• RESULTS OF OPERATIONS - This section provides an analysis of the Company's results of operations for the three and nine months ended September 30, 2008 and 2007. This section is organized using a layered approach, beginning with a discussion of consolidated results at a summary level, followed by more detailed discussions of business segment results and unallocated corporate items, including interest and income taxes.

• OUTLOOK - This section provides information regarding the Company's current expectations, mainly with regard to the remainder of the current fiscal year, and is organized to provide information by business segment and on a consolidated basis.

• LIQUIDITY AND CAPITAL RESOURCES - This section provides an analysis of the Company's financial condition, including cash flows for the nine months ended September 30, 2008 and 2007 and any material updates to the Company's aggregate contractual obligations as of September 30, 2008.

• OFF-BALANCE SHEET ARRANGEMENTS - This section provides information regarding any off-balance sheet arrangements that are, or could be, material to the Company's results of operations or financial condition.

• NEW ACCOUNTING STANDARDS - This section provides information regarding any newly issued accounting standards which have not yet been adopted by the Company.

OVERVIEW
BUSINESS
UST Inc. is a holding company for its wholly-owned subsidiaries: U.S. Smokeless Tobacco Company and International Wine & Spirits Ltd. The Company's largest subsidiary, U.S. Smokeless Tobacco Company, is the leading manufacturer and marketer of moist smokeless tobacco products, including the iconic premium brands Copenhagen and Skoal, and the value brands Red Seal and Husky. The Company's International Wine & Spirits Ltd. subsidiary produces and markets premium wines sold nationally, via its Ste. Michelle Wine Estates subsidiary, under 20 different labels including Chateau Ste. Michelle, Columbia Crest, Conn Creek, Red Diamond, Erath and Stag's Leap Wine Cellars. The Company also produces and markets sparkling wine under the Domaine Ste. Michelle label. In addition, the Company is the exclusive United States importer and distributor of the portfolio of wines produced by the Italian winemaker Marchesi Antinori, Srl ("Antinori").
The Company conducts its business principally in the United States. The Company's operations are divided primarily into two reportable segments:
Smokeless Tobacco and Wine. The Company's international smokeless tobacco operations, which are less significant, are reported as All Other Operations. As discussed in Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 17, Other Matters," on September 7, 2008, the Company and Altria entered into a merger agreement, pursuant to which Altria will acquire all outstanding shares of the Company's common stock for a price of $69.50 per share. The completion of the acquisition is subject to certain customary conditions, including, but not limited to, the receipt of shareholder approval. The transaction is currently expected to close, subject to the satisfaction of all conditions to closing, the first week of January 2009 and no later than January 7, 2009. The matters set forth in this Quarterly Report on Form 10-Q do not reflect any actions that Altria may take, or request the Company to take, following completion of the transaction.
SMOKELESS TOBACCO SEGMENT
The Company's vision in the Smokeless Tobacco segment is for its smoke-free products to be recognized by adults as the preferred way to experience tobacco satisfaction. The Company's primary objective in the Smokeless Tobacco segment is to continue to grow the moist smokeless tobacco category by building awareness and social acceptability of smokeless tobacco products among adults, primarily smokers, with a secondary objective of competing effectively in every segment of the moist smokeless tobacco category. Category Growth
Category growth is the Company's top focus, as moist smokeless tobacco is a low incidence category and offers a viable option to adult smokers who are increasingly facing restrictions and are seeking a discreet and convenient alternative. For perspective, the number of adults who smoke is significantly larger than the number of adults who use smokeless tobacco products. As a result, every one percent of adult smokers who converts to moist smokeless tobacco products represent a 7 percent to 8 percent increase in the moist smokeless tobacco category's adult consumer base. The Company views conversion as essential because consumer research indicates that the majority of new adult consumers who enter the category do so in the premium segment, of which the Company has approximately a 91 percent share.

In addition to advertising initiatives focused on category growth, the Company has utilized its direct mail and one-on-one marketing programs to promote the discreetness and convenience of smokeless tobacco relative to cigarettes. These programs, which the Company believes have been successful over the past several years, reaching over 6 million adult smokers, continue in 2008. The success of the category growth initiatives is also impacted by product innovation, as evidenced by the contribution that new products have made to the Smokeless Tobacco segment's results over the past several years. The success of the category growth initiatives is further evidenced by the fact that over the past several years, a majority of the new adult consumers who have recently entered the moist smokeless tobacco category first smoked cigarettes and that category growth has accelerated since the initiatives' inception. Based on these results and the rate of growth experienced for the first nine months of 2008, the Company expects category growth of about 7 percent for full-year 2008. Competing Effectively
The Company is committed to competing effectively in every segment of the moist smokeless tobacco category by accelerating profitable volume growth, with the goal of growing as fast as the category. The Company intends to achieve this goal through its premium brand loyalty and brand-building initiatives, and also through price-focused efforts related to price-value products. Premium Brand Loyalty - While category growth remains the Company's top priority, it has also significantly enhanced its efforts on adult consumer loyalty for its premium moist smokeless tobacco products. The premium brand loyalty plan is designed to minimize migration from premium to price-value products by delivering value to adult consumers through product quality and brand-building efforts, along with promotional spending and other initiatives. The Company believes this effort has been successful over the last two years, as demonstrated by the premium net can volume growth experienced during the vast majority of that period. However, during the second quarter of 2008, there was some softness in premium net unit volume as a result of macroeconomic challenges, high gasoline prices and increased competitive activity, in response to which the Company increased its promotional efforts. The Company believes these efforts were effective, as evidenced by an improving trend in premium net can volume in the latter half of the third quarter, with an increase of approximately 1.2 percent, versus the corresponding period of 2007. For the first nine months of 2008, despite the challenging external environment, premium net can volume increased 0.3 percent, as compared to the first nine months of 2007. The Company believes that the increased competitive activity experienced earlier in the year is moderating, with price-value brands all taking price increases. In addition, the rate of growth experienced by competitors is also expected to moderate, as they begin to compare to prior year product launches. Taking this improvement, as well as lower gasoline prices, into consideration, the Company does not intend any further increase to its premium brand-building and loyalty initiatives beyond currently planned levels for the remainder of 2008.
Price-Value Initiatives - The Company's commitment to accelerate profitable volume growth reflects a balanced portfolio approach, which also includes a full complement of marketing support for its price-value products. The Company's successful execution of a balanced portfolio approach continued in the first nine months of 2008, as 6.9 percent growth in price-value net can volume occurred at the same time as 0.3 percent growth in premium net can volume. Of note, the Company repriced and repositioned its Rooster brand to compete as a price-value brand during the second quarter of 2008.

WINE SEGMENT
The Company's vision in the Wine segment is for Ste. Michelle Wine Estates to be recognized as the premier fine wine company in the world. This is a vision based on continuous improvement in quality and greater recognition through third-party acclaim and superior products. In connection with that vision, the Company aims to elevate awareness of the quality of Washington state wines and increase its prestige to that of the top regions of the world through superior products, innovation and customer focus. In order to achieve these goals, attention is directed towards traditional style wines in the super premium to luxury-priced categories. The Company has made progress towards its vision, as demonstrated by its recent accomplishments, with premium case volume growth of 17.8 percent in the first nine months of 2008, as compared to the corresponding period of 2007. According to ACNielsen, Ste. Michelle Wine Estates continued to be the fastest growing of the ten largest wineries in the United States during the first nine months of 2008. During the first nine months of 2008, the Company's Chateau Ste. Michelle brand was the fastest growing top ten premium brand, according to ACNielsen. In addition, as reported by ACNielsen, volume growth for Washington state wines, where the Company maintained its strong leadership position, outpaced most other major regions thus far during 2008, with a growth rate of approximately 10 percent.
Strategic alliances and acquisitions in the Wine segment outside of Washington State have also been important in enabling the Company to achieve its long-term vision. The alliance with Antinori, to become its exclusive United States importer and distributor, and the purchase of the Erath label and winery, both of which occurred in 2006, have broadened the Company's position with respect to two key wine regions, Tuscany and Oregon. The addition of Antinori wines positions the Company as a leader in United States distribution of Tuscan wines, while the addition of Erath establishes the Company as one of the largest producers of Oregon Pinot Noir. The Company also completed the acquisition of Stag's Leap Wine Cellars and its signature Napa Valley, CA vineyards in September 2007, with a 15 percent minority interest held by Antinori California. This acquisition provides additional prestige to the Wine segment's acclaimed portfolio, further strengthens the Company's relationship with Antinori, and has contributed favorably to the segment's continued operating profit growth. Another key element of the Wine segment's strategy is expanded domestic distribution of its wines, especially in certain account categories such as restaurants, wholesale clubs, supermarkets, wine shops and mass merchandisers. To that end, the Company remains focused on the continued expansion of its sales force and category management staff.

RESULTS OF OPERATIONS
(In thousands, except per share amounts or where otherwise noted)
CONSOLIDATED RESULTS
Third Quarter of 2008 compared with the Third Quarter of 2007

                                     Three Months Ended
                                        September 30,            Increase/(Decrease)
                                     2008          2007          Amount            %
      Net sales                    $ 484,631     $ 479,612     $     5,019          1.0
      Net earnings                   125,322       133,600          (8,278 )       (6.2 )
      Basic earnings per share          0.85          0.85               -            -
      Diluted earnings per share        0.84          0.84               -            -

      Restructuring charges            6,406         1,677           4,729            -
      Antitrust litigation               450         3,158          (2,708 )      (85.8 )
      Acquisition-related costs        7,082             -           7,082            -

Net Earnings
Consolidated net earnings decreased in the third quarter of 2008, as compared to the third quarter of 2007, primarily due to decreased operating income and higher net interest expense, partially offset by lower income tax expense. The Company reported operating income of $203.7 million in the third quarter of 2008, representing 42 percent of consolidated net sales, compared to operating income of $218.5 million, or 45.6 percent of consolidated net sales, in the third quarter of 2007. The decrease in operating income was primarily due to the following:
• Lower net sales and gross margin in the Smokeless Tobacco segment;

• The impact of $7.1 million in acquisition-related costs recognized in connection with the pending acquisition of the Company by Altria, which adversely impacted the operating margin by 1.5 percentage points;

• Higher restructuring charges incurred in connection with the Project Momentum initiative (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 1.3 percentage points and 0.3 percentage points in the third quarter of 2008 and 2007, respectively; and

• Higher SA&A expenses in the Wine segment, including the impact of the addition of Stag's Leap Wine Cellars, which was acquired in mid-September 2007.

These factors were partially offset by:
• Increased net sales and gross margin in the Wine segment and the Company's international operations;

• Lower SA&A expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum;

• Lower unallocated corporate expenses, primarily due to the absence of the amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building, which adversely impacted the third quarter of 2007 operating margin percentage by 0.6 percentage points, as well as lower professional fees; and

• Lower antitrust litigation charges which adversely impacted the operating margin by 0.1 percentage points and 0.7 percentage points in the third quarter of 2008 and 2007, respectively.

Basic and diluted earnings per share of $0.85 and $0.84, respectively, for the third quarter of 2008, were equal to the corresponding comparative measures in 2007. Basic average shares outstanding in the third quarter of 2008 were 6.6 percent lower than in the comparable prior year period, primarily as a result of the 10 million shares repurchased during the 12-month period ended September 30, 2008, the majority of which were repurchased in the latter half of 2007, partially offset by the exercise of stock options. This decline in basic average shares outstanding occurred despite the Company's suspension of its share repurchase program during the second quarter of 2008 in connection with the pending acquisition by Altria. Diluted average shares outstanding in the third quarter of 2008 were lower than those in the third quarter of 2007 mainly due to the decrease in basic average shares outstanding and a lower level of dilutive options outstanding.

Net Sales

                                   Three Months Ended
                                      September 30,            Increase/(Decrease)
                                   2008          2007           Amount           %
        Net Sales by Segment:
        Smokeless Tobacco        $ 364,148     $ 384,067     $    (19,919 )      (5.2 )
        Wine                        99,760        82,286           17,474        21.2
        All Other Operations        20,723        13,259            7,464        56.3

        Consolidated Net Sales   $ 484,631     $ 479,612     $      5,019         1.0

The increase in consolidated net sales for the third quarter of 2008, as compared to the third quarter of 2007, was primarily due to the following:
• Improved case volume for existing premium wine brands, as well as the incremental impact from the addition of the Stag's Leap Wine Cellars portfolio of wines, which was acquired in September 2007;

• Higher international net sales, primarily relating to a Canadian excise tax increase, which is passed through to customers; and

• Increased net can volume for price-value moist smokeless tobacco products.

These factors were partially offset by:
• A slight decrease in premium net can volume for moist smokeless tobacco products; and

• Lower net revenue realization per can in the Smokeless Tobacco segment.

          Segment Net Sales as a Percentage of Consolidated Net Sales
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*   Smokeless Tobacco


Gross Margin

                                     Three Months Ended
                                        September 30,            Increase/(Decrease)
                                     2008          2007           Amount           %
       Gross Margin by Segment:
       Smokeless Tobacco           $ 294,299     $ 315,199     $    (20,900 )      (6.6 )
       Wine                           36,920        29,626            7,294        24.6
       All Other Operations            9,748         8,318            1,430        17.2

       Consolidated Gross Margin   $ 340,967     $ 353,143     $    (12,176 )      (3.4 )

The consolidated gross margin decrease in the third quarter of 2008, as compared to the third quarter of 2007, was primarily due to lower net sales in the Smokeless Tobacco segment and higher cost of products sold in all segments, partially offset by higher net sales in the Wine segment and the Company's international operations.

                                                   Three Months Ended
                                                      September 30,           Increase/
                                                   2008           2007       (Decrease)
  Gross Margin as a % of Net Sales by Segment:
  Smokeless Tobacco                                   80.8 %        82.1 %          (1.3 )
  Wine                                                37.0 %        36.0 %           1.0
  All Other Operations                                47.0 %        62.7 %         (15.7 )
  Consolidated                                        70.4 %        73.6 %          (3.2 )

The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to a change in segment mix, as case volume for wine, which sells at comparatively lower margins, grew faster than the net can volume for moist smokeless tobacco products. Also contributing to this decline was the lower net revenue realization per can in the Smokeless Tobacco segment, as well as the impact of a Canadian excise tax related price increase affecting the Company's international operations. Gross margin percentages for each segment are discussed further below.

Acquisition-Related Costs
In connection with Altria's pending acquisition of the Company, $7.1 million of acquisition-related costs were incurred during the third quarter of 2008, consisting of legal and other professional fees. Restructuring Charges
The Company recognized $6.4 million and $1.7 million in restructuring charges in the third quarter of 2008 and 2007, respectively, related to further actions undertaken in connection with Project Momentum. Under this initiative, the Company has targeted at least $150 million in annual savings to be realized within the three years following its initial implementation in September 2006, of which $130 million has been achieved through September 30, 2008. Refer to the Restructuring Charges section within the First Nine Months of 2008 compared with the First Nine Months of 2007 discussion below for additional information. First Nine Months of 2008 compared with the First Nine Months of 2007

                                        Nine Months Ended
                                          September 30,              Increase/(Decrease)
                                      2008            2007            Amount           %
  Net sales                        $ 1,463,516     $ 1,417,884     $     45,632         3.2
  Net earnings                         390,316         381,084            9,232         2.4
  Basic earnings per share                2.64            2.40             0.24        10.0
  Diluted earnings per share              2.62            2.37             0.25        10.5

  Gain on sale of corp. HQ bldg.             -         105,143         (105,143 )         -

  Restructuring charges                  8,024           9,105           (1,081 )     (11.9 )
  Antitrust litigation                   1,975         125,258         (123,283 )     (98.4 )
  Acquisition-related costs              7,082               -            7,082           -

Net Earnings
Consolidated net earnings increased in the first nine months of 2008, as compared to the first nine months of 2007, as a result of increased operating income and the impact of a lower effective tax rate, partially offset by higher net interest expense. The Company reported operating income of $654.3 million in the first nine months of 2008, representing 44.7 percent of consolidated net sales, compared to operating income of $624.2 million, or 44 percent of consolidated net sales, in the first nine months of 2007. The increase in operating income was primarily due to the following:
• Lower antitrust litigation charges, as the 2008 period included $2 million and the prior year period included $125.3 million. The charges in 2007 represented the estimated costs associated with the resolution of indirect purchaser antitrust class actions in the States of Wisconsin and California. Antitrust litigation charges adversely impacted the operating margin percentage by 0.1 percentage points and 8.8 percentage points in the first nine months of 2008 and 2007, respectively;

• Increased net sales and gross margin in the Wine segment and the Company's international operations;

• Lower SA&A expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum;

• Lower restructuring charges incurred in connection with the Project Momentum initiative (see Restructuring Charges section below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.5 percentage points and 0.6 percentage points in the first nine months of 2008 and 2007, respectively; and

• Lower unallocated corporate expenses, primarily due to lower costs related to changes in executive management and the absence of amortization of imputed rent related to a below-market short-term lease the Company executed in connection with the sale of its former corporate headquarters building. The impact of such charges adversely impacted the operating margin percentage by 0.1 and 0.8 percentage points in the first nine months of 2008 and 2007, respectively.

These factors were partially offset by:
• The absence of a $105 million pre-tax gain recognized in the prior year in connection with the sale of the Company's former corporate headquarters building, which favorably impacted the prior year operating margin by 7.4 percentage points;

• Lower net sales and gross margin in the Smokeless Tobacco segment;

• The impact of $7.1 million in acquisition-related costs recognized in connection with the pending acquisition of the Company by Altria, which adversely impacted the operating margin by 0.5 percentage points; and

• Higher SA&A expenses in the Wine segment, including the impact of the addition of Stag's Leap Wine Cellars, which was acquired in September 2007.

Basic and diluted earnings per share were $2.64 and $2.62, respectively, for the first nine months of 2008, representing increases of 10 percent and 10.5 percent, respectively, from each of the corresponding comparative measures in 2007. Basic average shares outstanding in the first nine months of 2008 were 7 percent lower than in the comparable prior year period, primarily as a result of the 10 million shares repurchased during the 12-month period ended September 30, 2008, partially offset by the exercise of stock options. Diluted average shares outstanding in the first nine months of 2008 were lower than those in the first nine months of 2007 mainly due to the decrease in basic average shares outstanding and a lower level of dilutive options outstanding.