• RESULTS OF OPERATIONS - This section provides an analysis of the Company's results of operations for the three and nine months ended September 30, 2007 and 2006. 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, 2007 and 2006 and any material updates to the Company's aggregate contractual obligations as of September 30, 2007.

• 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. Through its largest subsidiary, U.S. Smokeless Tobacco Company, the Company is a leading manufacturer and marketer of moist smokeless tobacco products including brands such as Copenhagen, Skoal, Red Seal, Husky and Rooster. Through International Wine & Spirits Ltd., the Company produces and markets premium wines sold nationally, via its Ste. Michelle Wine Estates subsidiary, under labels such as Chateau Ste. Michelle, Columbia Crest, Conn Creek, Villa Mt. Eden, Red

Diamond, Distant Bay, 14 Hands and Erath. In September 2007, through its acquisition of Stag's Leap Wine Cellars ("Stag's Leap") , the Company added the following labels: Cask 23, Fay, S.L.V., Arcadia, Artemis, Karia and Hawk Crest. 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 Antinori, which includes such labels as Tignanello, Solaia, Tormaresca, Montenisa and Haras de Pirque.
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 not significant, are reported as All Other Operations. In the third quarter of 2006, the Company commenced implementation of a cost-reduction initiative called "Project Momentum," with targeted savings of at least $100 million over its first three years. In addition, during 2007, the Company finalized plans on various other initiatives under Project Momentum, primarily related to manufacturing operations and the procurement function, which are expected to generate at least $50 million in additional savings beyond the original target, resulting in a new savings target of at least $150 million over the original three-year period. The majority of the incremental $50 million in savings are expected to be realized in 2008 and 2009. The Company believes that Project Momentum is prudent from a long-term growth perspective, as it is designed to provide resources for additional financial flexibility, whether to address potential competitive challenges in the smokeless tobacco category, make further investments behind its brands or increase net earnings. Operating income results in both the third quarter and nine-month periods of 2007 include the positive contribution realized from this initiative, with certain savings realized earlier than originally planned. Given this progress to date, the Company is confident that it is on track to realize Project Momentum's overall targeted savings within the aforementioned three-year timeframe. See Consolidated Results - Restructuring Charges within the Results of Operations section below for further information.
Category Growth
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 being competitive in every segment of the moist smokeless tobacco category. Over the past several years, industry trends have shown that some adult consumers in this category have migrated from premium brands to brands in the price-value segment. As such, a key to the Company's future growth and profitability is attracting growing numbers of adult consumers, primarily smokers, to the moist smokeless tobacco category, as approximately every one percent of adult smokers who convert to moist smokeless tobacco represents a 7 percent to 8 percent increase in the category's adult consumer base, and consumer research indicates that the majority of new adult consumers enter the category in the premium segment.
In addition to advertising and one-on-one marketing initiatives focused on category growth, the Company has utilized its direct mail marketing program to promote the discreetness and convenience of smokeless tobacco relative to cigarettes to over 4.5 million adult smokers. The direct mail program, which the Company believes has been successful over the past two years, continues in 2007. The success of the Smokeless Tobacco segment's category growth initiatives is also impacted by product innovation, as evidenced by the contribution that new products have made over the past several years. The Company believes that its

category growth efforts have contributed to the moist smokeless tobacco category's strong growth rates since their implementation. Premium Brand Loyalty
While category growth remains the Company's priority, it has also focused 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 promotional spending and other price-focused initiatives. As a result of this effort, premium volume has grown on a sequential basis during each of the last five quarters. For 2007, the Company now expects year-over-year premium net can volume growth of approximately 2 percent (excluding the positive impact of an extra billing day in the fourth quarter), which is in line with the trends seen so far this year.
WINE SEGMENT
The Company's focus in the Wine segment is to become one of the premier fine wine companies in the world, to elevate Washington state wines to the quality and prestige of the top regions of the world, and to be known for 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. Recent achievements have been well aligned with these goals. According to ACNielsen, Ste. Michelle Wine Estates was the fastest growing top-10 winery in the U.S. during the first nine months of 2007, with the Company's wines comprising 7.1 percent of total domestic 750ml units over that period, as compared to 6.2 percent for the full year in 2006. The Company continued to be the category leader for Riesling in 2007, based on ACNielsen data, comprising 32 percent of the domestic market on a year-to-date basis, reflecting a 2 percentage point increase over the Company's reported full-year 2006 share. Overall, the Wine segment maintained its strong leadership position in Washington State.
Strategic alliances and acquisitions in the Wine segment have also been important in enabling the Company to achieve its long-term goals. 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 Wine segment's position with respect to the two key wine regions represented by Antinori and Erath. The addition of Antinori wines positions the Wine segment as a leader in U.S. distribution of Tuscan wines, while the addition of Erath establishes the Company's Wine segment as one of the largest producers of Oregon Pinot Noir. Consistent with the Company's focus on becoming one of the premier fine wine companies in the world, in September 2007, the Company completed its acquisition of Stag's Leap and its signature Napa Valley, CA vineyards for approximately $185 million, 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 is expected to contribute to the segment's continued operating profit growth.
The Company remains focused on the continued expansion of its sales force and category management staff to further broaden the distribution of its wines in the domestic market, especially in certain account categories such as restaurants, wholesale chains and mass merchandisers. Sustained growth in the Wine segment will also be dependent on third party acclaim and ongoing category growth.

RESULTS OF OPERATIONS
(In thousands, except per share amounts or where otherwise noted)
CONSOLIDATED RESULTS
Third Quarter of 2007 compared with the Third Quarter of 2006

                                        Three Months Ended              Increase/
                                           September 30,               (Decrease)
                                        2007          2006         Amount          %
        Net sales                    $ 479,612     $ 458,649     $  20,963         4.6
        Net earnings                   133,600       118,085        15,515        13.1
        Basic earnings per share          0.85          0.74          0.11        14.9
        Diluted earnings per share        0.84          0.73          0.11        15.1

        Restructuring charges            1,677        17,495       (15,818 )     (90.4 )
        Antitrust litigation             3,158             -         3,158           -

Net Earnings
Consolidated net earnings increased in the third quarter of 2007, as compared to the third quarter of 2006, as a result of increased operating income, the impact of a lower effective tax rate on earnings from continuing operations and lower net interest expense. The Company reported operating income of $218.4 million in the third quarter of 2007, representing 45.5 percent of consolidated net sales, compared to operating income of $192.1 million, or 41.9 percent of consolidated net sales, in the third quarter of 2006. The increase in operating income was primarily due to the following:
• Increased net sales and gross margins in all segments;

• Lower selling, advertising and administrative ("SA&A") expenses in the Smokeless Tobacco segment, which can be attributed to Project Momentum; and

• Lower restructuring charges incurred in connection with the Project Momentum initiative, which commenced in the third quarter of 2006 (see Restructuring Chargessection below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.3 percentage points and 3.8 percentage points in the third quarter of 2007 and 2006, respectively.

These factors were partially offset by:
• An antitrust litigation charge of $3.2 million related to a ruling on a motion filed with respect to the settlement of the Kansas and New York actions seeking additional plaintiffs' attorneys' fees, expenses and costs, plus interest, which adversely impacted the operating margin by 0.7 percentage points; and

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

Net earnings for the third quarter of 2006 included after-tax income of $3.9 million from discontinued operations, which resulted from the reversal of an accrual for an income tax-related contingency originally recorded in connection with the June 2004 transfer of the Company's former cigar operations to a smokeless

tobacco competitor. This reversal resulted from a change in facts and circumstances, as the income tax consequences of the Company's then anticipated sale of its corporate headquarters in connection with Project Momentum eliminated the need for the aforementioned contingency.
Basic and diluted earnings per share were $0.85 and $0.84, respectively, for the third quarter of 2007, representing increases of 14.9 percent and 15.1 percent, respectively, from each of the corresponding comparative measures in 2006. Average basic shares outstanding were lower in the third quarter of 2007 than in the comparable prior year period, primarily as a result of share repurchases, partially offset by the exercise of stock options. Average diluted shares outstanding in the third quarter of 2007 were lower than those in the third quarter of 2006 due to the impact of share repurchases and a lower level of dilutive options outstanding.

Net Sales

                                      Three Months Ended             Increase/
                                         September 30,              (Decrease)
                                      2007          2006         Amount        %
           Net Sales by Segment:
           Smokeless Tobacco        $ 384,067     $ 377,258     $  6,809        1.8
           Wine                        82,286        69,536       12,750       18.3
           All Other Operations        13,259        11,855        1,404       11.8

           Consolidated Net Sales   $ 479,612     $ 458,649     $ 20,963        4.6

The increase in consolidated net sales for the third quarter of 2007, as compared to the third quarter of 2006, was primarily due to the following:
• Improved case volume for premium wine, including the addition of Stag's Leap wines late in the quarter;

• An increase in both premium and overall net can volume for moist smokeless tobacco products; and

• Improved international results.

These factors were partially offset by:
• Lower net revenue realization per unit in the Smokeless Tobacco segment, reflecting the impact of the premium brand loyalty plan.

          Segment Net Sales as a Percentage of Consolidated Net Sales

         [[Image Removed: (PIE CHART)]]   [[Image Removed: (PIE CHART)]]



*   Smokeless Tobacco


Gross Margin

                                       Three Months Ended             Increase/
                                          September 30,              (Decrease)
                                       2007          2006         Amount        %
         Gross Margin by Segment:
         Smokeless Tobacco           $ 315,199     $ 311,053     $  4,146        1.3
         Wine                           29,626        24,210        5,416       22.4
         All Other Operations            8,318         7,531          787       10.5

         Consolidated Gross Margin   $ 353,143     $ 342,794     $ 10,349        3.0

The consolidated gross margin increase in the third quarter of 2007, as compared to the third quarter of 2006, was due to higher net sales in all segments, partially offset by higher cost of products sold in all segments.

                                                     Three Months Ended
                                                       September 30,          Increase/
                                                      2007          2006      (Decrease)
   Gross Margin as a % of Net Sales by Segment:
   Smokeless Tobacco                                   82.1 %       82.5 %         (0.4 )
   Wine                                                36.0 %       34.8 %          1.2
   All Other Operations                                62.7 %       63.5 %         (0.8 )
   Consolidated                                        73.6 %       74.7 %         (1.1 )

The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to the following:
• Higher case volume for wine, which sells at lower margins than moist smokeless tobacco products;

• Increased unit costs in the Wine and Smokeless Tobacco segments; and

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

Restructuring Charges
The Company recognized $1.7 million in restructuring charges in the third quarter of 2007 in connection with the continued implementation of Project Momentum, the Company's previously announced cost-reduction initiative. Restructuring charges recognized in the third quarter of 2006, when the Project Momentum initiative commenced, amounted to $17.5 million. This initiative is designed to create additional financial resources for growth via operational productivity and efficiency enhancements. The Company believes that such an effort is prudent as it is designed to provide additional flexibility in the increasingly competitive smokeless tobacco category. Refer to the Restructuring Charges section within the "First Nine Months of 2007 compared with the First Nine Months of 2006" discussion below for additional information, including cumulative charges incurred to date and the total amount of charges expected to be incurred in connection with Project Momentum for each major type of cost associated with the initiative.
First Nine Months of 2007 compared with the First Nine Months of 2006

                                          Nine Months Ended                Increase/
                                            September 30,                  (Decrease)
                                        2007            2006          Amount          %
   Net sales                        $ 1,417,884     $ 1,365,190     $  52,694          3.9
   Net earnings                         381,084         368,653        12,431          3.4
   Basic earnings per share                2.40            2.29          0.11          4.8
   Diluted earnings per share              2.37            2.27          0.10          4.4

   Gain on sale of corp. HQ bldg.       105,143               -       105,143            -
   Antitrust litigation                 125,258           1,350       123,908            -

Net Earnings
Consolidated net earnings increased in the first nine months of 2007, as compared to the first nine months of 2006, as a result of increased operating income, the impact of a lower effective tax rate on earnings from continuing operations and lower net interest expense. The Company reported operating income of $623.8 million in the first nine months of 2007, representing 44 percent of consolidated net sales, compared to operating income of $614.1 million, or 45 percent of consolidated net sales, in the first nine months of 2006. The increase in operating income was primarily due to the following:
• The impact of a $105 million pre-tax gain recognized in connection with the sale of the Company's corporate headquarters building, which favorably impacted the operating margin percentage by 7.4 percentage points;

• Increased net sales and gross margin in all segments;

• Lower SA&A expenses in the Smokeless Tobacco segment, which can be traced to the impact of Project Momentum; and

• Lower restructuring charges incurred in connection with the Project Momentum initiative, which commenced in the third quarter of 2006 (see Restructuring Chargessection below). The impact of restructuring charges adversely impacted the operating margin percentage by approximately 0.6 percentage points and 1.3 percentage points in the first nine months of 2007 and 2006, respectively.

These factors were partially offset by:
• Antitrust litigation charges of $125.3 million, primarily representing the estimated costs associated with the resolution of indirect purchaser class actions in the States of Wisconsin and California, which adversely impacted the operating margin percentage by approximately 8.8 percentage points; and

• Increased unallocated corporate expenses, primarily due to amortization charges for the below-market short-term lease on its former corporate headquarters building and costs associated with a change in executive management, the aggregate amount of which adversely impacted the operating margin by 0.8 percentage points.

Net earnings for the first nine months of 2006 included after-tax income of $3.9 million from discontinued operations, which resulted from the reversal of an accrual for an income tax-related contingency, as discussed in the "Third Quarter of 2007 compared with the Third Quarter of 2006" discussion above. Basic and diluted earnings per share were $2.40 and $2.37, respectively, for the first nine months of 2007, representing increases of 4.8 percent and 4.4 percent, respectively, from each of the corresponding comparative measures in 2006. Average basic shares outstanding were lower in the first nine months of 2007 than in the comparable prior year period, primarily as a result of share repurchases, partially offset by the exercise of stock options. Average diluted shares outstanding in the first nine months of 2007 were lower than those in the first nine months of 2006 due to the impact of share repurchases and a lower level of dilutive options outstanding, partially offset by the impact of a comparatively higher average stock price in 2007, which effectively increases diluted shares outstanding.

Net Sales

                                       Nine Months Ended               Increase/
                                         September 30,                (Decrease)
                                     2007            2006          Amount        %
         Net Sales by Segment:
         Smokeless Tobacco        $ 1,150,518     $ 1,142,646     $  7,872        0.7
         Wine                         230,581         187,845       42,736       22.8
         All Other Operations          36,785          34,699        2,086        6.0

         Consolidated Net Sales   $ 1,417,884     $ 1,365,190     $ 52,694        3.9

The increase in consolidated net sales for the first nine months of 2007, as compared to the first nine months of 2006, was primarily due to the following:
• Improved case volume for premium wine;

• Net sales growth in the Smokeless Tobacco segment, reflecting an increase in both premium and overall net can volume for moist smokeless tobacco products ; and

• Improved international results.

These factors were partially offset by:
• Lower net revenue realization per unit in the Smokeless Tobacco segment.

[[Image Removed: (PIE CHART)]] [[Image Removed: (PIE CHART)]]

* Smokeless Tobacco

Gross Margin

                                        Nine Months Ended               Increase/
                                          September 30,                (Decrease)
                                      2007            2006          Amount        %
       Gross Margin by Segment:
       Smokeless Tobacco           $   945,138     $   943,072     $  2,066        0.2
       Wine                             80,575          67,471       13,104       19.4
       All Other Operations             23,200          22,168        1,032        4.7

       Consolidated Gross Margin   $ 1,048,913     $ 1,032,711     $ 16,202        1.6

The consolidated gross margin increase in the first nine months of 2007, as compared to the first nine months of 2006, was due to higher net sales in all segments, partially offset by higher cost of products sold in all segments.

                                                   Nine Months Ended
                                                     September 30,           Increase/
                                                   2007           2006      (Decrease)
  Gross Margin as a % of Net Sales by Segment:
  Smokeless Tobacco                                   82.1 %       82.5 %          (0.4 )
  Wine                                                34.9 %       35.9 %          (1.0 )
  All Other Operations                                63.1 %       63.9 %          (0.8 )
  Consolidated                                        74.0 %       75.6 %          (1.6 )

The decline in the consolidated gross margin, as a percentage of net sales, was mainly due to the following: . . .