Description of the Company

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

PMI Spin-Off

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

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

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

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

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

Holders of Altria Group, Inc. restricted stock or deferred stock awarded prior to January 30, 2008, retained their existing awards and received the same number of shares of restricted or deferred stock of PMI. The restricted stock and deferred stock will not vest until the completion of the original restriction period (typically, three years from the date of the original grant). Recipients of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by Altria Group, Inc. after the Distribution Date, received additional shares of deferred stock of Altria Group, Inc. to preserve the intrinsic value of the award. Recipients of Altria Group, Inc. deferred stock awarded on January 30, 2008, who were employed by PMI after the Distribution Date, received substitute shares of deferred stock of PMI to preserve the intrinsic value of the award.

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

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

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

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

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

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

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

Dividends and Share Repurchases

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

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

Other

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

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

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

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

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

Executive Summary

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

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

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

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

Subtotal 2007 items                                                114                  0.06


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

Subtotal 2008 items                                               (273 )               (0.13 )


Change in tax rate                                                   4
Lower shares outstanding                                                                0.01

Operations                                                         255                  0.12

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

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

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

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

Loss on Early Extinguishment of Debt - As more fully discussed in Note 1. Basis of Presentation and PMI Spin-Off, in the first quarter of 2008, Altria Group, Inc. and its subsidiary, Altria Finance (Cayman Islands) Ltd., completed tender offers to purchase for cash $2.3 billion of notes and debentures denominated in U.S. dollars, and €373 million in euro-denominated bonds, equivalent to $568 million in U.S. dollars. As a result, Altria Group, Inc. recorded a pre-tax loss of $393 million ($256 million after taxes) on the early extinguishment of debt in the first quarter of 2008.

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

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

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

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

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

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

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

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

• Lower interest and other debt expense, net;

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

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

partially offset by:

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

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

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

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

Subtotal 2007 items                                              (44 )                (0.03 )


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

Subtotal 2008 items                                              (84 )                (0.04 )


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


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

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

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

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

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

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

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

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

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

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

partially offset by:

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

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

2008 Forecasted Results - On October 23, 2008, Altria Group, Inc. reaffirmed its 2008 earnings per share guidance. Altria Group, Inc. forecasts that 2008 adjusted full-year diluted earnings per share from continuing operations is expected to be in the range of $1.63 to $1.67. This range represents a 9% to 11% growth rate in earnings per share from an adjusted base of $1.50 per share in 2007. Altria Group, Inc. continues to expect full-year operating companies income growth from continuing operations in the mid-single digits on both a reported and adjusted basis. The factors described in the Cautionary Factors That May Affect Future Results section of the following Discussion and Analysis represent continuing risks to this forecast.

   Reconciliation of 2007 Reported Diluted EPS from Continuing Operations to

              2007 Adjusted Diluted EPS from Continuing Operations



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

2007 Adjusted diluted EPS from continuing operations   $  1.50

Discussion and Analysis

Consolidated Operating Results

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



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

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

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