General

Our company was renamed Alliance One International, Inc. on May 13, 2005, concurrent with the merger of Standard Commercial Corporation with and into DIMON Incorporated, the third largest and second largest global independent leaf tobacco merchants, respectively.

Executive Overview

The following executive overview is intended to provide significant highlights of the discussion and analysis that follows.

Financial Results

Overall, our 2008 fiscal year results continued to demonstrate the successful execution of our strategy. Current year results improved from the prior year, although current year gross margin decreased, principally as a result of the increased costs associated with the Malawi 2007 burley crop, the strength of local currencies against the U.S. dollar and significant farmer debt costs, particularly in Brazil. Overall selling, administrative and general expenses decreased despite the increases in the current year amounts resulting from the strength of local currencies against the U.S. dollar. Current year other income was significant as a result of the sales of Malawi and Greek assets. We had also incurred additional restructuring charges during the year as we continued to refine our operational footprint. Additional impairment charges were reflected relative to the sale of our non-core dark tobacco operations and reductions in the European flue cured and burley tobacco volumes.

Liquidity

As planned, we continued to deleverage our balance sheet during the year with cash flows from operations and non-core asset sale proceeds, reducing higher cost debt prudently, while maintaining adequate credit and cash availability. At the same time further devaluation of the U.S. dollar throughout the year along with increasing commodity and green tobacco costs necessitated further working capital line availability. Our access to shorter term capital remains strong and our financing partners around the world are providing the corresponding required capital as expected. Disruption that began mid-year in the U.S. and European capital markets has placed upward pressure on short term borrowing spreads worldwide. Increased spreads were partially offset by our improving credit outlook, while underlying indices declined at similar levels, leaving "all-in" shorter term working capital borrowing costs, on average, approximately unchanged. As a result of these events we have consciously increased our credit and cash positions and maintain appropriate levels of liquidity throughout the year through a combination of long term commitments in concert with various shorter term seasonal credit lines, ongoing customer pre-financing and available cash on hand.

During the year the following played a role in our liquidity position:

·

March 31, 2007 total available credit including letter of credit and cash were $631.1 million comprised of $538.0 million of credit lines, $12.8 million for letters of credit and $80.3 million of cash;

·

$250.0 million senior secured revolver remained unfunded and no letters of credit were issued under this facility during the fiscal year;

·

$55.0 million accounts receivable sale program was upsized to $100.0 million while the pricing was improved and the maturity extended to 5 years from the March 31, 2008 closing;

·

$65.6 million in net cash proceeds from non-core asset divestitures were collected during the year;

·

$145.0 million senior secured term loan B was repaid in full as of September 28, 2007;

·

$315.0 million 11% senior unsecured notes due 2012 were permanently reduced to $272.7 million; and

·

March 31, 2008 total available credit including letters of credit and cash were $696.9 million, a 10.4% increase over the prior year, comprised of $556.1 million of credit lines, $28.6 million for letters of credit and $112.2 million of cash.

Outlook

Global supply and demand continues to be tight in the marketplace with very little uncommitted inventories available. Production costs continue to rise and customer selling prices are increasing as well in most origins. Farmer prices have escalated rapidly this year in most origins for tobacco and across many other commodities. This remains a critical issue to our industry and farmer flight will continue in certain areas as farmers migrate to other crops with good returns and lower labor requirements. Nonetheless, we will continue working to improve profitability. We will continue to challenge all of our operations to achieve appropriate return targets and to effect actions which will positively improve future performance. The strategy behind our merger and the creation of Alliance One is simple, and has not changed: We are seeking to create the profile of a strategic leaf supply partner with the footprint and scale necessary to drive efficiency, sustainability and long-term shareholder value in what remains an intensely competitive global industry.

In fiscal 2008, we completed the exit of several marginal and/or unprofitable origins or businesses as well as we substantially completed the exit from our discontinued operations. In addition, we focused on profit improvement and debt reduction. Our focus in 2009 will be on continued profit improvement and debt reduction. While we will again face challenges associated with the weaker U.S. dollar and increased costs as a result of the decreased volume available, we remain totally committed to our customer-focused strategy, and we are confident that our strategy will position us to enhance our already strong customer relationships and allow us to grow with our customers. As such, we will continue to focus our attention and resources on those origins that are growing in market importance, on delivering outstanding customer service, exercising expense discipline, and above all, delivering the full benefits of the merger.

Results of Operations

Consolidated Statement of Operations
                                                     Twelve Months Ended March 31,
                                                  Change                     Change
(in millions)                           2008       $      %      2007         $       %  2006  (1)
Sales and other operating revenues  $2,011.5   $ 32.4    1.6  $1,979.1   $(133.6)  (6.3) $2,112.7
Gross profit                           250.4    (45.3) (15.3)    295.7      71.0   31.6     224.7
Selling, administrative and general
    expenses                           157.4     (0.9)  (0.6)    158.3      (5.8)  (3.5)    164.1
Other income                            20.2     14.1              6.1       3.6              2.5
Goodwill impairment                        -        -                -    (256.9)           256.9
Restructuring and asset impairment
    charges                             19.6    (10.2)            29.8     (55.6)            85.4
Debt retirement expense                  5.9      2.0              3.9     (62.6)            66.5
Interest expense                       101.9     (3.7)           105.6      (3.0)           108.6
Interest income                         16.2      7.6              8.6       1.5              7.1
Derivative financial instruments
    income                                 -     (0.3)             0.3      (4.8)             5.1
Income tax expense (benefit)           (5.5)    (21.6)            16.1      33.6            (17.5)
Equity in net income of investee
    companies                            1.8      0.8              1.0         -              1.0
Minority interests (income)              0.4     (0.3)             0.7       0.9             (0.2)
Income (loss) from discontinued
    operations                           7.9     26.6            (18.7)      5.4            (24.1)
Cumulative effect of accounting
    changes, net of income tax             -      0.3             (0.3)     (0.3)               -
Net income (loss)                   $   16.9* $  38.5         $  (21.6)* $ 425.8         $ (447.4)*

* Amounts do not equal column totals due to rounding.

Sales and Other Operating Revenue Supplemental Information

                                               Twelve Months Ended March 31,
                                             Change                      Change
(in millions, except per kilo
amounts)                            2008     $       %       2007       $        %  2006 (1)
Tobacco sales and other
operating
    revenues:
   Sales and other operating
revenues                        $ 1,933.0 $ 23.7    1.2  $ 1,909.3 $ (147.8)  (7.2) $2,057.1
   Kilos                            556.1  (28.8)  (4.9)     584.9    (80.5) (12.1)    665.4
   Average price per kilo       $    3.48 $ 0.22    6.7  $    3.26  $  0.17    5.5  $   3.09
Processing and other revenues   $    78.5    8.7   12.5  $    69.8     14.2   25.5  $   55.6
Total sales and other operating
revenues                        $ 2,011.5 $ 32.4    1.6  $ 1,979.1 $ (133.6)  (6.3) $2,112.7

(1) The merger of DIMON and Standard was completed May 13, 2005, which was during the first quarter of fiscal 2006. As a result, total revenues and expenses for the twelve months ended March 31, 2006 exclude Standard's results from April 1 to May 13, 2005.

Comparison of the Year Ended March 31, 2008 to the Year Ended March 31, 2007

Sales and other operating revenues. The increase of 1.6% from $1,979.1 million in 2007 to $2,011.5 million in 2008 is the result of a 6.7% or $0.22 per kilo increase in average sales prices and a 12.5% or $8.7 million increase in processing and other revenues partially offset by a 4.9% or 28.8 million kilo decrease in quantities sold.

South America region. Tobacco revenues increased $121.5 million, reflecting increases of 32.6 million kilo in quantities sold and $0.05 per kilo in average sales prices versus the prior year. The return of certain customer sales in the current year as well as increased demand for Brazilian tobacco are the primary reasons for the increase in the South America operating segment revenues.

Other regions. Tobacco revenues decreased $97.8 million due to a 61.3 million kilo decrease in quantities sold, partially offset by a $0.32 per kilo increase in average sales prices. The decrease in volumes is primarily as a result of opportunistic sales of U.S. inventories that occurred in the prior year. The decrease in sales also reflected the exit from the European markets in Greece and Spain, decreased volumes available in Zimbabwe and reduced sales from Malawi and Zambia due to smaller 2007 crops. These decreases were partially offset by Asian sales due to increased demand for these tobaccos. Processing and other revenues increased 12.5% from $69.8 million in 2007 to $78.5 million in 2008 primarily as a result of increased processing volumes and prices in the United States.

Gross profit as a percentage of sales. Gross profit decreased 15.3% from $295.7 million in 2007 to $250.4 million in 2008 and the gross profit percentage decreased from 14.9% in 2007 to 12.4% in 2008.

South America region. Gross profit declined $38.8 million in 2008 compared to 2007. Although current year volumes increased, prior year results included the reversal of a reserve for interstate trade tax assets from the State of Rio Grande do Sul as the assets were determined to be realizable due to an amended agreement with the government. In addition, gross margin was negatively impacted by a $37.5 million bad debt provision associated with farmer accounts related to the cumulative impact of the lower quality of the 2006 crop and smaller 2007 crop. The continued impact of the strengthening Brazilian real also had a negative impact on gross margin as we experienced substantial increases in both green tobacco and tobacco processing costs for the 2006 and 2007 crops.
Management considers the 2007 crop to be of improved quality. However, as a result of the poor quality of the 2006 crop and the resulting surplus quantities on hand, 2007 crop production and purchases declined as planned. The decline in market conditions again resulted in an increased grower bad debt provision for the 2007 crop. During 2008, a provision of $6.2 million related to interstate trade taxes receivable from the State of Parana was recorded which also negatively impacted Brazilian gross profits. See Note P "Contingencies - Non-Income Tax" to the "Notes to Condensed Consolidated Financial Statements" for further information. These cost increases in 2008 were partially offset by an $8.6 million inventory valuation adjustment in 2007 as a result of poor quality crops.

Other Region. The current year gross profit decreased $6.5 million primarily as a result of the increased cost of the 2007 burley crop in Malawi that is being sold. A smaller crop size due to weather, coupled with an increase of competition within the Malawi market, almost doubled the average auction prices for the 2007 crop in Malawi. In addition, the reduction in crop purchases also increased the per kilo processing and overhead costs allocated to the 2007 crop.
Negotiated sales price increases were insufficient to compensate for lost volumes thereby resulting in decreased current year margins. These factors will have a material negative impact on Other Region gross profit as the remainder of the 2007 Malawi burley crop is sold in fiscal 2009. Also negatively impacting gross profit in the Africa region was the short crop in Zambia and the decrease in volumes available from Zimbabwe. Partially offsetting these decreases in gross profit were increases in gross profit from the Asia, Europe and North America operating segments. The increases in gross profit were primarily related to decreased inventory valuation adjustments of approximately $6.3 million as well as the timing of shipments in the current year in the oriental markets in Bulgaria and Serbia and increased volumes in certain Asian markets.

Selling, administrative and general expenses decreased $0.9 million or 0.6% from $158.3 million in 2007 to $157.4 million in 2008. The decrease is primarily due to decreased legal and professional fees and compensation costs. The weak U.S. dollar negatively impacted expenses denominated in foreign currencies, primarily Brazilian Reals, Euros and Pounds Sterling. Foreign currency denominated expenses accounted for approximately 33.1% and 32.9% of the total selling, administrative and general expenses in 2008 and 2007, respectively.

Other income increased $14.1 million from $6.1 million in 2007 to $20.2 million in 2008. The increase is primarily attributable to the gains of approximately $9.5 million and $7.0 million on the sales of the Malawi factory and Greek properties, respectively. These sales occurred primarily during the fourth quarter of fiscal 2008. The remaining 2008 income is primarily other gains on sales of fixed assets. The 2007 income is primarily related to the final collection of pre-1991 Gulf War Iraqi receivables written off in prior years and gains on fixed asset sales. See Note A "Significant Accounting Policies" to the "Notes to Consolidated Financial Statements" for further information.

Restructuring and asset impairment charges were $19.6 million in 2008 compared to $29.8 million in 2007. During 2008, we incurred asset impairment charges of $10.6 million which are primarily the result of a $6.1 million charge from the sale of CdF. In addition, we reported an impairment charge of $2.7 million related to long-lived assets in Turkey as a result of significant reductions in future Turkish flue cured and burley tobacco volumes. The remaining restructuring charges of $9.0 million are substantially employee severance charges primarily in Malawi due to the sale of one of the Malawi factories, in Turkey due to the significant reductions in future volumes, in Brazil due to the sale of one of the operating facilities as previously disclosed and other employee severance charges as we continue the execution of our merger integration plan. The 2007 costs relate to additional impairment charges of $13.2 million to write down our Zimbabwe operations to zero as a result of the continuing political and economic strife as well as the further decline in crop size. Other asset impairment charges of $6.7 million related to assets in the United States, Thailand and Greece, primarily machinery and equipment. The remaining $9.9 million in 2007 relates primarily to employee severance and other integration related charges as a result of the merger. See Note D "Restructuring and Assets Impairment Charges" to the "Notes to Consolidated Financial Statements" for further information.

Debt retirement expense of $5.9 million in 2008 relates to accelerated amortization of debt issuance costs as a result of debt prepayment and retirement as well as other one time costs associated with the retirement of senior notes including tender premiums paid for the repurchase of the senior notes and other debt related fees. Debt retirement expense of $3.9 million in 2007 relates to one time costs of refinancing our senior secured credit facility.

Interest expense decreased $3.7 million from $105.6 million in 2007 to $101.9 million in 2008 primarily due to lower average borrowings.

Interest income was $16.2 million in 2008 and $8.6 million in 2007. The increase of $7.6 million was primarily due to higher cash balances in 2008 and increased interest income from Brazilian farmer refinancing.

Effective tax rates were a benefit of (268.8)% in 2008 and an expense of 122.7% in 2007. Effective tax rates are largely determined by the distribution of taxable income among various taxing jurisdictions as well as management's judgment on the ability to realize the tax benefits of deferred tax assets. The significant variance from the statutory tax rate in 2008 is due primarily to permanent differences related to local goodwill amortization and to exchange gains and losses and currency translation adjustments, partially offset by increases to valuation allowance. The significant unfavorable variance from the statutory rate in 2007 is primarily due to the inability to recognize the benefit of losses in certain jurisdictions and the additional income tax accrual for the tax audit in Germany. See Note L "Income Taxes" to the "Notes to Consolidated Financial Statements" for further information. The effective rate was favorably impacted as a result of the reduction in tax rates in Turkey and a reduction in valuation allowance related to U.S. foreign tax credit carryovers.

Income (loss) from discontinued operations was $7.9 million in 2008 compared to $(18.7) million in 2007. The increase of $26.6 million is primarily due to gains on the sale of the remaining wool assets of $7.2 million, 2007 charges of $9.3 million related to finalizing our exit from the Italian market and a 2007 fair value adjustment to inventory in Mozambique for $1.1 million. The remaining increase of $9.0 million is due to our exit from the discontinued operations in Italy, Mozambique and wool operations. See Note C "Discontinued Operations" to the "Notes to Consolidated Financial Statements" for further information.

Comparison of the Year Ended March 31, 2007 to the Year Ended March 31, 2006

Sales and other operating revenues. The decrease of 6.3% from $2,112.7 million in 2006 to $1,979.1 million in 2007 is the result of a 12.1% or 80.5 million kilo decrease in quantities sold, offset by a 5.5% or $0.17 per kilo increase in average sales prices and a 25.5% or $14.2 million increase in processing and other revenues.

South America region. Tobacco revenues decreased $34.5 million, reflecting a 37.1 million kilo decrease in quantities sold versus the prior year primarily related to the timing of 2005 shipments that had been delayed to 2006 and a decrease in demand primarily resulting from the quality of the 2006 crop. This was offset by a $0.36 per kilo increase in average sales prices, attributable primarily to the increased costs of the 2006 crop.

Other regions. Tobacco revenues decreased $113.3 million due to a 43.4 million kilo decrease in quantities sold, partially offset by a $0.06 per kilo increase in average sales prices. The decrease in volume resulted primarily from prior year opportunistic sales in the oriental market as well as the exit from certain European markets during 2007. The decrease in volume also reflected diminished prior year low margin sales from Thailand and China, and the delay of U.S. shipments into fiscal year 2008. The increase in average sales prices resulted from the product mix in Asian origin sales as well as higher costs of 2006 Asian crops. Other region processing and other revenues increased $14.2 million primarily related to greater quantities of U.S. customer-owned tobacco processed.

Gross profit as a percentage of sales. The $71.0 million increase in gross profit, or 31.6%, from $224.7 million in 2006 to $295.7 million in 2007, as well as the gross profit percentage increased from 10.6% in 2006 to 14.9% in 2007, is primarily attributable to two factors:

First, gross profit in the South American region increased approximately $63.5 million. As disclosed in the quarterly and annual reports for the fiscal year ended March 31, 2006, gross profit in Brazil was negatively impacted by the poor quality of the 2005 crop, the strength of the local currency against the U.S. dollar on prices paid to growers and related processing costs, and increased costs from the absorption of local intrastate trade taxes from a change in local laws. In the first quarter of 2007 we entered into an agreement with the government of Rio Grande do Sul allowing us to transfer accumulated intrastate trade tax credits related to the 2005 crop. As a result, intrastate trade taxes related to the 2005 crop of $19.2 million previously recorded as cost of goods and services sold in fiscal 2006 were reversed during the current year. The impact of this agreement in the current year coupled with 2006 crop sales price increases resulted in an increase in gross profit when comparing 2007 with 2006. Partially offsetting the impact of the items noted above which increased the gross profit in the South American region during 2007, was the quality of the 2006 crop and decreased demand. While the 2006 Brazilian crop had been expected to be of average quality, weather related growing conditions in the latter part of the season significantly impacted quality and demand declined. As a result, we increased the provision for grower bad debt, impacting the current year gross profit by $8.3 million compared to the prior year, as well as future quarters relative to 2006 crop sales.

Second, as required by SFAS No. 141, we adjusted Standard's inventory to its fair value less selling costs. These purchase accounting adjustments impacting gross profit on sales of inventory acquired in the merger were reduced by $16.6 million from $18.0 million in 2006 compared to $1.4 million in 2007, primarily in the Other Regions reportable segment. There will be no further impact on gross profit related to purchase accounting adjustments resulting from the merger. This cost reduction was partially offset by a $6.9 million increase in the tobacco market valuation adjustment recorded in 2007 compared to 2006 that was primarily in the South America reportable segment as a result of poor quality crops.

Selling, administrative and general expenses decreased $5.8 million or 3.5% from $164.1 million in 2006 to $158.3 million in 2007. The decrease is primarily due to the deconsolidation of Zimbabwe and a significant reduction in merger and integration related travel expenses.

Other income increased $3.6 million from $2.5 million in 2006 to $6.1 million in 2007. The increase is primarily attributable to the recovery of receivable previously written off and increased gains on fixed asset sales.

Goodwill impairment is tested for each reporting unit annually as of the first day of the last quarter of the fiscal year and whenever events or circumstances indicate that impairment may have occurred. In 2007, there were no indications of impairment. Based on the impairment analysis in 2006, we recorded a total goodwill impairment charge of $256.9 million during the fourth quarter related to the reporting units of North America ($75.7 million) and South America ($181.2 million). See Note E "Goodwill and Other Intangibles" to the "Notes to Consolidated Financial Statements" for further information.

Restructuring and asset impairment charges were $29.8 million in 2007 compared to $85.4 million in 2006. At March 31, 2006, in accordance with ARB 51, we deconsolidated our Zimbabwe operations. A non-cash impairment charge of $47.9 million was recorded in 2006 to adjust the investment in those operations to estimated fair value. In 2007, an additional non-cash impairment charge of $13.2 million was recorded to write down our Zimbabwe investment to zero. Neither of these charges was deductible for income tax purposes. Other impairment charges in 2006 relate to $22.2 million for employee severance and other integration charges related to the merger and $15.3 million for asset impairments primarily related to the decision to sell the dark air-cured tobacco business, including intangibles of the Indonesian dark air-cured operation. Other impairment charges in 2007 relate to $6.7 million for asset impairments in Greece, Thailand and Turkey, primarily machinery and equipment, and $9.9 million for employee severance and other integration related charges as a result of the merger. See Note D "Restructuring and Assets Impairment Charges" to the "Notes to Consolidated Financial Statements" for further information.

Debt retirement expense of $3.9 million in 2007 relates to one time costs of refinancing our senior secured credit facility. Debt retirement expense of $66.5 million in 2006 relates to one time costs of retiring DIMON debt as a result of the merger. These costs include tender premiums paid for the redemption of senior notes and convertible subordinated debentures, the expense recognition of debt issuance costs associated with former DIMON debt instruments, termination of certain interest rate swap agreements and other related costs.

Interest expense decreased $3.0 million from $108.6 million in 2006 to $105.6 million in 2007 due to lower average borrowings offset by higher average rates.

Interest income increased $1.5 million from $7.1 million in 2006 to $8.6 million in 2007 primarily due to the interest income received from the release of Brazilian PIS/Cofins escrow deposits during the fourth quarter of fiscal 2007.

Derivative financial instruments resulted in a benefit of $0.3 million in 2007 and $5.1 million in 2006. These items are derived from changes in the fair value of non-qualifying interest rate swap agreements.

Effective tax rates were an expense of 122.7% in 2007 and a benefit of 4.0% in 2006. Effective tax rates are largely determined by the distribution of taxable income among various taxing jurisdictions as well as management's judgment on the ability to realize the tax benefits of deferred tax assets. The significant unfavorable variance from the statutory rate in 2007 is primarily due to the inability to recognize the benefit of losses in certain jurisdictions and the additional income tax accrual for the tax audit in Germany. See Note P "Contingencies and Other Information" to the "Notes to Consolidated Financial Statements" for further information. The effective rate was favorably impacted as a result of the reduction in tax rates in Turkey and a reduction in valuation allowance related to U.S. foreign tax credit carryovers. The difference from the statutory rate in 2006 is primarily due to significant goodwill impairment charges for which no tax benefit is realized. See Note L "Income Taxes" to the "Notes to Consolidated Financial Statements" for further information.

Losses from discontinued operations were $18.7 million in 2007 and $24.1 million in 2006. The decrease of $5.4 million is due to a $12.0 million assessment in 2006 related to an administrative investigation into tobacco buying and selling practices within the leaf tobacco industry in Italy by the Directorate General for Competition. Also included in the decrease is reduced losses of $2.7 million from our non-tobacco, Italian and Mozambique tobacco operations as well as our wool operations. Substantially offsetting this decrease is $9.3 million . . .