Description of the Company

At March 31, 2009, Altria Group, Inc.'s wholly-owned subsidiaries included Philip Morris USA Inc. ("PM USA"), which is engaged in the manufacture and sale of cigarettes and certain smokeless products in the United States; UST Inc. ("UST"), which through its subsidiaries is engaged in the manufacture and sale of smokeless products and wine; 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 March 31, 2009. 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.

As discussed in Note 2. UST Acquisition to the condensed consolidated financial statements ("Note 2"), on January 6, 2009, Altria Group, Inc. acquired all of the outstanding common stock of UST, whose direct and indirect wholly-owned subsidiaries include U.S. Smokeless Tobacco Company ("USSTC") and Ste. Michelle Wine Estates ("Ste. Michelle"). As a result of the acquisition, UST has become an indirect wholly-owned subsidiary of Altria Group, Inc.

Beginning with the first quarter of 2009, 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 UST. At March 31, 2009, Altria Group, Inc.'s reportable segments were cigarettes, smokeless products, cigars, wine, and financial services.

On March 28, 2008, Altria Group, Inc. distributed all of its interest in Philip Morris International Inc. ("PMI") to Altria Group, Inc.'s stockholders in a tax-free distribution. 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.

Executive Summary

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

In the first quarter of 2009, Altria Group, Inc. completed the acquisition of UST and began to integrate it into its family of companies. In addition, Altria Group, Inc. issued $4.2 billion of long-term notes and completed all long-term financing related to the acquisition of UST.

Consolidated Operating Results for the Three Months Ended March 31, 2009 - The changes in Altria Group, Inc.'s earnings from continuing operations and diluted earnings per share ("EPS") from continuing operations for the three months ended March 31, 2009, from the three months ended March 31, 2008, 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 March 31, 2008                  $           614         $        0.29

2008 Exit, implementation and integration costs                        172                  0.08
2008 Gain on sale of corporate headquarters building                  (263 )               (0.12 )
2008 Loss on early extinguishment of debt                              256                  0.12

Subtotal 2008 items                                                    165                  0.08


2009 Exit, implementation and integration costs                       (105 )               (0.05 )
2009 UST acquisition-related costs                                    (117 )               (0.06 )

Subtotal 2009 items                                                   (222 )               (0.11 )


Change in tax rate                                                       3
Fewer shares outstanding                                                                    0.01
Operations                                                              29                  0.01


For the three months ended March 31, 2009                  $           589         $        0.28

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

Shares Outstanding - Fewer shares outstanding during the three months ended March 31, 2009 compared with the prior year period were due primarily to shares repurchased by Altria Group, Inc. during the second quarter of 2008 under its share repurchase program, which was suspended in January 2009.

Operations - The increase of $29 million shown in the table above was due primarily to the following:

• Acquisition of UST, which is reflected in the smokeless products and wine segments (see Note 2);

• Higher income from cigarettes, cigars and financial services; and

• Lower general corporate expenses;

partially offset by:

• Higher interest and other debt expense, net, due to the issuance of senior unsecured long-term notes in November and December 2008, and February 2009 to finance the acquisition of UST; and

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

2009 Forecasted Results - In April 2009, Altria Group, Inc. announced that 2009 full-year reported diluted EPS from continuing operations are expected to be in a range of $1.47 to $1.52, which includes approximately $0.23 per share of estimated charges as detailed in the table below, as compared with 2008 full-year reported diluted EPS from continuing operations of $1.48, which includes $0.17 per share of net charges as detailed in the table below. Anticipated 2009 full-year adjusted diluted EPS from continuing operations, which excludes the charges in the table below, represent a growth rate of 3% to 6% over 2008 full-year adjusted diluted EPS from continuing operations. The 2009 forecast reflects higher tobacco excise taxes, investment spending on smokeless tobacco brands, ongoing cost reduction initiatives, increased pension expenses and no share repurchases. 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.

    Net Charges Included In Reported Diluted EPS from Continuing Operations



                                                            2009     2008

         Exit, integration and implementation costs        $ 0.17   $  0.15
         Gain on sale of corporate headquarters building              (0.12 )
         Loss on early extinguishment of debt                          0.12
         SABMiller intangible asset impairments                        0.03
         UST acquisition-related costs                       0.06      0.02
         Tax items                                                    (0.03 )

                                                           $ 0.23   $  0.17

Adjusted diluted EPS from continuing operations is a financial measure that is not consistent with accounting principles generally accepted in the United States of America ("U.S. GAAP"). Certain income and expense items that management believes are not part of underlying operations are excluded from adjusted diluted EPS because such items can obscure underlying business trends. Management believes it is appropriate to disclose this non-GAAP financial measure to help investors analyze underlying business performance and trends. Such adjusted measures are regularly provided to management for use in the evaluation of segment performance and allocation of resources. This information should be considered as supplemental in nature and is not meant to be considered in isolation or as a substitute for the related financial information prepared in accordance with U.S. GAAP.

Discussion and Analysis

Consolidated Operating Results

See pages 87-90 for a discussion of Cautionary Factors That May Affect Future
Results.



                                                      For the Three Months Ended
                                                               March 31,
                                                       2009                2008
                                                             (in millions)
 Net revenues:
 Cigarettes                                        $       3,896       $       4,233
 Smokeless products                                          298
 Cigars                                                      115                  91
 Wine                                                         75
 Financial services                                          139                  86

 Net revenues                                      $       4,523       $       4,410


 Excise taxes on products:
 Cigarettes                                        $         680       $         791
 Smokeless products                                           12
 Cigars                                                       16                  15
 Wine                                                          3

 Excise taxes on products                          $         711       $         806


 Operating income:
 Operating companies income (loss):
 Cigarettes                                        $       1,143       $       1,040
 Smokeless products                                           (2 )
 Cigars                                                       54                  41
 Wine                                                          1
 Financial services                                          120                  74
 Amortization of intangibles                                  (6 )                (2 )
 Gain on sale of corporate headquarters building                                 404
 General corporate expenses                                  (53 )               (97 )
 UST transaction costs                                       (60 )
 Corporate exit costs                                         (6 )              (247 )

 Operating income                                  $       1,191       $       1,213

As discussed in Note 11. Segment Reporting to the condensed consolidated financial statements, management reviews operating companies income, which is defined as operating income before general corporate expenses and amortization of intangibles, to evaluate segment performance and allocate resources. Management believes it is appropriate to disclose this measure to help investors analyze the business performance and trends of the various business segments.

The following events that occurred during the three months ended March 31, 2009 and 2008, affected the comparability of statement of earnings amounts.

• Acquisition of UST - In January 2009, Altria Group, Inc. acquired UST, the results of which are reflected in the smokeless products and wine segments (see Note 2).

• Exit, Implementation and Integration Costs - For the three months ended March 31, 2009 and 2008, pre-tax exit, implementation and integration costs consisted of the following (in millions):

                                    For the Three Months Ended March 31, 2009
                                           Implementation       Integration
                          Exit Costs           Costs               Costs          Total
    Cigarettes           $         19     $             18     $           -     $    37
    Smokeless products            101                                     15         116
    Cigars                                                                 3           3
    Wine                            2                                      1           3
    General corporate               6                                                  6

    Total                $        128     $             18     $          19     $   165

                                   For the Three Months Ended March 31, 2008
                                          Implementation       Integration
                         Exit Costs           Costs               Costs          Total
    Cigarettes          $         11     $             15     $           -     $    26
    Cigars                                                                2           2
    General corporate            247                                                247

    Total               $        258     $             15     $           2     $   275

For further details on exit, implementation and integration costs, see Note 3. Exit, Implementation and Integration Costs to the condensed consolidated financial statements.

Altria Group, Inc. continues to have aggressive company-wide cost management programs, which include the restructuring programs discussed in Note 3. For the three months ended March 31, 2009, Altria Group, Inc. achieved $140 million in cost savings for a total cost savings of $780 million since January 1, 2007. Altria Group, Inc. expects to achieve approximately $720 million in additional cost savings by 2011, for total cost reductions of $1.5 billion versus 2006, as shown in the table below.

                                                                 Cost Reduction Initiatives
                                                  Cost Savings Achieved
                                                                                          Additional
                                                                    For the Three            Cost             Total
                                        For the Years Ended          Months Ended           Savings            Cost
                                           December 31,               March 31,           Expected by        Savings
                                           2007 and 2008                 2009                2011            Expected
                                                                       (in millions)
Corporate expense and selling,
general and administrative            $                   640      $            140      $         532      $    1,312
Manufacturing optimization
program                                                                                            188             188

Total cost reduction initiatives      $                   640      $            140      $         720      $    1,500

Altria Group, Inc. expects to generate an estimated $300 million in UST integration cost savings by 2011. These integration cost savings are included in the "Corporate expense and selling, general and administrative" line item above.

The manufacturing optimization program is expected to entail capital expenditures of approximately $230 million. Capital expenditures for the program of $25 million were made during the first quarter of 2009, for a total of $146 million since inception.

¡ transaction costs of $60 million, which consisted primarily of investment banking and legal fees. These amounts are included in marketing, administration and research costs on Altria Group, Inc.'s condensed consolidated statements of earnings;

¡ increased cost of sales of $17 million ($12 million and $5 million to the smokeless products and wine segments, respectively), relating to the fair value purchase accounting adjustment of UST's inventory at the acquisition date that was sold during the period; and

¡ structuring and arrangement fees of $87 million for borrowings under a 364-day term bridge loan facility (the "Bridge Facility"), which was terminated in February 2009, upon the issuance of $4.2 billion of senior unsecured long-term notes. These amounts are included in interest and other debt expense (income), net on Altria Group, Inc.'s condensed consolidated statements of earnings.

• Income Taxes - The income tax rate of 38.7% for the first quarter of 2009 increased 1.4 percentage points from 37.3% for the first quarter of 2008, due primarily to certain costs incurred in the first quarter of 2009 related to the acquisition of UST that are not deductible for tax purposes.

• Gain on Sale of Corporate Headquarters Building - In March 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.

• Loss on Early Extinguishment of Debt - In connection with the spin-off of PMI, in the first quarter of 2008, Altria Group, Inc. recorded a pre-tax loss of $393 million on the early extinguishment of debt. See Note 7. Debt to the condensed consolidated financial statements ("Note 7") for further details.

Consolidated Results of Operations for the Three Months Ended March 31, 2009

The following discussion compares consolidated operating results for the three months ended March 31, 2009, with the three months ended March 31, 2008.

Net revenues, which include excise taxes billed to customers, increased $113 million (2.6%), due primarily to the acquisition of UST.

Excise taxes on products decreased $95 million (11.8%), due primarily to the impact of lower volume in the cigarettes segment, partially offset by the acquisition of UST.

Cost of sales decreased $117 million (6.2%), due primarily to lower cigarettes volume and lower cigarettes promotional volume, partially offset by the acquisition of UST.

Marketing, administration and research costs increased $69 million (10.6%), due primarily to the acquisition of UST (including transaction and integration costs), partially offset by lower marketing, research and general corporate expenses. The lower general corporate expenses reflect cost reduction initiatives.

Operating income decreased $22 million (1.8%), due primarily to the 2008 gain on the sale of the corporate headquarters building, 2009 expenses related to the acquisition of UST and lower equity earnings in SABMiller, partially offset by 2008 charges related to the headquarters relocation, operating results from

UST in 2009, higher operating results from the cigarettes and financial services segments, and lower general corporate expenses.

Interest and other debt expense (income), net, was $336 million of expense for the three months ended March 31, 2009, compared with $16 million of income for the three months ended March 31, 2008. This change was due primarily to the issuance of senior unsecured long-term notes in November and December 2008, and February 2009 to finance the UST acquisition.

Altria Group, Inc.'s income tax rate increased 1.4 percentage points to 38.7%, due primarily to certain costs incurred in the first quarter of 2009 related to the acquisition of UST that are not deductible for tax purposes.

Earnings from continuing operations of $589 million decreased $25 million (4.1%), due primarily to higher interest expense, lower equity earnings in SABMiller and lower operating income, partially offset by the 2008 loss on early extinguishment of debt. Diluted and basic EPS from continuing operations of $0.28, each decreased by 3.4%.

Earnings from discontinued operations, decreased $1,901 million, due to the spin-off of PMI in the first quarter of 2008.

Net earnings attributable to Altria Group, Inc. of $589 million decreased $1,865 million (76.0%). Diluted and basic EPS from net earnings attributable to Altria Group, Inc. of $0.28, each decreased by 75.9%. These decreases reflect the spin-off of PMI in the first quarter of 2008.

Operating Results by Business Segment

Tobacco Space

Business Environment

Taxes, Legislation, Regulation and Other Matters Regarding Tobacco and Tobacco Use

The United States tobacco industry faces a number of challenges that may adversely affect the business and sales volume of our tobacco subsidiaries and our consolidated results of operations, cash flows and financial position. These challenges, which are discussed below and in Cautionary Factors That May Affect Future Results, include:

• pending and threatened litigation and bonding requirements as discussed in Note 13. Contingencies to the condensed consolidated financial statements ("Note 13");

• competitive disadvantages related to cigarette price increases attributable to the settlement of certain litigation;

• actual and proposed excise tax increases as well as changes in tax structures and tax stamping requirements;

• actual and proposed restrictions affecting tobacco product manufacturing, marketing, advertising and sales;

• the sale of counterfeit tobacco products by third parties;

• the sale of tobacco products by third parties over the Internet and by other means designed to avoid the collection of applicable taxes;

• diversion into one market of products intended for sale in another;

• the potential assertion of claims and other issues, relating to contraband shipments of tobacco products;

• governmental investigations;

• governmental and private bans and restrictions on tobacco use;

• governmental restrictions on the sale of tobacco products by certain retail establishments and the sale of tobacco products in certain packing sizes;

• the diminishing prevalence of cigarette smoking and increased efforts by tobacco control advocates to further restrict tobacco use;

• governmental requirements setting ignition propensity standards for cigarettes;

• potential adverse changes in tobacco price, availability and quality; and

• other actual and proposed tobacco product legislation and regulation.

In the ordinary course of business, our tobacco subsidiaries are subject to many influences that can impact the timing of sales to customers, including the timing of holidays and other annual or special events, the timing of promotions, customer incentive programs and customer inventory programs, as well as the actual or speculated timing of pricing actions and tax-driven price increases.

Excise Taxes: Tobacco products are subject to substantial excise taxes in the United States. Significant increases in tobacco-related taxes or fees have been proposed or enacted and are likely to continue to be proposed or enacted at the federal, state and local levels within the United States.

Effective April 1, 2009, the federal excise tax ("FET") on cigarettes increased from 39 cents per pack to approximately $1.01 per pack; on snuff from 58.5 cents per pound to $1.51 per pound; and on large cigars from 20.72% of the manufacturer's price (capped at 5 cents per cigar) to 52.75% of manufacturer's price (capped at 40.26 cents per cigar). The legislation enacting this FET increase included a floor stock tax provision that requires persons holding FET-paid tobacco products for sale (other than large cigars) on April 1, 2009 to pay the difference between the old and new rates, minus a $500 tax credit.

State and local excise taxes have increased substantially over the past decade, far outpacing the rate of inflation. For example, between the end of 1998 and the end of 2008, the weighted year-end average state and certain local cigarette excise taxes increased from $0.36 to $1.12 per pack. As of May 1, 2009, three states have enacted cigarette excise tax increases in 2009, which, when implemented, will increase the weighted average state excise tax to $1.14 per pack. Additionally, Puerto Rico has enacted a cigarette excise tax increase in 2009 that has not yet been implemented.

Tax increases are expected to continue to have an adverse impact on sales of tobacco products by our tobacco subsidiaries, due to lower consumption levels and to a potential shift in consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to counterfeit and contraband products.

A majority of states currently tax moist smokeless tobacco products using an ad valorem method, which is calculated as a percentage of wholesale price. This ad valorem method results in more tax being paid on premium products than is paid on lower-priced products of equal weight. Altria Group, Inc.'s subsidiaries support legislation to convert ad valorem taxes on moist smokeless tobacco to a weight-based methodology

because, unlike the ad valorem tax, a weight-based tax results in cans of equal weight paying the same tax. Fourteen states currently use a weight-based tax methodology for moist smokeless tobacco.

Food and Drug Administration (the "FDA") Regulations: On April 2, 2009, the United States House of Representatives passed bipartisan legislation (HR1256) to provide the FDA with broad authority to regulate tobacco products. This legislation has moved to the Senate. The Obama administration has expressed its support for this legislation. Alternate legislation for the federal regulation of tobacco has also been introduced in the Senate.

If enacted, such legislation would grant the FDA broad authority to regulate the design, manufacture, packaging, advertising, promotion, sale and distribution of cigarettes, cigarette tobacco and smokeless tobacco products and disclosures of related information. The legislation also would grant the FDA authority to extend the application of this legislation, by regulation, to other tobacco products, including cigars. Among other measures, this legislation would:

• provide the FDA with authority to regulate nicotine yields and to reduce or eliminate harmful smoke constituents or harmful ingredients or other components of tobacco products;

• ban descriptors such as "light" and "low tar," unless expressly authorized by the FDA;

• require complete ingredient disclosure to the FDA and more limited public ingredient disclosure;

. . .