Net Sales

                                                              Year Ended December 31,
                                                     % Change                              % Change
(In millions)                       2008       vs. Prior Year             2007       vs. Prior Year             2006
Spirits                        $ 2,480.9                 (4.8 )%     $ 2,606.8                  3.7 %      $ 2,513.4
Home and Hardware                3,759.1                (17.4 )        4,550.9                 (3.1 )        4,694.2
Golf                             1,368.9                 (2.6 )        1,405.4                  7.0          1,313.4
NET SALES                      $ 7,608.9                (11.1 )%     $ 8,563.1                  0.5 %      $ 8,521.0

                                                          Operating Income and Net Income

                                                              Year Ended December 31,
                                                     % Change                              % Change
(In millions)                       2008       vs. Prior Year             2007       vs. Prior Year             2006
OPERATING INCOME:
Spirits                        $   543.7                (29.1 )%     $   766.7                 16.1 %      $   660.6
Home and Hardware                 (465.6 )                 -             503.0                (27.7 )          695.4
Golf                               125.3                (24.3 )          165.5                 (0.3 )          166.0
Corporate expenses                 (57.8 )               (1.9 )          (58.9 )              (20.5 )          (74.1 )
OPERATING INCOME               $   145.6                (89.4 )%     $ 1,376.3                 (4.9 )%     $ 1,447.9

LESS:
Interest expense                   237.1                (19.2 )          293.6                 (4.9 )          308.8
Other income, net                 (279.9 )                 -             (37.5 )               (6.7 )          (40.2 )
Income taxes                        95.6                (72.4 )          346.3                 15.7            299.3
Minority interest (income)
expense                            (65.8 )                 -              24.4                (64.1 )           67.9
INCOME FROM CONTINUING
OPERATIONS                     $   158.6                (78.8 )%     $   749.5                 (7.7 )%     $   812.1
INCOME FROM DISCONTINUED
OPERATIONS                         152.5                   -              13.1                (27.2 )           18.0
NET INCOME                     $   311.1                (59.2 )%     $   762.6                 (8.1 )%     $   830.1

CONSOLIDATED

Summary

Fortune Brands, Inc. (Fortune Brands) is a holding company with subsidiaries that make and sell leading consumer branded products worldwide in the following markets: distilled spirits, home and 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 programs,

> 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,

> leveraging our breadth and balance and financial resources to drive shareholder value.

While our first priority is internal growth, we also strive to create shareholder value 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 pay down debt, repurchase shares and pay 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."

In 2008, net income and diluted earnings per share decreased 59% to $311.1 million and $2.02, respectively, compared to 2007. Income and diluted earnings per share from continuing operations decreased 79%. The decrease in profits was primarily due to:

> asset impairment charges ($659.4 million after tax),

> the impact of the downturn in the U.S. housing products market and the global economic environment,

> write-downs of the Spirits business's investment in Maxxium ($50.5 million), and

> the absence of 2007's gain on the sale of The Dalmore Scotch Whisky (The Dalmore) U.S. distribution rights and related assets ($28.5 million after tax).

Income from continuing operations benefited from:

> income due to the termination of the Spirits U.S. distribution agreement and the related deferred gain recognition ($190.9 million after tax in aggregate),

> tax-related credits ($98.4 million),

> a gain due to the reduction in the fair value of the minority interest in the Spirits business ($81.9 million after tax),

> new product sales,

> price increases implemented to offset higher commodity costs in the Home & Hardware business, as well as targeted price increases in the Spirits business,

> productivity improvements,

> aggressive cost management, including global sourcing initiatives, and

> lower interest expense.

The following summarizes the performance of each of our business segments in 2008:

> Sales of our Spirits business declined 5% and operating income decreased 29% compared to 2007. Net sales decreased primarily on the impact of a new U.S. distribution program to facilitate lower and more consistent distributor inventory levels, the adverse impact of an unexpected Australian excise tax increase on ready-to-drink spirits products, the impact of the wind-down of transitional manufacturing agreements with Pernod Ricard S.A. (Pernod Ricard) to produce certain products subsequent to a 2005 acquisition, and unfavorable foreign exchange. In addition, economic pressures resulted in lower net sales in certain markets. Sales benefited from a continued shift to the premium end of our portfolio, targeted price increases and the impact of the acquisition of Cruzan rum. Operating income was lower primarily due to the decline in sales, absence of 2007's gain on the sale of The Dalmore's U.S. distribution rights and related assets,

> Sales of our Home and Hardware business declined 17%, primarily as a result of the downturn in the U.S. home products market which deteriorated as the year progressed due to the U.S. recession and credit crisis. Sales benefited from new products and line extensions as well as expansion into adjacent product categories. Operating income was down $968.6 million from 2007 as a result of asset impairment charges of $758.3 million, lower sales and related unfavorable coverage of manufacturing and overhead costs (adverse operating leverage), and higher commodity costs. These decreases were partly offset by productivity improvements, aggressive cost management, and lower restructuring and restructuring-related costs related to supply-chain initiatives.

> Sales of our Golf brands declined 3% compared to 2007 on lower sales in the U.S. as a result of the soft consumer demand for discretionary purchases and the impact of a reduction in inventory by retailers. Sales benefited from strong international growth, particularly in Asia, favorable foreign currency, and favorable sales mix. Operating income decreased 24% primarily due to brand investment to support our growth initiatives, lower sales and resulting adverse operating leverage, higher patent license expense and increased commodity costs.

In 2008, we acquired the premium Cruzan rum business from Pernod Ricard S.A. (Pernod Ricard) for $103.2 million in cash. In addition, we repurchased the 10% minority interest in our Spirits business from Vin & Sprit Group (V&S) for $455.0 million. We also redeemed the 49% interest in our Spirits business's U.S. distribution joint venture held by V&S. In a related transaction, we received $230.0 million from Pernod Ricard for early termination of the U.S. distribution agreement with V&S subsequent to its acquisition by Pernod Ricard.

In December 2007, we sold our remaining U.S. wine assets to Constellation Brands for $887.0 million, after selling two wine brands and related assets to E. & J. Gallo Winery in August 2007. The sale to Constellation Brands resulted in a net after-tax gain on the sale of $5.2 million in 2007. In addition, in December 2007, we sold the U.S. distribution rights and related assets for The Dalmore for $58.0 million, resulting in a gain on the sale of $28.5 million, net of tax.

In June 2006, we acquired SBR, Inc. (now Simonton Holdings, Inc.), a privately held company, which owns a leading vinyl-framed window brand in North America.

In 2009, we expect to:

> remain focused on our initiatives designed to outperform our markets,

> aggressively focus on our supply-chain and cost initiatives to partly offset the impact of adverse operating leverage,

> benefit from the strength of our brands and new products across all segments, and

> continue targeted brand-building investment, innovation and expansion into new markets, including international growth opportunities in all of our segments.

We have also identified the following risks and challenges that may impact our businesses:

> the broad-based global recession and decrease in consumer discretionary spending,

> customers continuing to maintain lean inventories across all categories, and

> foreign exchange rates.

RESULTS OF OPERATIONS

2008 Compared to 2007

Net Sales

Net sales decreased $954.2 million, or 11%, to $7.6 billion primarily due to:

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

> weak consumer sentiment that reduced demand for discretionary purchases, including its adverse impact on our Home & Hardware and Golf businesses, and

> lower sales in certain markets in the Spirits business, including the impact of an Australian excise tax increase on ready-to-drink spirit products.

Sales benefited from:

> newly introduced products and line extensions across all businesses (approximately $241 million in total, net of discontinued products),

> 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, and

> growth in international markets in the Golf business.

Cost of products sold

Cost of products sold decreased $519.8 million, or 11%, primarily on lower sales, as well as cost reduction programs, global sourcing initiatives and productivity improvements. These factors were partly offset by adverse operating leverage, as well as higher commodity costs (approximately $85-90 million).

Excise taxes on spirits

Excise taxes on spirits were up 65 basis points as a percentage of sales compared to the prior year due to lower Home and Hardware sales and higher international spirits sales where we are the obligor as a percentage of 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 decreased $38.0 million, or 2%, primarily due to lower sales-related variable costs and cost reductions in the Home and Hardware business, partly offset by the restructuring-related organization repositioning, route-to-market initiatives and business repositioning costs in the Spirits business, as well as increased brand investment in the Golf business to support growth initiatives.

Amortization of intangible assets

Amortization of intangible assets increased $2.0 million, or 4%, primarily due to changes in foreign currency rates.

Asset impairment charges

We recorded pre-tax asset impairment charges in the Home & Hardware and Spirits businesses of $785.5 million ($659.4 million after tax). The Home and Hardware charges of $758.3 million included write-downs of goodwill, tradenames and other long-lived assets. While we are confident about the long-term prospects for the Home and Hardware business, these charges were a result of the impact of a steeper than anticipated decline in the U.S. home products market and the general economy in the current year, as well as the expectation of a slower than previously anticipated recovery. For additional information, refer to the Results of Operations for the Home and Hardware segment. In addition, we recorded a $27.2 million write-down of certain non-U.S. regional Spirits tradenames.

Restructuring charges

In the twelve months ended December 31, 2008, we recorded restructuring charges of $81.8 million. Home and Hardware business charges ($49.5 million in total) primarily related to supply-chain initiatives designed to align costs and capacities with marketplace conditions, including the announced closing of eight manufacturing facilities. Charges also included costs to exit from select low-return product offerings ($10.5 million). In addition, we recorded charges in the Spirits business ($32.3 million) related to business repositioning, including supply-chain activities and route-to-market initiatives in the U.S. and internationally. For the twelve months ended December 31, 2007, we recorded pre-tax restructuring charges of $73.5 million (Home and Hardware $70.2 million, Spirits $2.7 million and Golf $0.6 million).

Operating Income

Operating income decreased $1,230.7 million to $145.6 million, primarily due to asset impairment charges of $785.8 million, lower sales in the Home & Hardware and Golf businesses and resulting adverse operating leverage, higher commodity costs, increased brand investment in the Golf business, and the absence of the 2007 gain on the sale of The Dalmore Scotch Whisky U.S. distribution rights and related assets ($45.6 million). Operating income benefited from new products and line extensions, price increases (implemented to offset higher commodity costs in the Home and Hardware business and in the Spirits business), cost reduction programs, global sourcing initiatives, and productivity improvements.

Interest expense

Interest expense decreased $56.5 million, or 19%, primarily as a result of lower average debt, as well as lower average interest rates.

Other income, net

Other income, net, increased $242.4 million, predominantly due to $230.0 million of cash received from Pernod Ricard for the early termination of the Spirits U.S. distribution agreement, as well as $72.0 million due to 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. Other income, net, also includes non-operating income and expense, such as interest income and transaction gains/losses related to foreign currency denominated transactions.

In 2009, results will be unfavorably impacted by the absence of the amortization of the deferred gain from V&S's initial investment in the joint venture of $20.3 million in 2008 ($27.0 million on an annual basis), which will no longer be amortized in Other income, net.

Income tax expense

The effective income tax rates for the twelve months ended December 31, 2008 and 2007 were 50.7% and 30.9%, respectively. The 2008 effective income tax rate was unfavorably impacted by the absence of a tax benefit on goodwill impairment charges of $451.3 million and a $50.5 million write-down of our investment in the Maxxium joint venture, as well as income associated with termination of the Spirits business's U.S. distribution agreement at the higher U.S. tax rate. 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 of 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 income tax audit, non-goodwill impairment charges and higher restructuring charges in 2008 benefited at higher U.S. tax rates, and a higher portion of foreign income taxed at lower statutory rates.

Minority interest (income) expense

Minority interest income was $65.8 million in 2008 compared to expense of $24.4 million in 2007. The favorable change of $90.2 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) based upon the final settlement amount determined in connection with our repurchase of the minority interest in July 2008.

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 $311.1 million, or $2.05 per basic share and $2.02 per diluted share, for the twelve months ended December 31, 2008. This compared to net income of $762.6 million, or $4.98 per basic share and $4.87 per diluted share, for the twelve months ended December 31, 2007. Income from continuing operations (excluding the U.S. Wine business that was sold in 2007) was $158.6 million, or $1.04 per basic share and $1.03 per diluted share, for the twelve months ended December 31, 2008. These results compared to $749.5 million, or $4.89 per basic share and $4.79 per diluted share, for the twelve months ended December 31, 2007, respectively. The $590.9 million decrease in income from continuing operations was primarily due to lower operating income (including asset impairment charges) and write-downs of the Spirits business's investment in Maxxium ($50.5 million). Income from continuing operations benefited from income due to the termination of the Spirits U.S. distribution agreement and the related deferred gain recognition ($190.9 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 ($81.9 million), lower interest expense and tax-related credits ($98.4 million).

Income from discontinued operations was $152.5 million for the twelve months ended December 31, 2008, or $1.01 per basic share and $0.99 per diluted share. This included pre-tax income of $4.0 million (after tax $2.5 million) from the settlement of outstanding working capital claims related to the sale of the U.S. Wine business. We also recorded a $43.1 million tax benefit related to finalization of the tax accounting for the sale of the U.S. Wine business and tax credits associated with the

conclusion of our 2004-2005 federal income tax audit that pertained to other discontinued operations. In addition, the Congressional Joint Committee on Taxation completed its review of a tax refund associated with a capital loss carryforward item that was favorably resolved in an IRS administrative proceeding relating to our 2001-2002 federal tax returns. As a result, the final settlement of the audit of our 2001-2002 federal tax returns removed uncertainty relating to the utilization of a capital loss carryforward, and we recorded a $98.0 million tax benefit ($98.7 million unrecognized tax benefit less interest of $0.7 million) related to a capital loss carryforward position associated with the sale of the U.S. Wine business. This compared to income from discontinued operations for the twelve months ended December 31, 2007 of $13.1 million, or $0.09 per basic share and $0.08 per diluted share.

2007 Compared to 2006

Fortune Brands' net sales were slightly higher in 2007 compared to 2006. Operating income was 5% lower and net income decreased 8%, primarily due to the impact of the downturn in the U.S. home products markets, higher restructuring and restructuring-related charges, and the absence of 2006 tax credits.

Net Sales

Net sales were up $42.1 million, or 0.5%, benefiting from:

> newly introduced products and line extensions across all businesses (approximately $510 million in total, net of discontinued products),

> the impact of the Simonton acquisition ($182 million),

> strong international growth,

> favorable foreign exchange ($135 million), and

> targeted price increases (implemented to offset higher commodity costs in the Home and Hardware business, and for certain premium spirits brands).

Net sales were negatively impacted by the downturn in the U.S. home products market.

Cost of products sold

Cost of products sold increased $87.8 million, or 2%, primarily on the acquisition of Simonton ($127 million) and increased commodity costs, partly offset by the benefits of productivity improvements, global sourcing initiatives and facility consolidation/downsizing in the Home and Hardware business.

Excise taxes on spirits

Excise taxes on spirits were essentially the same as the prior year as a percentage of 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 in expenses.

Advertising, selling, general and administrative expenses

Advertising, selling, general and administrative expenses increased $9.2 million, or 0.5%, primarily as a result of higher brand investment in the Spirits business to support our global premium brands and in the Golf business to support new product introductions, as well as due to the impact of the Simonton acquisition. Increases were partly offset by the benefit of cost reduction initiatives,

particularly in the Home and Hardware business, and lower Corporate expenses (reflecting a projected reduction in incentive compensation program payouts).

Amortization of intangible assets

Amortization of intangible assets increased $4.7 million to $47.6 million, primarily due to amortization of intangible assets associated with the June 2006 Simonton acquisition.

Restructuring charges

For the twelve months ended December 31, 2007, we recorded pre-tax restructuring charges of $73.5 million. These charges were predominantly related to supply-chain initiatives in the Home and Hardware business (including tangible and intangible asset impairment charges resulting from the consolidation of facilities in cabinetry, window and tool storage, closure of a cabinetry component operation, and the planned exits from the entry door market in the United Kingdom and decorative column product lines in the U.S.). In the Home and Hardware business, we closed or downsized several facilities to optimize supply chains and better align our cost structures and capacity to navigate the current downturn in the U.S. housing product market and to support long-term growth. The 2007 charges consisted primarily of $16.3 million for workforce reduction costs, $49.6 million for asset write-downs, and $7.6 million for contract termination and other related costs. For additional information on the Home and Hardware restructuring, refer to Results of Operations by Segment - Home and Hardware - 2007 compared to 2006. In the twelve months ended December 31, 2006, we recorded pre-tax restructuring charges of $21.2 million, primarily related to supply-chain initiatives in the Home and Hardware business.

Gain on the sale of The Dalmore Scotch Whisky U.S. distribution rights

In 2007, we recorded pre-tax gain on the sale of The Dalmore Scotch Whisky U.S. distribution rights and related assets of $45.6 million.

Operating income

Operating income decreased $71.6 million, or 5%, to $1,376.3 million, primarily due to lower sales in the Home and Hardware business and adverse operating leverage, greater brand investment and higher restructuring and restructuring-related charges. Operating income benefited from new product sales, price increases (implemented to offset higher commodity costs in the Home and Hardware business and in the Spirits business), a mix shift to premium products (in the Golf and Spirits businesses), a gain on the sale of The Dalmore Scotch Whisky U.S. distribution rights and related assets ($45.6 million), productivity improvements, global sourcing initiatives, cost reduction efforts, lower Corporate expenses and favorable foreign exchange.

Interest expense

Interest expense decreased $15.2 million, or 5%, to $293.6 million due to lower average debt, partly offset by an increase in commercial paper rates.

Other income, net

Other income, net, decreased $2.7 million to $37.5 million. Other income, net, includes non-operating income and expense, such as amortization of deferred income related to Future Brands LLC (our Spirits business's U.S. sales and distribution joint venture), interest income and foreign currency transaction gains or losses.

Income taxes

The effective income tax rates for the twelve months ended December 31, 2007 and 2006 were 30.9% and 25.4%, respectively. The increase in the effective rate primarily resulted from the absence of 2006 tax credits of $85.9 million primarily associated with the favorable resolution of routine federal and state tax audits and changes in foreign tax laws that lowered income tax rates as they apply to foreign deferred income taxes. In addition, the 2007 effective tax rate was impacted by higher foreign income generally taxed at lower statutory rates and changes in foreign tax laws that lowered income tax rates as they apply to foreign deferred taxes.

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