively, in operating companies income. During the third quarter of 2007 and 2006, PMCC received proceeds from asset sales, maturities and bankruptcy recoveries of $23 million and $137 million, respectively, and recorded gains of $22 million and $61 million, respectively, in operating companies income.

Included in the proceeds for 2007 were partial recoveries of amounts previously provided for in the allowance for losses related to aircraft exposure, which resulted in additional operating companies income of $214 million and $7 million for the nine months and three months ended September 30, 2007, respectively.

PMCC leases one 750 megawatt (“MW”) natural gas-fired power plant (located in Pasadena, Texas) to an indirect subsidiary of Calpine Corporation (“Calpine”). Calpine, which has guaranteed the lease, is currently operating under bankruptcy protection. The subsidiary was not included as part of the bankruptcy filing of Calpine. PMCC does not record income on leases when the lessee or its guarantor is in bankruptcy. At September 30, 2007, PMCC’s finance asset balance for this lessee was $60 million. Based on PMCC’s assessment of the prospect for recovery on the Pasadena plant, a portion of the outstanding finance asset balance has been provided for in the allowance for losses.

During the third quarter of 2007, Calpine foreclosed on PMCC’s interest in two 265 MW natural gas-fired power plants (located in Tiverton, Rhode Island, and Rumford, Maine), which were part of the bankruptcy filing. These leases were rejected and written off during 2006. The foreclosure resulted in the acceleration of approximately $50 million in deferred taxes.

At September 30, 2007, PMCC’s allowance for losses was $223 million. During the nine months ended September 30, 2007, PMCC’s allowance for losses decreased by $257 million related to the partial recovery and write-off of certain aircraft leveraged lease investments. During the second quarter of 2006, PMCC increased its allowance for losses by $103 million due to continuing issues within the airline industry.

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

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Operating Results

	2007		2006
	(in millions)
Net revenues:
Nine months ended September 30,	$	126	$	272
Three months ended September 30,	$	31	$	109
Operating companies income:
Nine months ended September 30,	$	332	$	138
Three months ended September 30,	$	33	$	101

PMCC’s net revenues for the nine months ended September 30, 2007, decreased $146 million (53.7%) from the comparable period in 2006, due primarily to lower gains from asset management activity and lower lease revenues due to lower investment balances. Net revenues for the three months ended September 30, 2007, decreased $78 million (71.6%) from the comparable period in 2006, due primarily to lower gains from asset management activity and lower lease revenues.

PMCC’s operating companies income for the nine months ended September 30, 2007 increased $194 million (100.0+%) from the comparable period in 2006, due primarily to cash recoveries in 2007 on aircraft leases previously written down versus an increase to the loss provision in 2006, partially offset by lower revenues. PMCC’s operating companies income for the three months ended September 30, 2007, decreased $68 million (67.3%) from the comparable period in 2006, due primarily to lower revenues.

Financial Review

Net Cash Provided by Operating Activities, Continuing Operations

During the first nine months of 2007, net cash provided by operating activities on a continuing operations basis was $8.1 billion compared with $8.3 billion during the comparable 2006 period. The decrease in cash provided by operating activities was due primarily to the return in 2006 of approximately $2 billion of escrow bond deposits related to the Price U.S. tobacco case, mostly offset by higher earnings from continuing operations (after excluding the non-cash reversal of income tax reserves in 2006) and lower pension plan contributions.

Net Cash Used in Investing Activities, Continuing Operations

One element of PMI’s growth strategy is to strengthen its brand portfolio and/or expand its geographic reach through active programs of selective acquisitions. PM USA from time to time considers acquisitions as part of its adjacency strategy.

During the first nine months of 2007, net cash used in investing activities on a continuing operations basis was $921 million, compared with $357 million during the first nine months of 2006. The increase in cash used was due primarily to PMI’s purchase of an additional stake of a cigarette manufacturer in Pakistan in the first quarter of 2007.

Net Cash Used in Financing Activities, Continuing Operations

During the first nine months of 2007, net cash used in financing activities on a continuing operations basis was $4.8 billion, compared with $9.0 billion during the first nine months of 2006. The decrease in cash used in financing activities was due primarily to higher repayment of debt in 2006.

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Debt and Liquidity

Credit Ratings – At September 30, 2007, ALG’s debt ratings by major credit rating agencies were as follows:

	Short-term	Long-term	Outlook
Moody’s	P-2	Baa1	Stable
Standard & Poor’s	A-2	BBB	Stable
Fitch	F-2	BBB+	Stable

ALG’s credit quality, measured by 5 year credit default swaps, has improved over the past year with levels which approximate that of Single-A rated issuers.

Moody’s expects that, should PMI be spun-off from Altria Group, Inc. in early 2008, PMI’s long-term and short-term ratings could be as high as A2 and Prime-1, respectively. Standard & Poor’s believes that the potential corporate credit rating for PMI could be as high as A+ based solely on its business risk assessment.

Credit Lines – ALG and PMI maintain separate revolving credit facilities. ALG intends to use its revolving credit facilities to support the issuance of commercial paper.

The purchase price of the Sampoerna acquisition was primarily financed through a euro 4.5 billion bank credit facility arranged for PMI and its subsidiaries in May 2005, consisting of a euro 2.5 billion three-year term loan facility (which, through repayments has been reduced to euro 1.5 billion) and a euro 2.0 billion five-year revolving credit facility. These facilities, which are not guaranteed by ALG, require PMI to maintain an earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest ratio of not less than 3.5 to 1.0. At September 30, 2007, PMI’s ratio calculated in accordance with the agreements was 40.9 to 1.0.

In March 2007, ALG negotiated a new 364-day revolving credit facility in the amount of $1.0 billion, which expires on March 27, 2008, and replaces ALG’s 364-day facility which matured on March 30, 2007. In addition, ALG maintains a multi-year credit facility in the amount of $4.0 billion, which expires in April 2010. The ALG facilities require the maintenance of an earnings to fixed charges ratio, as defined by the agreements, of not less than 2.5 to 1.0. At September 30, 2007, the ratio calculated in accordance with the agreements was 20.0 to 1.0.

ALG and PMI expect to continue to meet their respective covenants. These facilities do not include any credit rating triggers or any provisions that could require the posting of collateral. The multi-year facilities enable the respective companies to reclassify short-term debt on a long-term basis.

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At September 30, 2007, credit lines for ALG and PMI, and the related activity, were as follows (in billions of dollars):

ALG	September 30, 2007
Type	Credit Lines		Amount Drawn		Commercial Paper Outstanding		Lines Available
364-day	$	1.0	$	—	$	—	$	1.0
Multi-year		4.0						4.0
	$	5.0	$	—	$	—	$	5.0
PMI	September 30, 2007
Type	Credit Lines		Amount Drawn		Lines Available
3-year term loan	$	2.1	$	2.1	$	—
5-year revolving credit		2.7		0.4		2.3
	$	4.8	$	2.5	$	2.3

In addition to the above, certain international subsidiaries of PMI maintain credit lines to meet their respective working capital needs. These credit lines, which amounted to approximately $2.2 billion are for the sole use of these international businesses. Borrowings on these lines amounted to approximately $0.5 billion and $0.4 billion at September 30, 2007 and December 31, 2006, respectively.

Debt – Altria Group, Inc.’s total debt (consumer products and financial services) was $8.0 billion and $8.5 billion at September 30, 2007 and December 31, 2006, respectively. Total consumer products debt was $7.5 billion and $7.4 billion at September 30, 2007 and December 31, 2006, respectively. Total consumer products debt includes PMI third-party debt of $3.4 billion and $2.8 billion at September 30, 2007 and December 31, 2006, respectively. At September 30, 2007 and December 31, 2006 (after giving effect to the Kraft spin-off), Altria Group, Inc.’s ratio of consumer products debt to total equity was 0.44 and 0.58, respectively. The ratio of total debt to total equity was 0.47 and 0.67 at September 30, 2007 and December 31, 2006 (after giving effect to the Kraft spin-off), respectively.

ALG does not guarantee the debt of PMI.

Guarantees – As discussed in Note 11, at September 30, 2007, Altria Group, Inc.’s third-party guarantees, which are primarily related to excise taxes and divestiture activities, were $69 million, of which $64 million have no specified expiration dates. The remainder expire through 2011, with none expiring through September 30, 2008. Altria Group, Inc. is required to perform under these guarantees in the event that a third party fails to make contractual payments or achieve performance measures. Altria Group, Inc. has a liability of $22 million on its condensed consolidated balance sheet at September 30, 2007, relating to these guarantees. In the ordinary course of business, certain subsidiaries of ALG have agreed to indemnify a limited number of third parties in the event of future litigation. At September 30, 2007, subsidiaries of ALG were also contingently liable for $2.9 billion of guarantees related to their own performance, consisting of the following:

• $2.6 billion of guarantees of excise tax and import duties related primarily to international shipments of tobacco products. In these agreements, financial institutions provide guarantees of tax payments to the respective governments. PMI then issues guarantees to the respective financial institutions for the payment

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of the taxes. These are revolving facilities that are integral to the shipment of tobacco products in international markets, and the underlying taxes payable are recorded on Altria Group, Inc.’s condensed consolidated balance sheet.

• $0.3 billion of other guarantees related to the tobacco businesses.

Although Altria Group, Inc.’s guarantees of its own performance are frequently short-term in nature, they are expected to be replaced, upon expiration, with similar guarantees of similar amounts. These items have not had, and are not expected to have, a significant impact on Altria Group, Inc.’s liquidity.

Payments Under State Settlement and Other Tobacco Agreements – As discussed previously and in Note 11, PM USA has entered into State Settlement Agreements with the states and territories of the United States and also entered into a trust agreement to provide certain aid to U.S. tobacco growers and quota holders, but PM USA’s obligations under this trust have now been eliminated by the obligations imposed on PM USA by FETRA. During 2004, PMI entered into a cooperation agreement with the European Community. Each of these agreements calls for payments that are based on variable factors, such as cigarette volume, market shares and inflation. PM USA and PMI account for the cost of these agreements as a component of cost of sales as product is shipped.

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

	For the Nine Months Ended September 30,				For the Three Months Ended September 30,
	2007		2006		2007		2006
PM USA	$	4,137	$	3,774	$	1,462	$	1,306
PMI		68		75		23		21
Total	$	4,205	$	3,849	$	1,485	$	1,327

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

	PM USA	PMI	Total
2007	$5.4	$0.1	$5.5
2008	5.5	0.1	5.6
2009	5.5	0.1	5.6
2010	5.5	0.1	5.6
2011	5.5	0.1	5.6
2012 to 2016	5.6 annually	0.1 annually	5.7 annually
Thereafter	5.7 annually		5.7 annually

The estimated amounts charged to cost of sales in each of the years above would generally be paid in the following year. As previously stated, the payments due under the terms of these agreements are subject to adjustment for several factors, including cigarette volume, inflation and certain contingent events and, in general, are allocated based on each manufacturer’s market share. The amounts shown in the table above are estimates, and actual amounts will differ as underlying assumptions differ from actual future results. See Note 11. Contingencies for a discussion of proceedings that may result in a downward adjustment of amounts paid under State Settlement Agreements for the years 2003 and 2004.

Litigation Escrow Deposits – As discussed in Note 11, in connection with obtaining a stay of execution in the Engle class action, PM USA placed $1.2 billion into an interest-bearing escrow account. The $1.2 billion escrow account and a deposit of $100 million related to the bonding requirement are included in the September 30, 2007 and December 31, 2006 condensed consolidated balance sheets as other assets. As discussed in Note 11, in July 2006, the Florida Supreme Court issued its ruling in the Engle case. The escrow and deposit

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amounts will be returned to PM USA subject to and upon the completion of final review of the judgment. Interest income on the $1.2 billion escrow account is paid to PM USA quarterly and is being recorded as earned in interest and other debt expense, net, in the condensed consolidated statements of earnings.

Also, as discussed in Note 11, in June 2006 under the order of the Illinois Supreme Court, cash deposits of approximately $2.2 billion related to the Price case were returned to PM USA, and PM USA’s obligations to deposit further cash payments were terminated.

With respect to certain adverse verdicts and judicial decisions currently on appeal, other than the Engle case discussed above, as of September 30, 2007, PM USA has posted various forms of security totaling approximately $193 million, the majority of which have been collateralized with cash deposits, to obtain stays of judgments pending appeals. These cash deposits are included in other assets on the condensed consolidated balance sheets.

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

Leases – PMCC’s investment in leases is included in the line item finance assets, net, on the condensed consolidated balance sheets as of September 30, 2007 and December 31, 2006. At September 30, 2007, PMCC’s net finance receivable of $6.2 billion in leveraged leases, which is included in the line item on Altria Group, Inc.’s condensed consolidated balance sheet of finance assets, net, consists of rents receivable ($20.9 billion) and the residual value of assets under lease ($1.6 billion), reduced by third-party nonrecourse debt ($13.8 billion) and unearned income ($2.5 billion). The repayment of the nonrecourse debt is collateralized by lease payments receivable and the leased property, and is nonrecourse to the general assets of PMCC. As required by accounting principles generally accepted in the United States of America (“U.S. GAAP”), the third-party nonrecourse debt has been offset against the related rents receivable and has been presented on a net basis within the line item finance assets, net, in Altria Group, Inc.’s condensed consolidated balance sheets. Finance assets, net, at September 30, 2007, also include net finance receivables for direct finance leases ($0.4 billion) and an allowance for losses ($0.2 billion).

Equity and Dividends

As discussed in Note 1. Basis of Presentation and Kraft Spin-Off, on March 30, 2007, Altria Group, Inc. spun-off all of its remaining interest (88.9%) in Kraft on a pro rata basis to Altria Group, Inc. stockholders of record as of the close of business on March 16, 2007 in a tax-free distribution. The distribution resulted in a net decrease to Altria Group, Inc.’s stockholders’ equity of $27.4 billion on March 30, 2007.

As discussed in Note 8. Stock Plans, in January 2007, Altria Group, Inc. issued 1.7 million rights to receive shares of stock to eligible U.S.-based and non-U.S. employees. Restrictions on these rights lapse in the first quarter of 2010. The market value per right was $87.36 on the date of grant. Recipients of these Altria Group, Inc. stock rights did not receive restricted stock or stock rights of Kraft upon the Kraft spin-off. Rather, they received 0.6 million additional stock rights of Altria Group, Inc. to preserve the intrinsic value of the original award.

Dividends paid in the first nine months of 2007 and 2006 were $5.1 billion and $5.0 billion, respectively, an increase of 1.1%, primarily reflecting a greater number of shares outstanding in 2007 and a higher dividend rate on Altria Group, Inc. stock.

During the second quarter of 2007, Altria Group, Inc. adjusted its quarterly dividend rate to $0.69 per share so that its stockholders who retained their Altria Group, Inc. and Kraft shares would receive in the aggregate the same dividend rate as before the distribution.

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During the third quarter of 2007, Altria Group, Inc.’s Board of Directors approved an 8.7% increase in the quarterly dividend rate to $0.75 per share. As a result, the present annualized dividend rate is $3.00 per share.

Market Risk

ALG’s subsidiaries operate globally, with manufacturing and sales facilities in various locations around the world. ALG and its subsidiaries utilize certain financial instruments to manage foreign currency exposures. Derivative financial instruments are used by ALG and its subsidiaries, principally to reduce exposures to market risks resulting from fluctuations in foreign exchange rates by creating offsetting exposures. Altria Group, Inc. is not a party to leveraged derivatives and, by policy, does not use derivative financial instruments for speculative purposes.

A substantial portion of Altria Group, Inc.’s derivative financial instruments are effective as hedges. Hedging activity affected accumulated other comprehensive earnings (losses), net of income taxes, as follows:

	For the Nine Months Ended September 30,						For the Three Months Ended September 30,
	2007			2006			2007		2006
	(in millions)
Gain at beginning of period	$	13		$	24		$	8	$	17
Derivative (gains) losses transferred to earnings		(38	)		(51	)		3		(33	)
Change in fair value		45			6			11		(5	)
Kraft spin-off		2
Gain (loss) as of September 30	$	22		$	(21	)	$	22	$	(21	)

The fair value of all derivative financial instruments has been calculated based on market quotes.

Foreign exchange rates. Altria Group, Inc. uses forward foreign exchange contracts, foreign currency swaps and foreign currency options to mitigate its exposure to changes in exchange rates from third-party and intercompany actual and forecasted transactions. The primary currencies to which Altria Group, Inc. is exposed include the Japanese yen, Swiss franc and the euro. At September 30, 2007 and December 31, 2006, Altria Group, Inc. had contracts with aggregate notional amounts of $4.9 billion and $3.2 billion, respectively.

In addition, Altria Group, Inc. uses foreign currency swaps to mitigate its exposure to changes in exchange rates related to foreign currency denominated debt. These swaps typically convert fixed-rate foreign currency denominated debt to fixed-rate debt denominated in the functional currency of the borrowing entity, and are accounted for as cash flow hedges. The unrealized gain (loss) relating to foreign currency swap agreements that do not qualify for hedge accounting treatment under U.S. GAAP was insignificant as of September 30, 2007 and December 31, 2006. At September 30, 2007 and December 31, 2006, the notional amounts of foreign currency swap agreements aggregated $1.4 billion.

Altria Group, Inc. also designates certain foreign currency denominated debt as net investment hedges of foreign operations. During the nine months ended September 30, 2007 and 2006, these hedges of net investments resulted in gains, net of income taxes of $2 million, and losses, net of income taxes, of $134 million, respectively, and were reported as a component of accumulated other comprehensive earnings (losses) within currency translation adjustments.

New Accounting Standard

See Note 13 to the Condensed Consolidated Financial Statements for a discussion of a new accounting standard.

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Contingencies

See Note 11 to the Condensed Consolidated Financial Statements for a discussion of contingencies.

Cautionary Factors That May Affect Future Results

Forward-Looking and Cautionary Statements

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

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

Tobacco-Related Litigation. There is substantial litigation related to tobacco products in the United States and certain foreign jurisdictions. Damages claimed in some of the tobacco-related litigation are significant, and in certain cases, range into the billions of dollars. We anticipate that new cases will continue to be filed. It is possible that there could be adverse developments in pending cases. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. Although PM USA has historically been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts have been appealed, there remains a risk that such relief may not be obtainable in all cases. This risk has been substantially reduced given that 42 states now limit the dollar amount of bonds or require no bond at all.

It is possible that the consolidated results of operations, cash flows or financial position of PM USA, PMI or Altria Group, Inc. could be materially affected in a particular fiscal quarter or fiscal year by an unfavorable outcome or settlement of certain pending litigation. Nevertheless, although litigation is subject to uncertainty, management believes the litigation environment has substantially improved. ALG and each of its subsidiaries named as a defendant believe, and each has been so advised by counsel handling the respective cases, that it has a number of valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts against it. All such cases are, and will continue to be, vigorously defended. However, ALG and its subsidiaries may enter into settlement discussions in particular cases if they believe it is in the best interests of ALG’s stockholders to do so. Please see Note 11 for a discussion of pending tobacco-related litigation.

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

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Corporate Restructuring. On August 29, 2007, the Board of Directors of ALG announced its intention to pursue the spin-off of PMI to ALG shareholders, and anticipates that it will be in a position to finalize its decision and announce the precise timing of the spin-off at its regularly scheduled meeting on January 30, 2008. If the spin-off is authorized, it is possible that an action may be brought seeking to enjoin the spin-off. Any such injunction would have to be based on a finding that Altria is insolvent or would be insolvent after giving effect to the spin-off or intends to delay, hinder or defraud creditors. In the event the spin-off is challenged, ALG will defend such action vigorously, including by prosecuting any necessary appeals. Although litigation is subject to uncertainty, management believes that Altria should ultimately prevail against such action.

Tobacco Control Action in the Public and Private Sectors. Our tobacco subsidiaries face significant governmental action, including efforts aimed at reducing the incidence of smoking, restricting marketing and advertising, imposing regulations on warnings and disclosure of ingredients and seeking to hold us responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke. Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volume, and we expect that such actions will continue to reduce consumption levels. Significant regulatory developments will take place over the next few years in most of PMI’s markets, driven principally by the World Health Organization’s Framework Convention for Tobacco Control, or FCTC. The FCTC is the first international public health treaty, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. In addition, the FCTC has led to increased efforts by tobacco control advocates and public health organizations to reduce the palatability and appeal of tobacco products to adult smokers. Regulatory initiatives that have been proposed, introduced or enacted include:

• the levying of substantial and increasing tax and duty charges;

• restrictions or bans on advertising, marketing and sponsorship;

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

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

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

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

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

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

• elimination of duty free allowances for travelers; and

• encouraging litigation against tobacco companies.

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

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Excise Taxes. Cigarettes are subject to substantial excise taxes in the United States and to substantial taxation abroad. Significant increases in cigarette-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States, the Member States of the European Union (the “EU”) and in other foreign jurisdictions. Legislation has been passed by the United States Congress that would increase the federal excise tax on cigarettes by $0.61 a pack. The President has stated his intention to veto this legislation. It is not possible to predict whether such legislation will become law. In addition, in certain jurisdictions, PMI’s products are subject to tax structures that discriminate against premium priced products and manufactured cigarettes and to inconsistent rulings and interpretations on complex methodologies to determine excise and other tax burdens.

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

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

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

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

Counterfeit Cigarettes in International Markets. Large quantities of counterfeit cigarettes are sold in the international market. PMI believes that Marlboro is the most heavily counterfeited international cigarette brand, although PMI cannot quantify the amount of revenue it loses as a result of this activity. In addition, PMI’s revenues are reduced by contraband and legal cross-border transactions.

Governmental Investigations. From time to time, ALG and its tobacco subsidiaries are subject to governmental investigations on a range of matters. Ongoing investigations include allegations of contraband shipments of cigarettes and allegations of unlawful pricing activities within certain international markets. We cannot predict the outcome of those investigations or whether additional investigations may be commenced, and it is possible

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that our tobacco subsidiaries’ business could be materially affected by an unfavorable outcome of pending or future investigations.

New Tobacco Product Technologies. Our tobacco subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the risk of tobacco use while continuing to offer adult consumers products that meet their taste expectations. Potential solutions being researched include attempting to reduce constituents in tobacco smoke identified by public health authorities as harmful and seeking to produce products that reduce or eliminate exposure to tobacco smoke. Our tobacco subsidiaries may not succeed in these efforts. If they do not succeed, but one or more of their competitors do, our tobacco subsidiaries may be at a competitive disadvantage. Further, we cannot predict whether regulators will permit the marketing of products with claims of reduced risk to consumers, which could significantly undermine the commercial viability of any products that might be developed.

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

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

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

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

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

• promote brand equity successfully;

• anticipate and respond to new consumer trends;

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

• improve productivity; and

• be able to protect or enhance margins through price increases.

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The willingness of consumers to purchase premium cigarette brands depends in part on local economic conditions. In periods of economic uncertainty, consumers tend to purchase more private label and other economy brands, and the volume of our consumer products subsidiaries could suffer accordingly.

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

Strengthening Brand Portfolios Through Acquisitions. One element of PMI’s growth strategy is to strengthen its brand portfolio and/or expand its geographic reach through active programs of selective acquisitions. PM USA from time to time considers acquisitions as part of its adjacency strategy. Acquisition opportunities are limited, and acquisitions present risks of failing to achieve efficient and effective integration, strategic objectives and anticipated revenue improvements and cost savings. There can be no assurance that we will be able to continue to acquire attractive businesses on favorable terms or that all future acquisitions will be quickly accretive to earnings.

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

IRS Challenges to PMCC Leases. The IRS concluded its examination of Altria Group, Inc.’s consolidated tax returns for the years 1996 through 1999, and issued a final Revenue Agent’s Report (“RAR”) on March 15, 2006. The RAR disallowed benefits pertaining to certain PMCC leveraged lease transactions for the years 1996 through 1999. Altria Group, Inc. has agreed with all conclusions of the RAR, with the exception of the disallowance of benefits pertaining to several PMCC leveraged lease transactions for the years 1996 through 1999. PMCC will continue to assert its position regarding these leveraged lease transactions and contest approximately $150 million of tax and net interest assessed and paid with regard to them. The IRS may in the future challenge and disallow more of PMCC’s leveraged leases based on Revenue Rulings, an IRS Notice and subsequent case law addressing specific types of leveraged leases (lease-in/lease-out (“LILO”) and sale-in/lease-out (“SILO”) transactions). PMCC believes that the position and supporting case law described in the RAR, Revenue Rulings and the IRS Notice are incorrectly applied to PMCC’s transactions and that its leveraged leases are factually and legally distinguishable in material respects from the IRS’s position. PMCC and ALG intend to vigorously defend against any challenges based on that position through litigation. In this regard, on October 16, 2006, PMCC filed a complaint in the U.S. District Court for the Southern District of New York to claim refunds for a portion of these tax payments and associated interest. However, should PMCC’s position not be upheld, PMCC may have to accelerate the payment of significant amounts of federal income tax and significantly lower its earnings to reflect the recalculation of the income from the affected leveraged leases, which could have a material effect on the earnings and cash flows of Altria Group, Inc. in a particular fiscal quarter or fiscal year. PMCC considered this matter in its adoption of FIN 48 and FASB Staff Position No. FAS 13-2.

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Item 4.    Controls and Procedures.

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

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Part II – OTHER INFORMATION

Item 1.    Legal Proceedings.

See Note 11. Contingencies, of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for a discussion of legal proceedings pending against Altria Group, Inc. and its subsidiaries. See also Exhibits 99.1 and 99.2 to this report.

Item 1A.    Risk Factors.

Information regarding Risk Factors appears in “MD&A – Cautionary Factors That May Affect Future Results,” in Part I – Item 2 of this Form 10-Q and in Part I – Item 1A. Risk Factors of our Report on Form 10-K for the year ended December 31, 2006. Other than as set forth in Part I – Item 2 of this Form 10-Q, there have been no material changes from the risk factors previously disclosed in our Report on Form 10-K, with the exception of the following additions:

Corporate Restructuring. On August 29, 2007, the Board of Directors of ALG announced its intention to pursue the spin-off of PMI to ALG shareholders, and anticipates that it will be in a position to finalize its decision and announce the precise timing of the spin-off at its regularly scheduled meeting on January 30, 2008. If the spin-off is authorized, it is possible that an action may be brought seeking to enjoin the spin-off. Any such injunction would have to be based on a finding that Altria is insolvent or would be insolvent after giving effect to the spin-off or intends to delay, hinder or defraud creditors. In the event the spin-off is challenged, ALG will defend such action vigorously, including by prosecuting any necessary appeals. Although litigation is subject to uncertainty, management believes that Altria should ultimately prevail against such action.

Tobacco Control Action in the Public and Private Sectors. Our tobacco subsidiaries face significant governmental action, including efforts aimed at reducing the incidence of smoking, restricting marketing and advertising, imposing regulations on warnings and disclosure of ingredients and seeking to hold us responsible for the adverse health effects associated with both smoking and exposure to environmental tobacco smoke. Governmental actions, combined with the diminishing social acceptance of smoking and private actions to restrict smoking, have resulted in reduced industry volume, and we expect that such actions will continue to reduce consumption levels. Significant regulatory developments will take place over the next few years in most of PMI’s markets, driven principally by the World Health Organization’s Framework Convention for Tobacco Control, or FCTC. The FCTC is the first international public health treaty, and its objective is to establish a global agenda for tobacco regulation with the purpose of reducing initiation of tobacco use and encouraging cessation. In addition, the FCTC has led to increased efforts by tobacco control advocates and public health organizations to reduce the palatability and appeal of tobacco products to adult smokers. Regulatory initiatives that have been proposed, introduced or enacted include:

• the levying of substantial and increasing tax and duty charges;

• restrictions or bans on advertising, marketing and sponsorship;

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

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

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

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

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

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

• elimination of duty free allowances for travelers; and

• encouraging litigation against tobacco companies.

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

Excise Taxes. Cigarettes are subject to substantial excise taxes in the United States and to substantial taxation abroad. Significant increases in cigarette-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted within the United States, the Member States of the European Union (the “EU”) and in other foreign jurisdictions. Legislation has been passed by the United States Congress that would increase the federal excise tax on cigarettes by $0.61 a pack. The President has stated his intention to veto this legislation. It is not possible to predict whether such legislation will become law. In addition, in certain jurisdictions, PMI’s products are subject to tax structures that discriminate against premium priced products and manufactured cigarettes and to inconsistent rulings and interpretations on complex methodologies to determine excise and other tax burdens.

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

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

New Tobacco Product Technologies. Our tobacco subsidiaries continue to seek ways to develop and to commercialize new product technologies that may reduce the risk of tobacco use while continuing to offer adult consumers products that meet their taste expectations. Potential solutions being researched include attempting to reduce constituents in tobacco smoke identified by public health authorities as harmful and seeking to produce products that reduce or eliminate exposure to tobacco smoke. Our tobacco subsidiaries may not succeed in these efforts. If they do not succeed, but one or more of their competitors do, our tobacco subsidiaries may be at a competitive disadvantage. Further, we cannot predict whether regulators will permit the marketing of products with claims of reduced risk to consumers, which could significantly undermine the commercial viability of any products that might be developed.

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

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

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

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

ALG’s share repurchase activity for each of the three months ended September 30, 2007, was as follows:

Period	Total Number of Shares Repurchased (1)	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
July 1, 2007 – July 31, 2007	6,649	$	70.03	—	—
August 1, 2007 – August 31, 2007	344	$	67.36	—	—
September 1, 2007 – September 30, 2007	—		—	—	—
For the Quarter Ended September 30, 2007	6,993	$	69.90	—	—

(1) The shares repurchased during the periods presented above represent shares tendered to ALG by employees who vested in restricted stock and rights, or exercised stock options, and used shares to pay all, or a portion of, the related taxes and/or option exercise price.

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Item 6.    Exhibits.

3.1	Amended and Restated By-Laws of Altria Group, Inc., as amended effective July 1, 2007 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on July 3, 2007).
10	Stock Purchase Agreement, dated October 31, 2007, by and among Altria Group, Inc., Bradford Holdings, Inc. and John Middleton, Inc.
12	Statement regarding computation of ratios of earnings to fixed charges.
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Certain Litigation Matters and Recent Developments.
99.2	Trial Schedule for Certain Cases.

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Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ALTRIA GROUP, INC.

/s/  DINYAR S. DEVITRE

Dinyar S. Devitre

Senior Vice President and

Chief Financial Officer

November 6, 2007

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EX-10

Exhibit 10

STOCK PURCHASE AGREEMENT

Dated as of October 31, 2007

by and among

ALTRIA GROUP, INC.,

BRADFORD HOLDINGS, INC.

and

JOHN MIDDLETON, INC.

TABLE OF CONTENTS

		Page
ARTICLE I
Certain Definitions
ARTICLE II
Purchase and Sale of Shares
Section 2.1.	Purchase and Sale	9
Section 2.2.	Time and Place of Closing	9
Section 2.3.	Deliveries by Seller	10
Section 2.4.	Deliveries by Buyer	10
Section 2.5.	Escrow of Funds	10
ARTICLE III
Representations and Warranties of Seller and the Company
Section 3.1.	Incorporation; Authorization; etc.	11
Section 3.2.	Capitalization; Structure	12
Section 3.3.	Financial Statements; Books and Records	13
Section 3.4.	No Undisclosed Liabilities	13
Section 3.5.	Properties; Sufficiency	14
Section 3.6.	Absence of Certain Changes	14
Section 3.7.	Litigation; Orders	15
Section 3.8.	Intellectual Property	15
Section 3.9.	Licenses, Approvals, Other Authorizations, Consents, Reports, etc.	15
Section 3.10.	Labor Matters	16
Section 3.11.	Compliance with Laws	16
Section 3.12.	Insurance	16
Section 3.13.	Material Contracts	16
Section 3.14.	Brokers, Finders, etc.	17
Section 3.15.	Environmental Compliance	17
Section 3.16.	Employee Benefit Plans	19
Section 3.17.	Non-Reliance	22
ARTICLE IV
Representations and Warranties of Buyer
Section 4.1.	Incorporation; Authorization; etc.	23
Section 4.2.	Licenses, Approvals, Other Authorizations, Consents, Reports, etc.	23

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Section 4.3.	Brokers, Finders, etc.	24
Section 4.4.	Acquisition of Shares for Investment	24
Section 4.5.	Financial Capability	24
Section 4.6.	Non-Reliance	24
ARTICLE V
Covenants of the Parties
Section 5.1.	Investigation of Business; Access to Properties and Records	25
Section 5.2.	Filings; Other Actions; Notification	27
Section 5.3.	Further Assurances	28
Section 5.4.	Conduct of Business	28
Section 5.5.	Public Announcements	31
Section 5.6.	Intercompany Accounts; Guaranties	31
Section 5.7.	No Solicitation	32
Section 5.8.	Notice of Acquisition Proposals	32
Section 5.9.	Insurance	32
Section 5.10	Indebtedness; Working Capital	33
Section 5.11.	Directors’ and Officers’ Indemnification and Related Matters	34
Section 5.12.	Transfer of Limerick Property	36
ARTICLE VI
Employee Benefits Matters
Section 6.1.	Employee Benefits Matters	36
ARTICLE VII
Tax Matters
Section 7.1.	Tax Representations of Seller	38
Section 7.2.	Tax Indemnification	39
Section 7.3.	Allocation of Certain Taxes	41
Section 7.4.	Refunds and Related Matters	41
Section 7.5.	Preparation and Filing of Tax Returns	42
Section 7.6.	Tax Contests	44
Section 7.7.	Cooperation	45
Section 7.8.	Termination of Tax Sharing Agreements	46
Section 7.9.	Buyer Consolidated Returns	46
Section 7.10.	Seller Consolidated Returns	46
Section 7.11	Tax Treatment; Purchase Price Allocation	47
Section 7.12.	Post-Closing Actions which Affect Seller Tax Indemnitee’s Liability for Taxes for Pre-Closing Periods	48
Section 7.13.	Survival	49
Section 7.14.	Characterization of Payments	49

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Section 7.15.	Definitions	49
ARTICLE VIII
Conditions Precedent
Section 8.1.	Conditions to Each Party’s Obligation	51
Section 8.2.	Additional Conditions to Buyer’s Obligations	51
Section 8.3.	Additional Conditions to Seller’s Obligation	52
ARTICLE IX
Survival; Indemnification
Section 9.1.	Survival	53
Section 9.2.	Indemnification by Seller	53
Section 9.3.	Indemnification by Buyer	54
Section 9.4.	Indemnification Procedures	54
Section 9.5.	Limitations on Indemnification	56
Section 9.6.	Exclusive Tax Indemnification	58
Section 9.7.	Exclusive Remedy	58
ARTICLE X
Termination
Section 10.1.	Termination	58
Section 10.2.	Procedure and Effect of Termination	59
ARTICLE XI
Miscellaneous
Section 11.1.	Counterparts	59
Section 11.2.	Governing Law; Jurisdiction and Forum; Waiver of Jury Trial	59
Section 11.3.	Enforcement	60
Section 11.4.	Entire Agreement	60
Section 11.5.	Expenses	61
Section 11.6.	Notices	61
Section 11.7.	Successors and Assigns	62
Section 11.8.	Headings; Definitions	62
Section 11.9.	Amendments and Waivers	62
Section 11.10.	No Strict Construction	63

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LIST OF EXHIBITS
Exhibit A	Form of Non-Competition and Non-Solicitation Agreement
Exhibit B	Form of Escrow Agreement

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STOCK PURCHASE AGREEMENT

THIS STOCK PURCHASE AGREEMENT (this “Agreement”), dated as of October 31, 2007, is by and among ALTRIA GROUP, INC., a Virginia corporation (“Buyer”), BRADFORD HOLDINGS, INC., a Delaware corporation (“Seller”), and JOHN MIDDLETON, INC., a Pennsylvania corporation (the “Company”). Unless otherwise specified, capitalized terms herein shall have the meaning ascribed to them in Article I.

WHEREAS, the Company and its subsidiary are engaged in the Business and the Company is a wholly-owned subsidiary of Seller;

WHEREAS, Buyer desires, either directly or through one or more of its subsidiaries designated by it, to purchase from Seller, and Seller desires to sell or cause to be sold to Buyer, 100% of the outstanding shares of capital stock of the Company upon the terms and subject to the conditions set forth herein (the “Stock Purchase”); and

WHEREAS, (a) the Board of Directors of Seller has determined that this Agreement is expedient, fair to and for the best interests of Seller and its stockholders and has approved this Agreement and the Stock Purchase, (b) the stockholders of Seller have approved this Agreement and the Stock Purchase and (c) the Board of Directors of Buyer has approved this Agreement and the Stock Purchase.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements contained in this Agreement, and intending to be legally bound hereby, the parties hereto agree as follows:

ARTICLE I

Certain Definitions

(a) As used in this Agreement the following terms shall have the following respective meanings:

“Action” shall mean any action, suit, arbitration or proceeding by or before any court, governmental or other regulatory or administrative agency or commission.

“Affiliate” shall mean, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such first Person. For purposes of this definition, the Business Entities will be treated as Affiliates of Seller until the Closing is completed and as Affiliates of Buyer after the Closing is completed. As used in this definition, “control” (including, with correlative meanings, “controlled by” and “under common control with”) shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies (whether through ownership of securities or partnership or other ownership interests, by contract or otherwise).

“Books and Records” shall mean the corporate minute and stock books of the Business Entities and all of the books and records primarily related to the operations of the Business

Entities or the Business, including, without limitation, books and records relating to employees of the Business Entities, the purchase of materials, supplies and services, research and development, manufacture and sale of products and services, advertising, packaging, promotional materials, dealings with customers of the Business Entities or the Business, governmental and regulatory applications, filings and correspondence, litigation, contractual arrangements and financial statements and associated records, but excluding books and records relating to employee benefit plans (other than Company Plans) administered by a Subsidiary of Seller and insurance purchased by a Subsidiary of Seller.

“Business” shall mean the business of manufacturing, developing, selling, distributing, advertising and marketing cigars and pipe tobacco and related accessories and the business generally reflected in the Business Financial Statements.

“Business Day” shall mean any day that is not a Saturday, Sunday or other day on which the commercial banks in New York City are authorized or required by Law to remain closed.

“Business Entities” shall mean the Company and its, and their, respective Subsidiaries.

“Business Intellectual Property Rights” means all Intellectual Property Rights (i) owned or licensed and used or held for use by any Business Entity or (ii) owned or licensed by Seller or any Continuing Affiliate and used pursuant to such license in whole or in part in the conduct of the Business, but excluding Intellectual Property Rights related to employee benefit plans and insurance.

“Buyer Financial Advisor” shall mean Centerview Partners LLC.

“Business Key Persons” shall mean the individuals listed on Schedule 1.1(a) to the Seller Disclosure Letter.

“Business Material Adverse Effect” means a material adverse effect on the business, assets, condition (financial or otherwise) or results of operations of the Business Entities taken as a whole, provided, in no event shall any of the following, alone or in combination, be deemed to constitute, nor shall any of the following be taken into account in determining whether there has been or shall be, a Business Material Adverse Effect: (i) any effect resulting from actions set forth in Section 5.12 or actions taken by any Business Entity which Buyer has requested or to which Buyer has consented; (ii) any effect (including any response or reaction of any competitor of the Business) to the extent resulting from the announcement or pendency of the transactions contemplated by this Agreement; (iii) any effect that results from events, circumstances or situations affecting the tobacco industry, or the cigar or pipe tobacco industry or the United States economy generally; (iv) any effect that results from events, circumstances or situations affecting general worldwide economic or capital market conditions; (v) any product Liability arising from the research, development, manufacture, sale, advertising, distribution, consuming, marketing or use of cigar or pipe tobacco products; (vi) any effect of any proposed or actual institution of any new, or interpretation of any existing, Laws affecting cigars, pipe tobacco or the tobacco industry generally; and (vii) any effect of any proposed or actual increase of any Taxes upon any Business Entity or upon any of the products or assets of the Business resulting from changes in Tax Laws.

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“Business Material Employment Arrangement” means (x) any Employment Agreement that provides to a current or former officer or employee of, or Individual Consultant to, any Business Entity any of the following: (i) an annual base salary or other annual compensation in excess of $150,000; (ii) a stated term of employment that expires on or after December 31, 2008 which is not currently or following the Stock Purchase terminable by a Business Entity upon 90 or fewer days notice and without the payment of severance or a similar obligation (other than pursuant to the Severance Plan referred to in Section 6.1(e)); (iii) any other payments in excess of $150,000, including contingent, severance or other termination benefits or payments (other than pursuant to the Severance Plan referred to in Section 6.1(e)); or (iv) the right to accelerate such Person’s material benefits as a result of the Stock Purchase, and (y) any written employment agreement or other written arrangement with respect to the compensation of any Business Key Person (other than pursuant to the Severance Plan referred to in Section 6.1(e) and the Bonus Plan as described in Schedule 5.4(viii) to the Seller Disclosure Letter).

“Code” shall mean the Internal Revenue Code of 1986, as amended, and any successor thereto.

“Company Class A Common Stock” shall mean the shares of voting Class A common stock, par value $0.10 per share, of the Company.

“Company Class B Common Stock” shall mean the shares of non-voting Class B common stock, par value $0.10 per share, of the Company.

“Company First Preferred Stock” shall mean the shares of non-voting First Preferred Stock, par value $100 per share, of the Company.

“Company Plan” shall mean any Employee Plan sponsored and maintained exclusively by, or for, any Business Entity and with respect to which only current and former employees, directors, or Individual Consultants of the Business Entity (and/or their beneficiaries and dependents) participate or benefit.

“Continuing Affiliate” shall mean any Affiliate of Seller, other than a Business Entity and other than the Persons listed on Schedule 1.1(b) to the Seller Disclosure Letter.

“Contract” means any agreement, contract, note, bond, mortgage, indenture, deed of trust, license, franchise, lease, instrument or guaranty, in whatever form, written or oral.

“Covered Losses” shall mean any and all losses, liabilities, fines, deficiencies, damages, costs and expenses (including, without limitation, interest and penalties due and payable with respect thereto and reasonable attorneys’ and accountants’ fees), including, without limitation any of the foregoing arising under or incurred in connection with any Action, order or consent decree of any Governmental Authority or award of any arbitrator of any kind, or any law, rule, regulation, contract, commitment or undertaking.

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“Employment Agreement” means a contract, offer letter or agreement of a Business Entity with or addressed to any individual who is rendering or has rendered services thereto as an employee or Individual Consultant to a Business Entity or pursuant to which a Business Entity has any actual or contingent liability or obligation to provide compensation and/or benefits in consideration for past, present or future services.

“Employee Plan” shall mean any Plan, including any Company Plan, providing benefits or covering any current or former employee, director or Individual Consultant of any Business Entity (or their dependents or beneficiaries) or with respect to which any Business Entity has any current liability or may have any liability prior to or immediately following the Stock Purchase.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.

“ERISA Affiliate” of any entity means any other entity that, together with such entity, would be treated as a single employer under Section 414(b) or (c) of the Code or Section 4001(a)(14) of ERISA (with respect to matters relating to Title IV of ERISA).

“Governmental Authority” shall mean any United States federal, state or local, or any foreign, government, governmental, regulatory or administrative authority, agency or commission or any court, tribunal, or judicial or arbitral body.

“HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

“Indebtedness” shall mean, (i) the principal and premium (if any) in respect of all indebtedness of any Business Entity for the repayment of borrowed money, whether or not represented by bonds, debentures, notes or similar instruments, all accrued and unpaid interest thereon and any cost associated with prepaying any such debt; (ii) the principal and premium (if any) in respect of all other indebtedness of any Business Entity evidenced by bonds, debentures, notes or similar instruments, including all accrued and unpaid interest thereon; (iii) all obligations of any Business Entity as lessee or lessees under leases that constitute capital leases under U.S. GAAP or that are accounted for as capital leases in the Business Financial Statements; (iv) all obligations to pay the deferred and unpaid purchase price of property and equipment which have been delivered (other than trade payables and other similar obligations incurred in the ordinary course of business); (v) negative balances in bank accounts; (vi) net cash payment obligations under swaps, options, derivatives and other hedging agreements or arrangements that will be payable upon termination thereof (assuming they were terminated on the date of determination); and (vii) all Indebtedness of another Person referred to in clauses (i) through (vi) above guaranteed directly or indirectly, jointly or severally, in any manner by any of the Business Entities.

“Individual Consultant” means an individual natural person providing services to a Person in a capacity other than as an employee.

“Intellectual Property Right” means any trademark, service mark, trade name, mask work, invention, patent, patent application, invention disclosure, trade secret, copyright, know-how or proprietary information contained on any website, processes, formulae, products,

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technologies, discoveries, apparatus, Internet domain names, trade dress and general intangibles of like nature (together with goodwill), customer lists, confidential information, licenses, software, databases and compilations including any and all collections of data and all documentation thereof (including any registrations or applications for registration of any of the foregoing) or any other similar type of proprietary intellectual property right.

“knowledge” of (i) Seller and/or the Company shall mean the actual knowledge of any of the persons identified on Schedule 1.2 to the Seller Disclosure Letter and (ii) Buyer shall mean the actual knowledge of any of the persons identified on Schedule 1.2 to the Buyer Disclosure Letter, in each case after reasonable inquiry consistent with such person’s position.

“Law” shall mean any United States federal, state or local, or any foreign, order, writ, injunction, judgment, award, decree, statute, law, rule or regulation.

“Liabilities” shall mean any and all debts, liabilities and obligations, whether accrued or fixed, known or unknown, absolute or contingent, matured or unmatured or determined or determinable.

“Lien” shall mean any easement, encroachment, security interest, pledge, mortgage, lien, charge, encumbrance, proxy, voting trust or voting agreement.

“PBGC” means the Pension Benefit Guaranty Corporation.

“Permitted Liens” shall mean all (x) Liens (i) which are reflected or reserved against in the Business Balance Sheet (up to the amounts so reflected or reserved against), (ii) which arise out of Taxes, general or special assessments or other governmental fees or charges not in default and payable without penalty or interest or the validity of which is being contested in good faith by appropriate proceedings, (iii) of carriers, warehousemen, mechanics, materialmen and other similar persons or otherwise imposed by Law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, (iv) which relate to deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security or (v) which do not materially impair the use of the asset subject thereof for the purposes for which currently used; (y) in the case of the Business Real Property, (i) easements, quasi-easements, licenses, covenants, rights-of-way, rights of re-entry or other similar restrictions that are shown by a current title report or other similar report or listing, (ii) any conditions that are shown by a current survey or physical inspection and (iii) zoning, building, subdivision or other similar requirements or restrictions, in the case of each of the agreements, conditions, restrictions or other matters referenced in this clause (y) which do not materially impair the use of the applicable property encumbered thereby for the purposes for which it is currently used; and (z) other immaterial Liens.

“Person” shall mean any individual, corporation, partnership, limited liability company, association, trust or other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

“Plan” shall mean, whether or not written, any “employee benefit plan” (as defined in Section 3(3) of ERISA, but regardless of whether subject to ERISA), each plan, arrangement

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or policy providing for bonuses, stock option, stock purchase or other stock related rights or other forms of incentive or deferred compensation, severance, vacation, workers’ compensation, health, life, disability, sick leave or medical benefits, insurance coverage (including any self-insured arrangements), or post-employment, retirement or pension benefits, change of control or fringe benefits, that is sponsored or maintained by the Seller or any Business Entity or any of their ERISA Affiliates or to which the Seller, any Business Entity or any of their ERISA Affiliates contributes or is obligated to contribute, including without limitation any employee welfare benefit plan within the meaning of Section 3(1) of ERISA, any employee pension benefit plan within the meaning of Section 3(2) of ERISA (whether or not such plan is subject to ERISA).

“Purchase Price” for the Shares shall mean Two Billion Nine Hundred Million Dollars ($2,900,000,000), subject to adjustment pursuant to Item 3 of Exhibit 5.4 referenced in Schedule 5.4(viii) to the Seller Disclosure Letter.

“Remedial Action” means (a) action to clean up soil, surface water, groundwater, pollution or sediments in response to a release or threatened release of Hazardous Materials, including associated action taken to investigate, monitor, assess and evaluate the extent and severity of any such release; post-remediation monitoring of any such release; and preparation of all reports, studies, analyses or other documents relating to the above and (b) any judicial, administrative or other proceeding relating to any of the above, including the negotiation and execution of judicial or administrative consent decrees; responding to governmental information requests; or defending claims brought by any Governmental Authority or any other Person, whether such claims are equitable or legal in nature, relating to the cleanup of soil, surface water, groundwater, pollution or sediments in response to a release of Hazardous Materials and associated actions.

“Securities Act” shall mean the Securities Act of 1933, as amended.

“Seller Financial Advisor” shall mean Sandler O’Neill & Partners, L.P.

“Shareholder” shall have the meaning ascribed to such term in the Non-Competition and Non-Solicitation Agreement.

“Subsidiary” shall mean, with respect to any Person, any other entity of which securities or other ownership interests having ordinary power to elect a majority of the board of directors or other persons performing similar functions of such entity are directly or indirectly owned by such Person.

“U.S. GAAP” shall mean United States generally accepted accounting principles.

“Withdrawal Liability” shall mean liability to or with respect to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as those terms are defined in Title IV of ERISA.

“Working Capital” as of a specified date, shall mean the excess of: the (i) current assets, adjusted as set forth in the following sentence, less (ii) current liabilities, adjusted as set forth in the following sentence, in each case, of the Company on a consolidated basis, all as determined (a) in accordance with U.S. GAAP and determined in a manner consistent with the

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methods, principles and classifications used in preparing the Business Balance Sheet included in the Business Financial Statements and (b) on a basis consistent with the detailed statement of Working Capital attached as Schedule 1.3 to the Seller Disclosure Letter. For purposes of calculating Working Capital, (A) current assets shall be adjusted to the extent necessary to exclude (1) the overpayment of federal excise taxes on cigars and (2) the Closing Date Cash required by Section 5.10(b)(ii), and (B) current liabilities shall be adjusted to the extent necessary to exclude any liabilities associated with (u) incurred but not yet reported claims under the Hunter Service Company self-insured medical plan, (v) the Hunter Service Company, Inc. Employees’ Pension Plan, (w) the John Middleton, Inc. Supplemental Pension Plan, (x) the Company’s Profit Sharing Bonus practice, (y) Alcohol Tobacco Tax and Trade Bureau levies and (z) tobacco quota buyout assessments.

(b) Each of the following terms is defined in the Section set forth opposite such term:

Term	Section
Acquisition Proposal	5.7(a)
Agreement	Preamble
Assets	7.11(b)
Bonus Plan	3.16(a)
Business Balance Sheet	3.3(a)
Business Financial Statements	3.3(a)
Business Material Contracts	3.13
Business Real Property	3.5(a)
Buyer	Preamble
Buyer Disclosure Letter	Article IV
Buyer Group	7.15(a)
Buyer Indemnified Parties	9.2(a)
Buyer Material Adverse Effect	4.1(a)
Buyer Tax Indemnitees	7.15(b)
Buyer Tax Indemnitors	7.15(c)
Buyer Taxes	7.2(b)
Closing	2.2
Closing Date	2.2
Closing Date Cash	5.10(b)
Closing Working Capital	5.10(b)
COBRA Coverage	6.1(d)
Company	Preamble
Confidentiality Agreement	5.1(b)
Controlled Group Liability	3.16(b)
Covenant	7.11(b)
D&O Indemnitees	5.11(a)
D&O Indemnitors	5.11(a)
D&O Released Parties	5.11(c)
Deferred Compensation Arrangements	3.16(e)
Draft Allocation	7.11(b)

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Term	Section
Employees	6.1(a)
Environmental Laws	3.15(a)
Escrow Agent	2.5
Escrow Agreement	2.5
Escrow Amount	2.5
Escrow Fund	2.5
Extraordinary Taxes	7.2(b)
Final Allocation	7.11(b)
Final Tax Determination	7.2(d)
Hazardous Materials	3.15(a)
Indemnified Party	9.4(b)
Indemnifying Party	9.4(a)
Insurance Claims	5.9(b)
IRS	3.16(a)
Joint Instruction	2.5
Licenses	3.9(a)
Limited Final Allocation	7.11(b)
MSA	Article III
Multiemployer Plan	3.16(c)
Neutral Accounting Firm	7.15(d)
Neutral Valuation Firm	7.15(e)
Non-Business Guaranty	5.6(b)
Notice of Claim	9.4(a)
Post-Closing Period	7.15(f)
Pre-Closing Period	7.15(g)
QSub	7.15(b)
Releasing Parties	5.11(c)
Representation Survival Date	9.1(a)
Returns	7.15(i)
S Corporation	7.15(k)
Seller	Preamble
Seller Disclosure Letter	Article III
Seller Guaranty	5.6(b)
Seller Indemnified Parties	9.3(a)
Seller Insurance Policies	5.9(b)
Seller Plan	6.1(g)
Seller Representatives	5.7(a)
Seller Tax Indemnitees	7.15(j)
Severance Plan	6.1(e)
Shares	3.2(a)
Stock Purchase	Recitals
Straddle Period	7.5(c)
Straddle Period Return	7.5(c)
Subchapter S Group	7.15(l)
Subchapter S Return	7.15(m)

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Term	Section
Subject Courts	11.2(b)
Tax	7.15(n)
Tax Claim	7.15(o)
Tax Indemnitee	7.15(p)
Tax Indemnitor	7.15(q)
Tax Proceeding	7.6(b)
Tax Returns	7.15(i)
Taxes	7.15(n)
Taxing Authority	7.15(r)
Termination Date	10.1(b)
Title IV Plan	3.16(b)
Treasury Regulations	7.15(s)

ARTICLE II

Purchase and Sale of Shares

Section 2.1. Purchase and Sale. On the basis of the representations, warranties, covenants and agreements and subject to the satisfaction or waiver (to the extent permitted) of the applicable conditions set forth herein, at the Closing, Seller shall sell, transfer, convey, assign and deliver to Buyer (or one or more of its permitted designees), and Buyer shall (or shall cause one or more of its permitted designees to) purchase, acquire and accept from Seller, free and clear of all Liens, the Shares which constitute, and will constitute as of the Closing, 100% of the issued and outstanding shares of capital stock or other equity interests in the Company. In payment for such Shares, simultaneously with the delivery by Seller of certificates for such Shares, with all appropriate stock powers and all requisite tax stamps attached, properly signed, in form suitable for the transfer of such Shares to Buyer (or one or more of its permitted designees), and the other deliveries required by Section 2.3, and subject to the satisfaction or waiver (to the extent permitted) of the applicable conditions set forth herein, Buyer will wire transfer or cause to be wire transferred (i) the Purchase Price less the Escrow Amount, in immediately available funds to an account of Seller, which account shall be specified by Seller no later than two Business Days prior to the Closing Date and (ii) the Escrow Amount, in immediately available funds to the account specified by the Escrow Agent.

Section 2.2. Time and Place of Closing. The closing of the purchase and sale of the Shares (the “Closing”) shall take place (a) at 10:00 a.m., New York City time, at the offices of Wachtell, Lipton, Rosen & Katz, 51 West 52nd Street, New York, New York 10019, as promptly as practicable (but no later than the third Business Day) following the date on which the last to be satisfied or waived of the conditions set forth in Article VIII (other than those conditions that by their nature cannot be satisfied until the Closing Date, but subject to the satisfaction or, where permitted, waiver of those conditions) shall be satisfied or waived in accordance with this Agreement or (b) at such other place, time and/or date as Seller and Buyer shall agree (the date of the Closing, the “Closing Date”).

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Section 2.3. Deliveries by Seller. At the Closing, Seller shall deliver the following to Buyer:

(a) certificates representing the Shares, in each case with appropriate stock powers or other instruments of transfer and requisite tax stamps attached and properly signed;

(b) control over all Books and Records in the possession of Seller or any Continuing Affiliate that are required to be delivered on or before the Closing pursuant to the plan contemplated by Section 5.1(c), except as otherwise provided by Law;

(c) the certificate required to be delivered by Seller pursuant to Section 8.2(d);

(d) a duly executed counterpart of the Escrow Agreement executed by Seller;

(e) a duly executed counterpart of the Non-Competition and Non-Solicitation Agreement, the form of which is attached as Exhibit A hereto, duly executed by the Seller and Shareholder;

(f) resignations, effective as of the Closing Date, of those directors of the Business Entities as Buyer may request;

(g) a certificate of Seller’s non-foreign status that complies with the requirements of Section 1445 of the Code and the Treasury Regulations promulgated thereunder; and

(h) such other documents, instruments and certificates as Buyer may reasonably request in connection with the transactions contemplated by this Agreement.

Section 2.4. Deliveries by Buyer. At the Closing, Buyer shall deliver the following to Seller:

(a) the Purchase Price less the Escrow Amount in immediately available funds;

(b) the certificate required to be delivered by Buyer pursuant to Section 8.3(c);

(c) a duly executed counterpart of the Escrow Agreement executed by Buyer;

(d) a duly executed counterpart of the Non-Competition and Non-Solicitation Agreement executed by Buyer; and

(e) such other documents, instruments and certificates as Seller may reasonably request in connection with the transactions contemplated by this Agreement.

Section 2.5. Escrow of Funds. At the Closing, Buyer shall in accordance with Section 2.1, deliver or cause to be delivered to a bank or financial institution in the United States

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mutually acceptable to Buyer and Seller, as escrow agent (the “Escrow Agent”), One Hundred Forty-Five Million Dollars ($145,000,000) in cash (the “Escrow Amount”), by wire transfer of immediately available funds to be held by the Escrow Agent pursuant to an escrow agreement (the “Escrow Agreement”) in the form attached as Exhibit B hereto, with such changes as may be requested by the Escrow Agent to which Buyer and Seller may agree. The funds delivered to the Escrow Agent, together with any interest or other proceeds with respect thereto, shall be the “Escrow Fund.” The Escrow Agent shall invest the Escrow Fund as set forth in the Escrow Agreement. The Escrow Fund shall be released from time to time upon the giving of a joint instruction(s) (the “Joint Instruction”) by Buyer and Seller and any remaining Escrow Funds shall be released on the first anniversary of the Closing Date, except as provided pursuant to the terms of the Escrow Agreement or as set forth on Schedule 2.5 to the Buyer Disclosure Letter. All costs and expenses relating to the Escrow Agreement, including the fees and expenses of the Escrow Agent, shall be borne equally by Buyer and Seller.

ARTICLE III

Representations and Warranties of Seller and the Company

Except as set forth in the corresponding schedule to the disclosure letter delivered to Buyer by Seller on or prior to the date hereof (the “Seller Disclosure Letter”) (it being agreed that disclosure of any item in any schedule to the Seller Disclosure Letter shall also be deemed disclosure with respect to any other Section of this Article III to which the relevance of such item is reasonably apparent; provided that no such disclosure shall be deemed to qualify or limit the representations and warranties of Seller and the Company set forth in Section 3.6(b) of this Agreement unless expressly set forth on Schedule 3.6(b) to the Seller Disclosure Letter), each of Seller and the Company hereby represents and warrants to Buyer as set forth in this Article III. Notwithstanding anything to the contrary in this Agreement, and for the avoidance of doubt, neither Seller nor the Company is making any representations or warranties in this Agreement with respect to (a) the existence of any product Liability arising from the research, development, manufacture, sale, advertising, distribution, consuming, marketing or use of cigars or pipe tobacco products or (b) that certain Master Settlement Agreement, dated as of November 23, 1998, among the 46 states and five United States territories listed on the signature pages thereto, the District of Columbia, Philip Morris Incorporated, R.J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corporation and Lorillard Tobacco Company, as amended, supplemented or replaced (the “MSA”).

Section 3.1. Incorporation; Authorization; etc. (a) The name of each of the Business Entities is listed on Schedule 3.1(a) to the Seller Disclosure Letter. Each Business Entity is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization. Each of the Business Entities (i) has the requisite corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted and (ii) is in good standing and is duly qualified to transact business in each other jurisdiction in which the nature of property owned or leased by it or the conduct of its business requires it to be so qualified, except where the failure to be in good standing or to be duly qualified to transact business would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect. Seller is a corporation duly organized and validly existing under the laws of the State of Delaware.

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(b) Each of Seller and the Company has the requisite corporate power to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by Seller and the Company of this Agreement, the performance by Seller and the Company of their respective obligations hereunder and the consummation by Seller and the Company of the transactions contemplated hereby have been duly and validly authorized by the respective Boards of Directors of Seller and the Company, by the stockholders of Seller and by Seller in its capacity as sole stockholder of the Company, and no other corporate proceedings on the part of Seller or the Company, their respective Boards of Directors or stockholders are necessary therefor. This Agreement has been duly executed and delivered by Seller and the Company.

(c) Except as set forth on Schedule 3.1(c) to the Seller Disclosure Letter and, with respect to clauses (ii) and (iii), subject to obtaining the consents set forth thereon, the execution, delivery and performance by Seller and the Company of this Agreement will not (i) violate any provision of Seller’s or any Business Entity’s respective certificate of incorporation or by-laws (or equivalent organizational documents), (ii) violate in any material respect any provision of, or be an event that is (or with the passage of time will result in) a violation in any material respect by Seller or the Company of, or result in the acceleration of or entitle any party to accelerate or exercise (whether after the giving of notice or lapse of time or both) any material right or obligation of the Seller or any Business Entity, under, or result in the imposition of any Lien upon or the creation of a security interest in any of the Shares or any Business Entity’s assets or properties pursuant to, any material agreement, instrument, order, arbitration award, judgment or decree to which Seller or any Business Entity is a party or by which any of them is bound, or (iii) violate or conflict in any material respect with any Law to which Seller or any Business Entity is subject. Assuming the due execution of this Agreement by Buyer, this Agreement constitutes the legal, valid and binding obligations of Seller and the Company, enforceable against Seller and the Company in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and to general principles of equity. At the Closing, the Escrow Agreement will be duly executed and delivered by Seller, and, assuming the due execution and delivery thereof by the other parties thereto, at the Closing the Escrow Agreement will constitute the legal, valid and binding obligations of Seller, enforceable against Seller in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and to general principles of equity. Seller has provided to Buyer true and correct copies of the certificate of incorporation and by laws or similar organizational documents, each as amended to date, of each of the Business Entities.

(d) Since at least January 1, 1990, the Business Entities have not operated any business other than the Business.

Section 3.2. Capitalization; Structure. (a) The authorized capital stock of the Company consists of (i) 1,161 shares of Company Class A Common Stock, (ii) 1,161,000 shares of Company Class B Common Stock and (iii) 2,500 shares of Company First Preferred Stock. As of the date hereof, (x) 1000 shares of Company Class A Common Stock are outstanding (the

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“Shares”), which Shares are validly issued, fully paid and nonassessable, have been issued free of preemptive rights and are owned by Seller free and clear of all Liens, and (y) no shares of any other class of capital stock of the Company are outstanding. The Company has no Subsidiaries other than the other Business Entities. Schedule 3.2(a) to the Seller Disclosure Letter sets forth the name of each Subsidiary of the Company, its jurisdiction of incorporation or organization, the number of outstanding shares of its capital stock or other equity interests of each class and the name of and number of shares owned by each holder of any such shares of capital stock or other equity interests. All of the outstanding shares of capital stock or other equity interests of each Subsidiary of the Company have been validly issued, are fully paid and nonassessable and have been issued free of preemptive rights. Upon consummation of the Stock Purchase at the Closing as contemplated by this Agreement, Seller will deliver to Buyer good and valid title to all of the Shares, free and clear of all Liens.

(b) There are no outstanding options, warrants or other rights of any kind to acquire, or obligations to issue, shares of capital stock of any class of, or other equity interests in, any Business Entity. None of the Business Entities owns any material equity interest, directly or indirectly, in any Person other than the other Business Entities. There are no outstanding obligations of any Business Entity (i) to repurchase, redeem or otherwise acquire any shares of capital stock or other equity interests in any Business Entity or (ii) to grant preemptive or antidilutive rights with respect to any such shares or interests.

Section 3.3. Financial Statements; Books and Records. (a) Attached as Schedule 3.3(a) to the Seller Disclosure Letter are true and complete copies of the audited consolidated statements of income, balance sheets and statements of cash flows of the Company as of and for the fiscal years ended December 31, 2006, 2005 and 2004, and the unaudited consolidated statements of income and balance sheets of the Company as of and for the nine months ended September 30, 2007 and 2006 (collectively, the “Business Financial Statements”). The Business Financial Statements present fairly in all material respects the consolidated financial position and results of operations and cash flows of the Company for the respective periods or as of the respective dates set forth therein, in each case in accordance with U.S. GAAP applied on a consistent basis throughout the periods involved (except as otherwise indicated therein and except for, in the case of the unaudited Business Financial Statements, the absence of notes and schedules and changes resulting from normal year-end adjustments). The Business Financial Statements have been prepared from and in all material respects in accordance with the books and records of the Business Entities. The balance sheet as of December 31, 2006 included in the Business Financial Statements is referred to in this Agreement as the “Business Balance Sheet.”

(b) The books and records of the Business Entities for the fiscal years ended December 31, 2006, 2005 and 2004 and for the period from December 31, 2006 through the date hereof have been maintained in all material respects in compliance with legal and accounting requirements applicable to such Business Entity.

Section 3.4. No Undisclosed Liabilities. Except as set forth on Schedule 3.4 to the Seller Disclosure Letter, none of the Business Entities has any Liabilities which are, individually or in the aggregate, material (and adverse), except for (a) Liabilities which are disclosed or reserved against in the Business Balance Sheet, (b) performance obligations under contracts (other than with respect to a breach or default) and (c) Liabilities incurred in the ordinary course of business since the date of the Business Balance Sheet.

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Section 3.5. Properties; Sufficiency. (a) With the exception of properties disposed of since December 31, 2006 in the ordinary course of business consistent with past practice, each Business Entity has good title to, or holds by valid and existing lease or license, free and clear of all Liens other than Permitted Liens, each piece of material real and personal property capitalized on or included in the Business Balance Sheet and each piece of material real and personal property acquired by any Business Entity since the date of the Business Balance Sheet that would, had it been acquired prior to such date, be capitalized on or included in the Business Balance Sheet. Schedule 3.5(a) to the Seller Disclosure Letter sets forth a list of all the real property owned or leased by any of the Business Entities (the “Business Real Property”) material to the Business. Prior to the date hereof, Seller has made available to Buyer correct and complete copies of all material leases and subleases (including all material amendments, modifications and side letters thereto, and all notices of default and other material notices thereunder) relating to the Business Real Property material to the Business to which any of the Business Entities is a party, and all such material leases and subleases are identified on Schedule 3.5(a) to the Seller Disclosure Letter, it being understood that for purposes of this sentence, “material” shall mean any lease or sublease with total future payments in excess of $1,000,000. There are no pending or, to Seller’s or the Company’s knowledge, threatened condemnation proceedings relating to any of the Business Real Property material to the Business. Except as disclosed on Schedule 3.5(a) to the Seller Disclosure Letter, none of the Business Real Property material to the Business or any properties owned or leased by Seller or any Continuing Affiliate is shared by any Business Entity, on the one hand, and Seller or a Continuing Affiliate, on the other hand.

(b) Immediately following the Closing, the Business Entities will own, lease or have a valid license to use all of the assets, properties and rights necessary to operate the Business as heretofore conducted and such assets, properties and rights are sufficient in all material respects to operate the Business in the manner heretofore operated, including all assets and properties reflected on the Business Balance Sheet and assets and properties acquired since the date of the Business Balance Sheet in the conduct of the Business (except for properties disposed of in the ordinary course of business since the date of the Business Balance Sheet). Except as set forth on Schedule 3.5(b) to the Seller Disclosure Letter, following the Closing neither Seller nor any Continuing Affiliate will have any ownership interest in or right to use any asset described in the preceding sentence.

Section 3.6. Absence of Certain Changes. Since December 31, 2006 through the date hereof, (a) except as set forth on Schedule 3.6(a) to the Seller Disclosure Letter, the Business Entities have conducted the Business in the ordinary course of business, (b) except as set forth on Schedule 3.6(b) to the Seller Disclosure Letter there has been no change or development in or effect on the Business that has had, or would reasonably be expected to have, a Business Material Adverse Effect and (c) except as set forth on Schedule 3.6(c) to the Seller Disclosure Letter, there has been no action taken by Seller or any Business Entity prior to the date hereof which, if taken from the date hereof through the Closing Date, would require the consent of Buyer under any of the provisions of subsection (i), (ii), (iii), (iv), (v), (vi), (ix) or (xiv) of Section 5.4; provided, that, solely for this purpose, each reference in clauses (v) and (vi) of Section 5.4 to $1 million and $2 million, respectively, shall be deemed to be a reference to $5 million and the proviso in Section 5.4(v)(B) shall be disregarded.

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Section 3.7. Litigation; Orders. Except as set forth on Schedule 3.7 to the Seller Disclosure Letter, there are no lawsuits, actions, administrative or arbitration or other proceedings or (to the knowledge of the Seller or the Company) governmental investigations pending or, to Seller’s or the Company’s knowledge, threatened against any Business Entity that, if determined adversely to the Business Entities, would, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect or prevent or materially delay the consummation of the Stock Purchase. Except as set forth on Schedule 3.7 to the Seller Disclosure Letter, there are no material judgments or material outstanding orders, injunctions, decrees, stipulations or awards (whether rendered by a court or administrative agency, or by arbitration) against any Business Entity or any of their respective properties or businesses.

Section 3.8. Intellectual Property. The Business Entities own, or are validly licensed or otherwise have the right to use, all material Business Intellectual Property Rights necessary for the conduct of the Business. No Business Intellectual Property Right is subject to any outstanding judgment, injunction, order or decree restricting the use thereof by the Business Entities or restricting the licensing thereof by the Business Entities to any Person, or any agreement so restricting in any material respect the use or licensing thereof. To the knowledge of Seller and the Company, no Business Entity is infringing in any material respect on any other Person’s Intellectual Property Rights. To the knowledge of Seller and the Company, no Person is in infringing in any material respect on any Business Intellectual Property Rights. No Business Entity is a defendant in any action, suit, or proceeding relating to, or otherwise was notified of, any alleged material claim of infringement of any Business Intellectual Property Right, and the Business Entities have no outstanding material actions or suits for any continuing infringement by any other Person of any Business Intellectual Property Rights. Schedule 3.8 to the Seller Disclosure Letter sets forth a list of all United States and foreign patents and patent applications, invention disclosure, trademark registrations and applications therefor, registered copyrights and applications therefor included in the Business Intellectual Property Rights and trade names of any of the Business Entities that are material to the Business.

Section 3.9. Licenses, Approvals, Other Authorizations, Consents, Reports, etc. (a) Except as set forth on Schedule 3.9(a) to the Seller Disclosure Letter, the Business Entities possess or have been granted all licenses, permits, franchises, registrations and other authorizations of any Governmental Authority (“Licenses”) necessary to entitle them presently to conduct the Business in the manner in which it is presently being conducted, except those whose failure to possess or have been granted would not reasonably be expected to have a Business Material Adverse Effect. All Licenses possessed by or granted to any of the Business Entities and material to the Business are in all material respects in full force and effect. No proceeding is pending or, to Seller’s or the Company’s knowledge, threatened seeking the revocation or limitation of any such material License.

(b) Schedule 3.9(b) to the Seller Disclosure Letter contains a list of all registrations, filings, applications, notices, consents, approvals, orders, qualifications and waivers required to be made, filed, given or obtained by Seller, its Subsidiaries or any Business Entity with, to or from any Persons in connection with the consummation of the Stock Purchase and the other

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transactions required by this Agreement, except for those the failure of which to make, file, give or obtain would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect or prevent or materially delay the consummation of the Stock Purchase.

Section 3.10. Labor Matters. None of the Business Entities is party to any agreement with any labor unions or associations representing employees of any of the Business Entities. No labor organization or group of employees of the Business Entities has a pending demand for recognition or certification, and there are no representation or certification proceedings or petitions seeking a representation proceeding presently pending or, to the knowledge of the Seller or the Company, threatened to be brought or filed, with the National Labor Relations Board or any other labor relations tribunal or authority. None of the Business Entities is involved in or, to Seller’s or the Company’s knowledge, threatened with any work stoppage, labor dispute, arbitration, lawsuit or administrative proceeding relating to labor matters involving the employees of any Business Entity (excluding routine workers’ compensation and unemployment compensation claims) that would, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect. Each of the Business Entities is in compliance with all applicable Laws respecting employment and employment practices, terms and conditions of employment, wages and hours and occupational safety and health, except for any failure to be in compliance that would not individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect.

Section 3.11. Compliance with Laws. The conduct by the Business Entities of the Business complies in all material respects with all Laws applicable to the Business Entities, it being understood that nothing set forth in this Section 3.11 is intended to address compliance with any law that is the subject of any other representation or warranty set forth in Section 3.9, 3.10, 3.15 or 3.16 or in Article VII.

Section 3.12. Insurance. Schedule 3.12 to the Seller Disclosure Letter lists all material insurance policies relating to fire and casualty, liability and other forms of property and casualty insurance in effect as of the date hereof and all such historic occurrence based policies written in the last five years which cover any Business Entity or the Business Real Property to be transferred pursuant to Section 5.12, together with a statement of policy number and coverage limits. All such insurance policies are in full force and effect (other than such historic occurrence based policies written in the last five years), are valid and enforceable, and all premiums due thereunder have been paid. In the last two (2) years, neither Seller nor any of its Subsidiaries (with respect to the Business) nor any Business Entity has received written notice of cancellation or termination, other than in connection with normal renewals, of any such insurance policy, and no claim is pending as of the date of this Agreement under any such insurance policy involving an amount in excess of $500,000.

Section 3.13. Material Contracts. As of the date hereof, except as set forth on Schedule 3.13 to the Seller Disclosure Letter, none of the Business Entities is a party to or bound by any (a) employment or consulting agreement with an individual requiring payments of base compensation in excess of $150,000 per year; (b) written agreement with a distributor with purchases from the Company of at least $1,000,000 in the last calendar year which is not terminable on one year’s (or less) notice; (c) joint venture or similar contract or agreement; (d) contract

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which is terminable by the other party or parties thereto upon a change of control of any of the Business Entities; (e) contract or agreement that materially limits the ability of any of the Business Entities or any Affiliates of a Business Entity to compete in any line of business or in any geographic area; (f) contract or agreement between or among one or more Business Entities on the one hand and Seller or any Continuing Affiliate or any officer or director of any of the Business Entities on the other hand; (g) note, mortgage, indenture and other obligation and agreement and other instrument for or relating to any lending or borrowing (including assumed or guaranteed debt) of $1,000,000 or more effected by any Business Entity or to which any properties or assets of any of the Business Entities are subject; or (h) other contract or agreement, entered into other than in the ordinary course of business, requiring total future payments in excess of $1,000,000 or which is otherwise material to the Business. The contracts required to be so listed on Schedule 3.13 to the Seller Disclosure Letter are referred to herein as “Business Material Contracts.” With respect to all Business Material Contracts, (i) none of the Business Entities, Seller or any Continuing Affiliate, nor, except as set forth on Schedule 3.13 to the Seller Disclosure Letter, to Seller’s or the Company’s knowledge, any other party to any such Business Material Contract is in breach thereof or default thereunder, and (ii) there does not exist any event that, with the giving of notice or the lapse of time or both, would constitute such a breach or default by any Business Entity, Seller or any Continuing Affiliate, except for such breaches, defaults and events which in the case of clauses (i) and (ii) would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect. Prior to the date hereof, Seller and the Company have made available to Buyer true and correct copies of all Business Material Contracts.

Section 3.14. Brokers, Finders, etc. Except for the services of the Seller Financial Advisor, no broker, finder or investment banker is entitled to any brokerage, finder’s or other similar fee, commission or expenses in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Seller, any Continuing Affiliate or any Business Entity. Seller is solely responsible for such fees and expenses of the Seller Financial Advisor.

Section 3.15. Environmental Compliance. (a) Except as set forth on Schedule 3.15 to the Seller Disclosure Letter, each Business Entity has obtained all permits, licenses and other authorizations which are required with respect to the operation of the Business Entities as presently conducted under federal, state and local laws and regulations relating to pollution or protection of human health or the environment, including laws relating to emissions, discharges, releases or threatened releases or discharges of hazardous, toxic or other pollutants, contaminants, chemicals or industrial materials, including petroleum and petroleum-based products (hereinafter referred to as “Hazardous Materials”) into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials; provided, however, that any applicable product Liability laws governing the research, development, manufacture, sale, advertising, distribution, consuming, marketing or use of cigars or pipe tobacco products shall not be deemed to be an Environmental Law (the “Environmental Laws”), except where the failure to have obtained such permits, licenses and other authorizations would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect.

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(b) Except as set forth on Schedule 3.15 to the Seller Disclosure Letter, each of the Business Entities is presently conducting its business in compliance with all terms and conditions of the permits, licenses and authorizations required by the Environmental Laws, and is in compliance with all other applicable limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules and timetables contained in the Environmental Laws or contained in any regulation, code, plan, order, decree, judgment, injunction, notice or demand letter issued, entered, promulgated or approved thereunder applicable to the Business Entities, except for such noncompliance which would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect. There is no civil, criminal or administrative action, suit, written demand, notice of violation, investigation known to Seller or the Company, proceeding, written notice or demand letter pending relating to the Business Real Property or business of any Business Entity or, to the knowledge of Seller and the Company, threatened against the business or Business Real Property of any Business Entity under Environmental Laws or any code, plan, order, or decree, judgment, injunction, written notice or demand letter issued, entered, promulgated or approved thereunder applicable to the Business Entities, in each case that would, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect.

(c) To the knowledge of Seller and the Company and except as set forth on Schedule 3.15 to the Seller Disclosure Letter, with regard to any of the Business Real Property, there are no past or present events, conditions, circumstances, or future events, conditions or circumstances as to which Seller or any of its Subsidiaries has written notice, which would interfere with or prevent, or would be reasonably likely to interfere with or prevent, any Business Entity, based on the operation of the Business as presently conducted, from complying in all material respects with Environmental Laws, or which otherwise would be reasonably likely to form the basis of any material claim, action, demand, proceeding or notice of violation, based on or related to the emission, discharge, release or threatened release into the environment of any Hazardous Material. Without in any way limiting the foregoing, except as would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect and except as set forth on Schedule 3.15 to the Seller Disclosure Letter, none of the Business Entities nor, to the knowledge of the Seller or the Company, any other Person has buried, released, emitted, discharged, dumped or disposed of any Hazardous Materials into the environment in quantities that would give rise to material liability on the part of any Business Entity or require cleanup by any Business Entity under Environmental Laws based on the operation of the Business as presently conducted.

(d) Except as set forth on Schedule 3.15 to the Seller Disclosure Letter and except as would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect, to the knowledge of Seller and the Company, no cleanup has occurred at any Business Real Property, which would result or reasonably be expected to result in the creation of a Lien on such property by any Governmental Authority with respect thereto, nor has any such assertion of a Lien been made by any Governmental Authority with respect thereto.

(e) Except as set forth on Schedule 3.15 to the Seller Disclosure Letter, and except as would not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect, (i) neither Seller nor any of its Subsidiaries (with respect to

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the Business) nor any of the Business Entities has received any written notice from any Governmental Authority or private or public entity or individual requesting information in connection with a possible violation of Environmental Laws or advising it that it is in non-compliance with applicable Environmental Laws, or responsible for, or potentially responsible for, costs with respect to a release, a threatened release or clean-up of Hazardous Materials generated, stored, treated, disposed of or transported by any Business Entity, and (ii) no Business Entity has entered into any agreement for the clean-up of any Hazardous Materials.

(f) Except as set forth on Schedule 3.15 to the Seller Disclosure Letter, to the knowledge of Seller and the Company, none of the Business Real Property material to the Business includes any equipment, machinery, device, or other apparatus that contains polychlorinated biphenyls that is now or ever has been leaking in any material respect that requires removal or remediation based on continued operation of the Business Entities as presently conducted; any asbestos or asbestos-containing material that requires removal, remediation or abatement based on continued operation of the Business Entities as presently conducted; any “waters of the United States” determined by Seller, any of its Subsidiaries or any Governmental Authority to be subject to any legal requirement or restriction under Environmental Laws related to wetlands, wetlands buffer, stream buffer or transition areas or open waters; or any underground storage tank, unregistered above ground storage tank, surface impoundment, septic tank, pit, swamp or lagoon in which Hazardous Materials are being or have been treated, stored, or disposed of in violation of applicable Environmental Laws, in each case that would give rise to any material liability on the part of any Business Entity.

Section 3.16. Employee Benefit Plans. (a) Schedule 3.16(a) to the Seller Disclosure Letter contains a list (under appropriate headings) of each material Employee Plan and Business Material Employment Arrangement and designates each of which is an Employee Plan, Company Plan, Seller Plan (as defined in Section 6.1(g)) and Business Material Employment Arrangement. With respect to each material Employee Plan and Business Material Employment Arrangement, Seller has delivered or made available to Buyer a true, correct and complete copy of: (i) each such Employee Plan or Business Material Employment Arrangement document (or a summary of any unwritten Employee Plan or Business Material Employment Arrangement), trust agreement and insurance contract or other funding vehicle; (ii) the most recent Annual Report (Form 5500 Series) and accompanying schedule, if any; (iii) the current summary plan description and any material modifications thereto, if any (in each case, whether or not required to be furnished under ERISA); (iv) the most recent annual financial report, if any; (v) the most recent actuarial report, if any; and (vi) the most recent determination letter from the Internal Revenue Service (“IRS”), if any. Neither the Company nor any ERISA Affiliate of the Company has any commitment or obligation to establish or adopt any, or enter into any, new or additional Employee Plans or Business Material Employment Agreement or to increase the benefits under any existing Employee Plan, other than the Severance Plan (as defined in Section 6.1(e)) and the bonus and retention arrangement (as described on Schedule 5.4(viii) to the Seller Disclosure Letter) (“Bonus Plan”).

(b) Except as set forth on Schedule 3.16(b) to the Seller Disclosure Letter, none of the Business Entities, any predecessor of any of the Business Entities sponsors or any of their ERISA Affiliates, maintains or contributes to, or has in the past six years sponsored, maintained or contributed to, any Plan subject to Title IV of ERISA or Section 412 of the Code (a

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“Title IV Plan”). No Company Plan is a Title IV Plan. With respect to any Title IV Plan, (i) there does not exist any accumulated funding deficiency within the meaning of Section 412 of the Code or Section 302 of ERISA, whether or not waived; (ii) the fair market value of the assets of such Title IV Plan equals or exceeds the actuarial present value of all accrued benefits under such Title IV Plan (whether or not vested) on an accumulated benefits obligation basis (consistent with FAS No. 35 as amended) based on the most recent actuarial report for each such plan; and (iii) no reportable event within the meaning of Section 4043(c) of ERISA for which the 30-day notice requirement has not been waived has occurred, and the consummation of the Stock Purchase will not result in the occurrence of any such reportable event. Except as set forth on Schedule 3.16(b), no Controlled Group Liability has been incurred by any Business Entity nor do any circumstances exist that could reasonably be expected to result in Controlled Group Liability for any of the Business Entities following the Closing by reason of such Business Entities having been an ERISA Affiliate of Seller (or of any other ERISA Affiliate of Seller) prior to the Closing. For purposes of this Agreement, “Controlled Group Liability” means any and all liabilities (i) under Section 302(f) or Title IV of ERISA, (ii) under Sections 412(n) or 4971 of the Code and (iv) for a material violation of the continuation coverage requirements of Section 601 et seq. of ERISA and Section 4980B of the Code or the group health requirements of Sections 9801 et seq. of the Code and Sections 701 et seq. of ERISA.

(c) None of the Company, any predecessor of any of the Business Entities nor any of their ERISA Affiliates contributes to or is obligated to contribute to, or has in the past six years contributed to, or has been obligated to contribute to, any multiemployer plan, as defined in Section 3(37) of ERISA (each, a “Multiemployer Plan”) and no Employee Plan is a Multiemployer Plan. None of the Business Entities or any of their ERISA Affiliates has incurred any liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as those terms are defined in Part I of Subtitle E of Title IV of ERISA, that has not been satisfied in full. With respect to each such Multiemployer Plan, none of the Business Entities has received any written notification, nor, to the knowledge of Seller and the Company, has any reason to believe, that any such Multiemployer Plan is in reorganization, has been terminated, is insolvent, or may reasonably be expected to be in reorganization, to be insolvent, or to be terminated.

(d) Except as set forth on Schedule 3.16(d) to the Seller Disclosure Letter, each Employee Plan which is intended to be qualified under Section 401(a) of the Code has received the most recently available favorable determination letter (under the “GUST” or “EGTRAA” round of filings), or has pending an application for such determination from the IRS, and Seller and the Company have no knowledge as to why any such determination letter should be revoked or not be reissued. The Seller shall take, or shall cause its Subsidiaries to take, all reasonably actions to preserve the qualification of each Employee Plan, which has heretofore been intended to be qualified under Section 401(a) of the Code, with Section 401(a) of the Code. No Employee Plan or related funding vehicle from which the Employee Plan benefits are paid is intended to meet the requirements of Section 501(c)(9) of the Code. Each Employee Plan and each Employment Agreement has been maintained in compliance in all material respects with its terms and with the requirements prescribed by all statutes, orders, rules and regulations, including ERISA and the Code, which are applicable to such Employee Plan or Employment Agreement. All contributions required to be made to any Employee Plan by applicable Law or by any plan document or other contractual undertaking, and all premiums due or payable with

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respect to insurance policies funding any Employee Plan, have been timely made or accrued in accordance with U.S. GAAP and applicable U.S. Department of Labor Regulations or if there has been any failure to make such contribution, such failure or failures shall not, individually or in the aggregate, have or reasonably be expected to have a Business Material Adverse Effect. No events have occurred with respect to any Employee Plan that would reasonably be expected to result in payment or assessment by or against any Business Entity of any material excise taxes under Sections 4972, 4975, 4976, 4977, 4979, 4980B, 4980D, 4980E, 4980F or 5000 of the Code. There are no pending or, to the knowledge of Seller and the Company, threatened claims (other than claims for benefits in the ordinary course), lawsuits, investigations, audits or arbitrations which have been asserted or instituted against any one or more of the Employee Plans, any, to the knowledge of Seller and the Company, fiduciaries thereof with respect to their duties to the Employee Plans or the assets of any of the trusts under any of the Employee Plans, which would reasonably be expected to result in any material liability of any Business Entity to the PBGC, the U.S. Department of the Treasury, the U.S. Department of Labor, any Employee Plan, any participant in an Employee Plan or any other party.

(e) Schedule 3.16(e) to the Seller Disclosure Letter sets forth a complete list of all material funded and material unfunded non-qualified deferred compensation arrangements payable now or in the future to each current and former employee or director of any Business Entity, or any other Person with respect to which any Business Entity has any current liability or may have Liability prior to or immediately following the consummation of the Stock Purchase (collectively, the “Deferred Compensation Arrangements”), which schedule shall include the name and title or position of each such Person, the amount payable to such Person, the payment terms applicable thereto, and whether funded or unfunded and, if funded, a brief description of such funding. The Liability associated with each Deferred Compensation Arrangement has been properly accrued and accounted for on the Business Financial Statements. Each Employee Plan is either exempt from or has been operated and maintained in good faith compliance with Section 409A of the Code. Each Deferred Compensation Arrangement that is subject to Section 409A of the Code has been amended to comply with Section 409A of the Code to the extent required by applicable guidance from the U.S. Department of Treasury and Internal Revenue Service to avoid taxes under Section 409A of the Code presently and in the future (based on the law in effect and guidance provided on or before the date hereof), after taking into account any extension to make any required amendments to comply with Code Section 409A and applicable regulations. No Business Entity has any Liability for, or obligation to, indemnify any Person with respect to any Liability that has been or may be imposed on such Person under Sections 409A or 280G of the Code.

(f) Except as set forth on Schedule 3.16(f) to the Seller Disclosure Letter or in the Severance Plan or Bonus Plan, no Business Entity has any current or projected material Liability in respect of post employment or post retirement health, medical, life insurance or other welfare benefits for retired, former or current employees and/or directors of any Business Entity except as otherwise required by Law.

(g) There are no Employee Plans that are subject to the Laws of any jurisdiction outside of the United States.

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(h) Seller has made available to Buyer a true and complete list, as of October 31, 2007, of each Business Key Person, his or her current rate of annual base salary or current wages, 2007 bonus target, job title, employment status, work location and credited service date, fiscal year 2006 bonus, fiscal year 2005 bonus and date of hire. No Business Key Person has given notice to terminate employment. Upon request, Seller shall make available to the Buyer information concerning other employees of the Business Entities other than Business Key Persons that is comparable to the information described above with respect to Business Key Persons.

(i) Schedule 3.16(i) to the Seller Disclosure Letter sets forth a true, correct and complete list of each Employee Plan under which the execution and delivery of this Agreement, the Stock Purchase or actions or transactions required by the Agreement will result in, cause the accelerated vesting, funding or delivery of, or materially increase the amount or value of, any payment or benefit (including the forgiveness of indebtedness) to any employee, officer, Individual Consultant or director of any Business Entity, or could limit the right of any Business Entity to amend, merge, terminate or receive a reversion of assets from any Employee Plan or related trust or any Business Material Employment Arrangement or related trust.

Section 3.17. Non-Reliance. Seller acknowledges that the representations and warranties set forth in Article IV, and the representations and warranties of Buyer set forth in Article 13 of the Escrow Agreement and the Non-Competition and Non-Solicitation Agreement constitute the sole and exclusive representations and warranties of Buyer to Seller in connection with the transactions contemplated hereby, and Seller acknowledges and agrees that Buyer is not making any representation or warranty whatsoever, express or implied, beyond those expressly given in this Agreement, the Escrow Agreement or the Non-Competition and Non-Solicitation Agreement. Seller further acknowledges and agrees that (a) except and solely to the extent of the representations and warranties in Article IV, Buyer has made no representation or warranty either express or implied as to the accuracy or completeness of any information regarding Buyer and its Affiliates furnished or made available to Seller, the Company and/or their respective representatives, and (b) except with respect to the representations and warranties in Article IV, Seller shall have no claim or right to indemnification pursuant to Articles VII or IX with respect to any information, documents or materials furnished by Buyer, any of its Affiliates or any of its representatives to Seller or the Company in any materials or information furnished in connection with the transactions contemplated hereby. Notwithstanding the foregoing provisions of this Section 3.17, nothing herein is intended to or shall limit or otherwise restrict any claim by or right of Seller with respect to or arising from any intentional misrepresentation or fraud.

ARTICLE IV

Representations and Warranties of Buyer

Except as set forth in the corresponding schedule to the disclosure letter delivered to Seller by Buyer on or prior to the date hereof (the “Buyer Disclosure Letter”) (it being agreed that disclosure of any item in any schedule to the Buyer Disclosure Letter shall also be deemed disclosure with respect to any other Section of this Article IV to which the relevance of such item is reasonably apparent), Buyer hereby represents and warrants to Seller as set forth in this Article IV:

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Section 4.1. Incorporation; Authorization; etc. (a) Buyer is a corporation duly organized and validly existing under the laws of the Commonwealth of Virginia. Buyer (i) has the requisite corporate power and authority to own its properties and assets and to carry on its business as it is now being conducted and (ii) is in good standing and is duly qualified to transact business in each other jurisdiction in which the nature of property owned or leased by it or the conduct of its business requires it to be so qualified, except where the failure to be in good standing or to be duly qualified to transact business would not, individually or in the aggregate, have or reasonably be expected to have a material adverse effect on the ability of Buyer to consummate the Stock Purchase or would otherwise prevent the performance of the obligations of Buyer under this Agreement (a “Buyer Material Adverse Effect”).

(b) Buyer has the requisite corporate power to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution and delivery by Buyer of this Agreement, the performance by Buyer of its obligations hereunder and the consummation by Buyer of the transactions contemplated hereby have been duly and validly authorized by the Board of Directors of Buyer, and no other corporate proceedings on the part of Buyer, its Board of Directors or stockholder(s) are necessary therefor. This Agreement has been duly executed and delivered by Buyer.

(c) The execution, delivery and performance of this Agreement will not (i) violate any provision of Buyer’s certificate of incorporation or by-laws, (ii) violate any provision of, or be an event that is (or with the passage of time will result in) a violation of, or result in the acceleration of or entitle any party to accelerate or exercise (whether after the giving of notice or lapse of time or both) any obligation or right under, or result in the imposition of any Lien upon or the creation of a security interest in any shares of capital stock of Buyer or its Subsidiaries or any of Buyer’s assets or properties pursuant to, any agreement, instrument, order, arbitration award, judgment or decree to which Buyer or any of its Subsidiaries is a party or by which any of them is bound, or (iii) violate or conflict with any other restriction of any kind or character to which Buyer or any of its Subsidiaries is subject, that, in the case of clauses (ii) or (iii) would, individually or in the aggregate, reasonably be expected to have a Buyer Material Adverse Effect. Assuming the due execution of this Agreement by Seller and the Company, this Agreement constitutes the legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and to general principles of equity. At the Closing, the Escrow Agreement will be duly executed and delivered by Buyer and, assuming the due execution and delivery thereof by the other parties thereto, at the Closing the Escrow Agreement will constitute the legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting creditors’ rights and remedies generally and to general principles of equity.

Section 4.2. Licenses, Approvals, Other Authorizations, Consents, Reports, etc. Schedule 4.2 to the Buyer Disclosure Letter contains a list of all registrations, filings, applications, notices, consents, approvals, orders, qualifications and waivers required to be made, filed,

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given or obtained by Buyer or any of its Affiliates with, to or from any Person in connection with the consummation of the Stock Purchase and of the other obligations of Buyer under this Agreement except for those the failure to make, file, give or obtain which would not, individually or in the aggregate, have or reasonably be expected to have a Buyer Material Adverse Effect.

Section 4.3. Brokers, Finders, etc. Except for the services of the Buyer Financial Advisor, no broker, finder or investment banker is entitled to any brokerage, finder’s or other similar fee, commission or expenses in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Buyer. Buyer is solely responsible for such fees and expenses of the Buyer Financial Advisor.

Section 4.4. Acquisition of Shares for Investment. Buyer is acquiring the Shares for investment and not with a view to, or for sale in connection with, any distribution thereof. Buyer acknowledges that the Shares are not registered under the Securities Act or any applicable state securities Laws, and that such Shares may not be transferred or sold except pursuant to the registration provisions of the Securities Act and applicable state securities laws or pursuant to an applicable exemption therefrom. Buyer (either alone or together with its advisors) has sufficient knowledge and experience in financial and business matters so as to be capable of evaluating the merits and risks of its investment in the Shares and is capable of bearing the economic risks of such investment.

Section 4.5. Financial Capability. Buyer has, and as of the Closing Date will have, sufficient cash on hand and/or cash available to it to pay the Purchase Price and otherwise consummate the Stock Purchase.

Section 4.6. Non-Reliance. Buyer acknowledges that the representations and warranties set forth in Article III and Article VII, and the representations and warranties of Seller set forth in Article 13 of the Escrow Agreement and in Article 2 of the Non-Competition and Non-Solicitation Agreement. constitute the sole and exclusive representations and warranties of Seller and the Company to Buyer in connection with the transactions contemplated hereby, and Buyer acknowledges and agrees that Seller and the Company are not making any representation or warranty whatsoever, express or implied, beyond those expressly given in this Agreement, the Escrow Agreement or the Non-Competition and Non-Solicitation Agreement, including any implied warranty as to condition, merchantability, or suitability as to any of the assets of the Business. Buyer further acknowledges and agrees that any estimates, budgets, projections, forecasts or other predictions that may have been provided to Buyer or any of its representatives are not representations or warranties of Seller and the Company or guarantees of performance and that actual results may vary substantially from any such estimates, budgets, projections, forecasts or other predictions. Buyer further acknowledges and agrees that (a) except and solely to the extent of the representations and warranties in Article III and Article VII, Seller and the Company have made no representation or warranty either express or implied as to the accuracy or completeness of any information regarding the Business Entities and the Business furnished or made available to Buyer and/or its representatives, and (b) except with respect to the representations and warranties in Article III and Article VII, Buyer shall have no claim or right to indemnification pursuant to Articles VII or IX with respect to any information, documents or materials furnished by Seller and the Company, any of their Affiliates or any of their respective representatives to Buyer, in any management presentation, information, due diligence response, supplemental information, or

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other materials or information furnished in connection with the transactions contemplated hereby. Notwithstanding the foregoing provisions of this Section 4.6, nothing herein is intended to or shall limit or otherwise restrict any claim by or right of Buyer with respect to or arising from any intentional misrepresentation or fraud.

ARTICLE V

Covenants of the Parties

Section 5.1. Investigation of Business; Access to Properties and Records. (a) From the date hereof through the Closing, Seller and the Company shall, and shall cause the Business Entities to, afford to Buyer and Buyer’s accountants, counsel and other representatives reasonable access during regular business hours, upon reasonable advance notice, to the offices, plants, properties, books and records and to employees of the Business Entities and, to the extent related to the Business, Seller and its Subsidiaries, and their respective agents and consultants, in order that Buyer may make reasonable investigations of the affairs of the Business and the Business Entities. The foregoing shall not require Seller, the Company or any Seller Subsidiary to permit any inspection, or to disclose any information, that in the reasonable judgment of counsel to such Person is reasonably likely to (i) result in the waiver of any attorney-client privilege (it being understood that Seller and its Subsidiaries will enter into one or more appropriate joint defense agreements or similar protective arrangements if such agreements or arrangements would permit such inspection or disclosure without waiver of such privilege), the disclosure of any trade secrets or the violation of any Law or (ii) violate any of their obligations owed to any third party with respect to confidentiality if Seller, the Company or any Seller Subsidiary, as the case may be, shall have used commercially reasonable efforts to obtain the consent of such third party to such inspection or disclosure. The Seller and the Company shall not be required, nor shall Seller nor the Company be required to cause the Business Entities or any Seller Subsidiary, to take any action pursuant to this Section 5.1(a) beyond commercially reasonable efforts or that would unreasonably disrupt their respective normal operations.

(b) Any information provided to Buyer or its representatives pursuant to Section 5.1(a) prior to the Closing shall be subject to the terms of the Confidentiality Agreement dated January 9, 2007 between Buyer and Seller (the “Confidentiality Agreement”).

(c) Prior to the Closing, Seller and Buyer will cooperate to identify, and will reasonably agree upon a plan pursuant to which Seller will deliver (or will deliver control with respect to), the Books and Records to the Business Entities, it being understood that a portion of the Books and Records will be so delivered as of the Closing Date and a portion of the Books and Records will be so delivered as promptly as reasonably practicable following the Closing Date.

(d) Following the Closing, Seller shall, and shall cause its Subsidiaries to, (i) afford to Buyer and its accountants, counsel and other representatives reasonable access during regular business hours, upon reasonable advance notice, to any books and records retained by Seller or its Subsidiaries that relate in part to the operations of the Business Entities (but that are not Books and Records that must be delivered to Buyer on or before the Closing), but such access

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need be given only with respect to the portion of such books and records as are related to the operations, or the financial, accounting, tax or legal condition, of the Business Entities or the Business, provided that such access to such books and records shall not unreasonably interfere with the Seller’s or its Subsidiaries’ business operations and provided that the foregoing shall not require Seller or any of its Subsidiaries to permit any access that in the reasonable judgment of counsel to such Person is reasonably likely to result in the waiver of any attorney-client privilege or the violation of any applicable Law and (ii) maintain such books and records (and make available for examination and copying by the Buyer at the Buyer’s expense) for a period of not less than five years following the Closing Date. Upon Buyer’s request and at Buyer’s expense, Seller shall, and shall cause its Subsidiaries to, provide Buyer with copies of the portions of such books and records that relate to the operations of the Business Entities.

(e) Following the Closing, Buyer shall, and shall cause the Business Entities to, (i) allow the Seller and its Subsidiaries, upon reasonable prior notice and during regular business hours, through their employees and representatives, to examine and make copies (at the Seller’s or such Subsidiaries’ expense) of the Books and Records transferred to the Buyer at the Closing or created prior to Closing and in the possession of the Business Entities for any reasonable business purpose relating to their respective businesses, including the preparation or examination of Tax Returns, regulatory filings and financial statements, compliance with any applicable Law or their obligations under this Agreement and the conduct of any litigation or the conduct of any regulatory, contract holder, participant or other dispute resolution whether pending or threatened, provided that such access to such Books and Records shall not unreasonably interfere with the Business Entities’ or their Affiliates’ business operations and provided that the foregoing shall not require Buyer or any of its Affiliates to permit any access that in the reasonable judgment of counsel to such Person is reasonably likely to result in the waiver of any attorney-client privilege or the violation of any applicable Law and (ii) maintain such books and records (and make available for examination and copying by the Seller and its Subsidiaries at the Seller’s or such Subsidiaries’ expense) for a period of not less than five years following the Closing Date. Seller may retain (i) one copy of the materials produced in the due diligence investigation in connection with the transactions contemplated by this Agreement, together with a copy of all documents referred to in such materials, (ii) all internal correspondence and memoranda, valuations, investment banking presentations in connection with the sale of the Shares, and (iii) a copy of all consolidating and consolidated financial information and all other accounting records prepared or used in connection with the preparation of the Business Financial Statements.

(f) From and after the Closing, neither Seller nor any Continuing Affiliate nor any of their respective representatives shall, except as required by Law or as required to be disclosed pursuant to a Federal or state court order or legal proceedings or pursuant to a subpoena or requirement of any Governmental Authority, (i) disclose to any Person any non-public information related to the Business or the Business Entities (including, without limitation, any information which would be considered “Information” pursuant to the Confidentiality Agreement) or (ii) waive any provision of any confidentiality agreement to which it is a party to the extent it relates to the Business or the Business Entities. Effective as of the Closing, the Confidentiality Agreement shall terminate automatically and shall thereafter be of no further force and effect. From and after the Closing, neither Buyer nor any Business Entity nor any of their respective representatives shall, except as required by Law or as required to be disclosed pursuant to a Federal or state court order or legal proceedings or pursuant to a subpoena or requirement of any

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Governmental Authority, disclose to any Person any non-public information related to the Seller or any Continuing Affiliate or their respective businesses (including, without limitation, any information which would be considered “Information” pursuant to the Confidentiality Agreement).

Section 5.2. Filings; Other Actions; Notification. (a) Each of the parties hereto agrees to cooperate and use (and to cause their respective Subsidiaries, officers and directors, and to use reasonable best efforts to cause their Affiliates, employees, agents, attorneys, accountants and representatives, to use) their respective reasonable best efforts as promptly as practicable to (i) take or cause to be taken all action, and to do or cause to be done all things, necessary, proper or advisable on its part under this Agreement and any applicable Law to consummate and make effective the Stock Purchase and the other transactions contemplated by this Agreement, including preparing, providing and filing all documentation and other information to effect all necessary notices, reports, applications, filings and other submissions, and to obtain as promptly as is practicable all consents, approvals, waivers, licenses, permits, authorizations, registrations, qualifications, decisions, determinations or other permissions or actions necessary or advisable to be obtained from any Governmental Authority or any other Person in order to consummate the Stock Purchase (including to obtain expiration or termination of the waiting period under the HSR Act or any clearance as may be required under such other Law for the consummation of the transactions contemplated by this Agreement); (ii) provide all such information concerning such party, its Subsidiaries and its officers, directors, employees, partners and Affiliates as may be necessary or reasonably requested in connection with any of the foregoing; (iii) avoid the issuance or entry of, or have vacated or terminated, any decree, order, injunction, judgment, decision or determination that would, in whole or in part, restrain, prevent or materially delay the consummation of the Stock Purchase; and (iv) enter into such agreements with any Governmental Authority to divest assets as may be necessary to obtain approval of the transactions contemplated by this Agreement; provided, however, that Buyer shall not be required to take any such action or actions specified in clause (i), (iii) or (iv) that would reasonably be expected to materially and adversely impact the Business or the businesses of Buyer and its Subsidiaries taken as a whole; and provided further that Seller shall not, nor shall it cause or permit any of the Business Entities to, divest or dispose of any plants, assets or businesses pursuant to the obligations of Section 5.2(a)(iv) without the prior consent of Buyer. Filing fees required in connection with any filings under the HSR Act or with any Governmental Authority under any other applicable competition law shall be borne by Buyer.

(b) Subject to applicable Laws relating to the exchange of information, the parties hereto shall have the right to review in advance, and to the extent practicable to consult with the other parties on, all the information relating to the Business Entities or Buyer, as the case may be, and any of their respective Subsidiaries, that appear in any filing made with, or written materials submitted to, any Governmental Authority in connection with the Stock Purchase and any other transaction contemplated by this Agreement. In exercising the foregoing right, each of the parties hereto shall act reasonably and as promptly as is practicable.

(c) Except as prohibited by applicable Law, the parties hereto shall keep the other parties reasonably apprised of the status of matters relating to completion of the transactions contemplated hereby, including promptly furnishing the other with copies of notices or other communications received by such parties or any of their respective Affiliates from any third Person with respect to the transactions contemplated by this Agreement.

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(d) Seller shall, and shall cause Shareholder to, enter into the Non-Competition and Non-Solicitation Agreement on the Closing Date.

Section 5.3. Further Assurances. Following the Closing, the parties hereto agree that, from time to time, each of them will execute and deliver such further instruments of conveyance and transfer and take such other actions as may be necessary to carry out the purposes and intents of this Agreement. Without limiting the generality of the foregoing, the parties hereto agree that:

(a) Following the Closing, to the extent any assets or rights of the Business have been retained by Seller and the Continuing Affiliates, Seller shall and shall cause the Continuing Affiliates to use their respective reasonable best efforts to convey such assets or rights to the Business Entities as promptly as practicable (and pending such conveyance to provide the Business Entities with the benefit of such assets).

(b) To the extent any real property or other assets or facilities, or any rights or services (including but not limited to Seller’s letter of credit facility for workers’ compensation coverage for employees of the Business Entities and the Seller and its Subsidiaries or their predecessors), are shared or used jointly by the Business Entities, on the one hand, and the Seller and its Subsidiaries, on the other hand, the parties will use their reasonable best efforts to reach equitable arrangements under which such real property, assets, facilities, rights and services will cease to be shared at or prior to the Closing. To the extent this is not possible, the parties will mutually agree in good faith on reasonable transition arrangements that will allow such sharing to cease as soon as practicable following the Closing. Seller agrees to cause the Seller’s Subsidiaries to provide such transition services as may reasonably be requested by Buyer for mutually agreed compensation, for a reasonable period, in order to assist in the smooth transition of the Business (such services to be of a scope no more extensive than the services provided by such Seller’s Subsidiaries to the Business Entities as of the date hereof).

Section 5.4. Conduct of Business. Each of Seller and the Company agrees, as to each of the Business Entities, that, from the date hereof until the Closing, except as set forth on Schedule 5.4 to the Seller Disclosure Letter, as expressly contemplated by this Agreement (including (i) actions taken pursuant to Section 5.2, (ii) transactions contemplated by Section 5.12 or (iii) as required by applicable Law), or as otherwise agreed to in writing by those representatives of Buyer set forth on Schedule 5.4 to the Buyer Disclosure Letter (which consent shall not be unreasonably withheld or delayed), the Business Entities shall conduct the Business in the ordinary course of business and, to the extent consistent therewith (and subject to the restrictions set forth in this Section 5.4), the Business Entities will use their commercially reasonable efforts to preserve and maintain in all material respects existing relations and goodwill with employees, customers, brokers, suppliers and other Persons with which the Business Entities have significant business relations. Without limiting the foregoing, from the date hereof until the Closing, except as set forth on Schedule 5.4 to the Seller Disclosure Letter, as expressly contemplated by this Agreement (including (i) actions taken pursuant to Section 5.2, (ii) transactions contemplated by Section 5.12 or (iii) as required by applicable Law), or as otherwise agreed to in writing by those representatives of Buyer set forth on Schedule 5.4 to the Buyer Disclosure Letter (which consent shall not be unreasonably withheld or delayed), the Company shall not and shall cause the other Business Entities not to, and Seller shall cause each of the Business Entities not to, directly or indirectly do, or commit or agree to do, any of the following:

(i) declare or pay any dividend or other distribution with respect to any share of its capital stock other than dividends and other distributions paid by any Business Entity to its parent corporation if such parent is another Business Entity and other than cash dividends paid by the Company to Seller to the extent such cash is not required to satisfy Seller’s obligations under Section 5.10(b);

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(ii) repurchase, redeem or otherwise acquire any shares of capital stock or other securities of, or other ownership interests in, any of the Business Entities;

(iii) issue, deliver, pledge, encumber or sell any shares of capital stock of or other equity interests in any Business Entity, or any securities convertible into any such shares of capital stock or other equity interests, or any rights, warrants or options to acquire any such shares of capital stock or other equity interests;

(iv) amend its certificate of incorporation or bylaws or other comparable organizational documents or amend any terms of the outstanding securities of any Business Entity;

(v) merge or consolidate with any other Person, make any equity or similar investment in any other Person, including any joint venture (other than the receipt of stock in settlement of amounts owed to the Company in any bankruptcy proceeding), or acquire the capital stock or significant assets of any other Person other than (A) in each case in the ordinary course of business with a commitment period of one year or less, purchases of inventory, supplies, property, plant and equipment, services and items used or consumed in the manufacturing process, (B) capital expenditures not in excess of $2 million; provided that Seller shall consult with Buyer in advance of making or committing to make any such capital expenditure or series of related expenditures in excess of $250,000, or (C) other transactions not described in (A) or (B) that are in the ordinary course of business and not individually in excess of $1 million;

(vi) sell, lease to others, license (as licensor or sublicensor) or otherwise dispose of any Business Entity or any assets, securities, rights or property of any Business Entity, other than (A) sales of inventory in the ordinary course of business or (B) transactions that are in the ordinary course of business and not individually in excess of $2 million;

(vii) incur any indebtedness for borrowed money, guarantee any such indebtedness, enter into any new or amend (other than to terminate) existing facilities relating to indebtedness, issue or sell any debt securities or warrants or other rights to acquire any debt securities or guarantee any debt securities;

(viii) except in the ordinary course of business consistent with past practices, (A) enter into or adopt any new, or amend or terminate any existing, Employee Plan (including any trust or other funding arrangement) or Employment Agreement, other than as required by Law, (B) increase the compensation or benefits of any employee, director

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or Individual Consultant of, a Business Entity, including the making or modification of any new or existing grants or awards or to become payable to or pay any severance or bonus not otherwise due to its officers, directors or employees or (C) take any action to accelerate the vesting of, or payment of, any compensation or benefit under any Employee Plan other than as contemplated hereby or thereby; (D) pay to any employee, director or Individual Consultant of a Business Entity (or their beneficiaries or dependents thereof) any benefit or amount not required under any Plan or Employment Agreement as in effect on the date of this Agreement, (E) change the terms of employment or material responsibilities of any Key Business Person; or (F) contribute any material amount to any trust or other arrangement funding any Employee Plan or related trust or other funding arrangement or take any action to secure the payment of compensation or benefits under any Employee Plan, except to the extent required by the existing terms of such Employee Plan, trust or other funding arrangement, by any written Employment Agreement existing on the date of this Agreement, or by applicable Law;

(ix) (A) adopt a plan of complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization or (B) enter into any agreement providing for acceleration of payment or performance as a result of a change of control of any Business Entity;

(x) renew or enter into any non-compete, exclusivity or similar agreement that would restrict or limit, in any material respect, the operations of the Business Entities or, after the Closing, of Buyer or any of its Affiliates;

(xi) (A) modify in any material respect, amend in any material respect or terminate (other than by expiration) any Business Material Contract or (B) enter into, renew or extend any Business Material Contract of the type set forth in subsection (d) or (e) of Section 3.13 or, except in the ordinary course of business, any other Business Material Contract;

(xii) other than pursuant to Section 5.6, renew, enter into, amend or waive any material right under any contract with or loan to any Affiliate of a Business Entity (other than another Business Entity);

(xiii) settle or compromise any material litigation, or waive, release or assign any material claims;

(xiv) adopt any change, other than as required by applicable generally accepted accounting principles, in its accounting policies, procedures or practices;

(xv) sell, license (as licensor or sublicensor), lease to others or otherwise dispose of any material Business Intellectual Property;

(xvi) other than as required by law, make any change in any method of accounting for Tax purposes, make any Tax election that is inconsistent with past practice or file any Tax Return other than in a manner consistent with past practice if such change, election or filing, would likely affect the liabilities of the Business Entities or the Buyer (or its Affiliates) in a material manner after the Closing Date;

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(xvii) other than in the ordinary course of business, take any action (A) to build inventory levels at the trade or factory level, except as required to satisfy increased product sales, or (B) to permit factory inventory levels to fall below reasonably expected requirements (other than as a result of sales in excess of budget);

(xviii) fail to continue advertising programs and maintain trade incentives consistent with its current marketing plans; or

(xix) offer discounts or incentives for early payment of accounts receivable other than consistent with past practice or pay accounts payable other than consistent with past practice.

Section 5.5. Public Announcements. (a) Except as may be required by applicable Law or any securities exchange on which the securities of Buyer or any of its Affiliates are listed, Buyer and Seller shall consult with each other before issuing, or permitting any agent or Affiliate to issue, any press releases or otherwise making or permitting any agent or Affiliate to make, any public statements with respect to this Agreement and shall agree on the text of any press release with respect to the announcement of this Agreement and the Closing (such approval not to be unreasonably withheld).

(b) Except as required by applicable Law, the parties to this Agreement shall, and shall cause their respective Affiliates and representatives to, keep confidential the nonpublic terms and conditions of this Agreement.

Section 5.6. Intercompany Accounts; Guaranties. (a) Other than as set forth on Schedule 5.6(a) to the Seller Disclosure Letter, all intercompany (i) accounts between Seller or any of the Continuing Affiliates, on the one hand, and any Business Entity, on the other hand, shall be paid in full in cash or terminated without liability on or prior to the Closing Date; (ii) Indebtedness between Seller or any of the Continuing Affiliates, on the one hand, and any Business Entity, on the other hand, shall be paid in full in cash or terminated without liability prior to the Closing Date; and (iii) subject to Section 5.3(b), Contracts between Seller or any of the Continuing Affiliates, on the one hand, and any Business Entity, on the other hand, shall be terminated without liability on or prior to the Closing Date.

(b) Buyer shall use its commercially reasonable efforts to cause itself or one or more of its Affiliates to be substituted in all respects for Seller or any Continuing Affiliate, effective as of the Closing, in respect of all obligations of Seller and any Continuing Affiliate under each of the guaranties, bonding arrangements, letters of credit, indemnification agreements and letters of comfort given by Seller or any of its Continuing Affiliates for the sole benefit of the Business Entities, which guaranties, performance bonds, letters of credit, indemnification agreements and letters of comfort are set forth on Schedule 5.6(b) to the Seller Disclosure Letter (each a “Seller Guaranty”). Seller shall use its commercially reasonable efforts to cause itself or one or more of the Continuing Affiliates to be substituted in all respects for any Business Entity, effective as of the Closing, in respect of all obligations of any Business Entity under each guaranty, bonding arrangement, letter of credit and letter of comfort given by any of the Business Entities for the benefit of Seller or any of the Continuing Affiliates and not related to the Business (each, a “Non-Business Guaranty”).

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(c) To the extent Seller and Buyer are unable to replace a Seller Guaranty or Non-Business Guaranty or obtain the beneficiary’s consent to the substitution therefor prior to the Closing as contemplated in Section 5.6(b), each of Seller and Buyer, as applicable, agrees to use its commercially reasonable efforts (and to cause its Affiliates to use their commercially reasonable efforts) to maintain each such Seller Guaranty or Non-Business Guaranty, as the case may be, in place until the expiration of the then-current term of the underlying Contract or other obligation supported by each such Seller Guaranty or Non-Business Guaranty in accordance with its terms (it being understood that after each such expiration, Seller and its Affiliates shall have no obligation to renew any such Seller Guaranty and Buyer and its Affiliates shall have no obligation to renew any such Non-Business Guaranty).

Section 5.7. No Solicitation. (a) From the date hereof until the earlier of the Closing or the termination of this Agreement, Seller shall not, and shall cause the Business Entities and its other Affiliates and its and their employees, agents and representatives, including any investment banker, attorney or accountant retained by Seller or any of its Affiliates (collectively, the “Seller Representatives”) not to, directly or indirectly through another Person, (i) solicit, initiate, entertain, consider, encourage, accept or otherwise facilitate any inquiries (including by way of furnishing any non-public information or otherwise) or the making of any inquiry, proposal or offer from any Person which constitutes an Acquisition Proposal (or would reasonably be expected to lead to an Acquisition Proposal) or (ii) participate in any discussions or negotiations regarding an Acquisition Proposal. For purposes of this Agreement, “Acquisition Proposal” means any direct or indirect inquiry, proposal or offer (or any improvement, restatement, amendment, renewal or reiteration thereof) relating to any direct or indirect acquisition or purchase of any capital stock of or other equity interest in, or any significant portion of the businesses of, any of the Business Entities or a merger, consolidation or other business combination transaction involving the Business Entities or a sale of any significant portion of the assets (other than sales of products in the ordinary course of business) of the Business Entities, other than the transactions contemplated by this Agreement or requested by Buyer in connection with any actions taken pursuant to Section 5.2.

Section 5.8. Notice of Acquisition Proposals. Seller or the Company shall promptly (but in any event within one Business Day) notify Buyer orally and in writing of any Acquisition Proposal or any inquiry regarding the making of any Acquisition Proposal, indicating, in connection with such notice, the name of the Person making such Acquisition Proposal or inquiry and the terms and conditions of any such Acquisition Proposal or inquiry.

Section 5.9. Insurance. (a) From the date hereof to the Closing, Buyer and Seller will cooperate reasonably to facilitate Buyer’s development and implementation of a transition plan with respect to insurance coverage for the Business Entities, including, without limitation, the provision by the Company, Seller and its Subsidiaries, as applicable, of information reasonably requested by Buyer regarding historical coverage and claims with respect to the Business Entities and the Business.

(b) From and after the Closing, Seller shall use its reasonable efforts, subject to the terms of the Seller Insurance Policies, to retain the right to make claims and receive recoveries for the benefit of the Business Entities under any property and casualty insurance policies maintained at any time prior to the Closing by Seller or any of its Subsidiaries or the predecessors

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of any of them that provide coverage on an “occurrence” rather than a “claims made” basis (collectively, the “Seller Insurance Policies”), covering any loss, liability, claim, damage or expense relating to the assets, business, operations, conduct, products and employees (including former employees) of any of the Business Entities and their respective predecessors (in each case, in so far as they cover or otherwise relate to the Business or otherwise relate to losses, liabilities, claims, damages or expenses as to which any of the Business Entities could have responsibility) that relates to or arises out of occurrences prior to or at the Closing (an “Insurance Claim”).

(c) Buyer or the applicable Business Entity will pay, incur and bear all amounts relating to any self-retention or deductible and any gaps in or limits on coverage applicable to an Insurance Claim asserted at any time with respect to the applicable Seller Insurance Policy and the coverage available with respect to any Insurance Claim shall be the actual coverage available under such Seller Insurance Policy at the time the Insurance Claim is made, taking into account the effect of any prior claim payments on any self-retention or deductible or in causing any gap or limits on coverage under the terms of such Seller Insurance Policy, whether or not the applicable Seller Insurance Policy solely covers claims of the Business Entities or covers claims of both Seller and its Subsidiaries on the one hand, and the Business Entities on the other hand. In the event that any legal action, arbitration, negotiation or other proceedings are required for coverage to be asserted against any insurer for an Insurance Claim to be perfected under the Seller Insurance Policies, in each case on behalf of any of the Business Entities, (i) Buyer shall, to the extent possible, do so at its own expense or at the expense of the applicable Business Entity or (ii) if Buyer is not permitted to assert coverage or perfect an Insurance Claim, Seller or one of its Subsidiaries shall do so, and, in either event, Buyer or the applicable Business Entity shall reimburse Seller and its Subsidiaries for any reasonable costs and expenses that they may incur because of such action (other than the incurrence of normal internal administrative expenses).

(d) Each of Seller, Buyer and the Business Entities shall use its reasonable best efforts (i) to cooperate fully and to cause its Subsidiaries to cooperate fully with the others in submitting good faith Insurance Claims on behalf of the Business Entities under the Seller Insurance Policies and (ii) to pay promptly over to Buyer (or, at Buyer’s request, to the applicable Business Entities) any and all amounts received by Seller or its Subsidiaries under the Seller Insurance Policies with respect to Insurance Claims.

(e) Seller and its Subsidiaries shall retain custody for at least five years from the Closing Date of the Seller Insurance Policies and any and all service contracts, claim settlements and all other insurance records relating thereto; and Buyer and the Business Entities shall have access to and the right to make copies of all such documents and records upon reasonable request to Seller or the Continuing Affiliates.

Section 5.10. Indebtedness; Working Capital; Related Matters. (a) Seller shall take all actions necessary to ensure that, as of the Closing Date, the Business Entities shall not have any Indebtedness except as contemplated by Section 5.6(c) or as set forth on Schedule 5.10 to the Seller Disclosure Letter.

(b) Seller covenants and agrees that (i) the Working Capital as of the Closing (“Closing Working Capital”) shall be no less than $32.4 million and (ii) as of the Closing the

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Business Entities shall have freely available cash, in excess of any cash required to satisfy Seller’s obligations pursuant to the foregoing clause (i), in an amount (the “Closing Date Cash”) equal to the sum of (A) the product of (x) $4.75 million and (y) a ratio, the numerator of which is the number of calendar days up to but not including the Closing Date which shall have elapsed in the calendar year in which the Closing occurs and the denominator of which is 365, plus (B) if the Closing occurs after December 31, 2007 and before payment of employee profit sharing bonuses with respect to 2007, $4.75 million.

(c) Following the close of business on the Business Day immediately prior to the Closing Date, Seller shall deliver to Buyer a statement, certified by the chief financial officer of the Company, of the estimated Closing Working Capital and the Closing Date Cash, which statement of estimated Closing Working Capital and Closing Date Cash shall contain no less detail than reflected on Schedule 1.3 to the Seller Disclosure Letter. Following receipt of such statement, Seller shall, and shall cause its advisors to, consult with Buyer and its advisors on the calculation of Closing Working Capital and Closing Date Cash and shall provide or cause to be provided to Buyer information reasonably requested to support the basis on which the statement was prepared. Seller shall cooperate with Buyer to resolve any disputes as to such calculation prior to the Closing.

(d) Following Seller’s receipt of notice from Buyer of such amount becoming due and payable by any of the Business Entities, Seller shall pay to the Company an amount in cash equal to the amount owing by the Business Entities for tobacco quota buyout assessments in respect of any pre-Closing periods or that portion of any such amount owing that relates to the pre-Closing portion of any period. Seller shall make such payment promptly, but in any event not later than five Business Days prior to the date any such amount becomes due and payable, by wire transfer, in immediately available funds, to the account specified in such notice.

Section 5.11. Directors’ and Officers’ Indemnification and Related Matters.

(a) Subject to the last sentence of this Section 5.11(a), from and after the Closing Date for a period of six years, the provisions of the certificates or articles of incorporation and by-laws of the Business Entities concerning the elimination of liability and indemnification of directors and officers shall not be amended in any manner that would adversely affect the rights thereunder of any person who is, as of the date hereof or as of the Closing Date, a current or former officer or director of any Business Entity. Subject to the last sentence of this Section 5.11(a), from and after the Closing Date for a period of six years, each of the Business Entities and Buyer (the “D&O Indemnitors”) shall indemnify and hold harmless each Person who is, or as of the Closing Date will be, a current or former officer or director of any Business Entity (the “D&O Indemnitees”) against all Covered Losses arising out of or pertaining to acts or omissions (or alleged acts or omissions) of the D&O Indemnitees, or any of them, in their capacities as such to the maximum extent permitted by the Law applicable to the relevant Business Entity, subject to the D&O Indemnitors’ receipt of an undertaking by such D&O Indemnitee to repay such Covered Losses paid in advance if it is ultimately determined that such D&O Indemnitee is not entitled to be so indemnified under applicable Law; provided however, that the D&O Indemnitors will not in any event be liable for any settlement effected without the D&O Indemnitors’ prior written consent and will not in any event be obligated to pay the fees and expenses of more than one counsel (selected by a plurality of the D&O Indemnitees) for all D&O Indemnitees in

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any jurisdiction with respect to a single proceeding, except to the extent that two or more of such D&O Indemnitees shall have conflicting interests in the outcome of, or differing defenses available with respect to, such claim, action, suit, proceeding or investigation that make such joint representation inadvisable. Subject to the last sentence of this Section 5.11(a), to the maximum extent permitted by applicable Law, the indemnification hereunder shall be mandatory rather than permissive, and each of the Business Entities, as applicable, shall promptly advance expenses in connection with such indemnification to the extent permitted under applicable Law. In the event any Business Entity or any of its successors or assigns (i) consolidates with or merges into any other Person and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, then, and in each such case, appropriate provision shall be made so that the successors and assigns of any Business Entity, or at the Buyer’s option, the Buyer, shall assume the obligations set forth in this Section 5.11(a). The D&O Indemnitors shall pay all expenses, including reasonable fees and expenses of counsel, that a D&O Indemnitee may incur in enforcing the indemnity and other obligations provided for in this Section 5.11(a). Notwithstanding anything to the contrary in this Section 5.11(a), no indemnification shall be available pursuant to the foregoing provisions of this Section 5.11(a) for any Covered Losses in respect of or arising from any claim by any shareholder of a Business Entity that was a shareholder prior to the Closing, whether such claim is brought directly in such capacity or in the nature of a derivative action or otherwise.

(b) Effective upon the Closing, Seller, for itself and its successors and assigns, hereby remises, releases and forever discharges each of the D&O Indemnitees of and from any and all claims which Seller now has, ever had, or at the Closing may have, or hereafter can, shall or may have against the D&O Indemnitees or any of them, for upon or by reason of any matter, cause or thing whatsoever, from the beginning of time through the Closing Date.

(c) Effective upon the Closing, Buyer and the Business Entities, and each of their respective successors and assigns (collectively, the “Releasing Parties”), hereby remises, releases and forever discharges the individuals set forth on Schedule 5.11(c) to the Seller Disclosure Letter (the “D&O Released Parties”) of and from any and all claims which the Releasing Parties, or any of them, now have, ever had, or at the Closing may have, or hereafter can, shall or may have against the D&O Released Parties or any of them, for upon or by reason of any matter, cause or thing whatsoever, from the beginning of time through the Closing Date; provided however, that the Releasing Parties shall not be deemed to have remised, released or discharged any D&O Released Party from (x) any breach in any material respect of any obligations of confidentiality with respect to any proprietary processes or other significant proprietary information of any Business Entity, however and whenever arising, or (y) intentional misconduct or fraud.

(d) The provisions of this Section 5.11 are (i) intended to be for the benefit of, and shall be enforceable by each D&O Indemnitee and D&O Released Party, as applicable, and each such Person’s heirs, representatives, successors or assigns, it being expressly agreed that such Persons shall be third party beneficiaries of this Section 5.11, and (ii) in addition to, and not in substitution for, any other right to indemnification or contribution that any such D&O Indemnitee or D&O Released Party may have by contract, bylaw or otherwise.

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Section 5.12. Transfer of Limerick Property. Seller shall cause Atlantic Properties Inc. to transfer by deed to the Company, free and clear of any Liens other than Permitted Liens, immediately prior to the Closing, the Business Real Property located in Limerick, Pennsylvania.

ARTICLE VI

Employee Benefits Matters

Section 6.1. Employee Benefits Matters. (a) Continued Benefits. For one year following the Closing, Buyer shall continue to provide all current employees of the Business Entities employed as of the Closing Date who continue to be employed following the Closing Date (including any individual(s) on a Company approved leave of absence or currently receiving workers’ compensation who have been identified on Schedule 3.16(d) to the Seller Disclosure Letter) (the “Employees”) with base compensation no less than the base compensation in effect for such Employee immediately prior to the Closing. The term “Employees” shall not include any employees or former employees of the Business Entities who prior to the Closing Date have retired, or have otherwise terminated employment. For one year following the Closing Date, Buyer shall maintain employee benefit plans, programs and policies which provide benefits that are substantially similar in the aggregate to those provided under the Employee Plans of the Business Entities in effect on the Closing Date (but excluding equity-based compensation plans); provided, however, that, except as otherwise specifically provided in this Agreement, nothing in this Agreement, express or implied, shall prevent the termination or amendment of any employee benefit plan, program or policy or limit the right of Buyer or any of its Affiliates to terminate the employment of any employee at any time.

(b) Service Credit. To the extent permitted by Law, Employees shall be given credit under each employee benefit plan, compensation program, policy or arrangement (including, but not limited to, pension, severance, including the Severance Plan, vacation, health and welfare, incentive bonus and equity-based plans) of Buyer or any of its Affiliates in which the Employees are eligible to participate for all service with any Business Entity and their ERISA Affiliates (to the extent such credit was given by the Business Entity or such ERISA Affiliate’s applicable employee benefit plan, program, policy or arrangement) for purposes of eligibility and vesting, provided that no such service shall be recognized for purposes of benefit accruals under any defined benefit plan or where such service recognition would result in a duplication of benefits to an Employee (or his or her beneficiaries or dependents).

(c) Employee Benefit Transition. Buyer shall waive pre-existing condition requirements, evidence of insurability provisions, waiting period requirements or any similar provisions for any Employees under any medical, dental, disability or life insurance plan maintained or sponsored by or contributed to by Buyer for such individuals after the Closing Date, other than pre-existing conditions and evidence of insurability that would have been applicable under the Employee Plans. Buyer shall also apply towards any deductible requirements and out-of-pocket maximum limits under such plans any amounts paid (or accrued) by each Employee under the Business Entity’s comparable benefit plans during the calendar year in which the Closing occurs.

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(d) COBRA. Following the Closing Date, Buyer will be responsible for satisfying obligations under Section 601 et seq. of ERISA and Section 4980B of the Code (“COBRA Coverage”) and any applicable similar state laws, to provide such COBRA Coverage to or with respect to any Employee in accordance with such law with respect to any “qualifying event,” and COBRA coverage with respect to any employee or former employee of a Business Entity who had a qualifying event prior to Closing with respect to a health claim incurred on or after the Closing Date; provided that, notwithstanding the foregoing, Seller shall be responsible for satisfying any COBRA Coverage obligations to, or with respect to any Employee or former employee of a Business Entity, under any health care flexible spending account (without regard to whether such individuals may receive similar coverage under an arrangement to maintained by Buyer and its Affiliates.

(e) Severance. For at least one year following the Closing Date, Buyer shall provide, or shall cause one of its Affiliates to provide, severance benefits to all Employees pursuant to a plan or arrangement (the “Severance Plan”) which shall be substantially in the form and provide severance benefits at least equal to the level of benefits described on Schedule 6.1(e) to the Seller Disclosure Letter. Any severance costs which arise under the Severance Plan shall be the sole responsibility of Buyer.

(f) No Third-Party Beneficiary Rights. Except as provided in Section 11.4, nothing in this Agreement, express or implied, shall create a third-party beneficiary relationship or otherwise confer any benefit, entitlement, or right upon any person or entity other than the parties hereto, including any right to employment or continued employment for any specified period, of any nature or kind whatsoever. Nothing in this Agreement shall cause duplicate benefits to be paid or provided to or with respect to any employee under any employee benefit policies, plans, arrangements, programs, practices, or agreements. Nothing herein shall be construed as an amendment to any Employee Plan or other employee benefit plan for any purpose.

(g) Plans Not Sponsored by Business Entities. Seller and its Subsidiaries shall be responsible for all benefits and liabilities under any Employee Plan that is not a Company Plan (each, a “Seller Plan”). Seller shall take all actions necessary and appropriate to ensure that as of the Closing Date (i) all Employees shall cease to accrue benefits under Seller Plans, including timely providing Employees with any and all notices required by applicable Law to cause such cessation of benefit accruals, (ii) each Employee shall be fully vested in his or her benefits under any Plan that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (whether or not such plan is subject to ERISA), and (iii) the Business Entities shall withdraw from participation in any Seller Plans. Seller shall take all actions necessary such that none of Buyer or any of its Affiliates shall have any Liability with respect to any Seller Plan. Seller shall cause itself or the applicable Continuing Affiliate to assume and be solely responsible for any Liability related to severance or other employee payment arising solely as a result of the consummation of the Stock Purchase under applicable Law or any Contract with an employee in effect prior to the Closing.

(h) Cooperation. After the Closing Date, Seller shall, and shall cause its Subsidiaries to, cooperate with the Buyer to provide, (i) such current information regarding the Employees and former employees of the Business on an ongoing basis as may be reasonably necessary to facilitate determinations of eligibility for, and payments of benefits to, the Employees

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under the employee benefit plans of the Buyer and its Affiliates and (ii) information regarding the accrued benefit under any Plan that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA (whether or not such plan is subject to ERISA). Subject to such party’s consent, not to be unreasonably withheld, each party shall, and shall cause its Subsidiaries to, permit Employees to provide such assistance to the other party as may be necessary in respect of claims against the Business Entities, whether asserted or threatened, to the extent that, (a) an employee of such party or one of its Subsidiaries has knowledge of relevant facts or issues, or (b) assistance by an employee of such party or one of its Subsidiaries is reasonably necessary in respect of any such claim.

ARTICLE VII

Tax Matters

Section 7.1. Tax Representations of Seller. Except as set forth on Schedule 7.1 to the Seller Disclosure Letter, each of Seller and the Company hereby represents and warrants to Buyer as follows:

(a) Seller made a valid election for federal income tax purposes to be treated as an S Corporation effective as of February 1, 2001, and has qualified as an S corporation at all times since such date;

(b) Seller made valid elections for federal income tax purposes to treat each of the Business Entities as a QSub effective as of February 1, 2001 and each such election has remained in effect since such date.

(c) In each state in which the Seller has filed an S corporation Tax Return (or the state equivalent thereof), (i) the Seller qualified as an S Corporation (or the state equivalent thereof) at the time such Tax Return was filed and continues to qualify as such and (ii) the Business Entities qualified as QSubs (or the state equivalent thereof) at the time such Tax Return was filed and continues to qualify as such.

(d) All Tax Returns required pursuant to applicable Laws to be filed by, on behalf of, or with respect to any of the assets or the operations of the Business Entities have been filed on a timely basis (taking into account valid extensions of the time for filing). All such Tax Returns are true, correct and complete in all material respects. All Taxes shown as due on such Tax Returns have been timely paid. Neither Seller nor any Business Entity has requested any extension of time within which to file any such Tax Returns which is currently in effect.

(e) Seller has made available to Buyer copies of all Tax Returns required to be filed by, on behalf of, or with respect to the assets or operations of the Business Entities for their last three (3) Tax periods for which Tax Returns were required to be filed; provided, that to the extent that any such Tax Return was filed with respect to any Subchapter S Group or any combined, consolidated or unitary Return that includes Seller or any Continuing Affiliate, Seller has made available to Buyer pro forma federal Tax Returns for the Business Entities for their last three (3) Tax periods.

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(f) All material Taxes due on or before the Closing Date, from or with respect the assets or operations of the Business Entities, whether or not disputed and whether or not shown on any Tax Return, have been paid in full (or will be paid in full) by the Closing Date.

(g) All Taxes that any of Seller or any Business Entity was required to collect or withhold with respect to the assets or operations of the Business Entities have been duly collected or withheld and to the extent required when due, have been or will be duly and timely deposited or paid to the proper Tax Authority.

(h) There are no Liens for Taxes (other than for current Taxes not yet due and payable or being disputed in good faith) upon the assets of Seller or any Business Entity.

(i) No Business Entity is a party to or bound by any Tax sharing, Tax indemnity or Tax allocation agreement or other similar arrangement with any Person other than among themselves.

(j) There is no material action, suit, proceeding, (to the knowledge of Seller or the Company) investigation, assessment, adjustment, audit or claim pending or, to the knowledge of Seller or the Company, threatened against or with respect to the assets or operations of the Business Entities in respect of any Tax.

(k) Neither Seller nor any Business Entity has received a Tax ruling or entered into a closing or similar agreement with any Taxing Authority that would likely affect the Tax liabilities of the Business Entities or the Buyer (or its Affiliates) in a material manner after the Closing Date.

(l) No Business Entity is required to include in income any adjustment pursuant to Section 481(a) of the Code or any comparable provision of state, local or foreign law or regulations, or with respect to any change in tax accounting method that would likely affect the Tax liabilities of the Business Entities or the Buyer (or its Affiliates) in material manner after the Closing Date.

(m) No power of attorney currently in force has been granted by any of the Business Entities that would be binding on Buyer with respect to Tax matters for the Post-Closing Tax Period.

(n) Seller is not subject to withholding under Section 1445 of the Code with respect to the Stock Purchase.

Section 7.2. Tax Indemnification. (a) Subject to the terms and conditions of this Article VII, from and after the Closing Date, the Seller shall indemnify and hold harmless each Buyer Tax Indemnitee from and against liability for the following Taxes:

(i) any and all Taxes arising out of or attributable to any Pre-Closing Period (including the portion of any Straddle Period properly allocable to the Pre-Closing Period) owed by or with respect to the assets or operations of any Business Entity;

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(ii) any liability for Taxes of Seller and any Subsidiary of Seller allocable to any Pre-Closing Period;

(iii) any liability for Taxes of or with respect to any Subchapter S Group or any combined, consolidated, unitary or other group that included the income or assets of a Business Entity and either Seller or any one or more Subsidiaries of Seller (other than the Business Entities);

(iv) any Tax or other payment of the Business Entities arising under any Tax sharing or Tax allocation agreement to which the Business Entities are or were a party on or prior to the Closing Date and entered into prior to the Closing Date;

(v) any and all Taxes arising from or in connection with any breach of any representation under Section 7.1;

(vi) any and all Taxes arising from or in connection with any breach of any covenant of Seller under this Article VII; and

(vii) any Tax imposed upon, relating to or resulting from the transaction referred to in Section 5.12.

(b) Notwithstanding anything in this Agreement to the contrary, neither Seller nor any Continuing Affiliate shall be liable for, nor shall be required to indemnify Buyer Tax Indemnitees for or pay for (i) Taxes to the extent such Taxes are taken into account in the Working Capital calculation or otherwise taken into account under Section 5.10(b), (ii) Taxes that arise from or in connection with transactions on the Closing Date after the Closing with respect to the assets or operations of any Business Entities which are not in the ordinary course of business of the Business Entities (“Extraordinary Taxes”), (iii) Taxes that arise as a result of actions taken or elections made by the Buyer, the Business Entities or any of their Affiliates after the Closing (“Buyer Taxes”), or (iv) Taxes with respect to any claim under Article VII that does not exceed $10,000.

(c) Subject to the terms and conditions of this Article VII, from and after the Closing Date, the Buyer Tax Indemnitors shall jointly and severally indemnify and hold harmless each Seller Tax Indemnitee from and against liability for (i) any and all Taxes arising out of or attributable to any Post-Closing Period (including the portion of any Straddle Period properly allocable to the Post-Closing Period) owed by or with respect to the assets or operations of any Business Entity, (ii) Extraordinary Taxes, (iii) Buyer Taxes, and (iv) any Taxes arising from any breach by the Buyer or any of its Affiliates of any covenant contained in this Article VII.

(d) Except as otherwise provided in Section 7.5, payment in full of any amount due to a Tax Indemnitee under this Section 7.2 shall be made to the affected Tax Indemnitee in immediately available funds within 15 Business Days after written notice is received by the Tax Indemnitor that payment of such Taxes to the appropriate Taxing Authority is due; provided that the Tax Indemnitee shall comply with its obligation to notify the other parties under Section 7.6; and provided, further, that the Tax Indemnitor shall not be required to make any payment earlier than two Business Days before such Taxes are due to the appropriate Taxing Authority. In the case of a Tax that is contested in accordance with the provisions of Section 7.6,

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payment of the Tax to the appropriate Taxing Authority will be considered to be due no earlier than the date a final determination (a “Final Tax Determination”) to such effect is made by the appropriate Taxing Authority or court provided, that if such Taxes have been previously paid, payment shall be made to the affected Tax Indemnitee within thirty (30) days of receiving notification of the Tax Claim (or if later, a Final Tax Determination).

(e) From and after the Closing, Seller will retain an amount of net assets reasonably sufficient, in the good faith judgment of Seller, to satisfy its obligations under this Article VII.

Section 7.3. Allocation of Certain Taxes. (a) If any of the Business Entities is permitted but not required under applicable state, local or foreign income Tax laws to treat the Closing Date as the last day of a taxable period, then the parties shall cause such Business Entity to treat that day as the last day of a taxable period.

(b) In the case of Taxes arising in a taxable period of any of the Business Entities that includes but does not end on the Closing Date, except as provided in Section 7.3(c), the allocation of such Taxes between the Pre-Closing Period and the Post-Closing Period shall be made on the basis of an interim closing of the books as of the end of the Closing Date.

(c) In the case of (i) franchise Taxes based on capitalization, debt or shares of stock authorized, issued or outstanding and (ii) ad valorem Taxes, in either case attributable to a Straddle Period (as defined below), the portion of such Taxes attributable to the Pre-Closing Period shall be the amount of such Taxes for the entire taxable period, multiplied by a fraction the numerator of which is the number of calendar days in such taxable period ending on and including the Closing Date and the denominator of which is the entire number of calendar days in such taxable period, and the balance of such Taxes shall be attributable to the Post-Closing Period; provided, however, that if any property, asset or other right of any of the Business Entities is sold or otherwise transferred prior to the Closing, then ad valorem Taxes pertaining to such property, asset or other right shall be attributed entirely to the Pre-Closing Period, and provided further, that in the case of any Tax based upon or measured by capital (including net worth or long-term debt) or intangibles, any amount thereof required to be allocated under this Section 7.3(c) shall be computed by reference to the level of such items on the Closing Date. All determinations necessary to effect the foregoing allocations shall be made in a manner consistent with the past practices of the Seller and the Business Entities.

(d) Any transfer Taxes attributable to the Stock Purchase or the provisions of Section 2.3 hereof shall be borne equally by Seller and Buyer; provided, however, that any transfer Taxes attributable to the transaction referred to in Section 5.12 shall be borne solely by Seller.

Section 7.4. Refunds and Related Matters. (a) Any refund or credit of Taxes (including any interest thereon) that relates to any of the Business Entities (or their assets or operations) and that is a refund or credit of Taxes with respect to a Pre-Closing Period shall be the property of Seller or its designee and shall be retained by Seller or its designee (or promptly reimbursed to Seller or such designee by the Business Entity if any such refund or credit (or interest thereon) is received by Buyer, a Business Entity or any of their respective Subsidiaries or Affiliates). Upon the request of Seller, Buyer shall file, or cause the Business Entity or any of

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their Affiliates to file, a claim for refund of any Taxes, including through the filing of amended Tax Returns or otherwise, relating to the Business Entities (or their assets or operations) for any Pre-Closing Period in such form as Seller may reasonably request. Seller shall, at its own expense, have the sole right to prosecute such claim for refund. Without limiting the generality of the foregoing, the Company shall make a refund claim with respect to amounts paid by or on behalf of the Company for the Pre-Closing Period relating to excise taxes on cigars as soon as reasonably possible after the Closing and promptly remit such refund to Seller upon receipt of the refund. Buyer agrees that it will reasonably cooperate, and cause the Business Entities or their Affiliates to reasonably cooperate, with Seller and its representatives in connection therewith. Notwithstanding any other portion of this Section 7.4(a), Buyer shall not be required to file, or cause the Business Entity or any of their Affiliates to file any claim for refund in accordance with this Section 7.4(a) if such claim for refund would likely have a material adverse affect on Buyer, the Business Entities or their Affiliates (without taking into account the payment of the refund to Seller).

(b) Any refund or credit of Taxes (including any interest thereon) that relates to any of the Business Entities and that is a refund or credit of Taxes with respect to a Post-Closing Period shall be the property of Buyer or the Business Entity and shall be retained by Buyer or the Business Entity (or promptly paid by Seller to Buyer or the Business Entity if any such refund or credit (or interest thereon) is received by Seller or the Continuing Affiliates).

(c) In applying Section 7.4(a) and Section 7.4(b), any refund or credit of Taxes (including any interest thereon) for a Straddle Period (as defined below) shall be allocated between the Pre-Closing Period and the Post-Closing Period in accordance with Section 7.3.

(d) Notwithstanding any other provision of this Section 7.4, Buyer shall not be required to pay to Seller any refund of Tax to the extent such refund was included in the Working Capital calculation or otherwise taken into account under Section 5.10(b).

Section 7.5. Preparation and Filing of Tax Returns. (a) Seller shall file or cause to be filed (i) any Subchapter S Group and any combined, consolidated or unitary Return that includes both Seller or any Continuing Affiliate and income or assets of any of the Business Entities and (ii) any other Return of any of the Business Entities for any taxable period that ends on or before the Closing Date provided that, except as required by applicable Law, all such Tax Returns specified in clause (ii) of this sentence shall be filed in a manner consistent with past practice, shall not include any change in method of accounting and shall not include any Tax election that is inconsistent with past practice. At least 15 Business Days prior to the due date (giving effect to any extension thereof) for the filing of a Return described in clause (i) or (ii) above, Seller shall provide Buyer a copy of such Return (or a copy of a pro forma separate Return for the Business Entities in the case of a Return described in clause (i)) for review and comment. Buyer shall provide any comments to such Returns within 10 Business Days after receiving such Returns and Seller shall consider any comments of Buyer in good faith. Seller shall, reasonably promptly after the filing of a Return described in clause (i) or (ii) above, provide Buyer a copy of such Return (or a copy of a pro forma separate Return for the Business Entities in the case of a Return described in clause (i)). Seller shall remit to the relevant Taxing Authority all Taxes shown by such Returns to be due. Buyer shall cause the Business Entities to furnish information, records and documents to Seller in connection with any such Return in accordance with the past procedures, customs and practices of Seller and the Business Entities or as reasonably requested by Seller.

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(b) Except to the extent set forth in Section 7.5(a), Buyer shall timely file or cause to be timely filed all Returns of, or that include, any of the Business Entities and shall pay or cause to be paid the Taxes shown to be due thereon; provided that Seller shall pay its allocable share of any such Taxes as provided in this Article VII.

(c) With respect to any Return of any of the Business Entities for a taxable period that, with respect to such Business Entity, begins on or before and ends after the Closing Date (such a Return, a “Straddle Period Return” and such a taxable period, a “Straddle Period”), Buyer shall deliver a copy of such Return to Seller at least 30 Business Days prior to the due date (giving effect to any extension thereof), accompanied by an allocation between the Pre-Closing Period and the Post-Closing Period of the Taxes shown to be due on such Return and any amount the Seller could have an indemnification obligation pursuant to Section 7.2. Such Return shall be prepared in accordance with past practices of the Seller and the Business Entities. Such Return and allocation shall be final and binding on Seller, unless, within 15 Business Days after the date of receipt by Seller of such Return and allocation, Seller delivers to Buyer a written request for explanation of items on or changes to such Return or allocation. If Seller delivers such a request, then Buyer and Seller shall undertake in good faith to resolve the issues raised in such request prior to the due date (including any extension thereof) for filing such Return. If Buyer and Seller are unable to resolve any issue within 10 Business Days from the date of receipt by Buyer of the request for changes, then Seller and Buyer jointly shall engage the Neutral Accounting Firm to determine the correct treatment of the item or items in dispute. Each of the Seller and the Buyer shall bear and pay one-half of the fees and other costs charged by the Neutral Accounting Firm. The determination of the Neutral Accounting Firm shall be final and binding on the parties hereto. Buyer shall not be entitled to file a Tax Return for any of the Business Entities for any Pre-Closing Period (or portion of any Straddle Period properly allocable to the Pre-Closing Period) in any jurisdiction in which Seller has not filed a Tax Return for itself or the Business Entities without the Seller’s prior written consent.

(d) Notwithstanding anything to the contrary in this Section 7.5, if the Closing Date occurs before January 1, 2008, Seller shall, at its expense, prepare and provide to Buyer, on or before July 15, 2008, a copy of the RTC-101, Pennsylvania Capital Stock/Foreign Franchise Tax Return, for the Company for the year ending December 31, 2007, accompanied by an allocation between the Pre-Closing Period and the Post-Closing Period of the Taxes shown to be due on such Return. Buyer will cooperate with Seller, pursuant to Section 7.7, to provide the necessary information to Seller to prepare the Return. Buyer shall timely file or cause to be timely filed an extension of time to file this Return after consultation with Seller regarding the preparation of such extension. Such Return shall be prepared in accordance with past practices of the Company. Such Return and allocation shall be final and binding on Buyer and Buyer shall timely file or cause to be timely filed such Return as prepared by Seller, unless, within 30 Business Days after the date of receipt by Buyer of such Return and allocation, Buyer delivers to Seller a written request for explanation of items on or changes to such Return or allocation. If Buyer delivers such a request, then Buyer and Seller shall undertake in good faith to resolve the issues raised in such request prior to the due date (including the extension thereof) for filing such Return. If Buyer and Seller are unable to resolve any issue within 10 Business Days from the

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date of receipt by Seller of the request for changes, then Seller and Buyer jointly shall engage the Neutral Accounting Firm to determine the correct treatment of the item or items in dispute. Each of the Seller and the Buyer shall bear and pay one-half of the fees and other costs charged by the Neutral Accounting Firm. The determination of the Neutral Accounting Firm shall be final and binding on the parties hereto.

(e) In the case of each Straddle Period Return, not later than two Business Days before the due date (including any extension thereof) for payment of Taxes with respect to such Return, Seller shall pay to Buyer or the relevant Business Entity the portion of the Taxes in connection with such Return for which Seller is responsible pursuant to Section 7.2(a)(i).

Section 7.6. Tax Contests. (a) Notices. If any Taxing Authority asserts a Tax Claim, then the party hereto first receiving notice of such Tax Claim shall provide written notice thereof to the other party or parties hereto within 10 Business Days of such Tax Claim; provided, however, that the failure of such party to give such timely notice shall not relieve the other party of any of its obligations under this Article VII, except to the extent that the other party is actually prejudiced thereby, and the amount of reimbursement to which the Tax Indemnitee is entitled shall be reduced by the amount, if any, by which the applicable Tax liability would have been less had such notice of Tax Claim been timely delivered. Such notice shall specify in reasonable detail the basis for such Tax Claim and shall include a copy of the relevant portion of any correspondence received from the Taxing Authority.

(b) Pre-Closing Taxable Periods. Seller shall have the right to control, at its own expense, any audit, examination, contest, litigation or other proceeding by or against any Taxing Authority (a “Tax Proceeding”) in respect of a Business Entity for any Pre-Closing Period; provided, however, that Seller (i) shall provide Buyer with a timely and reasonably detailed account of each stage of such Tax Proceeding and (ii) not settle, compromise or abandon any such Tax Proceeding without obtaining the prior written consent, which consent shall not be unreasonably withheld or delayed, of Buyer, if such settlement, compromise or abandonment could materially affect Buyer’s, any Business Entity’s, or their respective Affiliates’ liability for Tax with respect to any Post-Closing Period; provided further, that Buyer, at its own expense, may control and contest any Tax Proceeding for which Seller would otherwise have the right to control under this Section 7.6(b) if Seller declines to contest such Tax Proceeding; provided, further, however, that if Buyer exercises its right to control and contest any Tax Proceeding under the preceding clause, Buyer shall (a) provide Seller with a timely and reasonably detailed account of each stage of such Tax Proceeding, and (b) not settle, compromise or abandon any such Tax Proceeding without obtaining Seller’s prior written consent, which consent shall not be unreasonably withheld or delayed.

(c) Straddle Periods. Buyer shall have the right to control, at its own expense, any Tax Proceeding in respect of a Business Entity for any Straddle Period; provided, however, that Buyer (i) shall provide Seller with a timely and reasonably detailed account of each stage of such Tax Proceeding, (ii) not settle, compromise or abandon any such Tax Proceeding without obtaining the prior written consent, which consent shall not be unreasonably withheld or delayed, of Seller, if such settlement, comprise or abandonment could affect Seller’s liability for Taxes under this Article VII; and (c) shall consult with Seller in good faith concerning the appropriate strategy for contesting such Tax Proceeding; provided further, that Seller, at its own expense,

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may control and contest any Tax Proceeding for which Buyer would otherwise have the right to control under this Section 7.6(c) if Buyer declines to control such Tax Proceeding; provided further, however, that if Seller exercises its right to control and contest any Tax Proceeding under the preceding clause, Seller shall (a) provide Buyer with a timely and reasonably detailed account of each stage of such Tax Proceeding, and (b) not settle, compromise or abandon any such Tax Proceeding without obtaining the prior written consent, which consent shall not be unreasonably withheld or delayed, of Buyer, if such settlement, compromise or abandonment could affect Buyer’s, any Business Entity’s, or their respective Affiliates’ liability for Tax with respect to any Post-Closing Period.

(d) Post-Closing Taxable Periods. Buyer shall have the right to control any Tax Proceeding involving any of the Business Entities (other than any Tax Proceeding which Seller is entitled to control under Section 7.6(b), (c) or (e)).

(e) Control of Certain Matters. Notwithstanding anything in this Agreement to the contrary, Seller shall have the right to control, at its own expense, any Tax Proceeding (including Tax submissions) with respect to the matters set forth on Schedule 7.1(d)(2) to the Seller Disclosure Letter, including negotiations and settlements with the applicable Taxing Authority, for Pre-Closing Periods and Straddle Periods and the filing of any Tax Returns or amended Tax Returns for the Business Entities for Pre-Closing Periods, provided, that Seller shall provide Buyer with a timely and reasonably detailed account of the Tax proceeding involving such matters and shall not settle or compromise such proceeding, without obtaining Buyer’s prior written consent, which consent shall not be unreasonably withheld or delayed. Seller shall pay any Taxes due in connection with the matters set forth on such Schedule 7.1(d)(2) allocable to Pre-Closing Periods; provided that, for the avoidance of doubt, any such Tax or Taxes shall be treated as a single claim for purposes of Section 7.2(b)(iv). Subject to the foregoing, Buyer shall cause the Business Entities to execute any and all documents in order for Seller to control and resolve such matters. Buyer shall (and shall cause the Business Entities to) provide such cooperation, documentation and other information as Seller may reasonably request and use their reasonable best efforts to mitigate or reduce any Tax that could be imposed in connection with such matters.

Section 7.7. Cooperation. Each party hereto shall, and shall cause its Subsidiaries and Affiliates to, provide to each of the other parties hereto such cooperation, documentation and information as any of them reasonably may request in (i) filing any Return, amended Return or claim for refund, (ii) determining a liability for Taxes or an indemnity obligation under this Article VII or a right to refund of Taxes, (iii) conducting any Tax Proceeding, (iv) determining an allocation of Taxes between a Pre-Closing Period and Post-Closing Period or (v) preparing the schedules, Tax forms or other materials relating to Section 7.11. Such cooperation and information shall include providing copies of all relevant portions of relevant Returns, together with all relevant portions of relevant accompanying schedules and relevant work papers, relevant documents relating to rulings or other determinations by Taxing Authorities and relevant records concerning the ownership and Tax basis of property and other information, which any such party may possess. Each party will retain all Returns, schedules and work papers, and all material records and other documents relating to Tax matters, of the Business Entities for Pre-Closing Periods and Straddle Periods until the later of (x) the expiration of the statute of limitations for the Tax periods to which the Returns and other documents relate or (y) eight years following the due

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date (without extension) for such Returns. Thereafter, the party holding such Returns or other documents may dispose of them, provided that such party shall give to the other party written notice prior to doing so. Each party shall make its employees reasonably available on a mutually convenient basis at its cost to provide explanation of any documents or information so provided. Each party required to file Returns pursuant to this Article VII shall bear all costs of filing such Returns. Notwithstanding anything to the contrary contained in this Agreement, Seller shall be entitled to retain copies of all Tax Returns related to the income or operations of the Business Entities for all Pre-Closing Periods and information, records and documents relating to the Taxes and the preparation of Returns for any Pre-Closing Period or Straddle Period. The parties further agree to use their best efforts to obtain any certificate or other document from any Taxing Authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but without limitation to, with respect to the transactions contemplated by this Agreement).

Section 7.8. Termination of Tax Sharing Agreements. Any and all Tax allocation or sharing agreements or other agreements or arrangements relating to Tax matters between any of the Business Entities on the one hand and Seller or any Continuing Affiliate on the other hand shall be terminated with respect to each of the Business Entities as of the day before the Closing Date and, from and after the Closing Date, the Business Entities shall not have any rights or obligations thereunder for any past or future period.

Section 7.9. Buyer Consolidated Returns. Notwithstanding any other provision, (a) Buyer shall be entitled to control in all respects, and neither Seller nor any Subsidiary or Affiliate of any of them shall be entitled to participate in, any Tax Proceeding with respect to any consolidated, combined or unitary Tax Return that includes Buyer or any other member of the Buyer Group and (b) Buyer and its Subsidiaries and Affiliates shall not be required to provide any Person with any consolidated, combined or unitary Tax Return or copy thereof that includes Buyer or any other member of the Buyer Group (provided, however, that to the extent that such Tax Returns would be required to be delivered but for this Section 7.9(b), the Person that would be required to deliver such Tax Returns shall instead deliver pro forma Tax Returns relating solely to the Business Entities).

Section 7.10. Seller Consolidated Returns. Notwithstanding any other provision, (a) except to the extent set forth in Section 7.6, Seller shall be entitled to control in all respects, and neither Buyer nor any of its Subsidiaries or Affiliates shall be entitled to participate in, any Tax Proceeding with respect to any Subchapter S Return or any consolidated, combined or unitary Tax Return that includes Seller or any Continuing Affiliate and (b) Seller and its Subsidiaries and Affiliates shall not be required to provide any Person with any Subchapter S Return or any consolidated, combined or unitary Tax Return or copy thereof that includes Seller or any other Continuing Affiliate (provided, however, that to the extent that such Tax Returns would be required to be delivered but for this Section 7.10(b), the Person that would be required to deliver such Tax Returns shall instead deliver pro forma Tax Returns relating solely to the Business Entities).

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Section 7.11. Tax Treatment; Purchase Price Allocation.

(a) The parties hereto agree that for U.S. federal income tax purposes, the Stock Purchase shall be treated as a purchase of all of the assets of the Business Entities. The parties further agree that where applicable, such treatment shall apply for state, local, and foreign income tax purposes.

(b) Within eighty (80) days after the Closing Date, Seller shall prepare a schedule (the “Draft Allocation”) allocating the Purchase Price and any other consideration paid by Buyer (or deemed to be paid by Buyer) to Seller among the assets of the Business Entities (the “Assets”) including the non-competition and non-solicitation covenants set forth in the Non-Competition and Non-Solicitation Agreement (“Covenant”). The allocation shall be done in such a manner so as to comply with the requirements of Section 1060 of the Code and the applicable Treasury Regulations. Within forty-five (45) days of its receipt of such Draft Allocation, Buyer will provide Seller with a written notice of any proposed changes thereto, together with a detailed explanation of the basis for such proposed changes. If Buyer does not provide Seller with any proposed changes within such forty-five (45) day period, the Draft Allocation shall become final (the “Final Allocation”). If Buyer timely notifies Seller of any proposed changes to the Draft Allocation, the parties shall discuss such proposed changes in good faith and shall attempt to resolve any dispute. If the parties are able to reach a mutually satisfactory agreement as to any proposed changes, the Draft Allocation shall be modified to reflect such agreed changes and shall become the Final Allocation. In the event that the parties cannot agree on an allocation schedule within twenty-five (25) days after Seller’s receipt of Buyer’s notice of proposed changes, the dispute shall be resolved by a Neutral Valuation Firm; provided that if the dispute involves the valuation of the Covenant, then, at the option of Seller, the disputed allocations to be resolved by the Neutral Valuation Firm shall not include the valuation of Covenant, and the parties may rely upon their respective valuations of the Covenant for Tax purposes, and shall not be bound by the other party’s valuation of the Covenant in filing their Tax Returns and reports required under Section 1060 of the Code and the applicable Treasury Regulations. In such case, the allocation to Goodwill by the Neutral Valuation Firm shall assume a zero value for the Covenant and the parties would reduce their allocation to Goodwill by the amount they allocate to the Covenant for purposes of the allocation under Section 1060 of the Code. If the dispute involves the valuation of the Covenant and Seller does not exercise its option not to have the Neutral Valuation Firm value the Covenant, then the dispute involving the Covenant shall be resolved by the Neutral Valuation Firm along with other disputed items. Subject to the foregoing, the resolution by such Neutral Valuation Firm shall be binding on both parties. The Draft Allocation shall be modified to reflect such resolution (and any other agreed proposed changes) and shall become the Final Allocation (or if the parties have not agreed to an allocation with respect to the Covenant (and such valuation is not determined by a Neutral Valuation Firm), as adjusted by each party to reflect their allocation to the Covenant, a “Limited Final Allocation”).

(c) If there is an increase or decrease in consideration within the meaning of Treasury Regulations Section 1.1060-1(e)(ii)(B) after the parties have filed the initial IRS Form 8594, the parties shall allocate such increase or decrease (or if they cannot agree to such an allocation, a Neutral Valuation Firm shall allocate) the increase or decrease in consideration paid by Buyer to Seller among the Assets as required by and consistent with Section 1060 and the applicable Treasury Regulations which shall be the revised Final Allocation or revised Limited Final Allocation.

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(d) If there is a Final Allocation, Seller shall prepare (or cause to be prepared) an IRS Form 8594 (including any necessary supplement) consistent with the allocation set forth in the Final Allocation (or any revision thereto) and shall timely deliver a copy thereof to Buyer. Seller and Buyer shall each file such completed IRS Form 8594 (including any necessary supplement) with the IRS in a timely manner. If there is a Limited Final Allocation, Seller and Buyer shall prepare (or cause to be prepared) an IRS Form 8594 (including any necessary supplements) consistent with the Limited Final Allocation (or any revision thereto). Seller and Buyer shall file such IRS Form 8594 (including any necessary supplement) with the IRS in a timely manner.

(e) The parties hereto shall make consistent use of and adhere to the Final Allocation or Limited Final Allocation (or if applicable, the most recent revised Final Allocation or Limited Final Allocation) for all Tax purposes and in all filings, declarations and reports with the IRS in respect thereof, including the reports required to be filed under Section 1060 of the Code and the applicable Treasury Regulations. The parties shall not take, or cause or permit to be taken any position on any Tax Return which would be inconsistent with or prejudice the allocations set forth on the Final Allocation or Limited Final Allocation (or if applicable, the most recent revised Final Allocation or Limited Final Allocation). In any action or proceeding related to the determination of any Tax, neither Buyer nor Seller (or their respective Affiliates) shall contend or represent that such Final Allocation or Limited Final Allocation (or if applicable, the most recent revised Final Allocation or Limited Final Allocation) is not a correct allocation. For the avoidance of doubt, the parties agree that the Final Allocation or Limited Final Allocation shall not be binding for any purpose other than Tax purposes.

Section 7.12. Post-Closing Actions which Affect Seller Tax Indemnitee’s Liability for Taxes for Pre-Closing Periods.

(a) Except as provided elsewhere in this Article VII or as required by law, none of Buyer, any of the Business Entities or any of their Affiliates shall make any election, take any action, or amend, re-file or otherwise modify any Tax Return previously filed with any Taxing Authority, relating in whole or in part to any Business Entity with respect to any Pre-Closing Period, if doing so would increase a Seller Tax Indemnitee’s liability for Taxes for any Pre-Closing Period (including any indemnification liability of Seller under Article VII of this Agreement), without the prior written consent of Seller, which consent should not be unreasonably withheld or delayed; provided, that the parties agree that filing any Straddle Period or Post-Closing Period Tax Return (or extension thereof) for the matters set forth on Schedule 7.1(d)(2) to the Seller Disclosure Letter seven (7) days before the due date of such Tax Return or later is expressly permitted.

(b) Notwithstanding anything in this Agreement to the contrary, neither Buyer, a Business Entity nor any of their Affiliates shall waive any statute of limitations or agree to any extensions thereof in respect to any Pre-Closing Period without the prior written consent of the Seller, which consent should not be unreasonably withheld or delayed.

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Section 7.13. Survival. Notwithstanding any other provision of this Agreement, the representations, warranties, and obligations (including the obligations for indemnification) provided in this Article VII shall survive for thirty (30) days following the termination of the applicable statute of limitations with respect to the Tax to which such representation, warranty, or obligation relate.

Section 7.14. Characterization of Payments. Any indemnity payment made to Seller, Buyer, or any Business Entity pursuant to this Article VII or Article IX of this Agreement shall be treated as an adjustment of the Purchase Price for all purposes, including Tax purposes, to the maximum extent permitted by Law.

Section 7.15. Definitions. The following terms shall have the following respective meanings:

(a) “Buyer Group” shall mean Buyer and each of its Subsidiaries and Affiliates, other than the Business Entities.

(b) “Buyer Tax Indemnitees” means Buyer and each of its Subsidiaries and Affiliates, including the Business Entities.

(c) “Buyer Tax Indemnitors” means Buyer and the Business Entities.

(d) “Neutral Accounting Firm” means a nationally recognized accounting firm that has not performed any services for either Buyer Tax Indemnitee or Seller Tax Indemnitee in the prior 12 months mutually selected by Buyer and Seller (or if they cannot agree on the selection, Buyer and Seller shall each select such a nationally recognized accounting firm, which two firms shall select a third such nationally recognized accounting firm to serve as the Neutral Accounting Firm).

(e) “Neutral Valuation Firm” means a nationally recognized accounting or valuation firm that has not performed any services for either Buyer Tax Indemnitee or Seller Tax Indemnitee in the prior 12 months mutually selected by Buyer and Seller (or if they cannot agree on the selection, Buyer and Seller shall each select such a nationally recognized accounting or valuation firm, which two firms shall select a third such nationally recognized accounting or valuation firm to serve as the Neutral Valuation Firm).

(f) “Post-Closing Period” means any taxable period or portion thereof beginning, with respect to the Business Entities, after the Closing Date or, as the context may require, all such periods and portions.

(g) “Pre-Closing Period” means any taxable period or portion thereof ending, with respect to the Business Entities, on or before the Closing Date or, as the context may require, all such periods and portions.

(h) “QSub” means a qualified subchapter S subsidiary as defined in Code section 1361(b)(3) (or any similar provision of state, local, or foreign law).

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(i) “Returns” or “Tax Returns” means any returns, reports or statements (including any amended returns or information returns) required to be filed for purposes of a particular Tax.

(j) “Seller Tax Indemnitees” means Seller, its shareholders and each of the Subsidiaries or Affiliates of Seller, excluding the Business Entities.

(k) “S Corporation” means a corporation that is treated as an “S Corporation” within the meaning of section 1361(a)(1) of the Code (or any similar provision of state, local, or foreign law).

(l) “Subchapter S Group” means an S Corporation and each direct or indirect subsidiary of such S Corporation that is a QSub or that is otherwise treated as a disregarded entity under section 301.7701-3 of the Treasury Regulations (or any similar provision of state, local, or foreign law).

(m) “Subchapter S Return” means a Form 1120S (or any similar form under state, local, or foreign law).

(n) “Tax” or “Taxes” means all federal, state, local or foreign net or gross income, gross receipts, net proceeds, sales, use, ad valorem, value added, franchise, bank shares, withholding, payroll, employment, excise, property, alternative minimum, environmental or other taxes, assessments or duties, fees, levies or other governmental charges of any nature whatsoever, whether disputed or not, together with any interest, penalties, additions to tax and additional amounts imposed with respect thereto.

(o) “Tax Claim” means any claim with respect to Taxes made by any Taxing Authority that, if pursued successfully, would reasonably be expected to serve as the basis for a claim for indemnification of a Tax Indemnitee under this Article VII.

(p) “Tax Indemnitee” shall mean a Seller Tax Indemnitee or a Buyer Tax Indemnitee.

(q) “Tax Indemnitor” shall mean a Seller or a Buyer Tax Indemnitor.

(r) “Taxing Authority” means any governmental agency, board, bureau, body, department or authority of any United States federal, state or local jurisdiction or any foreign jurisdiction, having jurisdiction with respect to any Tax.

(s) “Treasury Regulations” means the regulations promulgated under the Code, including any temporary regulations.

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ARTICLE VIII

Conditions Precedent

Section 8.1. Conditions to Each Party’s Obligation. The obligations of Seller and Buyer to consummate the Stock Purchase shall be subject to the satisfaction of all of the following conditions precedent:

(a) No Injunctions or Restraints, Illegality. No Law shall have been adopted or promulgated, and no temporary restraining order, preliminary or permanent injunction or other order issued by a court or other Governmental Authority of competent jurisdiction shall be in effect having the effect of making the Stock Purchase or the other transactions contemplated hereby illegal or otherwise prohibiting consummation of the Stock Purchase or the other transactions contemplated hereby.

(b) Antitrust Clearance. The waiting period (and any extension thereof) applicable to the Stock Purchase under the HSR Act (and any agreement entered into in connection with filing under the HSR Act with any Governmental Authority not to consummate the transaction pending further review) shall have been terminated or shall have expired.

(c) Governmental and Regulatory Approvals. Other than the filings pursuant to the HSR Act, all consents, approvals and actions of, filings with and notices to any Governmental Authority required of Buyer, Seller or any of their Subsidiaries to consummate the Stock Purchase and the other transactions contemplated hereby, the failure of which to be obtained or made would have or would reasonably be expected to have a Business Material Adverse Effect or a Buyer Material Adverse Effect shall have been obtained or made or which otherwise makes the consummation of the Stock Purchase illegal; provided that, with respect to any such illegality, the parties hereto will use their reasonable best efforts to make alternate arrangements to permit the Closing to occur prior to the receipt of such consent or approval without violation of applicable Law.

(d) Escrow Agreement. The Escrow Agent shall have delivered to Buyer and Seller a duly executed counterpart of the Escrow Agreement, executed by the Escrow Agent.

Section 8.2. Additional Conditions to Buyer’s Obligations. The obligation of Buyer to consummate the Stock Purchase shall be subject to the satisfaction of all of the following additional conditions precedent:

(a) Representations and Warranties of Seller. Each of the representations and warranties of Seller and the Company set forth in this Agreement that is qualified as to Business Material Adverse Effect shall be true and correct, and each of the representations and warranties of Seller and the Company set forth in this Agreement that is not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent in either case that such representations and warranties speak as of another date, in which case such representations shall be true and correct or true and correct in all material respects, as applicable, as of such other date).

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(b) Performance of Obligations of Seller and the Company. Seller and the Company shall have performed or complied in all material respects with all agreements and covenants required to be performed by them under this Agreement at or prior to the Closing Date.

(c) No Business Material Adverse Effect. Since the date of this Agreement, there shall not have been any circumstance, change or event that, individually or in the aggregate, has had a Business Material Adverse Effect.

(d) Certificate. Buyer shall have received at the Closing a certificate dated the Closing Date and duly executed by the president and the chief financial officer of the Company and the president of Seller to the effect that the conditions specified in paragraphs (a), (b) and (c) of this Section 8.2 have been satisfied.

(e) Deliveries. Seller shall have delivered all the certificates, instruments, agreements and other documents required to be delivered pursuant to Section 2.3.

Section 8.3. Additional Conditions to Seller’s Obligation. Seller’s obligation to consummate the Stock Purchase shall be subject to the satisfaction of all of the following additional conditions precedent:

(a) Representations and Warranties of Buyer. Each of the representations and warranties of Buyer set forth in this Agreement that is qualified as to Buyer Material Adverse Effect shall be true and correct, and each of the representations and warranties of Buyer set forth in this Agreement that is not so qualified shall be true and correct in all material respects, in each case as of the date of this Agreement and as of the Closing Date as though made on and as of the Closing Date (except to the extent in either case that such representations and warranties speak as of another date in which case such representations shall be true and correct or true and correct in all material respects, as applicable, as of such other date).

(b) Performance of Obligations of Buyer. Buyer shall have performed or complied in all material respects with all agreements and covenants required to be performed by it under this Agreement at or prior to the Closing Date.

(c) Certificate. Seller shall have received at the Closing a certificate dated the Closing Date and duly executed by the chief executive officer and the chief financial officer of Buyer to the effect that the conditions specified in paragraphs (a) and (b) of this Section 8.3 have been satisfied.

(d) Deliveries. Buyer shall have delivered to Seller all the funds, certificates, instruments, agreements and other documents required to be delivered pursuant to Section 2.4.

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ARTICLE IX

Survival; Indemnification

Section 9.1. Survival. (a) The representations and warranties of Seller contained in this Agreement shall survive the Closing until the first anniversary of the Closing Date, except (i) the representations and warranties set forth in Sections 3.1(a), 3.1(b) and 3.2, which shall survive the Closing indefinitely, (ii) the representations and warranties set forth in Section 3.15, which shall survive the Closing until the third anniversary of the Closing Date (such first or third anniversary of the Closing Date, as the case may be, being the “Representation Survival Date”), and (iii) the representations and warranties set forth in Article VII, whose survival shall be as set forth in Section 7.13 of this Agreement. The representations and warranties of Buyer contained in this Agreement shall survive the Closing until the first anniversary of the Closing Date.

(b) The covenants and agreements of the parties hereto contained in this Agreement which by their terms apply or are to be performed in whole or in part following the Closing and this Article IX shall survive the Closing.

Section 9.2. Indemnification by Seller. (a) Subject to Section 9.5 hereof (except as provided in the last sentence of this Section 9.2(a)), from and after the Closing Date, Seller shall indemnify and hold harmless Buyer and its Subsidiaries (including the Business Entities) and their respective officers, directors and Affiliates (collectively, the “Buyer Indemnified Parties”) from and against any and all Covered Losses suffered by such Buyer Indemnified Parties resulting from or arising out of (i) any inaccuracy in or breach of any of the representations or warranties (without giving effect, other than with respect to Section 3.6(b), to any qualification as to “Business Material Adverse Effect” or “knowledge” contained therein) of Seller and the Company in Article III of this Agreement, other than those contained in Sections 3.1(a), 3.1(b) and 3.2, or any certificate delivered by Seller pursuant hereto (other than the representations and warranties set forth in Article VII hereof, indemnity for which is addressed in Article VII), and the matters described on Schedule 9.2(a) of the Seller Disclosure Letter, (ii) any inaccuracy in or breach of any of the representations and warranties of Seller and the Company contained in Sections 3.1(a), 3.1(b) and 3.2 or any breach or nonfulfillment of any covenants or agreements made by Seller or the Company herein, (iii) any liability or obligation of any of the Business Entities arising from or relating to any business other than the Business and (iv) any Non-Business Guaranty that remains in place following the Closing in accordance with Section 5.6(c). The obligation of Seller to indemnify under clause (iv) of this Section 9.2(a) shall not be subject to Section 9.5.

(b) The Buyer Indemnified Parties shall not be entitled to assert any indemnification pursuant to clause (i) of Section 9.2(a) (or by reason of any certification in respect of such representations and warranties) after the applicable Representation Survival Date; provided that if on or prior to the applicable Representation Survival Date a Notice of Claim shall have been given with reasonable specificity (in light of the extent of the information that Buyer has or should reasonably have with respect to such claim) to Seller pursuant to Section 9.4 hereof for such indemnification, the Buyer Indemnified Parties shall continue to have the right to be indemnified with respect to such indemnification claim until such claim for indemnification has been satisfied or otherwise resolved as provided in this Article IX.

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Section 9.3. Indemnification by Buyer. (a) Subject to Section 9.5 hereof (except as provided in the last sentence of this Section 9.3(a)), from and after the Closing Date, Buyer shall indemnify and hold harmless Seller and its Subsidiaries (excluding the Business Entities) and their respective officers, directors and Affiliates (collectively, the “Seller Indemnified Parties”) from and against any and all Covered Losses suffered by such Seller Indemnified Parties resulting from or arising out of (i) any inaccuracy in or breach of any of the representations or warranties (without giving effect to any qualification as to “Buyer Material Adverse Effect” contained therein) of Buyer in this Agreement or in any certificate delivered by Buyer pursuant hereto, (ii) any breach or nonfulfillment of any covenants or agreements made by Buyer herein, (iii) the operations of the Business Entities after the Closing Date and (iv) any Seller Guaranty that remains in place following the Closing in accordance with Section 5.6(c). The obligation of Buyer to indemnify under clause (iv) of this Section 9.3(a) shall not be subject to Section 9.5.

(b) The Seller Indemnified Parties shall not be entitled to assert any indemnification pursuant to clause (i) of Section 9.3(a) (or by reason of any certification in respect of such representations and warranties) after the first anniversary of the Closing Date; provided that if on or prior to the first anniversary of the Closing Date a Notice of Claim shall have been given with reasonable specificity (in light of the extent of the information that Seller has or should reasonably have with respect to such claim) to Buyer pursuant to Section 9.4 hereof for such indemnification, the Seller Indemnified Parties shall continue to have the right to be indemnified with respect to such indemnification claim until such claim for indemnification has been satisfied or otherwise resolved as provided in this Article IX.

Section 9.4. Indemnification Procedures. (a) Upon obtaining knowledge of any claim or demand which has given rise to, or is reasonably expected to give rise to, a claim for indemnification hereunder, Buyer or Seller, as the case may be, shall give written notice (“Notice of Claim”) of such claim or demand to the other. The party giving such Notice of Claim shall furnish to the other party in reasonable detail such information as the Buyer Indemnified Parties or the Seller Indemnified Parties, as the case may be, may have with respect to such indemnification claim (including copies of any summons, complaint or other pleading which may have been served on it and any written claim, demand, invoice, billing or other document evidencing or asserting the same). Subject to the limitations set forth in Sections 9.2(b) and 9.3(b) hereof, no failure or delay by Buyer or Seller in the performance of the foregoing shall reduce or otherwise affect the obligation of Seller or Buyer (such party the “Indemnifying Party”), respectively, to indemnify and hold the Buyer Indemnified Parties or the Seller Indemnified Parties, respectively, harmless, except to the extent that the Indemnifying Party shall have been materially prejudiced by such failure or delay.

(b) If the claim or demand set forth in the Notice of Claim given pursuant to Section 9.4(a) hereof is a claim or demand asserted by a third party, the party receiving such Notice of Claim shall have 20 days after the date on which Notice of Claim is given to notify the party giving such Notice of Claim in writing of its election to defend such third party claim or demand on behalf of the party seeking indemnification. If the party receiving such Notice of Claim elects, on behalf of the Indemnifying Party , to defend such third party claim or demand,

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the party seeking indemnification (such party, the “Indemnified Party”) shall make available to the Indemnifying Party and its agents and representatives all records and other materials which are reasonably required in the defense of such third party claim or demand and shall, pursuant to the Indemnifying Party’s reasonable request, otherwise reasonably cooperate with, and assist the Indemnifying Party in the defense of, such third party claim or demand at the Indemnifying Party’s expense, and so long as Seller or Buyer, as the case may be, is defending such third party claim in good faith, the Indemnified Party shall not pay, settle or compromise such third party claim or demand. In such case, the Indemnifying Party may settle or compromise such third party claim or demand (i) with the written consent of Seller or Buyer, on behalf of the Seller Indemnified Parties or the Buyer Indemnified Parties, as the case may be, such consent not to be unreasonably withheld or delayed (it being understood and agreed that the withholding of consent with respect to any of the matters referred to in subclause (A), (B) or (C) in the following clause (ii) shall not be deemed unreasonable), or (ii) without such consent, so long as such settlement includes (A) an unconditional release of the Indemnified Parties from all liability in respect of such claim or litigation, (B) does not subject the Indemnified Parties to any injunctive relief or other equitable remedy, and (C) does not include an affirmative statement or admission of fault, culpability or failure to act by any Indemnified Party. If the party receiving such Notice of Claim elects to defend such third party claim or demand, the Indemnified Party shall have the right to participate in the defense of such third party claim or demand, at such Indemnified Party’s own expense. The Indemnifying Party shall be liable for the fees and expenses of counsel to the Indemnified Parties for any period during which the Indemnifying Party has failed to assume the defense of such claim or demand and as set forth in the next sentence. In the event that representation by counsel to the Indemnifying Party of both such Indemnifying Party and the Indemnified Parties could reasonably be expected to represent a conflict of interest for such counsel, then the Indemnified Parties may employ separate counsel to represent or defend it in any such action or proceeding and the Indemnifying Party will pay the reasonable fees and expenses of such counsel; provided, that the Indemnifying Party shall not, in connection with any proceeding or related proceedings, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to local counsel) in respect of any claim for all Buyer Indemnified Parties or Seller Indemnified Parties, as the case may be. If the party receiving such Notice of Claim does not elect to defend such third party claim or demand or does not defend such third party claim or demand in good faith, the Indemnified Parties shall have the right, in addition to any other right or remedy they may have hereunder, at the Indemnifying Parties’ expense if the Indemnifying Parties are obligated to indemnify the Indemnified Parties for such third-party claim or demand under Article IX of this Agreement, to defend such third party claim or demand; provided, however, that (i) such Indemnified Parties shall not have any obligation to participate in the defense of, or defend, any such third party claim or demand; (ii) such Indemnified Parties’ defense of or participation in the defense of any such third party claim or demand shall not in any way diminish or lessen the obligations of the Indemnifying Parties under the agreements of indemnification set forth in this Article IX; and (iii) such Indemnified Parties may not settle any claim without the consent of Seller or Buyer, respectively, on behalf of Seller or Buyer, respectively (which consent shall not be unreasonably withheld or delayed).

(c) Subject to the limitations in Section 9.5, (i) Seller shall satisfy its obligations under this Article IX in respect of a valid claim for indemnification hereunder which is not contested by Seller (A) at such time as there are any funds remaining in the Escrow Fund, by delivering a joint notice along with Buyer to the Escrow Agent in accordance with the terms of the

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Escrow Agreement instructing the Escrow Agent to disburse funds from the Escrow Fund to Buyer in the amount of the lesser of such obligations or the remaining amount of funds in the Escrow Fund and (B) at such time as there are no longer any funds remaining in the Escrow Fund (including with respect to any obligations only a portion of which is disbursable to Buyer pursuant to the foregoing clause (A)), within 30 days after the date on which Notice of Claim is given by wire transfer, in immediately available funds, to the account specified by Buyer and (ii) Buyer shall satisfy its obligations under this Article IX in respect of a valid claim for indemnification hereunder which is not contested by Buyer within 30 days after the date on which Notice of Claim is given by wire transfer, in immediately available funds, to the account specified by Seller.

Section 9.5. Limitations on Indemnification. (a) Seller shall have no liability for indemnification pursuant to clause (i) of Section 9.2(a) (or by reason of any certification in respect of such representations and warranties) with respect to Covered Losses for which indemnification is provided thereunder (x) unless such Covered Losses exceed in the aggregate fourteen million, five hundred thousand dollars ($14,500,000), in which case Seller shall be liable (subject to clause (y) below) for all such Covered Losses in excess of such amount or (y) in the aggregate in excess of one hundred forty-five million dollars ($145,000,000). The Buyer Indemnified Parties shall look first to the Escrow Fund for any payment of indemnification claims pursuant to Section 9.2.

(b) Buyer shall have no liability for indemnification pursuant to clause (i) of Section 9.3(a) (or by reason of any certification in respect of such representations and warranties) with respect to Covered Losses for which indemnification is provided thereunder (x) unless such Covered Losses exceed in the aggregate fourteen million five hundred thousand dollars ($14,500,000), in which case Buyer shall be liable (subject to clause (y) below) for all such Covered Losses in excess of such amount or (y) in the aggregate in excess of one hundred forty-five million dollars ($145,000,000).

(c) Notwithstanding anything herein to the contrary, no party shall, in any event, be liable under Sections 9.2 or 9.3 or Article VII to any other Person for any consequential, incidental, indirect, special or punitive damages of such other Person, including loss of future revenue, income or profits, diminution of value or loss of business reputation or opportunity relating to the breach or alleged breach thereof (other than to the extent the third party has been awarded such in a third party claim).

(d) Neither Seller nor the Buyer shall have Liability under Sections 9.2 or 9.3, or to the Buyer Indemnified Parties or the Seller Indemnified Parties, as the case may be, in respect of any Covered Losses to the extent (but only to the extent) that:

(i) the Covered Loss (or any part thereof) in question arises, or is increased, as a result of a change after the Closing in any accounting policy, any Tax reporting practice or the length of any accounting period for Tax purposes of the Business Entities (in the case of the Buyer Indemnified Parties) or Seller and its Subsidiaries (in the case of the Seller Indemnified Parties);

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(ii) in the case of the Buyer Indemnified Parties, the Covered Loss (or any part thereof) in question arises from or relates to (a) any product Liability arising from the research, development, manufacture, sale, advertising, distribution, consuming, marketing or use of cigar or pipe tobacco products or (b) the MSA; or

(iii) the Covered Loss (A) was within the category covered by, and together with other Covered Losses in such category not exceeding the amount provided for in, the reserve reflected on the Business Balance Sheet or (B) was included in the Working Capital calculation or otherwise taken into account under Section 5.10(b).

(e) The amount of any Covered Losses under Sections 9.2 or 9.3 or Article VII sustained by a Buyer Indemnified Party or a Seller Indemnified Party shall be reduced by any amount received by such Person (or an Affiliate thereof) with respect thereto under any insurance coverage (including pursuant to Section 5.9(b)) or from any other Person alleged to be responsible therefor, and by the amount of any Tax benefit actually realized with respect to the Covered Loss, in each case net of costs incurred. The Buyer Indemnified Parties and the Seller Indemnified Parties shall use commercially reasonable efforts to collect any amounts available under such insurance coverage and from such other Person alleged to have responsibility with respect to the Covered Loss. If a Buyer Indemnified Party or Seller Indemnified Party realizes a Tax benefit or receives an amount under insurance coverage or from such other Person with respect to Covered Losses sustained at any time subsequent to any indemnification payment pursuant to Sections 9.2 or 9.3 or Article VII, then such Buyer Indemnified Party or Seller Indemnified Party shall promptly reimburse the applicable Indemnifying Party for any payment made to the Indemnified Party by such Indemnifying Party up to such amount realized or received by the Buyer Indemnified Party or Seller Indemnified Party, as applicable.

(f) Upon making any indemnification payment under Sections 9.2 or 9.3 or this Article VII, the Indemnifying Party will, to the extent of such payment, be subrogated to all rights of the Indemnified Party against any third party in respect of the Covered Loss to which the payment relates; provided, however, that until the Indemnified Party recovers full payment of its Covered Loss, any and all claims of the Indemnifying Party against any such third party on account of said payment are hereby made expressly subordinated and subjected in right of payment to the Indemnified Party’s rights against such third party.

(g) Notwithstanding anything to the contrary in this Agreement, Seller’s indemnification obligation under this Article IX for a breach of Section 3.15 (or any certification in respect thereof) is subject to the provisions of this Section 9.5(g). Seller shall be responsible for the cost of Remedial Action only to the extent necessary to reasonably comply with the remediation or compliance standard consistent with the industrial/commercial use of the property as intended to be used as the Closing Date, which standard will be reasonable, if acceptable to the applicable Government Authorities. Seller shall not be responsible for those costs incurred in connection with a Remedial Action to the extent such costs arise from or are exacerbated by actions of Buyer or the Business Entities after the Closing. Further, Seller shall not be responsible for costs incurred in connection with a Remedial Action unless such Remedial Action is (i) required by a Governmental Authority acting pursuant to Environmental Law; (ii) required to respond to a judgment or an order brought by a third party; (iii) required to respond to a condition discovered in connection with the normal day-to-day operation of a facility based on the continued

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operation of the Business as presently conducted or a facility expansion, demolition or closure actually implemented by Buyer where such Remedial Action is necessary to permit such operation, expansion, demolition or closure; or (iv) required to respond to a condition which presents a substantial endangerment to human health; provided that Seller shall have no Liability or responsibility for any of the matter described in the immediately preceding clauses (i) through (iv) to the extent that such matter arises from product Liability due to the research, development, manufacture, sale, advertising, distribution, consuming, marketing or use of cigars or pipe tobacco products.

(h) Buyer shall not be entitled to indemnification under Section 9.2 for a breach by Seller of its obligations under clause (i) of Section 5.10(b) to the extent Closing Working Capital is less than $32.4 million unless the amount of such shortfall exceeds $750,000, in which case the amount of any such shortfall which Buyer shall be entitled to recover under Section 9.2 shall be limited to the amount of such shortfall in excess of $750,000 and provided that any such claim shall have been made within 90 days following the Closing Date.

Section 9.6. Exclusive Tax Indemnification. Notwithstanding anything to the contrary in this Article IX, the above provisions of this Article IX shall not apply to Tax indemnification matters, which matters shall instead be governed by Article VII.

Section 9.7. Exclusive Remedy. NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS AGREEMENT TO THE CONTRARY, THE PARTIES HERETO ACKNOWLEDGE AND AGREE THAT FOLLOWING THE CLOSING, THE INDEMNIFICATION PROVISIONS IN THIS ARTICLE IX AND ARTICLE VII SHALL BE THE EXCLUSIVE REMEDY OF THE PARTIES WITH RESPECT TO A BREACH OF OR DEFAULT UNDER THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT, OTHER THAN ANY VIOLATION OF A COVENANT IN ARTICLE V, VI OR VII (OTHER THAN PARAGRAPHS (a) THROUGH (d) of SECTION 7.2) WHICH BY ITS TERMS IS TO BE PERFORMED FOLLOWING THE CLOSING, FOR WHICH INJUNCTIVE RELIEF SHALL ALSO BE AVAILABLE. SUBJECT TO THE FOREGOING, FOLLOWING THE CLOSING, THE PARTIES HEREBY WAIVE ANY CONTRACTUAL, STATUTORY, EQUITABLE OR COMMON LAW RIGHTS OR REMEDIES AGAINST THE OTHER PARTIES OF ANY NATURE. THIS SECTION 9.7 SHALL NOT APPLY IN RESPECT OF CLAIMS FOR FRAUD OR INTENTIONAL MISREPRESENTATION.

ARTICLE X

Termination

Section 10.1. Termination. This Agreement may be terminated at any time prior to the Closing by:

(a) Buyer and Seller by mutual written agreement;

(b) either Buyer or Seller if the Closing Date shall not have occurred by the close of business on May 1, 2008, which date may be extended by up to 120 additional days (in 30-day increments) by either party, if the Closing has not occurred by the then-

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effective Termination Date due to the failure to satisfy one or more of the conditions set forth in Article VIII (except that a party whose breach has caused such condition not to be satisfied shall not have the right to so extend the Termination Date) (as it may be extended, the “Termination Date”); provided, however, that the right to terminate this Agreement pursuant to this Section 10.1(b) shall not be available to (i) Buyer, if its failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing Date to occur on or before the Termination Date or (ii) Seller, if its failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Closing Date to occur on or before the Termination Date; or

(c) either Buyer or Seller if any Governmental Authority shall have issued an order, decree or ruling or taken any other action (which such party shall have used its reasonable best efforts to resist, resolve or lift, as applicable, in accordance with Section 5.2) permanently restraining, enjoining or otherwise prohibiting the Stock Purchase, and such order, decree, ruling or other action shall have become final and nonappealable.

Section 10.2. Procedure and Effect of Termination. (a) In the event of termination of this Agreement by either or both of Buyer and Seller pursuant to Section 10.1, written notice thereof shall forthwith be given by the terminating party to the other, and this Agreement shall thereupon terminate and become void and have no effect, and the transactions contemplated hereby shall be abandoned without further action by the parties hereto, except that the provisions of this Section 10.2, the Confidentiality Agreement and Article XI shall survive the termination of this Agreement.

(b) In the event this Agreement shall be terminated and at such time any party hereto is in material breach of, or material default under, any term or provision hereof, such termination shall be without prejudice to, and shall not affect, any and all rights to damages that the other party may have hereunder or otherwise under applicable Law.

ARTICLE XI

Miscellaneous

Section 11.1. Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts have been signed by each of the parties and delivered to the other parties.

Section 11.2. Governing Law; Jurisdiction and Forum; Waiver of Jury Trial. (a) This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware without reference to the choice of law principles thereof.

(b) Each of the parties hereto irrevocably agrees that any Action with respect to this Agreement and the rights and obligations arising hereunder, or for recognition and enforcement of any judgment in respect of this Agreement and the rights and obligations arising hereunder brought by the other party hereto or its successors or assigns, shall be brought and determined exclusively in the Delaware Court of Chancery and any state appellate court therefrom

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within the State of Delaware (or, if the U.S. Federal District Court has exclusive jurisdiction over a particular matter, any federal court within the State of Delaware) (such courts, the “Subject Courts”). Each of the parties hereto hereby irrevocably submits with regard to any such action or proceeding for itself and in respect of its property, generally and unconditionally, to the personal jurisdiction of the aforesaid courts and agrees that it will not bring any action relating to this Agreement or any of the transactions contemplated by this Agreement in any court other than the aforesaid courts. Each of the parties hereto hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of such Action. The parties further agree, to the extent permitted by applicable Law, that any final and unappealable judgment against any of them in any Action contemplated above shall be conclusive and may be enforced in any other jurisdiction within or outside the United States by suit on the judgment, a certified copy of which shall be conclusive evidence of the fact and amount of such judgment.

(c) To the extent that any party hereto has or hereafter may acquire any immunity from jurisdiction of any court or from any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its property, such party hereby irrevocably waives such immunity in respect of its obligations with respect to this Agreement.

(d) Each party waives, to the fullest extent permitted by applicable Law, any right it may have to a trial by jury in respect of any Action arising out of or relating to this Agreement. Each party certifies that it has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications set forth above in this Section 11.2.

Section 11.3. Enforcement. The parties hereto agree that irreparable damage would occur if any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement in any Subject Court, including without limitation, with respect to the parties’ obligation to consummate the Closing pursuant to the terms hereof, in addition to any other remedy to which any party is entitled at law or in equity.

Section 11.4. Entire Agreement. This Agreement, the Escrow Agreement, the Exhibits hereto, the Seller Disclosure Letter, the Buyer Disclosure Letter and the Confidentiality Agreement contain the entire agreement between the parties with respect to the subject matter hereof and there are no agreements, understandings, representations or warranties between the parties with respect thereto other than those set forth or referred to herein. Except for Section 5.11, which is intended to benefit, and be enforceable by, the D&O Indemnitees and the D&O Released Parties, as applicable, Section 7.2, which is intended to benefit, and to be enforceable by, the Buyer Tax Indemnitees and the Seller Tax Indemnitees, Section 9.2 which is intended to benefit, and be enforceable by, the Buyer Indemnified Parties, and Section 9.3 which is intended to benefit, and be enforceable by, the Seller Indemnified Parties, this Agreement is not intended to confer upon any Person not a party hereto (and their successors and assigns permitted by Section 11.7) any rights or remedies hereunder.

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Section 11.5. Expenses. Except as set forth in this Agreement and the Escrow Agreement, whether the Stock Purchase is or is not consummated, all legal, investment banking and other costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses. For the avoidance of doubt, any costs incurred in connection with this Agreement and the transactions contemplated hereby by Seller and its Subsidiaries (including the Business Entities) prior to the Closing, including any arrangements referred to in Section 3.14 with respect to the Seller Financial Advisor (including any indemnity obligations to the Seller Financial Advisor), shall be deemed incurred by Seller or one or more of its Subsidiaries, and not by any of the Business Entities.

Section 11.6. Notices. All notices hereunder shall be sufficiently given for all purposes hereunder if in writing and shall be deemed to have been duly given or made (i) as of the date so delivered if delivered personally, (ii) when sent by telefax or facsimile (in each case with confirmation of receipt) if sent during normal business hours of the recipient and, if not, on the next business day, (iii) three days after having been sent by registered or certified mail, postage prepaid, (iv) one business day after deposit with a nationally recognized, overnight courier service, specifying next day delivery, or (v) if given by any other means, when actually received by the addressee(s) set forth below. Notices to Seller shall be addressed to:

Bradford Holdings, Inc.

1105 North Market Street

Suite 1226

Wilmington, Delaware 19899

Attn.: President

Telecopy No.: (302) 651-8426

with a copy to:

Cozen O’Connor

1900 Market Street

Philadelphia, Pennsylvania 19103

Attn.: Larry P. Laubach

Telecopy No.: (215) 701-2346

or at such other address and to the attention of such other person as Seller may designate by written notice to Buyer. Notices to Buyer shall be addressed to:

Altria Group, Inc.

120 Park Avenue

New York, New York 10017

Attn.: G. Penn Holsenbeck

Telecopy No.: (917) 663-5372

with a copy to both:

Philip Morris USA Inc.

6601 West Broad Street

Richmond, Virginia 23230

Attn: Denise F. Keane

Telecopy No.: (804) 484-8265

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and

Wachtell, Lipton, Rosen & Katz

51 West 52nd Street

New York, New York 10019

Attn.: Andrew J. Nussbaum

Telecopy No.: (212) 403-2000

or at such other address and to the attention of such other person as Buyer may designate by written notice to Seller.

Section 11.7. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that no party hereto will assign its rights or delegate any or all of its obligations under this Agreement without the express prior written consent of each other party hereto, except that Buyer shall be permitted, upon notice to Seller, to designate one or more of its wholly-owned subsidiaries as the purchaser(s) of the Shares hereunder and shall be permitted to assign its rights and obligations hereunder with respect thereto to such permitted designee(s); provided that in the event of such assignment Buyer shall continue to be bound by its obligations hereunder.

Section 11.8. Headings; Definitions. The section and article headings contained in this Agreement are inserted for convenience of reference only and will not affect the meaning or interpretation of this Agreement. All references to Sections or Articles contained herein mean Sections or Articles of this Agreement unless otherwise stated. All capitalized terms defined herein are equally applicable to both the singular and plural forms of such terms. The terms “hereof”, “herein”, and “herewith” and words of similar import shall, unless otherwise stated, be construed to refer to this Agreement as a whole (including all of the Exhibits and the Disclosure Letters hereto) and not to any particular provision of this Agreement. The word “including” and words of similar import when used in this Agreement shall mean “including without limitation” unless the context otherwise requires or unless otherwise specified. All references in this Agreement to any period of days shall be deemed to be to the relevant number of calendar days unless otherwise specified.

Section 11.9. Amendments and Waivers. This Agreement may not be modified or amended except by an instrument or instruments in writing signed by the party against whom enforcement of any such modification or amendment is sought. Any party hereto may, only by an instrument in writing, waive compliance by another party hereto with any term or provision of this Agreement on the part of such other party hereto to be performed or complied with. The waiver by any party hereto of a breach of any term or provision of this Agreement shall not be construed as a waiver of any subsequent breach.

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Section 11.10. No Strict Construction. The parties to this Agreement have participated jointly in the negotiation and drafting of this Agreement. In the event any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by all parties and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provision of this Agreement.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first written above.

ALTRIA GROUP, INC.
By:	/s/ G. Penn Holsenbeck
Name:	G. Penn Holsenbeck
Title:	Vice President, Associate General Counsel and Corporate Secretary
BRADFORD HOLDINGS, INC.
By:	/s/ John S. Middleton
Name:	John S. Middleton
Title:	President
JOHN MIDDLETON, INC.
By:	/s/ Orrin W. Ridington Jr.
Name:	Orrin W. Ridington Jr.
Title:	President

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EX-12

Exhibit 12

ALTRIA GROUP, INC. AND SUBSIDIARIES

Computation of Ratios of Earnings to Fixed Charges

(in millions of dollars)

	Nine Months Ended September 30, 2007			Three Months Ended September 30, 2007
Earnings from continuing operations before income taxes, and equity earnings and minority interest, net	$	10,012		$	3,694
Add (deduct):
Equity in net earnings of less than 50% owned affiliates		(82	)		(38	)
Dividends from less than 50% owned affiliates		158			158
Fixed charges		596			172
Interest capitalized, net of amortization		(10	)		(4	)
Earnings available for fixed charges	$	10,674		$	3,982
Fixed charges:
Interest incurred:
Consumer products	$	475		$	134
Financial services		45			13
		520			147
Portion of rent expense deemed to represent interest factor		76			25
Fixed charges	$	596		$	172
Ratio of earnings to fixed charges (A)		17.9			23.2

(A) Reflects Kraft Foods Inc. as a discontinued operation. Interest incurred and the portion of rent expense deemed to represent interest factor of Kraft have been excluded from fixed charges in the computation. Including these amounts in fixed charges, the ratio of earnings to fixed charges would have been 15.4 for the nine months ended September 30, 2007.

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Exhibit 12

ALTRIA GROUP, INC. AND SUBSIDIARIES

Computation of Ratios of Earnings to Fixed Charges

(in millions of dollars)

	For the Years Ended December 31,
	2006			2005			2004			2003			2002
Earnings from continuing operations before income taxes, and equity earnings and minority interest, net	$	12,520		$	11,319		$	10,058		$	9,414		$	12,831
Add (deduct):
Equity in net earnings of less than 50% owned affiliates		(172	)		(180	)		(134	)		(152	)		(184	)
Dividends from less than 50% owned affiliates		196			170			154			116			16
Fixed charges		927			1,082			938			899			674
Interest capitalized, net of amortization		(4	)		(7	)		2			11			12
Earnings available for fixed charges	$	13,467		$	12,384		$	11,018		$	10,288		$	13,349
Fixed charges:
Interest incurred:
Consumer products	$	744		$	871		$	747		$	689		$	473
Financial services		81			107			94			105			100
		825			978			841			794			573
Portion of rent expense deemed to represent interest factor		102			104			97			105			101
Fixed charges	$	927		$	1,082		$	938		$	899		$	674
Ratio of earnings to fixed charges (A) (B)		14.5			11.4			11.7			11.4			19.8

(A) Earnings from continuing operations before income taxes, and equity earnings and minority interest, net for the year ended December 31, 2002, include a non-recurring pre-tax gain of $2,631 million related to the Miller Brewing Company transaction. Excluding this gain, the ratio of earnings to fixed charges would have been 15.9 for the year ended December 31, 2002.

(B) Reflects Kraft Foods Inc. as a discontinued operation. Interest incurred and the portion of rent expense deemed to represent interest factor of Kraft have been excluded from fixed charges in the computation. Including these amounts in fixed charges, the ratio of earnings to fixed charges would have been 8.8, 7.0, 6.6, 6.4 and 8.6 for the years ended December 31, 2006, 2005, 2004, 2003 and 2002, respectively. In addition, excluding the 2002 non-recurring pre-tax gain related to the Miller Brewing Company transaction, the ratio of earnings to fixed charges would have been 7.0 for the year ended December 31, 2002.

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EX-31.1

Exhibit 31.1

Certifications

I, Louis C. Camilleri, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Altria Group, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: November 6, 2007

/s/  LOUIS C. CAMILLERI        

Louis C. Camilleri

Chairman and Chief Executive Officer

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EX-31.2

Exhibit 31.2

Certifications

I, Dinyar S. Devitre, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Altria Group, Inc.;

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

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

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

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

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

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

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

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

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

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

Date: November 6, 2007

/s/  DINYAR S. DEVITRE

Dinyar S. Devitre

Senior Vice President and

Chief Financial Officer

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EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Altria Group, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Louis C. Camilleri, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  LOUIS C. CAMILLERI

Louis C. Camilleri

Chairman and Chief Executive Officer

November 6, 2007

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Altria Group, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dinyar S. Devitre, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  DINYAR S. DEVITRE

Dinyar S. Devitre

Senior Vice President and Chief Financial Officer

November 6, 2007

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Altria Group, Inc. and will be retained by Altria Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

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EX-99.1

Exhibit 99.1

CERTAIN LITIGATION MATTERS AND RECENT DEVELOPMENTS

As described in Note 11, Contingencies of this Form 10-Q, there are legal proceedings covering a wide range of matters pending or threatened in various U.S. and foreign jurisdictions against ALG, its subsidiaries and affiliates, including PM USA and PMI, and their respective indemnitees. Various types of claims are raised in these proceedings, including product liability, consumer protection, antitrust, tax, contraband shipments, patent infringement, employment matters, claims for contribution and claims of competitors and distributors. Pending claims related to tobacco products generally fall within the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs, (ii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring and purporting to be brought on behalf of a class of individual plaintiffs, including cases in which the aggregated claims of a number of individual plaintiffs are to be tried in a single proceeding, (iii) health care cost recovery cases brought by governmental (both domestic and foreign) and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits, (iv) class action suits alleging that the uses of the terms “Lights” and “Ultra Lights” constitute deceptive and unfair trade practices, common law fraud or RICO violations, and (v) other tobacco-related litigation.

The following lists certain of the pending claims included in these categories and certain other pending claims. Certain developments in these cases since August 7, 2007 are also described.

SMOKING AND HEALTH LITIGATION

The following lists the consolidated individual smoking and health cases as well as smoking and health class actions pending against PM USA and, in some cases, ALG and/or its other subsidiaries and affiliates, including PMI, as of November 1, 2007, and describes certain developments in these cases since August 7, 2007.

Consolidated Individual Smoking and Health Cases

In re: Tobacco Litigation (Individual Personal Injury cases), Circuit Court, Ohio County, West Virginia, consolidated January 11, 2000. In West Virginia, all smoking and health cases in state court alleging personal injury have been transferred to the State’s Mass Litigation Panel. The transferred cases include individual cases and putative class actions. All individual cases filed in or transferred to the court by September 13, 2000 were consolidated for pretrial proceedings and trial. Currently, the aggregated claims of 933 individuals (of which 540 individuals have claims against PM USA) are pending. In December 2005, the West Virginia Supreme Court of Appeals ruled that the United States Constitution does not preclude a trial in two phases in this case. Issues related to defendants’ conduct, plaintiffs’ entitlement to punitive damages and a punitive damages multiplier, if any, would be determined in the first phase. The second phase would consist of individual trials to determine liability, if any, and compensatory damages. In May 2007, the trial court denied defendants’ motion to vacate the trial court’s trial plan based on the United States Supreme Court’s decision in Williams v. Philip Morris. Defendants renewed their motion for review of the trial plan by the West Virginia Supreme Court of Appeals. Trial for the first phase has been scheduled for March 2008.

Flight Attendant Litigation

The settlement agreement entered into in 1997 in the case of Broin, et al. v. Philip Morris Companies Inc., et al., which was brought by flight attendants seeking damages for personal injuries allegedly caused by environmental tobacco smoke, allows members of the Broin class to file individual lawsuits seeking compensatory damages, but prohibits them from seeking punitive damages. In October 2000, the trial court ruled that the flight attendants will not be required to prove the substantive liability elements of their claims for negligence, strict liability and breach of implied warranty in order to recover damages, if any, other than establishing that the plaintiffs’ alleged injuries were caused by their exposure to environmental tobacco smoke and, if so, the amount of compensatory damages to be awarded. Defendants’ initial appeal of this ruling was

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Exhibit 99.1

dismissed as premature. Defendants appealed the October 2000 rulings in connection with their appeal of the adverse jury verdict in the French case. In December 2004, the Florida Third District Court of Appeal affirmed the judgment awarding plaintiff in the French case $500,000, and directed the trial court to hold defendants jointly and severally liable. Defendants’ motion for rehearing was denied in April 2005. In December 2005, after exhausting all appeals, PM USA paid $328,759 (including interest of $78,259) as its share of the judgment amount and interest in French and, although plaintiffs may still contest the amount, in August 2007, PM USA paid $229,293.11 (including interest of $7,380.48) representing its share of attorneys’ fees. As of November 1, 2007, 2,622 cases were pending in the Circuit Court of Dade County, Florida against PM USA and three other cigarette manufacturers, and trial in one case began on October 29, 2007.

Domestic Class Actions

Engle, et al. v. R.J. Reynolds Tobacco Co., et al., Circuit Court, Eleventh Judicial Circuit, Dade County, Florida, filed May 5, 1994. See Note 11, Contingencies, for a discussion of this case.

Scott, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed May 24, 1996. See Note 11, Contingencies, for a discussion of this case.

Young, et al. v. The American Tobacco Company, et al., Civil District Court, Orleans Parish, Louisiana, filed November 12, 1997.

Parsons, et al. v. A C & S, Inc., et al., Circuit Court, Kanawha County, West Virginia, filed February 27, 1998.

Cleary, et al. v. Philip Morris Incorporated, et al., Circuit Court, Cook County, Illinois, filed June 3, 1998. In April 2006, defendants’ motion to dismiss a nuisance claim was granted. In July 2006, plaintiffs filed a motion for class certification.

Cypret, et al. v. The American Tobacco Company, et al., Circuit Court, Jackson County, Missouri, filed December 22, 1998.

Simms, et al. v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed May 23, 2001. In May 2004, plaintiffs filed a motion for reconsideration of the court’s 2003 ruling that denied their motion for class certification. In September 2004, plaintiffs renewed their motion for reconsideration. This motion was denied by the court in December 2006.

Lowe, et al. v. Philip Morris Incorporated, et al., Circuit Court, Multnomah County, Oregon, filed November 19, 2001. In September 2003, the court granted defendants’ motion to dismiss the complaint, and plaintiffs appealed. In September 2006, the Oregon Court of Appeals affirmed the final judgment in favor of the defendants. In December 2006, plaintiffs filed a petition for review with the Oregon Supreme Court. The Oregon Supreme Court granted plaintiffs’ petition for review in March 2007.

Caronia, et al. v. Philip Morris USA, Inc., United States District Court, Eastern District of New York, filed January 13, 2006. See Note 11, Contingencies, for a discussion of this case.

Donovan, et al. v. Philip Morris, United States District Court, District of Massachusetts, filed March 2, 2007. See Note 11, Contingencies, for a discussion of this case.

International Class Actions

The Smoker Health Defense Association (ADESF) v. Souza Cruz, S.A. and Philip Morris Marketing, S.A., Nineteenth Lower Civil Court of the Central Courts of the Judiciary District of São Paulo, Brazil, filed July 25, 1995. See Note 11, Contingencies, for a discussion of this case.

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Exhibit 99.1

Sasson, et al. v. Philip Morris International Inc., et al., District Court, Tel Aviv, Israel, filed July 11, 2005. Plaintiffs’ motion for class certification was dismissed on statute of limitations grounds in May 2007. Plaintiff has appealed.

Public Prosecutor of Sao Paulo v. Philip Morris Brasil Industria e Comercio Ltda, Civil Court of the City of Sao Paolo, Brazil, filed August 6, 2007. The plaintiff is seeking: (1) unspecified damages on behalf of all smokers nationwide, former smokers, and their relatives; (2) unspecified damages on behalf of people exposed to ETS nationwide, and their relatives; and (3) reimbursement of the health care costs allegedly incurred for the treatment of tobacco-related diseases by all 27 states, approximately 5,000 municipalities, and the Federal District. While PMI’s subsidiary has not yet been served, the judge has authorized the claim to be served. On September 20, 2007, notice was published in the Official Gazette inviting interested parties to join the case as co-plaintiffs within 30 days.

HEALTH CARE COST RECOVERY LITIGATION

The following lists the health care cost recovery actions pending against PM USA and, in some cases, ALG and/or its other subsidiaries and affiliates as of November 1, 2007 and describes certain developments in these cases since August 7, 2007. As discussed in Note 11, Contingencies, in 1998, PM USA and certain other United States tobacco product manufacturers entered into a Master Settlement Agreement (the “MSA”) settling the health care cost recovery claims of 46 states, the District of Columbia, the Commonwealth of Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Marianas. Settlement agreements settling similar claims had previously been entered into with the states of Mississippi, Florida, Texas and Minnesota. PM USA believes that the claims in the city/county, taxpayer and certain of the other health care cost recovery actions listed below are released in whole or in part by the MSA or that recovery in any such actions should be subject to the offset provisions of the MSA.

City of St. Louis Case

City of St. Louis, et al. v. American Tobacco, et al., Circuit Court, City of St. Louis, Missouri, filed November 23, 1998. In November 2001, the court granted in part and denied in part defendants’ motion to dismiss and dismissed three of plaintiffs’ 11 claims. In June 2005, the court granted in part defendants’ motion for summary judgment limiting plaintiffs’ claims for past compensatory damages to those that accrued after November 16, 1993, five years prior to the filing of the suit. The trial is scheduled to begin in February 2010.

Department of Justice Case

The United States of America v. Philip Morris Incorporated, et al., United States District Court, District of Columbia, filed September 22, 1999. See Note 11, Contingencies, for a discussion of this case.

International Cases

Kupat Holim Clalit v. Philip Morris USA, et al., Jerusalem District Court, Israel, filed September 28, 1998. Defendants’ motion to dismiss the case has been denied by the district court. In June 2004, defendants filed a motion with the Israel Supreme Court for leave to appeal. The appeal was heard by the Supreme Court in March 2005, and the parties are awaiting the court’s decision.

Her Majesty the Queen in Right of British Columbia v. Imperial Tobacco Limited, et al., Supreme Court, British Columbia, Vancouver Registry, Canada, filed January 24, 2001. In June 2003, the trial court granted defendants’ motion to dismiss the case, and plaintiff appealed. In May 2004, the appellate court reversed the trial court’s decision. Defendants appealed. In September 2005, the Supreme Court of Canada ruled that the legislation permitting the lawsuit is constitutional, and, as a result, the case will proceed before the trial court. On September 15, 2006, the British Columbia Court of Appeal rejected PMI and PM USA’s motions seeking

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Exhibit 99.1

dismissal from the case on jurisdictional grounds. In April 2007, the Supreme Court of Canada denied PMI’s and PM USA’s motion seeking leave to appeal. Trial is scheduled to begin on September 6, 2010.

Junta de Andalucia, et al. v. Philip Morris Spain, et al., Court of First Instance, Madrid, Spain, filed February 21, 2002. In May 2004, the Court of First Instance dismissed the case, and plaintiffs appealed. In January 2006, the High Court of Appeal of Madrid dismissed plaintiffs’ appeal. In July 2006, the Junta initiated proceedings in the Contentious Administrative Court challenging the rejection of the Junta’s formal request for reimbursement of health care costs of treating smokers. The Junta alleges that the Spanish tobacco companies, including Philip Morris Spain, are jointly liable for the health care costs. As provided by court rules, the defendants filed notices with the Administrative Court that they are interested parties in the case. In September 2007, the plaintiff filed its complaint in the Administrative Court. The Ministry of Economy has filed its preliminary objections to the claim. In October 2007, the other co-defendants in the proceedings, including Philip Morris Spain, filed their comments in response to the Ministry of Economy’s preliminary objections.

The Attorney General of Lagos State, et al. v. British American Tobacco (Nigeria) Limited, et al., High Court of Lagos State, Lagos, Nigeria, filed April 30, 2007. Plaintiff seeks reimbursement for the cost of treating alleged smoking related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking and health related diseases for the next 20 years, various injunctive relief, plus punitive damages. In June 2007, a subsidiary of PMI filed its preliminary objections regarding service of process.

The Attorney General of Kano State v. British American Tobacco (Nigeria) Limited, et al., High Court of Kano State, Kano, Nigeria, filed May 9, 2007. Plaintiff seeks reimbursement for the cost of treating alleged smoking related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking and health related diseases for the next 20 years, various injunctive relief, plus punitive damages. In June 2007, a subsidiary of PMI filed its preliminary objections regarding service of process.

The Attorney General of Gombe State v. British American Tobacco (Nigeria) Limited, et al., High Court of Gombe State, Gombe, Nigeria, filed May 18, 2007. Plaintiff seeks reimbursement for the cost of treating alleged smoking related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking and health related diseases for the next 20 years, various injunctive relief, plus punitive damages. In July 2007, a subsidiary of PMI filed its preliminary objections regarding service of process.

The Attorney General of Oyo State, et al., v. British American Tobacco (Nigeria) Limited, et al., High Court of Oyo State, Ibidam, Nigeria, filed May 30, 2007. Plaintiff seeks reimbursement for the cost of treating alleged smoking related diseases for the past 20 years, payment of anticipated costs of treating alleged smoking and health related diseases for the next 20 years, various injunctive relief, plus punitive damages. In July 2007, a subsidiary of PMI filed its preliminary objections regarding service of process.

Public Civil Actions

Osorio v. Philip Morris Brasil Industria e Comercio Ltda, et al., Federal Court of Sao Paolo, Brazil, filed September 2003. Defendant filed its answer to the complaint in June 2004.

Associacao dos Consumidores Explorados do Distrito Federal v. Philip Morris Brasil Industria e Comercio Ltda., State Court of Brasilia, Brazil, filed April 14, 2006. Plaintiff seeks a ban on the production and sale of cigarettes on the grounds that they are harmful to health. Plaintiff’s complaint also requests a fine amounting to approximately $500,000 per day be imposed should the ban be granted and defendant continues to produce or sell cigarettes. Defendant filed a response to the complaint in June 2006. The trial court dismissed the case in June 2007. Plaintiff has appealed.

Associacao dos Consumidores Explorados do Distrito Federal v. Sampoerna Tabacos America Latina Ltda., filed April 14, 2006. Plaintiff seeks a ban on the production and sale of cigarettes on the grounds that they are harmful to health. Plaintiff’s complaint also requests a fine amounting to approximately $500,000 per day be

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Exhibit 99.1

imposed should the ban be granted and defendant continues to produce or sell cigarettes. Defendant filed a response to the complaint in June 2006.

Morales v. Philip Morris Colombia S.A. and Colombian Government, Administrative Court of Bogotá, Colombia, filed February 2, 2007. Plaintiff alleges that Philip Morris Colombia violated the collective right to a healthy environment, public health rights, and the rights of consumers, and that the government failed to protect those rights. Plaintiff seeks various monetary damages and other relief, including a ban on descriptors and a ban on cigarette advertising. Philip Morris Colombia filed its answer to the complaint in March 2007.

Garrido v. Philip Morris Colombia S.A., Civil Court of Bogotá, Colombia, filed March 30, 2007. Plaintiff seeks various forms of injunctive relief, including the ban of the use of “lights” descriptors, and requests that Philip Morris Colombia be ordered to finance a national campaign against smoking. Philip Morris Colombia filed its answer to the complaint in April 2007.

Garrido v. Coltabaco (Garrido II), Civil Court of Bogotá, Colombia, filed March 2007. Plaintiff seeks various forms of injunctive relief, including the ban of the use of “lights” descriptors, and requests that Coltabaco be ordered to finance a national campaign against smoking. Coltabaco, a subsidiary of PMI, filed its answer to the complaint in April 2007.

Guzman v. Coltabaco, et al., Administrative Court of Bogotá, Colombia, filed May 8, 2007. Plaintiff is seeking economic restitution to the country, an increase in sales tax for cigarettes, as well as various forms of injunctive relief. Coltabaco, a subsidiary of PMI, filed its answer to the complaint in June 2007.

Asociación Argentina de Derecho de Danos v. Massalin Particulares S.A., et al., Civil Court of Buenos Aires, Bueno Aires, Argentina, filed February 26, 2007 (served June 2007). Plaintiff seeks the establishment of a relief fund for reimbursement of medical costs associated with diseases allegedly caused by smoking. Massalin Particulares, a subsidiary of PMI, filed its answer to the complaint in September 2007.

Consumer Awareness Enhancement Association v. TEKEL, et al., Istanbul Consumer Court, Istanbul, Turkey, served May 2007. Plaintiff argues that cigarette manufacturers and importers should be banned from providing cigarettes to Turkish consumers. PHILSA, a subsidiary of PMI, filed its answer to the complaint in June 2007. On October 9, 2007, the court dismissed the claim. Plaintiff may appeal.

Medicare Secondary Payer Act Case

United Seniors Association v. Philip Morris, et al., District of Massachusetts, filed August 4, 2005. In August 2006, the trial court granted defendants’ motion to dismiss plaintiff’s complaint. In September 2006, plaintiff appealed to the United States Court of Appeals for the First Circuit. In August 2007, the United States Court of Appeals for the First Circuit affirmed the district court’s dismissal.

LIGHTS/ULTRA LIGHTS CASES

The following lists the Lights/Ultra Lights cases pending against ALG and/or its various subsidiaries and others as of November 1, 2007, and describes certain developments since August 7, 2007.

Aspinall, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Superior Court, Suffolk County, Massachusetts, filed November 24, 1998. In October 2001, the court granted plaintiffs’ motion for class certification, and defendants appealed. In May 2003, the single Justice sitting on behalf of the Massachusetts Court of Appeals decertified the class. In August 2004, Massachusetts’ highest court affirmed the trial court’s ruling and reinstated the class certification order. In April 2006, plaintiffs filed a motion to have the court redefine the class. In August 2006, the trial court denied PM USA’s motion for summary judgment based on the state consumer protection statutory exemption and federal preemption. On motion of the parties, the trial court reported its decision to deny summary judgment to the appeals court for review, and the trial court proceedings

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Exhibit 99.1

are stayed pending completion of the appellate review. Motions for direct appellate review by the Massachusetts Supreme Judicial Court were granted in April 2007.

McClure, et al. v. Philip Morris Companies Inc. and Philip Morris Incorporated, Circuit Court, Davidson County, Tennessee, filed January 19, 1999. Plaintiffs’ motion for class certification on behalf of all purchasers of Marlboro Lights in Tennessee is pending. In June 2006, PM USA filed a motion to dismiss on federal preemption and consumer protection statutory exemption grounds.

Price, et al. v. Philip Morris Incorporated, Circuit Court, Madison County, Illinois, filed February 10, 2000. See Note 11, Contingencies, for a discussion of this case.

Craft, et al. v. Philip Morris Companies Inc., et al., Circuit Court, City of St. Louis, Missouri, filed February 15, 2000. In December 2003, the trial court granted plaintiffs’ motion for class certification. In September 2004, the court granted in part and denied in part PM USA’s motion for reconsideration. In August 2005, the Missouri Court of Appeals affirmed the trial court’s class certification order. In September 2005, the case was removed to federal court. In March 2006, the federal trial court granted plaintiffs’ motion and remanded the case to the Circuit Court, City of St. Louis. In May 2006, the Missouri Supreme Court declined to review the trial court’s class certification decision. Trial is currently scheduled to begin in January 2009.

Hines, et al. v. Philip Morris Companies Inc., et al., Circuit Court, Fifteenth Judicial Circuit, Palm Beach County, Florida, filed February 23, 2001. In February 2002, the court granted plaintiffs’ motion for class certification, and defendants appealed. In December 2003, a Florida District Court of Appeal decertified the class. In March 2004, plaintiffs filed a motion for rehearing, en banc review or certification to the Florida Supreme Court. In December 2004, the Florida Supreme Court stayed further proceedings pending the resolution of the Engle case discussed in Note 11, Contingencies. In January 2007, the Florida Supreme Court lifted the stay, but did not issue a decision on whether it will take jurisdiction of plaintiffs’ appeal.

Moore, et al. v. Philip Morris Incorporated, et al., Circuit Court, Marshall County, West Virginia, filed September 17, 2001.

Curtis, et al. v. Philip Morris Companies Inc., et al., Fourth Judicial District Court, Minnesota, filed November 28, 2001. In January 2004, the Fourth Judicial District Court, Hennepin County denied plaintiffs’ motion for class certification and defendants’ motions for summary judgment. In November 2004, the trial court granted plaintiffs’ motion for reconsideration and ordered the certification of a class. In April 2005, the Minnesota Supreme Court denied defendants’ petition for interlocutory review. In September 2005, the case was removed to federal court. In February 2006, the federal court denied plaintiffs’ motion to remand the case to state court. The case was stayed pending the outcome of Dahl v. R. J. Reynolds Tobacco Co., which was argued before the United States Court of Appeals for the Eighth Circuit in December 2006. In February 2007, the United States Court of Appeals for the Eighth Circuit issued its ruling in Dahl, and reversed the federal district court’s denial of plaintiff’s motion to remand that case to the state trial court. On October 17, 2007, the district court remanded the case to state court.

Tremblay, et al. v. Philip Morris Incorporated, Superior Court, Rockingham County, New Hampshire, filed March 29, 2002. The case has been consolidated with another Lights/Ultra Lights case and has been informally stayed.

Pearson v. Philip Morris Incorporated, et al., Circuit Court, Multnomah County, Oregon, filed November 20, 2002. In October 2005, plaintiffs’ motion for class certification on behalf of all purchasers of Marlboro Lights in Oregon was denied. In addition, PM USA’s motion for summary judgment with respect to reliance “from the time that plaintiff learned of the alleged fraud and continued to purchase Lights” cigarettes was granted. In November 2005, plaintiffs filed a motion with the trial court to have its order denying class certification certified for interlocutory appellate review. In March 2006, plaintiffs petitioned the Oregon Court of Appeals to review the trial court’s order denying plaintiffs’ motion for class certification. In October 2006, the Oregon

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Exhibit 99.1

Court of Appeals denied plaintiffs’ petition for review. Plaintiffs did not file a petition for review of the denial of the class certification decision by the Oregon Supreme Court by the deadline for doing so. In February 2007, PM USA filed a motion for summary judgment based on federal preemption and the Oregon statutory exemption. In September 2007, the district court granted PM USA’s motion for summary judgment based on express preemption under the Federal Cigarette Labeling and Advertising Act.

Virden v. Altria Group, Inc., et al., Circuit Court, Hancock County, West Virginia, filed March 28, 2003.

Stern, et al. v. Philip Morris USA, Inc., et al., Superior Court, Middlesex County, New Jersey, filed April 4, 2003. In March 2006, the court granted PM USA’s motion to strike plaintiffs’ class certification motion, and plaintiffs filed a motion for reconsideration. A renewed motion for class certification is pending.

Arnold, et al. v. Philip Morris USA Inc., Circuit Court, Madison County, Illinois, filed May 5, 2003.

Watson, et al. v. Altria Group, Inc., et al., Circuit Court, Pulaski County, Arkansas, filed May 29, 2003. In January 2006, the court stayed all activity in the case pending the resolution of plaintiffs’ petition for writ of certiorari filed with the United States Supreme Court. In June 2007, the United States Supreme Court reversed the lower court rulings that denied plaintiffs’ motion to have the case heard in a state, as opposed to federal, trial court. The Supreme Court rejected defendants’ contention that the case must be tried in federal court under the “federal officer” statute. The case was remanded to the state trial court in Arkansas.

Holmes, et al. v. Philip Morris USA Inc., et al., Superior Court, New Castle County, Delaware, filed August 18, 2003. In June 2006, PM USA filed a motion for summary judgment on preemption and consumer protection statutory exemption grounds.

El-Roy, et al. v. Philip Morris Incorporated, et al., District Court of Tel-Aviv/Jaffa, Israel, filed January 18, 2004. Plaintiffs’ motion for class certification is pending.

Schwab, et al. v. Philip Morris USA Inc., et al., United States District Court, Eastern District of New York, filed May 11, 2004. See Note 11, Contingencies, for a discussion of this case.

Navon, et al. v. Philip Morris Products USA, et al., District Court of Tel-Aviv/Jaffa, Israel, filed December 5, 2004. This case has been stayed pending the resolution of class certification issues in El-Roy v. Philip Morris Incorporated, et al.

Miner, et al. v. Altria Group, Inc., et al., Circuit Court, Franklin County, Arkansas, filed December 29, 2004. In December 2005, plaintiffs moved for certification of a class composed of individuals who purchased Marlboro Lights or Cambridge Lights brands in Arizona, California, Colorado and Michigan. PM USA’s motion for summary judgment is pending. After the motion was filed, plaintiffs moved to voluntarily dismiss the case without prejudice, which PM USA opposed. The court then stayed the action pending the United States Supreme Court’s ruling on plaintiffs’ petition for writ of certiorari in Watson, described above. In July 2007, the case was remanded to a state trial court in Arkansas. In August 2007, plaintiffs renewed their motion for class certification. In October 2007, the court denied PM USA’s motion to dismiss the case on procedural grounds and the court entered a case management order.

Mulford, et al. v. Altria Group, Inc., et al., United States District Court, New Mexico, filed June 9, 2005. On March 16, 2007, the federal district court granted in part PM USA’s motion for summary judgment, ruling that plaintiffs’ claims of fraudulent concealment, failure to warn and warning neutralization are expressly preempted by the Federal Cigarette Labeling and Advertising Act. The court otherwise denied PM USA’s motion for summary judgment on express preemption under the Federal Cigarette Labeling and Advertising Act, implied federal preemption and the statutory exemption from liability under the New Mexico Unfair Practices Act, with respect to plaintiffs’ claims that PM USA made false statements about lights cigarettes on its packages. On March 30, 2007, PM USA filed a motion for reconsideration of the part of the court’s order denying PM USA’s

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Exhibit 99.1

motion for summary judgment. In March 2007, the federal district court denied plaintiffs’ amended motion for class certification. In June 2007, plaintiffs renewed their motion for class certification.

Good, et al. v. Altria Group, Inc., et al., United States District Court, Maine, filed August 15, 2005. In May 2006, the federal trial court granted PM USA’s motion for summary judgment on the grounds that plaintiffs’ claims are preempted by the Federal Cigarette Labeling and Advertising Act and dismissed the case. In June 2006, plaintiffs appealed to the United States Court of Appeals for the First Circuit. On August 31, 2007, the United States Court of Appeals for the First Circuit vacated the district court’s grant of PM USA’s motion for summary judgment in the Good case on federal preemption grounds and remanded the case to district court. The district court has stayed proceedings pending the ruling of the United States Supreme Court on defendant’s anticipated petition for writ of certiorari, which was filed on October 26, 2007.

CERTAIN OTHER TOBACCO-RELATED ACTIONS

The following lists certain other tobacco-related litigation pending against ALG and/or its various subsidiaries and others as of November 1, 2007, and describes certain developments since August 7, 2007.

Tobacco Price Cases

Smith, et al. v. Philip Morris Companies Inc., et al., District Court, Seward County, Kansas, filed February 9, 2000. In November 2001, the court granted plaintiffs’ motion for class certification.

Romero, et al. v. Philip Morris Companies Inc., et al., First Judicial District Court, Rio Arriba County, New Mexico, filed April 10, 2000. Plaintiffs’ motion for class certification was granted in April 2003. In February 2005, the New Mexico Court of Appeals affirmed the class certification decision. In June 2006, defendants’ motion for summary judgment was granted and the case was dismissed. In July 2006, plaintiffs appealed the trial court’s grant of summary judgment.

Wholesale Leaders Cases

Smith Wholesale Company, Inc., et al., v. Philip Morris USA Inc., United States District Court, Eastern District, Tennessee, filed July 10, 2003. See Note 11, Contingencies, for a discussion of this case.

Cases Under the California Business and Professions Code

Brown, et al. v. The American Tobacco Company, Inc., et al., Superior Court, San Diego County, California, filed June 10, 1997. In April 2001, the court granted in part plaintiffs’ motion for class certification and certified a class comprised of residents of California who smoked at least one of defendants’ cigarettes between June 1993 and April 2001 and who were exposed to defendants’ marketing and advertising activities in California. Certification was granted as to plaintiffs’ claims that defendants violated California Business and Professions Code Sections 17200 and 17500 pursuant to which plaintiffs allege that class members are entitled to reimbursement of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. In September 2004, the trial court granted defendants’ motion for summary judgment as to plaintiffs’ claims attacking defendants’ cigarette advertising and promotion and denied defendants’ motion for summary judgment on plaintiffs’ claims based on allegedly false affirmative statements. Plaintiffs’ motion for rehearing was denied. In November 2004, defendants filed a motion to decertify the class based on a recent change in California law, which, in two July 2006 opinions, the California Supreme Court ruled applicable to pending cases. In March 2005, the court granted defendants’ motion. In April 2005, the court denied plaintiffs’ motion for reconsideration of the order that decertified the class. In May 2005, plaintiffs appealed. In September 2006, the California Court of Appeal, Fourth Appellate District, affirmed the trial court’s order decertifying the class. In November 2006, the California Supreme Court accepted review of the appellate court’s decision.

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Exhibit 99.1

Daniels, et al. v. Philip Morris Companies Inc., et al., Superior Court, San Diego County, California, filed April 2, 1998. In November 2000, the court granted the plaintiffs’ motion for class certification on behalf of minor California residents who smoked at least one cigarette between April 1994 and December 1999. Certification was granted as to plaintiffs’ claims that defendants violated California Business and Professions Code Section 17200 pursuant to which plaintiffs allege that class members are entitled to reimbursements of the costs of cigarettes purchased during the class period and injunctive relief barring activities allegedly in violation of the Business and Professions Code. In September 2002, the court granted defendants’ motions for summary judgment as to all claims in the case, and plaintiffs appealed. In October 2004, the California Fourth District Court of Appeal affirmed the trial court’s ruling. In February 2005, the California Supreme Court agreed to hear plaintiffs’ appeal. In August 2007, the California Supreme Court affirmed the dismissal of the Daniels class action on federal preemption grounds.

Gurevitch, et al. v. Philip Morris USA Inc., et al., Superior Court, Los Angeles County, California, filed May 20, 2004. See Note 11, Contingencies, for a discussion of this case.

Reynolds v. Philip Morris USA Inc., United States District Court, Southern District, California, filed September 20, 2005. In September 2005, a California consumer sued PM USA in a purported class action, alleging that PM USA violated certain California consumer protection laws in connection with alleged expiration of Marlboro Miles’ proofs of purchase, which could be used in accordance with the terms and conditions of certain time-limited promotions to acquire merchandise from Marlboro catalogues. PM USA’s motion to dismiss the case was denied in March 2006. In September 2006, PM USA filed a motion for summary judgment as to plaintiff’s claims for breach of the implied covenant of good faith and fair dealing. In October 2006, PM USA filed a second summary judgment motion seeking dismissal of plaintiff’s claims under certain California consumer protection statutes. In June 2007, the court denied PM USA’s motions for summary judgment. PM USA’s application for interlocutory review is currently pending before the United States Court of Appeals for the Ninth Circuit.

MSA-Related Cases

In the following case in which PM USA is a defendant, plaintiffs have challenged the validity of legislation implementing the MSA.

Sanders, et al. v. Philip Morris USA, Inc., et al., United States District Court, Northern District, California, filed June 9, 2004. Defendants’ motion to dismiss the case was granted in March 2005 and the United States Court of Appeals for the Ninth Circuit affirmed that dismissal on September 26, 2007.

As discussed further in Note 11, Contingencies, there are other cases in a number of states in which plaintiffs have challenged the MSA and/or legislation implementing it, but PM USA is not a defendant in these cases.

Non-Participating Manufacturer Adjustment Proceedings

See Note 11, Contingencies, for a description of these proceedings.

Public Ban Cost Recovery Action

Municipality of Haifa v. Dubek Ltd., et al., District Court of Haifa, Israel, filed March 28, 2004. This case is pending against Menache H. Eliachar Ltd., which is an indemnitee of a subsidiary of PMI. The Municipality of Haifa seeks to recover the costs it incurred enforcing a public ban on smoking. The case was dismissed by the District Court of Haifa, and the plaintiff has appealed to the Israeli Supreme Court.

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EX-99.2

Exhibit 99.2

TRIAL SCHEDULE FOR CERTAIN CASES

Below is a schedule setting forth by month the number of individual smoking and health cases against PM USA that are currently scheduled for trial through the end of 2008.

2008

January (1)

February (1)

March (2)

August (1)

September (2)

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