OVERVIEW

Fortune Brands, Inc. (Fortune Brands) is a holding company with subsidiaries that make and sell leading consumer branded products worldwide in the following markets: spirits, home & hardware, and golf products. We strive to enhance shareholder value in a variety of ways, including:

• profitably building leading consumer brands to drive sales and earnings growth and enhance returns on a long-term basis,

• positioning our brands and businesses to outperform their respective markets. We do this by:

- developing innovative new products and effective marketing campaigns,

- expanding customer relationships,

- extending brands into adjacent categories and

- developing international growth opportunities,

• pursuing business improvements by operating lean and flexible supply chains and business processes,

• promoting organizational excellence by developing winning cultures and associates, and

• leveraging our breadth and balance and financial strength to drive shareholder value.

While our first priority is internal growth, we also strive to achieve growth and high returns through add-on acquisitions, dispositions and joint ventures. In addition, over time, we enhance shareholder value through other initiatives, such as using our financial resources to repurchase shares and pay attractive dividends.

For a description of certain factors that may have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see "-Forward-Looking Statements."

RESULTS OF OPERATIONS

Nine Months Ended September 30, 2008 Compared To Nine Months Ended September 30,
2007



                                                 Net Sales
                                                               % Change
             (in millions)          2008          2007      vs. Prior Year

             Spirits              $ 1,759.5     $ 1,748.0              0.7 %
             Home and Hardware      2,907.1       3,439.4            (15.5 )
             Golf                   1,156.7       1,160.3             (0.3 )

             Net Sales            $ 5,823.3     $ 6,347.7             (8.3 )%

                                              Operating Income
                                                               % Change
                                    2008          2007      vs. Prior Year
             Spirits              $   417.6     $   476.6            (12.4 )%
             Home and Hardware        (45.9 )       440.2               -
             Golf                     143.6         172.2            (16.6 )
             Less:
             Corporate expenses        49.3          48.9              0.8

             Operating Income     $   466.0     $ 1,040.1            (55.2 )%

The 8% sales decrease was primarily due to the downturn in the U.S. home products market that impacted our Home and Hardware business, as well as lower U.S. sales in the Golf business. These decreases were partially offset by higher Spirits sales in the premium end of the portfolio, growth in international markets in the Golf and Home & Hardware businesses, and favorable foreign currency.

Operating income decreased due to second quarter 2008 non-cash intangible asset impairment charges in the Home and Hardware business, lower sales, adverse operating leverage in the Home and Hardware business, higher commodity costs, and increased brand investment in the Golf business, as well as higher restructuring and restructuring-related charges in the Home & Hardware and Spirits businesses. Operating income benefited from select price increases, as well as productivity improvements and cost reductions in the Home and Hardware business.

RESULTS OF OPERATIONS (Continued)

Net Sales

Net sales decreased $524.4 million, or 8%, to $5.8 billion due to:

• the downturn in the U.S. home products market and its impact on our Home and Hardware business,

• weak consumer sentiment reducing demand for discretionary purchases, and

• lower international sales in certain markets in the Spirits business including the impact on volume of a new Australian excise tax on ready-to-drink spirit products.

Sales benefited from:

• newly introduced products and line extensions across all businesses (approximately $189 million in total, net of discontinued products),

• favorable foreign currency (approximately $107 million),

• price increases implemented to offset higher costs for materials in the Home and Hardware business, as well as targeted price increases in the Spirits business

• higher sales in the premium end of the spirits portfolio, particularly in the U.S., and

• growth in international markets for the Golf and Home & Hardware businesses.

Cost of products sold

Cost of products sold decreased $337.4 million, or 10%, primarily on lower sales, as well as cost reduction programs, global sourcing initiatives and productivity improvements, partly offset by unfavorable coverage of manufacturing costs and higher commodity costs (including fuel-related costs).

Excise taxes on spirits

Excise taxes on spirits were up 80 basis points as a percentage of sales compared to the prior year due to higher U.S. spirits sales as a percent of total spirits sales. Excise taxes are generally levied based on the alcohol content of spirits products. Consistent with industry practice, excise taxes collected from customers are reflected in net sales and the corresponding payments to governments are reflected in expenses.

Advertising, selling, general and administrative expenses

Advertising, selling, general and administrative expenses increased $17.2 million, or 1%, primarily due to organizational repositioning and U.S. route-to-market initiative restructuring-related costs in the Spirits business and increased brand investment in the Golf business, partly offset by cost reductions in the Home and Hardware business.

Amortization of intangibles

Amortization of intangibles increased $1.5 million, or 4%, due to changes in foreign currency rates.

RESULTS OF OPERATIONS (Continued)

Intangible asset impairment charges

In the second quarter of 2008, we recorded pre-tax intangible asset impairment charges in the Home and Hardware business of $324.3 million, primarily due to the impact of a steeper than anticipated decline in the U.S. home products market in the current year, and the expectation of a slower than previously anticipated recovery in new home construction. For additional information, refer to the Results of Operations for the Home and Hardware segment.

Restructuring charges

In the nine months ended September 30, 2008, we recorded restructuring charges of $41.1 million, primarily in the Spirits business ($22.1 million in total) to restructure our U.S. and international routes to market ($18.2 million), including charges for workforce reduction and lease terminations. Restructuring charges also included costs for supply chain realignment ($3.9 million). In addition, we recorded charges in the Home and Hardware business ($19.0 million) to align costs and capacities with marketplace conditions, including the announced closing of six manufacturing facilities. In the nine months ended September 30, 2007, we recorded restructuring charges of $16.1 million, principally related to cost reduction initiatives in the Home and Hardware business ($13.2 million), as well as a change in the distribution model in Australia for the Spirits business ($2.7 million).

Interest expense

Interest expense decreased $46.9 million, or 21%, primarily as a result of lower average debt, as well as lower average interest rates.

Other income, net

Other income, net, increased $241.6 million, predominantly as a result of income of $230.0 million from Pernod Ricard S.A. (Pernod Ricard) for the early termination of the Spirits U.S. distribution agreement, as well as $72.0 million recognition of remaining unamortized deferred income from the initial establishment of the joint venture. These amounts were partially offset by a $50.5 million write-down of our investment in Maxxium, our international sales and distribution joint venture, primarily to reflect our share of a goodwill write-down recorded in the financial statements of Maxxium that resulted from the impending departures of Rémy Cointreau S.A. (Rémy) and V&S Group (V&S), and as a result of the execution of a Settlement Agreement with the joint venture partners that define the terms of V&S and Rémy's exit from Maxxium. In addition, we recorded $8.2 million of expenses related to participation in the auction process for the acquisition of V&S. Other income, net, also includes non-operating income and expense, such as amortization of deferred income related to our U.S. spirits distribution joint venture, Future Brands LLC (Future Brands), interest income and transaction gains/losses related to foreign currency-denominated transactions.

Future results will be unfavorably impacted by the absence of the pre-tax deferred gain recognition of V&S's initial investment in the joint venture, which will no longer be amortized in Other income, net ($7 million in the fourth quarter of 2008 and $27 million total in 2009).

RESULTS OF OPERATIONS (Continued)

Income tax expense

The effective income tax rate for the nine months ended September 30, 2008 and 2007 was 33.2% and 31.6%, respectively. The effective income tax rate was unfavorably impacted by the absence of a tax benefit on goodwill impairment charges of $288.9 million and a $50.5 million write-down of our investment in the Maxxium joint venture, as well as higher taxed income associated with termination of the Spirits business's U.S. distribution agreement. The 2008 effective income tax rate was favorably impacted by a $98.4 million tax benefit related to final settlement of the federal income tax audit related to our 2001-2002 federal tax returns. Additionally, the effective income tax rate was favorably impacted by tax credits associated with the conclusion of our 2004-2005 federal tax audit and higher foreign income taxed at lower statutory rates.

Minority interest (income) expense

Minority interest income was $67.5 million this year compared to expense of $18.2 million last year. The favorable change of $85.7 million was primarily due to an $87.9 million gain from a reduction in the fair value of the 10% minority interest in the Spirits business (BGSW) as a result of a valuation by an independent third party performed in connection with our repurchase of the minority interest.

As a result of redemption of the 10% minority interest in BGSW from V&S, effective July 25, 2008, future results will be favorably impacted by reduced minority interest expense as we will no longer pay a preferred dividend to V&S, which totaled $17.4 million after tax on an annual basis. This benefit will be partially offset by the interest expense on the debt incurred to finance the repurchase of the minority interest.

Net income

Net income was $592.4 million, or $3.89 per basic share and $3.83 per diluted share, for the nine months ended September 30, 2008. This compared to net income of $561.1 million, or $3.67 per basic share and $3.59 per diluted share, for the nine months ended September 30, 2007. Income from continuing operations (excluding the U.S. Wine business that was sold in 2007) was $439.9 million, or $2.89 per basic share and $2.85 per diluted share, for the nine months ended September 30, 2008. These results compared to $558.8 million, or $3.65 per basic share and $3.57 per diluted share, for the nine months ended September 30, 2007, respectively. The $118.9 million decrease in income from continuing operations was primarily due to second quarter 2008 intangible asset impairment charges ($310.7 million after tax) in the Home and Hardware business, lower operating income from business operations, write-downs of the Spirits business's investment in Maxxium ($50.5 million), and higher restructuring and restructuring-related charges ($40.8 million after tax in 2008 compared to $14.6 million in 2007). Income from continuing operations benefited from income due to the termination of the Spirits U.S. distribution agreement and the related deferred gain recognition ($187.3 million after tax in aggregate), as well as a gain due to a reduction in the fair value of the minority interest in the Spirits business ($81.5 million), lower interest expense and tax-related credits ($98.2 million).

Income from discontinued operations was $152.5 million for the nine months ended September 30, 2008, or $1.00 per basic share and $0.98 per diluted share due to finalization of the tax accounting for the sale of the U.S. Wine business in 2007. This compared to income from discontinued operations for the nine months ended September 30, 2007 of $2.3 million, or $0.02 per basic and diluted share.

Results of Operations By Segment

Spirits

Net sales increased $11.5 million, or 1%, to $1,759.5 million, benefiting from favorable foreign currency (approximately $52 million). In addition, net sales increased due to higher sales at the premium end of our portfolio, particularly in the U.S., U.K. and BRIC countries (Brazil, Russia, India and China), and the impact of targeted price increases. These factors were partially offset by lower sales in certain international markets, particularly Spain, Mexico and Germany, as well as the impact on net sales of an unexpected Australia excise tax on ready-to-drink spirit products instituted in April.

Operating income decreased $59.0 million, or 12%, to $417.6 million, primarily due to $34.0 million in restructuring and restructuring-related charges resulting from initiatives to restructure our international and U.S. routes to market, organizational repositioning, and supply chain realignment. In addition, operating income was impacted by higher brand spending, and increased operating expenses due to higher information technology costs, as well as the unfavorable margin impact of lower sales of high-margin ready-to-drink products in Australia as a result of the new excise tax. These factors were partially offset by the impact of price increases and a favorable mix shift toward our higher margin premium brands outside of Australia.

BGSW is a partner in Maxxium, an international sales and distribution joint venture that we account for using the equity method. BGSW has a 25% ownership interest in Maxxium. The Company's other equal partners in Maxxium are Rémy, The Edrington Group Ltd. (TEG) and V&S. In November 2006, Rémy gave notice to Maxxium that it will terminate its distribution agreement with Maxxium effective March 30, 2009, and on September 30, 2008 Rémy gave notice that it will also withdraw as a Maxxium shareholder on March 30, 2009. In connection with Rémy's termination, Rémy will pay a €224 million (approximately $318 million based on the September 30, 2008 exchange rate) termination penalty to Maxxium on March 28, 2009, and will receive €60.4 million (approximately $86 million based on the September 30, 2008 exchange rate) for its share in Maxxium on March 30, 2009.

In September 2008, we entered into a Settlement Agreement (Settlement Agreement) with the Maxxium partners that resulted in the termination of V&S's distribution agreement with Maxxium effective September 30, 2008 and will result in the exit of V&S and Rémy as shareholders of Maxxium effective March 30, 2009. In connection with V&S's termination, V&S paid a €59 million (approximately $84 million based on the September 30, 2008 exchange rate) termination penalty to Maxxium and will receive €60.4 million (approximately $86 million based on the September 30, 2008 exchange rate) for its share in Maxxium on March 30, 2009.

Results of Operations By Segment (Continued)

Spirits (Continued)

In the second quarter of 2008, we recorded a $25.1 million write-down of our Maxxium investment (in Other income, net), primarily to reflect our share of a goodwill write-down recorded in the financial statements of Maxxium that resulted from the impending departures of Rémy and V&S. In the third quarter, as a result of the Settlement Agreement that defined the terms of V&S and Rémy's exit from Maxxium, we recorded an additional $25.4 million write-down of our investment in Maxxium. The carrying value of the investment in Maxxium at September 30, 2008 was $45.1 million.

On September 30, 2008, we closed a transaction that resulted in the early termination, as of September 30, 2008, of the U.S. distribution agreement between BGSW and the U.S. business of V&S. The distribution joint venture, Future Brands, was scheduled to remain in place through February of 2012. Under the early termination agreement, Pernod Ricard paid Fortune Brands $230.0 million in cash in exchange for early termination of the distribution agreement, which was recorded in Other income, net, in the statement of income. The early termination of the U.S. distribution agreement allows us to simplify our route to market in the U.S. and exercise greater control over our distribution. The proceeds compensate us in advance for our higher costs of distribution over the remaining term of the joint venture agreement. As a part of the early termination of the U.S. distribution agreement, BGSW redeemed the 49% interest in Future Brands held by V&S. Future Brands was consolidated as of September 30, 2008 and did not have a material impact on the financial statements.

As a result of early termination of the U.S. distribution agreement, in the third quarter of 2008, in Other income, net, we recorded a pre-tax gain of $230.0 million and recognized the balance of unamortized deferred income of $72.0 million resulting from the initial payment in 2001 from V&S to establish the U.S. distribution joint venture.

V&S owned a 10% interest in our Spirits business. As a result of the sale of V&S, we exercised our call option to repurchase V&S's 10% equity stake in the Spirits business and, in July 2008, we repurchased the minority interest for the carrying value of $455.0 million. In the second quarter of 2008, we recorded, in Minority interest income (expense), an $87.9 million gain from a reduction in the fair value of the 10% minority interest in the Spirits business (BGSW) as a result of a valuation by an independent third party performed in connection with our repurchase of the minority interest,

In the third quarter of 2008, we purchased the premium Cruzan Rum business from Pernod Ricard for $100 million in cash.

Results of Operations By Segment (Continued)

Spirits (Continued)

We expect to incur additional restructuring and restructuring-related charges over the next 6 to 12 months related to our U.S. route-to-market strategic initiatives. In the future, we expect to be impacted by higher pre-tax operating costs of approximately $12 million in the fourth quarter of 2008 and an incremental approximately $20 million in 2009 as a result of our U.S. route-to-market initiatives. In addition, a new U.S. distributor partnership program, under which we'll support faster inventory turns for our distributor partners, is expected to result in the reduction of year-over-year distributor inventory levels and adversely impact fourth quarter 2008 sales, resulting in approximately $20 million lower operating income in the fourth quarter of 2008.

In September 2008, BGSW and TEG established an international distribution alliance providing for a joint venture arrangement between the two parties in many Maxxium markets beginning March 31, 2009. The alliance provides that BGSW and TEG will have equal joint ownership of sales and distribution companies in certain markets and that BGSW-controlled or TEG-controlled distribution companies will distribute both companies' products in certain other markets. BGSW and TEG will work together to facilitate an orderly transition or winding down of Maxxium operations. In 2009, operating costs may be higher in the Spirits business as a result of global route-to-market changes.

In April 2008, the Australian government increased excise taxes on ready-to-drink products by 70%, equating to a 25% price increase to consumers, which adversely impacted Beam's pre-mixed products including Jim Beam and Cola. Operating income will continue to be negatively impacted by the excise tax increase until its impact is annualized in the second quarter of 2009.

Factors that could adversely affect results include potential changes to distribution, commodity cost increases, competitive pricing activities, and the possibility of excise and other tax increases, including internationally.

Results of Operations By Segment (Continued)

Home and Hardware

Net sales decreased $532.3 million, or 15%, to $2,907.1 million. The decrease was primarily attributable to the downturn in the U.S. home products market, which declined at a faster rate in the third quarter as a result of the slower U.S. economy, the credit crisis, decreasing home prices and declining consumer confidence. These factors contributed to further reductions in both remodeling spending and new home construction. Sales benefited from new products and line extensions (approximately $237 million in total, particularly in faucets, cabinetry and exterior doors), higher sales of security products, expansion in international markets, continued extension of brands into adjacent product categories, and the impact of select price increases.

Operating income decreased $486.1 million resulting in a loss of $45.9 million, primarily due to second quarter 2008 intangible asset impairment charges of $324.3 million. In addition, operating income continued to be negatively impacted by lower sales, the resulting unfavorable coverage of manufacturing and overhead costs, and higher commodity and fuel-related costs (approximately $40 million excluding the benefit of price increases). Restructuring and restructuring-related charges were $8.0 million higher due to a continuing effort to align costs and capacity with marketplace conditions, including the closure of additional manufacturing facilities. Operating income benefited from select price increases, productivity improvements, global sourcing initiatives to reduce materials costs, as well as a reduction in manufacturing, overhead and administrative cost structures.

The downturn in the overall U.S. home products market, which we now project to decline at a high-teens percentage rate in 2008, will continue to negatively impact the results of operations for our Home and Hardware business. Our business may also continue to be affected by competitive pricing, as well as further changes in the costs of certain commodities and sourced components. We will continue to strive to mitigate the impact of the downturn on our net sales through market share gain initiatives, successful extension of brands into new markets, expanding existing customer relationships, and building on our substantial presence in the replace-and-remodel segment of the U.S. home products market. Through previously announced restructuring activities and ongoing cost control initiatives, we are aligning supply-chain and administrative costs with marketplace demand in order to mitigate the impact of the downturn on our operating income and operating margins.

Results of Operations By Segment (Continued)

Home and Hardware (Continued)

In the second quarter of 2008, we recorded pre-tax intangible impairment charges in the Home and Hardware segment, principally for the door and window brands, of $324.3 million. We forecast the U.S. home products market in two portions: the new home construction portion and the repair/remodel portion. Primarily due to the impact of a larger-than-anticipated decline in the U.S. home products market on financial results, the Company concluded it was necessary to conduct an interim goodwill impairment test of reporting units most significantly impacted by new construction and most recently acquired (newer historical carrying values), primarily the Therma-Tru door and Simonton window brands. Based on the results of the testing, the Company recorded pre-tax goodwill impairment charges, predominantly related to its Therma-Tru door reporting unit. For each reporting unit, the impairment charge was measured as the excess of the implied fair value of the goodwill over its carrying value. The implied fair value of goodwill was estimated based on a hypothetical allocation of each reporting unit's fair value to all of its underlying assets and liabilities in accordance with the requirements of with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Consistent with historical practice, the Company estimates the fair value of a reporting unit based on an estimate of future cash flows discounted at a market participant derived . . .