##### Table of Contents



FORM 10-K





SECURITIES AND EXCHANGE COMMISSION




|           |  |                                                                                                 
|---------- |  | ------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                 
|[X]        |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|           |  | For the fiscal year ended December 31, 2004                                                     
|OR        
|[ ]        |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to                                                 

Commission File Number 0-17506

UST Inc.




|                                         |  |                    
|---------------------------------------- |  | -------------------
|                                        
|                                        
|                                        
|                                        
|Delaware                                 |  | 06-1193986         
|(State or other jurisdiction of          |  | (I.R.S. Employer   
|incorporation or organization)           |  | Identification No.)
|                                        
|                                        
|                                        
|                                        
|100 West Putnam Avenue                   |  |                    
|Greenwich, Connecticut                   |  | 06830              
|(Address of principal executive offices) |  | (Zip Code)         

(203) 661-1100



Securities registered pursuant to Section 2(b) of the
Act:


|                                  |  |                                                   
|--------------------------------- |  | --------------------------------------------------
|                                  |  | Name of each exchange on                          
|Title of each class               |  | which registered                                  
|                                 
|                                 
|                                 
|                                 
|Common Stock  $.50 par
    value |  | New York Stock Exchange
    Pacific Exchange, Inc.

Securities registered pursuant to Section 12(g) of the
Act:






(Title of Class)



Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange Act Rule 12b-2). Yes
[X]     No [ ]

As of June 30, 2004, the aggregate market value of
Registrants Common Stock, $.50 par value, held by
non-affiliates of Registrant (which for this purpose does not
include directors or officers) was $5,889,218,544.

As of February 28, 2005, there were 165,312,625 shares
of Registrants Common Stock, $.50 par value,
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain pages of Registrants 2005 Notice of Annual Meeting
and Proxy
Statement                              Part III



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FORM 10-K

TABLE OF CONTENTS


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|                                       |  |                                                                                                                      |    | Page
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|PART I                                
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|Item 1.                                |  | Business                                                                                                             |    |      | 2  | 
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|Item 2.                                |  | Properties                                                                                                           |    |      | 7  | 
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|Item 3.                                |  | Legal Proceedings                                                                                                    |    |      | 7  | 
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|Item 4.                                |  | Submission of Matters to a
    Vote of Security Holders                                                              |    |      | 9  | 
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|PART II                               
|                                      
|                                      
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|Item 5.                                |  | Market for Registrants
    Common Equity, Related Stockholder Matters and Issuer Purchases
    of Equity Securities |    |      | 10 | 
|                                      
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|Item 6.                                |  | Selected Financial Data                                                                                              |    |      | 11 | 
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|Item 7.                                |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                            |    |      | 12 | 
|                                      
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|Item 7A.                               |  | Quantitative and Qualitative
    Disclosures about Market Risk                                                       |    |      | 28 | 
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|Item 8.                                |  | Financial Statements and
    Supplementary Data                                                                      |    |      | 29 | 
|                                      
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|Item 9.                                |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure                             |    |      | 62 | 
|                                      
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|Item 9A.                               |  | Controls and Procedures                                                                                              |    |      | 62 | 
|                                      
|                                      
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|                                      
|PART III                              
|                                      
|                                      
|                                      
|                                      
|Item 10.                               |  | Directors and Executive
    Officers of the Registrant                                                               |    |      | 63 | 
|                                      
|                                      
|                                      
|                                      
|Item 11.                               |  | Executive Compensation                                                                                               |    |      | 64 | 
|                                      
|                                      
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|                                      
|Item 12.                               |  | Security Ownership of
    Certain Beneficial Owners and Management                                                   |    |      | 64 | 
|                                      
|                                      
|                                      
|                                      
|Item 13.                               |  | Certain Relationships and
    Related Transactions                                                                   |    |      | 64 | 
|                                      
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|                                      
|Item 14.                               |  | Principal Accountant Fees
    and Services                                                                           |    |      | 64 | 
|                                      
|                                      
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|                                      
|PART IV                               
|                                      
|                                      
|                                      
|                                      
|Item 15.                               |  | Exhibits and Financial
    Statement Schedules                                                                       |    |      | 65 | 
|                                       |  |                                                                                                                      |    |      |    | 
|                                      
|                                      
|                                      
|                                      
|Signatures                             |  |                                                                                                                      | 68 |     
|EX-21: SUBSIDIARIES                   
|EX-23: CONSENT OF INDEPENDENT AUDITORS
|EX-31.1: CERTIFICATION                
|EX-31.2: CERTIFICATION                
|EX-32: CERTIFICATION                  





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##### Table of Contents



PART I







Item 1  Business

General

UST Inc. was formed on December 23, 1986 as a Delaware
corporation to serve as a new publicly-held holding company for
United States Tobacco Company (USTC), which was
formed in 1911. Pursuant to a reorganization approved by
stockholders at the 1987 Annual Meeting, USTC became a
wholly-owned subsidiary of UST Inc. on May 5, 1987,
and UST Inc. continued in existence as a holding company.
Effective January 1, 2001, USTC changed its name to
U.S. Smokeless Tobacco Company (USSTC).
UST Inc., through its subsidiaries (collectively
Registrant or the Company unless the
context otherwise requires), is engaged in the manufacturing and
marketing of consumer products in the following operating
segments:



| |                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------
| | Smokeless Tobacco Products:The Companys primary
    activities are the manufacturing and marketing of smokeless
    tobacco.                  
| | Wine:The Company produces and markets premium varietal
    and blended wines.                                                                  
| | All Other Operations:The Companys international
    operations, which market moist smokeless tobacco, is included in
    all other operations.

The Companys website address is www.ustinc.com. The
Company makes available free of charge through its website its
annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K and all
amendments to those reports as soon as reasonably practicable
after such material is electronically filed with or furnished to
the Securities and Exchange Commission.

Operating Segment Data

The Company hereby incorporates by reference the Consolidated
Segment Information pertaining to the years 2002 through 2004
set forth herein on pages 54-55.

SMOKELESS TOBACCO PRODUCTS

Principal Products

The Companys principal smokeless tobacco products and
brand names are as follows:

|      |  |                                                                                                                                           
|----- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|     
|     
|     
|     
|Moist |  | COPENHAGEN, SKOAL LONG CUT, SKOAL, COPENHAGEN
    LONG CUT, RED SEAL, SKOAL BANDITS, COPENHAGEN POUCHES, SKOAL
    POUCHES, ROOSTER, HUSKY
|     
|     
|     
|     
|Dry   |  | BRUTON, CC, RED SEAL                                                                                                                      

Reports with respect to the health risks of tobacco products
have been publicized for many years, and the sale, promotion and
use of tobacco continue to be subject to increasing governmental
regulation. Since 1964, the Surgeon General of the United States
and the Secretary of Health and Human Services have released a
number of reports linking cigarette smoking with a broad range
of adverse health effects, including various types of cancer,
coronary heart disease, and chronic lung disease, and discussing
the health risks of environmental tobacco smoke. Since 2000, a
major cigarette manufacturer has stated its agreement with the
overwhelming medical and scientific consensus that
cigarette smoking causes lung cancer, heart disease, emphysema
and other serious diseases in smokers. In 1985, the
Company ceased entirely its cigarette manufacturing operations.

In 1986, a Surgeon Generals Report reached the judgment
that smokeless tobacco use can cause cancer and
can lead to nicotine dependence or addiction. At the
time, 17 epidemiological studies reporting data or
information regarding smokeless tobacco and oral cancer had been
published. Also in 1986, Congress passed the Comprehensive
Smokeless Tobacco Health Education Act of 1986, which requires
the following warnings on smokeless tobacco packages and
advertising: WARNING: THIS PRODUCT MAY CAUSE MOUTH
CANCER, WARNING: THIS PRODUCT MAY CAUSE GUM DISEASE
AND TOOTH LOSS, WARNING: THIS PRODUCT IS NOT A SAFE
ALTERNATIVE TO CIGARETTES. In Canada, in addition to



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In light of scientific research taken as a whole, the Company
does not take the position that smokeless tobacco is safe.
Perhaps more importantly, however, the Company believes that
there is considerable agreement in the scientific community that
the use of smokeless tobacco involves significantly less risk of
adverse health effects than cigarette smoking. In the United
States, the Institute of Medicine, in a report published in 2001
entitled Clearing The Smoke  Assessing the
Science Base for Tobacco Harm Reduction..., concluded
that, regarding smokeless tobacco, the overall risk is
lower than for smoking and that smokeless tobacco
may be a valid substitute for cigarette smoking.... In
2003, a paper authored by researchers at the Centers for Disease
Control and Prevention (CDC) stated that [i]n
general, most public health authorities agree that
SLT [smokeless tobacco] is less hazardous than cigarette
use in terms of overall mortality when evaluated in the context
of lifetime exclusive use. In December 2002,
Britains Royal College of Physicians (RCP), one of
the worlds most prestigious medical institutions, issued a
report entitled Protecting Smokers, Saving Lives,
which focused on recommendations for tobacco regulatory policy
in the United Kingdom. With respect to smokeless tobacco, the
RCP report concluded that the consumption of
non-combustible tobacco is of the order of 10-1,000 times less
hazardous than smoking, depending on the product. In 2003,
a report published by leading European public health advocates,
entitled European Union policy on smokeless tobacco: A
statement in favour of evidence-based regulation for public
health concluded that some American smokeless
tobaccos are at least 90% less hazardous than cigarette
smoking and that there are very substantial benefits
in reduced risk to anyone that switches from smoking to
smokeless tobacco.... Also, in October 2003, the
Parliamentary Under Secretary of State for Public Health in the
United Kingdom stated in a letter that [t]here is no doubt
that oral tobacco use is considerably less dangerous than
cigarette smoking.... And in December 2004, researchers
funded by the National Cancer Institute published a paper in
which they reported on the opinions of an expert panel regarding
the comparative mortality risks related to low-nitrosamine
smokeless tobacco products and conventional cigarettes. The
researchers reported that [i]n comparison with smoking,
experts perceive at least a 90% reduction in the relative risk
of LN-SLT [low-nitrosamine smokeless tobacco] use.

Irrespective of the above, data from some surveys measuring the
publics perception of the relative risks of smokeless
tobacco compared to cigarette smoking indicate that at least 80%
of smokers believe smokeless tobacco is as dangerous as
cigarette smoking.

Nevertheless, as the debate accelerates regarding tobacco harm
reduction and the possible role of smokeless tobacco as part of
a public health strategy to reduce cigarette smoking, a growing
number of researchers have begun advocating that cigarette
smokers who do not quit and do not use medicinal nicotine
products should switch completely to smokeless tobacco products.
Based on surveys in the United States indicating that at least
half of the 46-50 million adult smokers are looking for an
alternative, the Company believes that there is a significant
opportunity for manufacturers of smokeless tobacco products to
have a constructive role in any tobacco harm reduction strategy
assuming appropriate measures are implemented from a public
health perspective.

As indicated above, in 1986, federal legislation was enacted
regulating smokeless tobacco products by, inter alia,
requiring health warning notices on smokeless tobacco packages
and advertising and prohibiting the advertising of smokeless
tobacco products on media subject to the jurisdiction of the
Federal Communications Commission. A federal excise tax was
imposed in 1986, which was increased in 1991, 1993, 1997, 2000
and 2002. Also, in recent years, other proposals have been made
at the federal level for additional regulation of tobacco
products including, among other things, the requirement of
additional warning notices, the disallowance of advertising and
promotion expenses as deductions under federal tax law, a ban or
further restriction of all advertising and promotion, regulation
of environmental tobacco smoke and increased regulation of the
manufacturing and marketing of tobacco products by new or
existing federal agencies. Substantially similar proposals will
likely be considered in 2005.

In recent years, various state and local governments continued
the regulation of tobacco products, including, among other
things, the imposition of significantly higher taxes, increases
in the minimum age to purchase tobacco products, sampling and
advertising bans or restrictions, ingredient and constituent



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On August 28, 1996, the Food and Drug
Administration (the FDA) published regulations
asserting unprecedented jurisdiction over nicotine in tobacco as
a drug and purporting to regulate smokeless tobacco
products as a medical device. The Company and other
smokeless tobacco manufacturers filed suit against the FDA
seeking a judicial declaration that the FDA has no authority to
regulate smokeless tobacco products. On March 21, 2000, the
United States Supreme Court ruled that the FDA lacks
jurisdiction to regulate tobacco products.

Proposals for comprehensive federal regulation of tobacco
products will continue to be considered. To date, the Company
has opposed such proposals because they fail completely to
recognize that smokeless tobacco is distinctly different from
cigarettes. As a result, the current proposals preserve the
status quo in favor of the manufacturers of conventional
cigarettes. The Company would consider supporting federal
regulation of tobacco products if the proposed regulatory regime
included the following components:



| |                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) a meaningful regulatory process whereby the agency
    could certify, based upon submissions by a manufacturer, that
    the use of smokeless tobacco involves significantly less risk of
    adverse health effects than cigarette smoking;                                                                                                                                                             
|
| | (2) a meaningful regulatory process whereby the agency
    could approve, based upon the submission of a manufacturer,
    comparative risk communications to current adult users of
    tobacco products, e.g., cigarette smokers who do not quit
    and do not use medicinal nicotine products should switch
    completely to smokeless tobacco products; and                                            
|
| | (3) a meaningful regulatory process whereby the severity of
    any provisions regarding regulation of ingredients,
    constituents, advertising, promotion and availability could be
    reduced for products that were classified on a continuum as
    involving less risk (e.g., less restrictive regulations for
    products classified as significantly reduced risk, such as
    smokeless tobacco).

Such a risk-based regulatory framework for product regulation
would mean that the level of regulatory control exercised over a
given product would be proportional to the risk posed by that
product, rather than the statutory or regulatory definition that
the product may fall under. More importantly, a risk-based
regulatory approach is consistent with, and would advance, the
objectives of public health.

On November 23, 1998, the Company entered into the
Smokeless Tobacco Master Settlement Agreement (the
STMSA) with attorneys general of various states and
U.S. territories to resolve the remaining health care cost
reimbursement cases initiated by various attorneys general
against the Company. The STMSA required the Company to adopt
various marketing and advertising restrictions and make payments
potentially totaling $100 million, subject to a minimum
3% inflationary adjustment per annum, over a minimum of ten
years for programs to reduce youth usage of tobacco and combat
youth substance abuse and for enforcement purposes. The period
over which the payments are to be made is subject to various
indefinite deferral provisions based upon the Companys
share of the smokeless tobacco segment of the overall tobacco
market (as defined in the STMSA).

On October 22, 2004, the Fair and Equitable Tobacco
Reform Act of 2004 (the Tobacco Reform Act)
was enacted in connection with a comprehensive federal corporate
reform and jobs creation bill. The Tobacco Reform Act
effectively repeals all aspects of the U.S. federal
governments tobacco farmer support program, including
marketing quotas and nonrecourse loans. As a result of the
Tobacco Reform Act, the Secretary of Agriculture will impose
quarterly assessments on tobacco manufacturers and importers,
not to exceed a total of $10.1 billion over a ten-year
period from the date of enactment. Amounts assessed by the
Secretary will be impacted by a number of allocation factors, as
defined in the Tobacco Reform Act. These quarterly assessments
will be used to fund a trust to compensate, or buy
out, tobacco quota farmers, in lieu of the repealed
federal support program. The Company does not believe that the
assessments imposed under the Tobacco Reform Act will have a
material adverse impact on its consolidated financial position,
results of operations or cash flows in any reporting period.



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Raw Materials

Except as noted below, raw materials essential to the
Companys business are generally purchased in domestic
markets under competitive conditions.

The Company purchased all of its leaf tobacco from domestic
suppliers in 2004, as it has for the last several years. Various
factors, including the level of domestic tobacco production, can
affect the amount of tobacco purchased by the Company from
domestic sources. Tobaccos used in the manufacture of smokeless
tobacco products are processed and aged by the Company for a
period of two to three years prior to their use.

The Company or its suppliers purchase certain flavoring
components used in the Companys tobacco products from
foreign sources.

At the present time, the Company has no reason to believe that
future raw material requirements for its tobacco products will
not be satisfied. However, the continuing availability and the
cost of tobacco is dependent upon a variety of factors which
cannot be predicted, including weather, growing conditions,
local planting decisions, overall market demands and other
factors.

In addition, as the Tobacco Reform Act repeals the federal
tobacco price support and quota programs beginning with the 2005
tobacco buying season and contains no price guarantee or
production control provisions, tobacco can be grown anywhere in
the United States, with no volume limitations or price
protection. As such, the Company believes that the Tobacco
Reform Act may favorably impact the cost of its future leaf
tobacco purchases. Grower contracting for the 2005 tobacco
buying season is substantially complete with lower contracted
costs compared to the 2004 tobacco buying season. Despite these
indications, it is still too early to estimate, however, the
significance of the Tobacco Reform Acts effects on the
overall United States leaf tobacco market, in terms of
supply and demand.

Working Capital

The principal portion of the Companys operating cash
requirements relates to its need to maintain significant
inventories of leaf tobacco, primarily for manufacturing of
smokeless tobacco products, to ensure an aging process of two to
three years prior to use.

Customers

The Company markets its moist smokeless tobacco products
throughout the United States principally to wholesalers and
chain stores. Approximately 32.3 percent of the
Companys gross sales of tobacco products are made to four
customers, one of which, McLane Co. Inc., a national
distributor, accounts for approximately 16.9 percent of the
Companys consolidated revenue. The Company has maintained
satisfactory relationships with its customers for many years.

Competitive Conditions

The tobacco manufacturing industry in the United States is
composed of at least four domestic companies larger than the
Company and many smaller ones. The larger companies concentrate
on the manufacture and marketing of cigarettes. The Company is a
well established and major factor in the smokeless tobacco
sector of the overall tobacco market. Consequently, the Company
competes actively with both larger and smaller companies in the
marketing of its tobacco products. The Companys principal
methods of competition in the marketing of its tobacco products
include quality, advertising, promotion, sampling, price,
product recognition, product innovation and distribution.



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WINE

The Company is an established producer of premium varietal and
blended wines. CHATEAU STE. MICHELLE and COLUMBIA CREST
varietal table wines and DOMAINE STE. MICHELLE sparkling
wine are produced by the Company in the state of Washington and
marketed throughout the United States. The Company also produces
and markets two California premium wines under the labels of
VILLA MT. EDEN and CONN CREEK. Approximately
42.5 percent of the Companys wine segment gross sales
are made to two distributors, neither of which accounts for more
than 28.3 percent of total wine segment gross sales.
Substantially all wines are sold through state-licensed
distributors with whom the Company maintains satisfactory
relationships.

It has been claimed that the use of alcohol beverages may be
harmful to health. In 1988, federal legislation was enacted
regulating alcohol beverages by requiring health warning notices
on alcohol beverages. Effective in 1991, the federal excise tax
on wine was increased from $.17 a gallon to $1.07 a gallon for
those manufacturers that produce more than 250,000 gallons a
year, such as the Company. In recent years at the federal level,
proposals were made for additional regulation of alcohol
beverages including, but not limited to, an excise tax increase,
modification of the required health warning notices and the
regulation of labeling, advertising and packaging. Substantially
similar proposals will likely be considered in 2005. Also in
recent years, increased regulation of alcohol beverages by
various states included, but was not limited to, the imposition
of higher excise taxes and advertising restrictions. Additional
state and local legislative and regulatory actions affecting the
marketing of alcohol beverages will likely be considered during
2005. The Company is unable to assess the future effects these
regulatory and other actions may have on the sale of its wines.

The Company uses grapes harvested from its own vineyards, as
well as grapes purchased from independent growers located in
Washington and California and purchases bulk wine from other
sources. Total grape tonnage harvested and purchased in 2004 is
adequate to meet expected demand.

The Companys principal competition comes from many larger,
well-established national and international companies, as well
as many smaller wine producers. The Companys principal
methods of competition include quality, price, consumer and
trade wine tastings, competitive wine judging and advertising.
The Company is a minor participant in the total nationwide
business of producing wines.

ALL OTHER OPERATIONS

All Other Operations consists of the Companys
international operations, which market moist smokeless tobacco
in select markets. Prior to June 18, 2004, All Other
Operations also included the cigar operation which manufactured
and marketed the premium cigar brands of DON TOMÁS, ASTRAL
and HELIX. The cigar operation was transferred to a smokeless
tobacco competitor on June 18, 2004, in connection with the
agreement to resolve an antitrust action. Neither of the above,
singly, constituted a material portion of the Companys
operations.

ADDITIONAL BUSINESS INFORMATION

Environmental Regulations

Compliance with federal, state and local provisions regulating
the discharge of materials into the environment or otherwise
relating to the protection of the environment has not had a
material effect upon the capital expenditures, earnings or
competitive position of the Company.

Number of Employees

The Companys average number of employees during 2004 was
5,100.



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##### Table of Contents






Trademarks

The Company markets consumer products under a large number of
trademarks. All of the Companys trademarks either have
been registered or applications therefor are pending with the
United States Patent and Trademark Office.

Seasonal Business

No material portion of the business of any operating segment of
the Company is seasonal.

Orders

Backlog of orders is not a material factor in any operating
segment of the Company.




Item 2  Properties

All of the principal properties in the Companys operations
were utilized only in connection with the Companys
business operations. The Company believes that the properties
described below at December 31, 2004 were suitable and
adequate for the purposes for which they were used, and were
operated at satisfactory levels of capacity. All principal
properties are owned in fee by the Company.

Smokeless Tobacco Products

The Company owns and operates three principal smokeless tobacco
manufacturing and processing facilities located in Franklin
Park, Illinois; Hopkinsville, Kentucky; and Nashville, Tennessee.

Wine

The Company owns and operates seven wine-making
facilities  five in Washington state and two in
California. In addition, it owns and operates vineyards in
Washington state and California.




Item 3  Legal
Proceedings

The Company has been named in certain health care cost
reimbursement/third party recoupment/ class action litigation
against the major domestic cigarette companies and others
seeking damages and other relief. The complaints in these cases
on their face predominantly relate to the usage of cigarettes;
within that context, certain complaints contain a few
allegations relating specifically to smokeless tobacco products.
These actions are in varying stages of pretrial activities.

The Company believes that these pending litigation matters will
not result in any material liability for a number of reasons,
including the fact that the Company has had only limited
involvement with cigarettes and the Companys current
percentage of total tobacco industry sales is relatively small.
Prior to 1986, the Company manufactured some cigarette products
which had a de minimismarket share. From
May 1, 1982 to August 1, 1994, the Company distributed
a small volume of imported cigarettes and is indemnified against
claims relating to those products.

Smokeless Tobacco Litigation

In Susan Smith, as Guardian for William Cole Cooper, a
Minor v. UST Inc., et al., United States
District Court for the District of Idaho (Civ.04-170-E-BLW),
this action was brought against the Company on behalf of a minor
child alleging that his father died of cancer of the
throat as a result of his use of the Companys
smokeless tobacco product. Plaintiff also alleges
addiction to nicotine and seeks unspecified
compensatory damages and other relief.

In Charles Swanson, et al. v. United States Tobacco
Company, et al., Circuit Court of Cook County,
Illinois, County Department, Chancery Division
(No. 97CH004873), this action, which was brought against
the Company by individual plaintiffs, purports to state a class
action on behalf of themselves and all other persons
similarly situated alleging that the Company
manipulates the nicotine levels and absorption rates



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In Matthew Vassallo, et al., v. United States
Tobacco Company, et al., Circuit Court of the 11th
Judicial District, Miami-Dade County, Florida (Case
No.: 02-28397 CA-20), this purported class action was
brought against the Company by six individuals on behalf
of themselves and all others similarly situated against
various smokeless tobacco manufacturers including the Company
and certain other organizations for personal injuries, including
cancers of the mouth and larynx, oral lesions, leukoplakia,
facial disfigurement, gum and tooth loss, fear of cancer, death
and depression and other injuries allegedly resulting from the
use of defendants smokeless tobacco products. Plaintiffs
also claim nicotine addiction and seek unspecified
compensatory damages and certain equitable and other relief,
including, but not limited to, medical monitoring.

The Company also is named in certain actions in West Virginia
brought on behalf of individual plaintiffs against cigarette
manufacturers, smokeless tobacco manufacturers, and other
organizations seeking damages and other relief in connection
with injuries allegedly sustained as a result of tobacco usage,
including smokeless tobacco products. Included among the
plaintiffs are six individuals alleging use of the
Companys smokeless tobacco products and alleging the types
of injuries claimed to be associated with the use of smokeless
tobacco products; five of the six individuals also allege the
use of other tobacco products.

The Company was served with a Summons and Complaint on
February 24, 2005 in an action entitled Kelly June Hill,
Executrix and Fiduciary of the Estate of Bobby Dean Hill,
et al.v. U.S. Smokeless Tobacco Company,
Connecticut Superior Court, Judicial District of Stamford. This
action was brought by a plaintiff individually, as Executrix and
Fiduciary of the Estate of Bobby Dean Hill, and on behalf
of their minor children for injuries, including squamous
cell carcinoma of the tongue, allegedly sustained by
decedent as a result of his use of the Companys smokeless
tobacco products. The Complaint also alleges
addiction to smokeless tobacco. The Complaint seeks
compensatory and punitive damages in excess of $15,000 and other
relief.

The Company believes, and has been so advised by counsel
handling the foregoing cases, that it has a number of
meritorious defenses to all such pending litigation. Except as
to the Companys willingness to consider alternative
solutions for resolving certain regulatory and litigation
issues, all such cases are, and will continue to be, vigorously
defended.

Antitrust Litigation

In In Re: Smokeless Tobacco Antitrust Litigation(formerly Keystone Tobacco and Mutual Wholesale Services
actions consolidated on January 8, 2001), United States
District Court for the District of Columbia (Civil Action
No.: 1:00CV01415), an action filed on behalf of
wholesalers/distributors of the Companys smokeless tobacco
products alleging that the Company engaged in conduct that
violates the federal antitrust laws, the Company has reached a
settlement with more than 550 of its direct purchasing customers
(wholesalers and distributors) who are potential class members
in this putative class action and who represent more than 88% of
the Companys sales volume based on 2002 sales revenue. For
those direct purchasing customers who agreed to settle the
lawsuit and release all claims against the Company, the Company
agreed to delay a planned reduction of its prompt-payment
discount terms. The effect of this settlement delayed cost
savings in 2003 and had no material adverse effect on the
Companys consolidated financial results. In January 2004,
the Company made a second settlement offer to those direct
purchasers that chose not to settle the litigation in 2003.
Direct purchasers that have settled pursuant to the first and
second settlement offers represented over 93% of the
Companys sales volume based on 2002 sales revenues. In
November 2004, the Company entered into a Settlement Agreement
with the remaining direct purchasers. The Settlement Agreement
has been preliminarily approved by the U.S. District Court
for the District of Columbia.

The Company has entered into a settlement with indirect
purchasers in the states of Arizona, Florida, Hawaii, Iowa,
Mississippi, Nevada, New Mexico, North Carolina, North Dakota,
South Dakota, Tennessee, Vermont and West Virginia and in the
District of Columbia (Settlement). Pursuant to the
Settlement, adult consumers will receive coupons redeemable on
future purchases of the Companys moist smokeless tobacco
products. The Company will pay all administrative costs of the
Settlement and attorneys fees. The Company



8







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##### Table of Contents








The Company also is named as a defendant in a number of
purported class actions in the states of Maine, New Hampshire,
New York, Vermont (motion to dismiss pending since indirect
purchasers in Vermont are already part of the Settlement
described above) and Wisconsin, which are not included in the
Settlement described above. In addition, the Company is named in
class actions in the states of California and Kansas. Each of
these actions are brought by indirect purchasers (consumers and
retailers) of the Companys smokeless tobacco products
during various periods of time ranging from January 1990 to the
date of certification or potential certification of the proposed
class. Plaintiffs in those actions allege that, individually and
on behalf of putative class members in a particular state or
individually and on behalf of class members in the states of
California and Kansas, the Company violated the antitrust laws,
unfair and deceptive trade practices statutes and/or common law
of those states. Plaintiffs seek to recover compensatory and
statutory damages in an amount not to exceed $75,000,
individually or per putative class member, and certain other
relief. The indirect purchaser actions are similar in all
material respects.

In In Re: Massachusetts Smokeless Tobacco Litigation(formerly the Ayres and Gavin actions consolidated on
November 6, 2003 and the Elichalt action consolidated on
February 14, 2005), Superior Court of Massachusetts,
Suffolk Division (No. 03-5038), on December 7, 2004,
the Court granted plaintiffs motion for class
certification, thereby certifying a class of indirect purchasers
of the Companys moist smokeless tobacco products in the
state of Massachusetts for the period January 1, 1990 to
the present.

In Jon Ren, et al. v. United States Tobacco
Company, et al., Circuit Court of Michigan, Wayne
County (No. 04-406325 CZ), on February 28, 2005,
the court approved the Stipulation of Settlement between the
Company and all indirect purchasers of the Companys
smokeless tobacco products in the states of Michigan and
Minnesota. Pursuant to the settlement, adult consumers will
receive coupons redeemable on future purchases of the
Companys smokeless tobacco products. The Company will pay
all administrative costs of the settlement and attorneys
fees.

The Company recorded a charge of $40 million in 2003, which
represented the best estimate of the total costs to resolve all
indirect purchaser actions.

Each of the foregoing actions is derived directly from the
previous antitrust action brought against the Company by its
competitor, Conwood Company L.P. For the plaintiffs in the
putative class actions to prevail, they will have to obtain
class certification to the extent not previously done. All of
the plaintiffs in the above actions will have to obtain
favorable determinations on issues relating to liability,
causation and damages. The Company believes, and has been so
advised by counsel handling these cases, that it has meritorious
defenses in all such cases. The Company intends to pursue
settlement of these indirect purchaser actions on substantially
similar terms as the Settlement described above. Except as to
the Companys willingness to consider alternative solutions
for resolving such cases, all such cases are, and will continue
to be, vigorously defended.




Item 4  Submission of Matters
to a Vote of Security Holders

Not applicable.



9







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##### Table of Contents



PART II







Item 5  Market for
Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | The Companys Common Stock is listed on the New York Stock
    Exchange (NYSE) and the Pacific Exchange, Inc. under
    the symbol UST. As of January 31, 2005, there
    were approximately 6,820 stockholders of record of the
    Companys Common Stock. The table below sets forth the high
    and low sales prices as reported by the NYSE Composite Tape and
    the cash dividends per share declared in each quarter and the
    year of fiscal years 2004 and 2003.

|               |  |      |       |      |  |           |       |      |  |      |      |           |  |   |       |  |  |   |       |  |  |   |      | 
|-------------- |  | ---- | ----- | ---- |  | --------- | ----- | ---- |  | ---- | ---- | --------- |  | - | ----- |  |  | - | ----- |  |  | - | ---- | 
|               |  |      |       | 2004 |  |           |       |      |  | 2003 |      |          
|               |  |     
|               |  |     
|               |  |      |       | Cash |  |           |       | Cash
|               |  | High |       | Low  |  | Dividends |       | High |  | Low  |      | Dividends
|               |  |     
|               |  |     
|First Quarter  |  | $    | 38.98 |      |  | $         | 34.00 |      |  | $    | .52  |           |  | $ | 34.82 |  |  | $ | 26.73 |  |  | $ | .50  | 
|              
|              
|              
|              
|Second Quarter |  |      | 39.00 |      |  |           | 35.35 |      |  |      | .52  |           |  |   | 37.79 |  |  |   | 26.90 |  |  |   | .50  | 
|              
|              
|              
|              
|Third Quarter  |  |      | 40.71 |      |  |           | 35.66 |      |  |      | .52  |           |  |   | 36.64 |  |  |   | 31.62 |  |  |   | .50  | 
|              
|              
|              
|              
|Fourth Quarter |  |      | 48.97 |      |  |           | 39.56 |      |  |      | .52  |           |  |   | 36.52 |  |  |   | 33.54 |  |  |   | .50  | 
|               |  |      |       |      |  |           |       |      |  |      |      |           |  |   |       |  |  |   |       |  |  |   |      | 
|Year           |  | $    | 48.97 |      |  | $         | 34.00 |      |  | $    | 2.08 |           |  | $ | 37.79 |  |  | $ | 26.73 |  |  | $ | 2.00 | 
|               |  |      |       |      |  |           |       |      |  |      |      |           |  |   |       |  |  |   |       |  |  |   |      | 



| |     |                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------
| | (c) | The following table presents the monthly share repurchases
    during the quarter ended December 31, 2004:

|                                  |  |           |           |          |  |              |       |             |  |  |           |  |  |  |            | 
|--------------------------------- |  | --------- | --------- | -------- |  | ------------ | ----- | ----------- |  |  | --------- |  |  |  | ---------- | 
|                                  |  |           |           |          |  |              |       | Maximum    
|                                  |  |           |           |          |  | Total        |       | Number of  
|                                  |  |           |           |          |  | Number of    |       | Shares that
|                                  |  |           |           |          |  | Shares       |       | May Yet Be 
|                                  |  | Total     |           | Average  |  | Purchased as |       | Purchased  
|                                  |  | Number    |           | Price    |  | Part of the  |       | Under the  
|                                  |  | of Shares |           | Paid Per |  | Repurchase   |       | Repurchase 
|                                  |  | Purchased |           | Share    |  | Programs(1)  |       | Programs(1)
|                                  |  |          
|                                  |  |          
|October (10/1/2004 - 10/31/2004)  |  |           | 281,200   |          |  | $            | 40.48 |             |  |  | 281,200   |  |  |  | 3,288,689  | 
|                                 
|                                 
|                                 
|                                 
|November (11/1/2004 - 11/30/2004) |  |           | 312,600   |          |  | $            | 43.53 |             |  |  | 312,600   |  |  |  | 2,976,089  | 
|                                 
|                                 
|                                 
|                                 
|December (12/1/2004 - 12/31/2004) |  |           | 1,324,100 |          |  | $            | 47.29 |             |  |  | 1,324,100 |  |  |  | 21,651,989 | 
|                                  |  |           |           |          |  |              |       |             |  |  |           |  |  |  |            | 
|Total                             |  |           | 1,917,900 |          |  | $            | 45.67 |             |  |  | 1,917,900 |  |  |  |            | 
|                                  |  |           |           |          |  |              |       |             |  |  |           |  |  |  |            | 



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In October 1999, the Companys Board of Directors
    authorized a program to repurchase shares of its outstanding
    common stock up to a maximum of 20 million shares. There is
    currently no stated expiration date for this program. In
    December 2004, the Companys Board of Directors authorized
    a new program to repurchase up to 20 million shares of its
    outstanding common stock. Repurchases under this new program
    will commence when repurchases under the existing program have
    been completed.



10







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##### Table of Contents









Item 6  Selected Financial
Data

UST

CONSOLIDATED SELECTED FINANCIAL DATA  FIVE
YEARS

(Dollars in thousands, except per share amounts)

|                                                         |                                                                     |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |           |        |       |  
|-------------------------------------------------------- | ------------------------------------------------------------------- | ---- | ------------------------------------------ | --------- | ------ | ----- | -------- | --------- | ------ | ----- | -------- | --------- | ------ | ------ | -------- | --------- | ------ | ----- | -------- | --------- | ------ | ----- | -
|                                                         |                                                                     |     
|                                                         |                                                                     |     
|                                                         |                                                                     | 2004 |                                            | 2003      |        | 2002  |          | 2001      |        | 2000 
|                                                         |                                                                     |     
|                                                         |                                                                     |     
|Summary of Operations for the year ended
    December 31 |                                                                     |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net sales                                                           |      | $                                          | 1,838,238 |        |       | $        | 1,731,862 |        |       | $        | 1,674,403 |        |        | $        | 1,619,186 |        |       | $        | 1,503,016 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cost of products sold (includes excise taxes)                       |      |                                            | 412,641   |        |       |          | 384,487   |        |       |          | 358,931   |        |        |          | 344,360   |        |       |          | 327,216   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Selling, advertising and administrative expenses                    |      |                                            | 513,570   |        |       |          | 470,740   |        |       |          | 447,709   |        |        |          | 435,478   |        |       |          | 416,024   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Antitrust litigation                                                |      |                                            | (582      | )      |       |          | 280,000   |        |       |          | 1,260,510 |        |        |          |          |        |       |          |          |       
|                                                         |                                                                     |     
|                                                         | Operating income (loss)                                             |      |                                            | 912,609   |        |       |          | 596,635   |        |       |          | (392,747  | )      |        |          | 839,348   |        |       |          | 759,776   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Interest, net                                                       |      |                                            | 75,019    |        |       |          | 76,905    |        |       |          | 46,146    |        |        |          | 33,765    |        |       |          | 34,288    |       
|                                                         |                                                                     |     
|                                                         | Earnings (loss) from continuing operations before
    income taxes  |      |                                            | 837,590   |        |       |          | 519,730   |        |       |          | (438,893  | )      |        |          | 805,583   |        |       |          | 725,488   |       
|                                                         |                                                                     |     
|                                                         | Income tax expense (benefit)                                        |      |                                            | 299,538   |        |       |          | 197,681   |        |       |          | (170,980  | )      |        |          | 309,876   |        |       |          | 279,018   |       
|                                                         |                                                                     |     
|                                                         | Earnings (loss) from continuing operations                          |      |                                            | 538,052   |        |       |          | 322,049   |        |       |          | (267,913  | )      |        |          | 495,707   |        |       |          | 446,470   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Loss from discontinued operations (including
    income tax effect) |      |                                            | (7,215    | )      |       |          | (3,260    | )      |       |          | (3,556    | )      |        |          | (4,105    | )      |       |          | (4,584    | )     
|                                                         |                                                                     |     
|                                                         | Net earnings (loss)                                                 |      | $                                          | 530,837   |        |       | $        | 318,789   |        |       | $        | (271,469  | )      |        | $        | 491,602   |        |       | $        | 441,886   |       
|                                                         |                                                                     |     
|Per Share Data                                           |                                                                     |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Basic earnings (loss) per share:                                    |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |           |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |      | Earnings (loss) from continuing operations |           |        | $3.26 |          |           |        | $1.93 |          |           |        | $(1.59 | )        |           |        | $3.02 |          |           |        | $2.74 |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |      | Loss from discontinued operations          |           |        | (.05  | )        |           |        | (.02  | )        |           |        | (.02   | )        |           |        | (.03  | )        |           |        | (.03  | )
|                                                         |                                                                     |     
|                                                         | Basic earnings (loss) per share                                     |      |                                            | 3.21      |        |       |          | 1.91      |        |       |          | (1.61     | )      |        |          | 2.99      |        |       |          | 2.71      |       
|                                                         |                                                                     |     
|                                                         | Diluted earnings (loss) per share:                                  |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |           |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |      | Earnings (loss) from continuing operations |           |        | 3.23  |          |           |        | 1.92  |          |           |        | (1.59  | )        |           |        | 2.99  |          |           |        | 2.73  |  
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     |      | Loss from discontinued operations          |           |        | (.04  | )        |           |        | (.02  | )        |           |        | (.02   | )        |           |        | (.02  | )        |           |        | (.03  | )
|                                                         |                                                                     |     
|                                                         | Diluted earnings (loss) per share                                   |      |                                            | 3.19      |        |       |          | 1.90      |        |       |          | (1.61     | )      |        |          | 2.97      |        |       |          | 2.70      |       
|                                                         |                                                                     |     
|                                                        
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Dividends per share                                                 |      |                                            | 2.08      |        |       |          | 2.00      |        |       |          | 1.92      |        |        |          | 1.84      |        |       |          | 1.76      |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Market price per share:                                             |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |           |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | High |                                            |           | $48.97 |       |          |           | $37.79 |       |          |           | $41.35 |        |          |           | $36.00 |       |          |           | $28.88 |      
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         |                                                                     | Low  |                                            |           | 34.00  |       |          |           | 26.73  |       |          |           | 25.30  |        |          |           | 23.38  |       |          |           | 13.88  |      
|                                                        
|                                                        
|                                                        
|                                                        
|Financial Condition at
    December 31                   |                                                                     |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Current assets                                                      |      | $                                          | 1,173,133 |        |       | $        | 1,247,966 |        |       | $        | 2,291,267 |        |        | $        | 891,959   |        |       | $        | 691,405   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Current liabilities                                                 |      |                                            | 618,873   |        |       |          | 521,093   |        |       |          | 1,462,442 |        |        |          | 222,462   |        |       |          | 172,872   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Working capital                                                     |      |                                            | 554,260   |        |       |          | 726,873   |        |       |          | 828,825   |        |        |          | 669,497   |        |       |          | 518,533   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Ratio of current assets to current liabilities                      |      |                                            | 1.9:1     |        |       |          | 2.4:1     |        |       |          | 1.6:1     |        |        |          | 4:1       |        |       |          | 4:1       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Total assets                                                        |      |                                            | 1,659,483 |        |       |          | 1,726,494 |        |       |          | 2,765,275 |        |        |          | 2,011,702 |        |       |          | 1,646,399 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Long-term debt                                                      |      |                                            | 840,000   |        |       |          | 1,140,000 |        |       |          | 1,140,000 |        |        |          | 862,575   |        |       |          | 865,875   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Total debt                                                          |      |                                            | 1,140,000 |        |       |          | 1,140,000 |        |       |          | 1,140,000 |        |        |          | 865,875   |        |       |          | 869,175   |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Stockholders equity (deficit)                                      |      |                                            | 9,565     |        |       |          | (115,187  | )      |       |          | (46,990   | )      |        |          | 581,062   |        |       |          | 270,572   |       
|                                                        
|                                                        
|                                                        
|                                                        
|Other Data                                               |                                                                     |      |                                            |           |        |       |          |           |        |       |          |           |        |        |          |           |        |       |          |          
|                                                        
|                                                        
|                                                        
|                                                        
|Stock repurchased                                        |                                                                     |      | $200,031                                   |           |        |       | $150,095 |           |        |       | $ 50,262 |           |        |        | $       |           |        |       | $ 97,470 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Dividends paid                                           |                                                                     |      | $344,128                                   |           |        |       | $332,986 |           |        |       | $324,233 |           |        |        | $303,277 |           |        |       | $287,009 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Dividends paid as a percentage of net earnings           |                                                                     |      | 64.8                                       | %         |        |       | 104.5    | %         |        |       | N/M      |           |        |        | 61.7     | %         |        |       | 65.0     | %        
|                                                        
|                                                        
|                                                        
|                                                        
|Return on net sales                                      |                                                                     |      | 28.9                                       | %         |        |       | 18.4     | %         |        |       | N/M      |           |        |        | 30.4     | %         |        |       | 29.4     | %        
|                                                        
|                                                        
|                                                        
|                                                        
|Return on average assets                                 |                                                                     |      | 31.4                                       | %         |        |       | 14.2     | %         |        |       | N/M      |           |        |        | 26.9     | %         |        |       | 33.2     | %        
|                                                        
|                                                        
|                                                        
|                                                        
|Return on average stockholders equity                   |                                                                     |      | N/M                                        |           |        |       | N/M      |           |        |       | N/M      |           |        |        | 115.4    | %         |        |       | 187.5    | %        
|                                                        
|                                                        
|                                                        
|                                                        
|Average number of shares
    (in thousands)  basic      |                                                                     |      | 165,164                                    |           |        |       | 166,572  |           |        |       | 168,786  |           |        |        | 164,250  |           |        |       | 163,181  |          
|                                                        
|                                                        
|                                                        
|                                                        
|Average number of shares
    (in thousands)  diluted    |                                                                     |      | 166,622                                    |           |        |       | 167,376  |           |        |       | 168,786  |           |        |        | 165,682  |           |        |       | 163,506  |          

N/ M: Not meaningful due to net loss and/or average
stockholders deficit.

See Managements Discussion and Analysis and Notes to
Consolidated Financial Statements.



11







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##### Table of Contents






Item 7  Managements
Discussion and Analysis of Financial Condition and Results of
Operations

UST

MANAGEMENTS DISCUSSION AND ANALYSIS

The following discussion and analysis of the Companys
consolidated results of operations and financial condition
should be read in conjunction with the consolidated financial
statements and notes thereto, included in Part II,
Item 8 of this Form 10-K. Herein the Company makes
forward-looking statements that involve risks, uncertainties,
and assumptions. Actual results may differ materially from those
anticipated in these forward-looking statements as a result of
various factors, including, but not limited to, those presented
under Cautionary Statement Regarding Forward-Looking
Information on page 27.

Overview

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, Rooster, Red Seal
and Husky. Through International Wine & Spirits Ltd.,
the Company produces and markets premium wines sold nationally
under the Chateau Ste. Michelle, Columbia Crest, Conn Creek,
Villa Mt. Eden and Red Diamond labels, and sparkling wine under
the Domaine Ste. Michelle label.

The Company conducts its business principally in the United
States. The Companys operations are divided primarily into
two segments, Smokeless Tobacco and Wine. The Companys
smokeless tobacco international operations, which are not
significant, are not included in these two segments and are
reported under All Other Operations.

The Companys 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. A key to the Companys growth and
profitability is attracting growing numbers of adult smokers, as
every 1 percent of adult smokers who convert to moist
smokeless tobacco represents a 10 percent increase in the
segments adult consumer base. Although the Company remains
dedicated to its strategic priorities of improving the value
equation for adult consumers, the Company continues to increase
its one-on-one marketing efforts focused increasingly on new
adult consumers. In addition to advertising initiatives focused
on category growth, the Company has begun an advertising
campaign late in 2004 to promote the convenience of smokeless
tobacco relative to cigarettes.

The Company continues to effectively compete in the moist
smokeless tobacco category by offering products in every
category segment. Product innovation remains a crucial element
of the segments success, evidenced by the fact that
9.4 percent of total sales volume in 2004 came from
products introduced in the last three years. The Companys
tobacco segment has 30 products and packaging initiatives
in development, covering both potential core product launches
and possible breakthrough innovations.

Consistent with the wine segments strategic vision, the
Company is committed to becoming a leader in the super-premium
wine segment, to elevate Washington state wines to the quality
and prestige of the top wine regions of the world, and to be
known for superior products, innovation and customer focus. As a
result, the Company remains focused on the continued expansion
of its sales force and category management staff to broaden the
distribution of its wine in the domestic market, especially in
certain account categories such as restaurants. Sustained growth
in the wine segment will also be dependent on the successful
introduction of new products and extension of existing product
lines, particularly for the Red Diamond brands extension
to all distribution channels worldwide.

In connection with an agreement to resolve an action brought
under the antitrust laws by a smokeless tobacco competitor, the
Company transferred its cigar operation to such competitor on
June 18, 2004. Results for this operation and the effects
of its disposal are included within Discontinued Operations,
with results for 2003 and 2002 reclassified to conform to the
2004 presentation. The Companys cigar operation had
previously been reported as a component of All Other Operations.



12







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##### Table of Contents






The Company reported record results in net sales, net earnings
and diluted earnings per share for the year ended
December 31, 2004 despite continued competitive pricing
pressures in the smokeless tobacco and wine industries. These
achievements resulted in part from the Companys strategic
initiatives aimed at accelerating growth in the moist smokeless
tobacco category and at strengthening and expanding the
Companys wine business.

Results of Operations

CONSOLIDATED RESULTS

|                                  |  |                        |           |      |  |      |           |  |  |   |           |  
|--------------------------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | -
|                                  |  |                       
|                                  |  | (Dollars in thousands,
|                                  |  | except per share data)
|                                  |  |                       
|                                  |  | 2004                   |           | 2003 |  | 2002
|                                  |  |                       
|                                  |  |                       
|Net sales                         |  | $                      | 1,838,238 |      |  | $    | 1,731,862 |  |  | $ | 1,674,403 |  
|                                 
|                                 
|                                 
|                                 
|Net earnings (loss)               |  |                        | 530,837   |      |  |      | 318,789   |  |  |   | (271,469  | )
|                                 
|                                 
|                                 
|                                 
|Basic earnings (loss) per share   |  |                        | 3.21      |      |  |      | 1.91      |  |  |   | (1.61     | )
|                                 
|                                 
|                                 
|                                 
|Diluted earnings (loss) per share |  |                        | 3.19      |      |  |      | 1.90      |  |  |   | (1.61     | )

2004 compared with 2003

Consolidated net sales and net earnings for the year ended
December 31, 2004 were $1.838 billion and
$530.8 million, respectively, which represented a
6.1 percent and 66.5 percent increase from the
comparable measures in 2003. The consolidated net sales increase
in 2004 was primarily due to higher selling prices and a slight
increase in unit volume for moist smokeless tobacco products, as
well as improved case volume for premium wine. Consolidated net
earnings increased in 2004 as a result of the favorable net
sales variance and a pretax charge of $280 million recorded
in 2003 related to the resolution of certain antitrust actions,
partially offset by higher costs and expenses, including
spending in 2004 on initiatives for category growth in the
Smokeless Tobacco segment and for increased distribution in the
Wine segment.

The $280 million pretax charge related to the following:
(1) the resolution of an antitrust action brought by a
smokeless tobacco competitor, Swedish Match North America, Inc.
(Swedish Match), (2) an agreement for a
proposed resolution of antitrust actions, subject to court
approval, by indirect purchasers in certain states and the
District of Columbia, and (3) the decision to settle other
indirect purchaser actions not covered by such agreement. The
settlement agreement in the smokeless tobacco competitor action
required the Company to pay $200 million and transfer its
cigar operation to Swedish Match during 2004. Included in the
$280 million above was a charge of $40 million
reflecting the fair value of the cigar operation, which
approximated its book value at that time. Also included in the
$280 million above, the Company recorded a charge of
$40 million, which represented the best estimate of the
total costs to resolve all indirect purchaser actions. The
proposed settlement of the indirect purchaser actions covered by
the subject agreement required the Company to issue coupons to
adult consumers redeemable on future purchases of its moist
smokeless tobacco products, as well as pay all administrative
costs and attorneys fees. The Company continues to pursue
settlement, on substantially similar terms, of other indirect
purchaser actions not covered by this agreement. See
Contingencies note to the Consolidated Financial Statements for
additional details.

The consolidated gross margin percentage remained level in 2004
at 77.6 percent, primarily as a result of higher selling
prices for moist smokeless tobacco products and the impact of a
2003 inventory write-down of $11.7 million at
F.W. Rickard Seeds, Inc. (Rickard Seeds), a
second-tier subsidiary within the Smokeless Tobacco segment.
This was substantially offset by higher case volume for wine,
which realizes lower margins than moist smokeless tobacco
products, and a slight shift in moist smokeless tobacco mix from
premium to price value products.

Selling, advertising and administrative (SA&A)
expenses increased 9.1 percent to $513.6 million in
2004 primarily due to a $15.9 million reduction in expense
for the Companys incentive compensation (bonus) fund,
partially offset by $4.2 million in other SA&A charges,
both of which were recorded in 2003 for Rickard Seeds. SA&A
expenses also increased in 2004 as a result of incremental
spending for direct selling and advertising initiatives in the
Smokeless Tobacco segment in connection with the Companys
plan to grow the smokeless



13







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)


tobacco category, and higher administrative expenses. The
SA&A variance was also impacted by a $4.4 million
charge recorded in 2003, related to the bankruptcy filing of a
significant smokeless tobacco customer. Corporate expenses
increased in 2004 due to higher professional fees, salaries and
related costs and other administrative expenses, offset by lower
legal spending.

The Companys SA&A expenses include legal expenses,
which incorporate, among other things, costs of administering
and litigating product liability claims. For the years ended
December 31, 2004 and 2003, outside legal fees and other
internal and external costs incurred in connection with
administering and litigating product liability claims were
$9.5 million and $8.9 million, respectively. These
costs reflect a number of factors, including the number of
claims, and the legal and regulatory environments affecting the
Companys products. The Company expects these factors to be
the primary influence on its future costs of administering and
litigating product liability claims. The Company does not expect
these costs to increase significantly in the future; however, it
is possible that adverse changes in the aforementioned factors
could have a material adverse effect on such costs, as well as
on results of operations and cash flows in the periods such
costs are incurred.

The Company reported operating income of $912.6 million in
2004, representing 49.6 percent of consolidated net sales.

Net interest expense decreased $1.9 million, primarily as a
result of higher income from cash equivalent investments,
resulting from both higher interest rates and higher levels of
investments in 2004.

The Company recorded income tax expense of $299.5 million
in 2004. Various income tax audits by the Internal Revenue
Service and other taxing authorities were completed and settled
during 2004. Taking into consideration the results of these
settlements, as well as the expiration of certain statutes of
limitations and changes in facts and circumstances, the Company
reversed income tax accruals of $20 million, net of federal
income tax benefit, in 2004. The Companys effective tax
rate decreased to 35.8 percent for the year ended
December 31, 2004, from 38 percent for the year ended
December 31, 2003, primarily as a result of the reversal of
these accruals.

Basic and diluted earnings per share for 2004 were $3.21 and
$3.19, respectively, which reflected a corresponding increase of
68.1 percent and 67.9 percent over each of the
comparative measures in 2003. Basic and diluted shares
outstanding were lower in 2004 than in 2003, primarily as a
result of share repurchases, partially offset by the exercise of
stock options.

Net earnings for 2004 included an after-tax loss of
$7.2 million from discontinued operations compared to an
after-tax loss of $3.3 million in 2003. Discontinued
operations reflect the results of the Companys cigar
operation, which was transferred to a smokeless tobacco
competitor on June 18, 2004, in connection with the
agreement to resolve an antitrust action. The 2004 after-tax
loss included a loss from cigar operations and the recognition
of expenses, including a $3.9 million accrual for income
tax contingencies, as well as severance and transaction costs,
partially offset by the recognition of the difference between
the fair value charge recorded in 2003 and the book value of the
entity transferred in 2004. See the Discontinued Operations note
to the Consolidated Financial Statements for additional details.

2003 compared with 2002

In 2003, consolidated net sales increased 3.4 percent to
$1.732 billion, net earnings were $318.8 million, and
basic and diluted earnings per share amounted to $1.91 and
$1.90, respectively. In 2002, the Company reported a net loss of
$271.5 million and basic and diluted loss per share of
$1.61. Included in 2002 results was a $1.261 billion pretax
charge, resulting from a judgment against the Company in an
antitrust case. The charge was recorded, due to the exhaustion
of the Companys appeal remedies, when the United States
Supreme Court declined to hear the Companys appeal. The
consolidated net sales increase for 2003 included higher selling
prices and stable unit volume for moist smokeless tobacco
products as well as improved sales for the Companys
international operations, partially offset by lower sales for
wine products.

The consolidated gross margin percentage decreased in 2003 to
77.8 percent, primarily as a result of the Rickard Seeds
inventory charge, higher unit cost for moist smokeless tobacco
products and a continued shift in moist smokeless tobacco
product mix from premium to price value. These factors were
partially offset by



14







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Consolidated SA&A expenses increased 5.1 percent to
$470.7 million in 2003, primarily as a result of higher
salaries and related costs, principally pension expense, and
higher Smokeless Tobacco segment direct selling and advertising
spending. SA&A expenses also increased due to the absence of
the 2002 one-time adjustment of $5.6 million due to a
change in the Companys vacation policy, a
$4.4 million charge related to the bankruptcy filing of a
significant wholesale customer in 2003, and the non-inventory
portion of the Rickard Seeds charge in 2003. Partially
offsetting these amounts were the absence of bonding costs
associated with the Companys resolved antitrust litigation
and lower expenses for the Companys incentive compensation
(bonus) fund, resulting from the aforementioned reduction
to offset the Rickard Seeds charge. The change in vacation
policy specifically related to a revision of the period in which
vacation was earned by employees, and as a result of the change,
no accrual was necessary.

For the years ended December 31, 2003 and 2002, outside
legal fees and other internal and external costs incurred in
connection with administering and litigating product liability
claims were $8.9 million and $22.9 million,
respectively. These costs reflect a number of factors, including
the number of claims, and the legal and regulatory environment
affecting the Companys products.

The Company reported operating income of $596.6 million in
2003, representing approximately 34.5 percent of
consolidated net sales.

Net interest expense increased $30.8 million, primarily as
a result of lower income from cash investments and higher
average debt outstanding, as well as a slightly higher average
interest rate on such debt.

The Company recorded income tax expense of $197.7 million
in 2003 at an effective tax rate of 38 percent versus an
income tax benefit of $171 million, due to the net loss, at
an effective tax rate of 39 percent in 2002.

Basic and diluted shares outstanding were lower in 2003,
primarily as a result of share repurchases, partially offset by
the exercise of stock options.

Net earnings for 2003 and 2002 included after-tax losses of
$3.3 million and $3.6 million, respectively, from
discontinued operations. Discontinued operations in 2003 and
2002 reflect the reclassified results of the Companys
cigar operation, which had previously been reported as a
component of All Other Operations.

Smokeless Tobacco Segment

|                        |  |                        |           |      |  |      |           |  |  |   |           |  
|----------------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | -
|                        |  |                       
|                        |  | (Dollars in thousands)
|                        |  |                       
|                        |  | 2004                   |           | 2003 |  | 2002
|                        |  |                       
|                        |  |                       
|                       
|                       
|                       
|                       
|Net sales               |  | $                      | 1,575,254 |      |  | $    | 1,504,893 |  |  | $ | 1,447,093 |  
|                       
|                       
|                       
|                       
|Operating profit (loss) |  |                        | 897,991   |      |  |      | 585,910   |  |  |   | (408,675  | )

2004 compared with 2003

Net sales for the Smokeless Tobacco segment increased
4.7 percent to $1.575 billion and accounted for
85.7 percent of 2004 consolidated net sales. This increase
was primarily attributable to higher selling prices and slightly
higher net unit volume for moist smokeless tobacco products. In
addition, the 2004 increase in net sales included lower cash
discounts partially offset by increased sales incentive
spending. This spending included costs associated with the
Companys new brand-building customer incentive plan, the
STEPS Rewards program, partially offset by a decrease in other
discounting initiatives, primarily retail buydowns. Overall,
full year net unit volume for moist smokeless tobacco products
increased 0.8 percent in 2004 to 641.3 million cans,
while net unit volume increased 1 percent to
158.8 million cans in the fourth quarter, as compared to
the corresponding 2003 periods. The increased unit volume
included a slight shift in product mix from premium products to
price value products. Dry snuff products accounted for less than
one percent of segment net sales and unit volume.

Premium unit volume results include net can sales for standard
products, which consist of straight stock, on-pack and value
pack products, along with can sales for pre-pack promotional
products. Straight stock refers



15







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)


to single cans of premium smokeless tobacco sold at wholesale
list prices. On-pack products are single or multiple can
packages sold at wholesale list prices accompanied by a free
premium giveaway item, such as a multi-purpose tool or work
gloves. Value packs, which were introduced to more effectively
compete for and retain value-conscious adult consumers, are
multiple can packages sold at everyday low prices that are lower
than standard wholesale list prices for straight stock products.
Pre-pack promotions refer to those products that are bundled and
packaged in connection with a specific promotional pricing
initiative for a limited period of time, such as multiple
cans offered at a reduced price. Overall, net unit volume
for premium products declined 1.2 percent in 2004,
primarily as a result of a 31 percent reduction in pre-pack
promotional volume, compared to the prior year, partially offset
by a 0.3 percent increase in net unit volume for standard
products. Approximately 40 percent, or 3 million cans,
of the reduction in pre-pack promotional volume was due to the
absence of a 15-gram can test, which took place in the fourth
quarter of 2003. The Company believes this was offset by some
customers increasing inventories in the fourth quarter of 2004
in advance of the January 1, 2005 price increase for
premium products. Although the net effect is not significant to
the improved volume trend in 2004, it could have a modest
negative effect on trend results in the first quarter of 2005.
Pre-pack premium promotional unit volume represented
approximately 3.2 percent of 2004 premium net unit volume,
versus 4.5 percent in 2003. The increased net unit volume
for standard premium products included higher value pack can
sales, which now represent approximately 1.5 percent of
total premium net unit volume, compared to 0.6 percent in
2003.

Net unit volume for price value products increased by
20.2 percent in 2004 compared to 2003. These net unit
volume results included higher pre-pack promotional unit volume,
mainly due to the introduction of the Companys sub-price
value product, Husky, and the promotion of the Companys
traditional price value product, Red Seal. Red Seal and Husky
accounted for approximately 11.1 percent of 2004 total
moist smokeless tobacco net unit volume, as compared to
9.3 percent in 2003.

The Companys 2004 net unit volume growth can be
attributed, in part, to its successful new product introductions
in both the premium and price value product categories, despite
aggressive price value competition within the moist smokeless
tobacco category. Net can sales for 2004 included approximately
60.1 million cans of new products launched within the last
three years, representing 9.4 percent of total moist
smokeless tobacco unit volume. These new products included Skoal
Long Cut Apple Blend, Skoal Long Cut Vanilla Blend, Skoal Long
Cut Berry Blend, Skoal and Copenhagen Pouches, two new Red Seal
products and Husky.

The Companys Retail Activity Data Share & Volume
Tracking System (RAD-SVT), which measures shipments to retail,
indicated that for the year-to-date period ended
December 25, 2004, total moist smokeless tobacco category
retail shipments increased 5.9 percent over the similar
prior year period, on a can-volume basis. Although the
Companys share of total category declined
2.8 percentage points to 69.3 percent, the
Companys retail shipments on a can-volume basis increased
1.8 percent from the similar prior year period. The premium
segments decline moderated to 0.8 percent, while the
Companys premium net volume decreased 0.2 percent in
the corresponding period. The moist smokeless tobacco
categorys value segments, which include traditional price
value and sub-price value, increased 24.5 percent during
the same period, with the Companys net volume of combined
traditional price value and sub-price value increasing
18.8 percent over the comparative period. The 2003 RAD-SVT
data, which is used in the above comparisons, has been restated
in order to improve the overall reporting accuracy of the
information by incorporating refinements to the projection
methodology. RAD-SVT information is provided as an indication of
current domestic moist smokeless tobacco trends from wholesale
to retail and is not intended as a basis for measuring the
Companys financial performance. This information can vary
significantly from the Companys actual results due to the
fact that the Company reports net shipments to wholesale, while
RAD-SVT measures shipments from wholesale to retail. In
addition, differences in the time periods measured, as well as
new product introductions and promotions affect comparisons of
the Companys actual results to those from RAD-SVT.

Cost of products sold increased 3.6 percent in 2004,
primarily as a result of higher unit costs and slightly higher
net unit volume for moist smokeless tobacco products, along with
a $1 million charge recorded in connection with the
recently enacted tobacco quota buyout legislation. These factors
were partially offset by the net impact of the difference
between the current and prior year charges taken in connection
with inventory



16







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##### Table of Contents








Gross profit increased 4.9 percent in 2004 compared to the
similar 2003 period. This increase was primarily the result of
higher selling prices and slightly higher net unit volume for
moist smokeless tobacco products, partially offset by the
aforementioned cost of products sold variance. The gross profit
percentage remained level in 2004 at 83.6 percent as a
result of these factors and the aforementioned shift in product
mix, which included higher unit volume for price value and lower
unit volume for premium products.

Selling and advertising expenses increased 13.9 percent in
2004 compared to 2003. This increase was primarily attributable
to higher spending on one-on-one marketing efforts to adults and
various marketing, print media and sales initiatives associated
with promoting the moist smokeless tobacco category. Selling and
advertising expenses in 2004 also included increased costs
associated with the Companys retail shelving systems used
in promoting the moist smokeless tobacco categorys
products. The increased selling and advertising expenses, which
were in line with the Companys plans to increase moist
smokeless tobacco category growth, were partially offset by
lower spending associated with a customer sales alliance
program, which was replaced with the aforementioned STEPS
Rewards program in early 2004. Indirect selling expenses were
higher in 2004 compared to 2003, primarily as a result of higher
costs associated with the implementation of the Companys
moist smokeless tobacco category growth plans, which included
the effect of headcount additions related to one-on-one adult
marketing efforts. Administrative and other expenses increased
during 2004, primarily as a result of the aforementioned 2003
reduction in the incentive compensation (bonus) fund of
$15.9 million and higher spending to address proposed
regulatory issues in 2004, partially offset by a
$4.4 million charge recorded in 2003 related to the
bankruptcy filing of a significant wholesale customer, the
non-inventory charge of $4.2 million in 2003 related to
Rickard Seeds, and lower legal and other professional fees in
2004.

Included in 2003 segment results was the $280 million
charge associated with the resolution of an antitrust action
brought by a smokeless tobacco competitor, an agreement to
resolve antitrust actions by indirect purchasers in certain
states and the District of Columbia, and the decision to settle,
on substantially similar terms, other indirect purchaser
antitrust actions not covered by the agreement. In 2004, certain
states actions were resolved. As a result of these
resolutions, the Company recognized a favorable pretax
adjustment. Also in 2004, the Company recorded a pretax charge
for costs associated with the resolution of the remainder of the
smokeless tobacco direct purchaser antitrust actions. The net
impact of these adjustments is reported in antitrust
litigation on the Consolidated Statement of Operations.
See the Contingencies note to the Consolidated Financial
Statements for additional details.

As a result of the aforementioned factors, segment operating
profit in 2004 was $898 million, representing an increase
of 53.3 percent from 2003.

2003 compared with 2002

Net sales for the Smokeless Tobacco segment increased
4 percent to $1.505 billion and accounted for
86.9 percent of 2003 consolidated net sales as higher
selling prices for moist smokeless tobacco products and higher
net unit volume for price value products were partially offset
by lower net unit volume for premium products. Dry snuff
products accounted for less than one percent of segment net
sales and unit volume.

Overall, moist smokeless tobacco net unit volume for the year
was stable at 636.1 million cans. A decline in net unit
volume for premium moist smokeless tobacco products was offset
by increased net unit volume for non-premium products. Despite
higher returned goods and aggressive sub-price value competition
within the moist smokeless category, the Companys
2003 net unit volume remained stable, which can be
attributed in part to its successful new product program and
increased promotional activity. Net can sales for the full year
included approximately 43.6 million cans of new products
launched within the last three years, representing
6.9 percent of total moist smokeless tobacco unit volume.
These new products included Skoal Long Cut Vanilla Blend, Skoal
Long Cut Berry Blend, Skoal and Copenhagen Pouches and two new
Red Seal products, Long Cut Mint and Long Cut Natural.
Promotional unit volume included approximately 3 million
15-gram promotional cans, as the Company began testing the
viability of various can sizes. Unit volume for Red Seal, the
Companys primary non-premium product, increased
17.5 percent in 2003 and represented 9.1 percent of
the Companys total moist smokeless tobacco unit volume.
The increased returned goods in 2003 were primarily the result
of cans associated with Copenhagen and Skoal Pouches, along with
executional issues



17







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)


associated with Skoal Winterblend, which was a seasonal flavor
sold promotionally in the fourth quarter of 2002.

RAD-SVT indicated that for the year-to-date period ended
December 27, 2003, on a can-volume basis, total category
shipments increased 3.7 percent over the corresponding 2002
period. The premium segment declined 3 percent and the
price value segment increased 28.2 percent during the same
period. The Companys total share declined
3.3 percentage points to 72.2 percent versus 2002. The
2003 and 2002 RAD-SVT data, which is used in the above
comparisons, has been restated in order to improve the overall
reporting accuracy of the information by incorporating
refinements to the projection methodology. Since the incidence
of oral tobacco use by members of the military tends to be
significantly higher than that of the broad adult population,
the movement of armed forces personnel stationed in the U.S.,
particularly reservists, to the Middle East had a negative
impact on RAD-SVT results since it only measures domestic
shipments to retailers.

Cost of products sold increased 11.9 percent in 2003,
primarily as a result of the $11.7 million charge taken in
connection with Rickard Seeds, as well as higher unit costs for
moist smokeless tobacco products. The increased unit costs were
primarily the result of higher leaf tobacco costs, as well as
higher salaries and related costs for both direct labor and
overhead.

Gross profit increased 2.6 percent compared to the similar
2002 period. This increase was primarily the result of higher
selling prices for moist smokeless tobacco products, partially
offset by the aforementioned cost of products sold increases.
The gross profit percentage decreased slightly in 2003 to
83.5 percent as a result of these factors and the
aforementioned change in product mix, which included higher unit
volume for price value and lower unit volume for premium
products.

Selling and advertising expenses increased 7.3 percent in
2003, compared to the corresponding 2002 period. This increase
was primarily attributable to higher spending on print media and
various marketing and sales initiatives associated with the
introduction of Copenhagen and Skoal Pouches. Indirect selling
expenses were higher in 2003 due to increased salaries and
related costs, which include the effect of higher pension
expense. Administrative and other expenses decreased during
2003, primarily as a result of the absence of bonding costs
recorded in 2002, associated with the Companys resolved
antitrust litigation, and the aforementioned 2003 reduction in
the incentive compensation (bonus) fund. These factors were
partially offset by a $4.4 million charge recorded in 2003,
related to the bankruptcy filing of a significant wholesale
customer, the absence of the aforementioned 2002 reversal of a
benefit accrual and the non-inventory portion of the 2003
Rickard Seeds charge.

Also included in 2003 segment results was the $280 million
charge associated with the resolution of an antitrust action
brought by a smokeless tobacco competitor, an agreement to
resolve antitrust actions by indirect purchasers in certain
states and the District of Columbia, and the decision to settle,
on substantially similar terms, other indirect purchaser
antitrust actions not covered by the agreement.

As a result of the foregoing factors, segment operating profit
in 2003 was $585.9 million. The segment reported an
operating loss of $408.7 million in 2002, due to a
$1.261 billion pretax charge, resulting from a judgment
against the Company in an antitrust case.

Wine Segment

|                 |  |                        |         |      |  |      |         |  |  |   |         | 
|---------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                 |  |                       
|                 |  | (Dollars in thousands)
|                 |  |                       
|                 |  | 2004                   |         | 2003 |  | 2002
|                 |  |                       
|                 |  |                       
|                
|                
|                
|                
|Net sales        |  | $                      | 226,650 |      |  | $    | 194,905 |  |  | $ | 203,541 | 
|                
|                
|                
|                
|Operating profit |  |                        | 32,382  |      |  |      | 24,341  |  |  |   | 30,111  | 

2004 compared with 2003

Wine segment net sales increased 16.3 percent to
$226.7 million and represented 12.3 percent of 2004
consolidated net sales. The net sales increase was primarily the
result of increased premium case volume versus the prior year,
as the Company increased distribution through the expansion of
its sales force. Case



18







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##### Table of Contents






Wine
Enthusiast


Segment cost of products sold in 2004 increased
14.6 percent from 2003, primarily as a result of increased
case volume for Chateau Ste. Michelle, Columbia Crest and Red
Diamond brands. The gross profit percentage increased slightly
in 2004, primarily as a result of a shift in total case sales
towards higher priced varietals.

During 2004, selling, advertising and administrative expenses
were $53.5 million, representing an increase of
12 percent from 2003. Selling and advertising expenses
increased predominantly as a result of increased selling, media
and point of sale costs, which were in line with the
Companys distribution growth initiatives, partially offset
by lower public relations spending in 2004. Indirect selling
expenses increased primarily as a result of higher salaries and
related costs due to a continued sales force expansion aimed at
broadening distribution of the Companys wines throughout
the domestic market. In 2004, distribution gains were achieved
in the restaurant, club store and grocery chain segments of the
market as a result of the sales force expansion. Administrative
and other spending was higher in 2004 primarily due to an
unfavorable market adjustment of $1 million related to a
property sold in December 2004, along with the impact of the
segments share of the reduction in the incentive
compensation (bonus) fund in 2003 related to the
aforementioned Rickard Seeds adjustment.

As a result of the above mentioned factors, Wine segment
operating profit increased 33 percent to $32.4 million
in 2004.

2003 compared with 2002

Wine segment net sales decreased 4.2 percent to
$194.9 million and represented 11.2 percent of 2003
consolidated net sales. The net sales decline was primarily the
result of a shift in product mix towards new premium wines sold
at lower prices as well as promotional pricing on other selected
premium wines. Premium case volume results slightly offset the
impact of these factors as it increased 0.4 percent from
the prior year. The net sales and case volume results in 2003
were adversely affected by a combination of economic factors in
the marketplace. Case volume results for the Companys two
leading brands were varied as Chateau Ste. Michelle increased
7.5 percent and Columbia Crest decreased 4.3 percent
from 2002 levels. These two leading brands accounted for
32.7 percent and 45.2 percent of the Companys
total 2003 case volume, respectively. Although 2003 Columbia
Crest case volume compared unfavorably to 2002 case volume,
which included strong shipments driven by critical acclaim on
its Grand Estates Chardonnay, fourth quarter shipments received
a positive boost when the December 2003 issue of Wine
Spectatorgave strong reviews to some of the Columbia Crest
reserve wines.

Segment cost of products sold decreased 2.1 percent,
primarily as a result of continued cost reduction efforts and a
shift in mix to lower cost products. The gross profit percentage
decreased in 2003, primarily as a result of the lower selling
prices on selected wines.

During 2003, selling, advertising and administrative expenses
approximated 2002 levels. Selling and advertising expenses
decreased due to lower media advertising, as wine consumers were
generally price and promotion driven in 2003 rather than loyal
to established brands. In response, the Company reallocated a
portion of its selling and advertising budget to price and
promotional activities. Indirect selling expenses increased
primarily as a result of higher salaries and related costs due
to sales force expansion and increases in benefits expenses. The
sales force expansion was targeted at increasing distribution of
the Companys wines throughout the domestic market. In
2003, distribution gains were achieved in the restaurant and
grocery chain



19







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)


segments of the market as a result of the initial sales force
expansion. Administrative and other spending was higher in 2003
due to increased insurance costs, professional fees and other
administrative spending, and a $1 million gain recorded in
2002 on the sale of an underutilized facility, partially offset
by the segments share of the 2003 reduction in the
incentive compensation (bonus) fund.

As a result of the foregoing factors, segment operating profit
decreased 19.2 percent to $24.3 million in 2003.

All Other Operations

|                 |  |                        |        |      |  |      |        |  |  |   |        | 
|---------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                 |  |                       
|                 |  | (Dollars in thousands)
|                 |  |                       
|                 |  | 2004                   |        | 2003 |  | 2002
|                 |  |                       
|                 |  |                       
|                
|                
|                
|                
|Net sales        |  | $                      | 36,334 |      |  | $    | 32,064 |  |  | $ | 23,769 | 
|                
|                
|                
|                
|Operating profit |  |                        | 10,266 |      |  |      | 7,962  |  |  |   | 1,781  | 

2004 compared with 2003

Net sales for All Other Operations increased 13.3 percent
to $36.3 million and accounted for 2 percent of
consolidated net sales in 2004. The increase in net sales was
primarily the result of higher unit volume for moist smokeless
tobacco products sold by the Companys international
operations. In addition, the increase also included the impact
of a favorable foreign exchange rate. The gross margin
percentage for All Other Operations increased slightly in 2004
as compared to 2003, with comparative increases in cost of sales
also related to higher volume and a favorable foreign exchange
rate. All Other Operations reported an operating profit of
$10.3 million for 2004, which represents an increase of
28.9 percent from 2003. The results for the cigar business,
previously reported in All Other Operations, have been reflected
as discontinued operations for all periods presented, and have
therefore been eliminated from the results reflected above.

2003 compared with 2002

Net sales for All Other Operations increased 34.9 percent
to $32.1 million and accounted for 1.9 percent of
consolidated net sales in 2003. The increase in net sales was
mainly driven by higher moist smokeless tobacco sales in the
Companys international operations associated with a new
15-gram can, which provides more favorable pricing at retail,
and the launch of Skoal Long Cut Berry Blend. In addition, the
increase also included the impact of a favorable foreign
exchange rate. All Other Operations reported an operating profit
of $8 million in 2003 compared to an operating profit of
$1.8 million in the corresponding 2002 period.

Discontinued Operations

Net earnings for 2004 included after-tax losses of
$7.2 million from discontinued operations compared to
losses of $3.3 million in 2003 and $3.6 million in
2002. Discontinued operations reflected the results of the
Companys cigar operation, which was transferred to a
smokeless tobacco competitor in 2004, in connection with the
agreement to resolve an antitrust action. See Discontinued
Operations note to the consolidated financial statements for
more details.

Outlook

The Companys objective is to continue to grow the moist
smokeless tobacco category by building awareness and social
acceptability of smokeless tobacco products among adults. In
2004, the Company expanded its efforts to accelerate growth in
this category by spending an additional $24 million on
product innovation and programs to reach out to new adult
consumers, primarily adult smokers. A notable initiative to
drive category growth is the Companys one-on-one adult
marketing program which introduces potential adult customers to
the moist smokeless tobacco category through adult-only
facilities. In addition, the Company began an advertising
campaign late in the year, which promotes the convenience of the
moist smokeless tobacco category relative to cigarettes. The
investment in such product innovation and programs, combined
with positive external factors, contributed to the strong
results for the Company in 2004, and, as such, the Company
continues to focus its strategy on moist smokeless tobacco
category growth. The Company



20







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##### Table of Contents








The Company is encouraged by improvement in moist smokeless
tobacco category trends, with category growth initiatives fully
in place and operating in 2005. A key to sustaining the
Companys growth and profitability at increasing levels is
attracting growing numbers of adult smokers. Consistent with its
initiatives for 2004, the Company continues to increase its
one-on-one adult marketing efforts, which allows it to increase
communication with adult consumers.

Competition, changes in consumer preferences, including their
impact on the relative mix of premium versus price value product
sales, acceptance of new products and other marketing
initiatives, excise taxes, the effects of possible litigation
and legislative and regulatory actions, including increases in
the minimum age to purchase tobacco products, may adversely
affect operating and unit volume results for the smokeless
tobacco business in the future, as well as the growth rate of
the moist smokeless tobacco category.

Despite the competitive conditions in the wine category, the
Companys Wine segment finished the year with record
results, driven by exceptional media and editorial acclaim, as
well as the Companys additional investment in 2004 in the
sales force, which focused on expanded distribution,
successfully introducing new products and extensions of existing
product lines and expanding sales distribution in certain
account categories, such as restaurants. Although the Wine
segment has significant momentum going into 2005, sustained
growth will be dependent upon ongoing success in aforementioned
areas from 2004, specifically the successful introduction of the
Red Diamond brand to retail channels, as well as the effects of
several other key factors, including the global supply of wine,
a weak U.S. dollar contributing to increased prices of
imported competitors wines and an overall improvement in
the U.S. economy. The Company plans to grow its wine
business through the continued expansion of its sales force and
the broadening of its distribution in the domestic market.

Competition, pricing, acts of nature, changes in consumer
preferences, published wine ratings and other editorial and
media coverage, and the effects of possible legislative actions
and tax changes may impact the performance of the wine business
in the future.

The Company is committed to delivering exceptional operating
performance in each of its business segments. The Company
presently anticipates diluted earnings per share in 2005 in the
range of $3.30 to $3.40.

The Companys financial forecast for 2005 and beyond may be
affected by the Companys ability to address the factors
described above impacting each of its business segments, as well
as the matters described under Cautionary Statements
Regarding Forward-Looking Statements.

Financial Condition

Liquidity

|                          |  |                        |           |      |  |      |           |  |  |   |           | 
|------------------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                          |  |                       
|                          |  | (Dollars in thousands)
|                          |  |                       
|                          |  | 2004                   |           | 2003 |  | 2002
|                          |  |                       
|                          |  |                       
|Cash and cash equivalents |  | $                      | 510,202   |      |  | $    | 438,040   |  |  | $ | 382,003   | 
|                         
|                         
|                         
|                         
|Restricted deposits       |  |                        |          |      |  |      |          |  |  |   | 1,242,431 | 
|                         
|                         
|                         
|                         
|Total debt                |  |                        | 1,140,000 |      |  |      | 1,140,000 |  |  |   | 1,140,000 | 

Historically, the Company has relied upon cash flows from
operations supplemented by debt issuance and revolving credit
borrowings, as needed, to finance its working capital
requirements, the payment of dividends, stock repurchases and
capital expenditures. The Companys cash equivalent
investments are generally liquid, short-term investment grade
securities.



21







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)


The Companys cash and cash equivalents totaled
$510.2 million at December 31, 2004, an increase of
$72.2 million from December 31, 2003. The major
sources of cash in 2004 were net earnings generated mainly by
the Smokeless Tobacco segment and proceeds from the issuance of
common stock. The major uses of cash were for dividend payments,
the repurchase of Company stock and the cash payment portion of
the aforementioned resolution of an antitrust action brought by
a smokeless tobacco competitor, Swedish Match North America, Inc.

In 2003, the litigation liability associated with the 2002
adverse antitrust judgment against the Company was paid.
However, the overall effect on reported cash and cash
equivalents was minimal as the Company paid the judgment
primarily out of funds that had been held in restricted
deposits, which were a component of financing activities in 2003
on the Consolidated Statement of Cash Flows. Given the size of
the award, the Company recognizes that the payment of the
judgment had, at the time of payment, a material adverse effect
on its consolidated financial position. However, in light of the
Companys ability to satisfy the judgment primarily with
funds accumulated since the initial rendering of the judgment,
the payment of the judgment did not have a material adverse
effect on the Companys dividend policy or its ability to
implement its strategic business plans.

|                                |  |                        |          |      |  |      |          |   |  |   |          |  
|------------------------------- |  | ---------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                |  |                       
|                                |  | (Dollars in thousands)
|                                |  |                       
|                                |  |                       
|                                |  | 2004                   |          | 2003 |  | 2002
|                                |  |                       
|                                |  |                       
|Net cash provided by (used in): |  |                        |          |      |  |      |          |   |  |   |          |  
|                               
|                               
|                               
|                               
|Operating activities            |  | $                      | 562,469  |      |  | $    | (704,928 | ) |  | $ | 802,124  |  
|                               
|                               
|                               
|                               
|Investing activities            |  |                        | (60,424  | )    |  |      | (46,671  | ) |  |   | (59,567  | )
|                               
|                               
|                               
|                               
|Financing activities            |  |                        | (429,883 | )    |  |      | 807,636  |   |  |   | (632,523 | )

Operating Activities

In 2004, the primary sources of cash from operations included
net earnings generated mainly by the Smokeless Tobacco segment,
adjusted for the effects of non-cash items. The primary uses of
cash in operations in 2004, other than for the $200 million
cash payment of the antitrust judgment, were $86.7 million
for the purchase of leaf tobacco and $48.7 million for
grapes. Operating activities in 2003 included the effects of the
aforementioned $1.262 billion payment in connection with
the 2002 antitrust litigation loss along with net cash provided
by operating activities of $557 million, resulting in net
cash used in operating activities of approximately
$704.9 million. The primary sources of cash from operations
in 2003 included net earnings, adjusted for the effects of
non-cash items, and higher income taxes payable. The primary
uses of cash in operations in 2003, other than for the payment
of the antitrust judgment, were $78.8 million for the
purchase of leaf tobacco and $62.6 million for
contributions to the Companys qualified defined benefit
pension plans, of which approximately $61 million were
discretionary. In 2002, net cash from operating activities was
positively impacted by the income tax effects of recording the
litigation loss.

The Company carries significant amounts of leaf tobacco along
with bulk and bottled wine inventories as a result of the aging
process required for the production of moist smokeless tobacco
products and wine, respectively. The increases in inventories
over the past several years related primarily to in-process and
finished goods wine inventory resulting from factors in the
marketplace, including an oversupply of grapes and cheaper
imported wines. As indicated in Critical Accounting
Policies and Estimates, management reviews these
inventories and has determined that they are saleable and
appropriately carried at the lower of cost or market. Total
expenditures for leaf tobacco over the last three years were
$242.3 million. Total costs of grapes harvested and
purchased and purchases of bulk wine were $58.5 million in
2004 and $232.3 million over the last three years.

Investing Activities

The 2004 increase in net cash used in investing activities was
due to higher purchases of property, plant and equipment
compared to 2003. Over the last three years, capital
expenditures for property, plant and equipment have averaged
approximately $61 million per year.



22







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##### Table of Contents






Major areas of capital spending from 2002 through 2004 by
segment were:

Smokeless Tobacco segment



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Manufacturing, processing and packaging equipment, including
    equipment for new products, line extensions and existing products
| |  | Computer equipment and software                                                                                                   
| |  | Building improvements and renovations                                                                                             
| |  | Company aircraft                                                                                                                  

Wine segment



| |   |                                     
| | - | ------------------------------------
| |  | Wine barrels and storage tanks      
| |  | Computer software and equipment     
| |  | Wine making and processing equipment

Over the past three years, capital expenditures for the
Smokeless Tobacco segment accounted for 72.8 percent of the
consolidated total capital expenditures, while the Wine segment
accounted for 25.9 percent and All Other Operations and
corporate accounted for 1.3 percent. Capital expenditures
for equipment in the Smokeless Tobacco segment over the past
three years were primarily related to assuring manufacturing
capabilities, new product innovations and product line extension
capabilities. Wine segment capital expenditures during that
period were primarily for increased capacity and expansion.

Financing Activities

The Company had net cash used in financing activities of
$429.9 million in 2004 compared to net cash provided by
financing activities of $807.6 million in 2003. Cash
dividends paid in 2004 were higher than those in 2003 due to a
4 percent increase in the dividend rate approved by the
Board of Directors, partially offset by lower common shares
outstanding. Although consistent through the first three
quarters of 2004 and 2003, comparatively, payments for the
repurchase of Company common stock in 2004 were higher than
those made in 2003 based on managements decision to
increase repurchases in the fourth quarter of 2004. Proceeds
from the issuance of common stock were higher than those
received in 2003 primarily as a result of an increase in the
number of stock options exercised and the higher average
exercise price of such options exercised during 2004. The 2003
amount of net cash provided by financing activities was
primarily attributable to the Companys utilization of
$1.242 billion of funds held in restricted deposits, used
to substantially pay the aforementioned antitrust judgment, and
$48.4 million in proceeds from the issuance of stock,
partially offset by dividend payments of $333 million and
payments for the repurchase of Company common stock of
$150.1 million.

Capital Resources

|                |  |                        |           |      |  |      |           |  |  |   |           | 
|--------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | --------- | 
|                |  |                       
|                |  | (Dollars in thousands)
|                |  |                       
|                |  |                       
|                |  | 2004                   |           | 2003 |  | 2002
|                |  |                       
|                |  |                       
|               
|               
|               
|               
|Working capital |  | $                      | 554,260   |      |  | $    | 726,873   |  |  | $ | 828,825   | 
|               
|               
|               
|               
|Total debt      |  |                        | 1,140,000 |      |  |      | 1,140,000 |  |  |   | 1,140,000 | 

On July 9, 2004, the Company replaced its $300 million
unsecured line of credit with various financial institutions
with a new $300 million three-year credit facility (the
New Credit Facility). The previous facility was
comprised of a $150 million, 364-day credit agreement and a
$150 million three-year credit agreement (the
Previous Credit Facility). The New Credit Facility
requires the maintenance of certain financial ratios, the
payment of commitment and administrative fees and includes
affirmative and negative covenants customary for facilities of
this type. The commitment fee payable on the unused portion of
the New Credit Facility is determined based on an interest rate,
within a range of rates, dependent upon the Companys
senior unsecured debt rating. The commitment fee currently
payable is .15 percent per annum. This New Credit Facility
was executed primarily to support commercial paper borrowings.
The Company had no direct borrowings under the New Credit
Facility or commercial paper borrowings at December 31,
2004. Fees of approximately $0.9 million associated with
the establishment of the New Credit Facility have been
capitalized



23







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)


and will be amortized over the term of the New Credit Facility.
See the Borrowing Arrangements note to the Consolidated
Financial Statements for additional details.

In July 2002, the Company issued $600 million aggregate
principal amount of 6.625 percent senior notes at a price
of 99.53 percent of the principal amount. The notes mature
on July 15, 2012, with semiannual interest payments.

Also in July 2002, the Company terminated its previous
$1 billion senior secured credit facility. The Company had
borrowed $330 million of floating rate debt under the
provisions of the terminated credit facility, the proceeds of
which were used to fund the court-administered qualified
settlement fund in connection with the antitrust judgment.
During 2002, the Company made scheduled quarterly principal
payments under the terms of the loan facility of
$0.8 million per quarter. In July 2002, amounts outstanding
under this loan facility were repaid.

The Companys working capital decreased to
$554.3 million at December 31, 2004 as compared to
$726.9 million at December 31, 2003. The working
capital decrease in 2004 was mainly attributable to the
reclassification of the $300 million current portion of
long-term debt and decreased deferred income tax assets, offset
by increased cash and cash equivalents in 2004 and the decrease
in the liabilities associated with the antitrust litigation. The
ratio of current assets to current liabilities (current ratio)
decreased to 1.9 to 1 from 2.4 to 1. In January 2003, the
Company paid the judgment resulting from its 2002 antitrust
litigation loss in the amount of $1.262 billion. The
Company utilized funds held in restricted deposits in the amount
of $1.242 billion and $19.7 million in cash in
satisfaction of this judgment.

In December 2004, the Board of Directors increased the
Companys first quarter 2005 dividend to stockholders to 55
cents per share with an indicated annual rate of $2.20 per
share. This represents a 6 percent increase over 2004.

During 2004, the Company spent $200 million under its share
repurchase program for the repurchase of Company common stock,
compared to $150 million spent under the same program in
2003. The Company expects to spend $200 million in 2005 to
buy back its common shares. Stock prices, market conditions and
other factors will determine the actual number of shares
repurchased.

On March 16, 2004, the Company paid $200 million of
its antitrust litigation liability.

The Company estimates that amounts expended in 2005 for tobacco
leaf purchases for moist smokeless tobacco products will be
lower than amounts expended in 2004, while grape purchases for
wine products will be slightly higher than amounts in the
corresponding 2004 period.

In 2005, expenditures under the Companys capital program
are expected to be approximately $96.8 million.

The Company is subject to various threatened and pending
litigation and claims, as disclosed in the notes to the
consolidated financial statements. The Company believes that the
ultimate outcome of such litigation and claims will not have a
material adverse effect on its consolidated results or its
consolidated financial position, although if plaintiffs in these
actions were to prevail, the effect of any judgment or
settlement could have a material adverse impact on its
consolidated financial results in the particular reporting
period in which resolved and, depending on the size of any such
judgment or settlement, a material adverse effect on its
consolidated financial position.

The Companys cash requirements in 2005 and beyond will be
primarily for the payment of dividends, repayment of borrowings,
repurchase of common stock, purchases of inventory and capital
expenditures. Please see table under Aggregate Contractual
Obligations for a detailed schedule of certain future cash
requirements. Cash flows generated from operations will be the
primary means of meeting these cash requirements, and, if
necessary, the Company will utilize some portion of its excess
cash or short-term borrowings to fund shortfalls from
operations. Extraordinary items, including any adverse
litigation judgments or resolutions, would be satisfied with
funds provided by these sources.



24







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##### Table of Contents






Aggregate Contractual Obligations



|                                   |  |                        |           |           |  |           |         |           |  |         |         |  |  |   |         |  |  |   |         | 
|---------------------------------- |  | ---------------------- | --------- | --------- |  | --------- | ------- | --------- |  | ------- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                       
|                                   |  |                        |           | Less Than |  |           |         | More Than
|                                   |  | Total                  |           | 1 Year    |  | 1-3 Years |         | 3-5 Years |  | 5 Years
|                                   |  |                       
|                                   |  |                       
|Contractual Obligations            |  |                        |           |           |  |           |         |           |  |         |         |  |  |   |         |  |  |   |         | 
|                                  
|                                  
|                                  
|                                  
|Current portion of long-term debt  |  | $                      | 300,000   |           |  | $         | 300,000 |           |  | $       |        |  |  | $ |        |  |  | $ |        | 
|                                  
|                                  
|                                  
|                                  
|Long-term debt                     |  |                        | 840,000   |           |  |           |        |           |  |         |        |  |  |   | 240,000 |  |  |   | 600,000 | 
|                                  
|                                  
|                                  
|                                  
|Operating leases                   |  |                        | 40,192    |           |  |           | 10,025  |           |  |         | 12,050  |  |  |   | 5,439   |  |  |   | 12,678  | 
|                                  
|                                  
|                                  
|                                  
|Unconditional purchase obligations |  |                        | 380,680   |           |  |           | 82,064  |           |  |         | 102,257 |  |  |   | 90,276  |  |  |   | 106,083 | 
|                                   |  |                       
|                                   |  | $                      | 1,560,872 |           |  | $         | 392,089 |           |  | $       | 114,307 |  |  | $ | 335,715 |  |  | $ | 718,761 | 
|                                   |  |                       

The above table represents the Companys total contractual
obligations as of December 31, 2004. Unconditional purchase
obligations relate primarily to contractual commitments for the
purchase of grapes and leaf tobacco for use in the production of
wine and moist smokeless tobacco products, respectively.
Purchase commitments under contracts to purchase grapes for
periods beyond one year are subject to variability resulting
from potential changes in market price indices.

Critical Accounting Policies and Estimates

The preparation of financial statements, in accordance with
accounting principles generally accepted in the United States,
requires management to make assumptions and estimates that
affect the reported amounts of assets and liabilities as of the
balance sheet date and revenues and expenses recognized and
incurred during the reporting period then ended. In addition,
estimates affect the determination of contingent assets and
liabilities and their related disclosure. The Company bases its
estimates on a number of factors, including historical
information and other assumptions that it believes are
reasonable under the circumstances. Actual results may differ
from these estimates in the event there are changes in related
conditions or assumptions. The development and selection of the
disclosed estimates have been discussed with the Audit Committee
of the Board of Directors. The following accounting policies are
deemed to be critical, as they require accounting estimates to
be made based upon matters that are highly uncertain at the time
such estimates are made.

The Company carries significant amounts of leaf tobacco as well
as bulk and bottled wine as a result of the aging process
required in the production of its moist smokeless tobacco and
wine products, respectively. The carrying value of these
inventories includes managements assessment of their
estimated net realizable values. Management reviews these
inventories to make judgments for potential write-downs for
slow-moving, unsaleable or obsolete inventories, to reflect such
inventories at the lower of cost or market. Factors considered
in managements assessment include, but are not limited to,
evaluation of cost trends, changes in customer demands, product
pricing, physical deterioration and overall product quality.

Amounts recognized in the financial statements for the
Companys noncontributory defined benefit pension plans are
determined using actuarial valuations. Inherent in these
valuations are key assumptions, including those for the expected
long-term rate of return on plan assets and the discount rate
used in calculating the applicable benefit obligation. The
Company evaluates these assumptions on an annual basis and
considers adjustments to the applicable long-term factors based
upon current market conditions, including changes in interest
rates, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 87, Employers
Accounting for Pensions. Changes in the related pension
expense may occur in the future as a result of changes in these
assumptions. Pension expense was approximately
$27.8 million, $33.1 million and $20.3 million
for the years ended December 31, 2004, 2003 and 2002,
respectively. On average, over the past three years,
approximately 82.8 percent of pension expense was reflected
in selling, advertising and administrative expenses, while the
remainder was included in cost of products sold. The decrease in
pension expense for 2004 was primarily a result of increased
returns on a higher asset base, due to contributions made in the
prior year, partially offset by a decrease in the discount rate
from 6.5 percent to 6.25 percent and a decrease in
expected return on plan assets from 8 percent to
7.5 percent. The Company believes the long-term rate of
return is reasonable based upon the plans asset
composition and information available at the time, along with
consideration of historical trends. The Company used a discount
rate of 6 percent to calculate



25







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)


its pension liabilities at December 31, 2004. This rate
approximates the rate at which current pension liabilities could
effectively be settled. At December 31, 2004, unrecognized
actuarial losses, associated with pension plan asset
performance, were approximately $108.9 million. These
losses will be amortized over the applicable remaining service
period which is approximately 11 years. The Company did not
contribute to its qualified pension plans in 2004. The impact of
a lower discount rate, partially offset by lower actuarial
losses is expected to result in higher pension expense for 2005.
The following provides a sensitivity analysis, which
demonstrates the effects that adverse changes in actuarial
assumptions would have on 2005 pension expense. A 50 basis
point decrease in the expected long-term rate of return on plan
assets would increase pension expense by approximately
$1.3 million, while the same basis point decrease in the
discount rate would result in an increase of approximately
$3.7 million.

The Company maintains a number of other postretirement welfare
benefit plans which provide certain medical and life insurance
benefits to substantially all full-time employees who have
completed specified age and service requirements upon
retirement. Amounts recognized in the financial statements in
connection with these other postretirement benefit plans are
determined utilizing actuarial valuations. The key assumptions
inherent in these valuations include health care cost trend
rates and the discount rate used in calculating the applicable
postretirement benefit obligation, each of which are evaluated
by the Company on an annual basis. Future changes in the related
postretirement benefit expense may be impacted by changes in
these assumptions. The Company used a discount rate of
6 percent to calculate its postretirement benefit
obligation at December 31, 2004, which approximates the
rate at which current postretirement benefit liabilities could
effectively be settled. The health care cost trend increase used
in calculating the postretirement benefit obligation at
December 31, 2004 is assumed to be 10 percent in 2005
and is expected to decrease gradually to 4.5 percent by
2011 and remain level thereafter. A sensitivity analysis
demonstrating the impact that a 100 basis point increase or
decrease in these rates would have on both the postretirement
benefit obligation and the related expense is disclosed in the
Employee Benefit and Compensation Plans note to the Consolidated
Financial Statements. Expense related to these plans was
approximately $5.6 million, $2.9 million and
$3.6 million for the years ended December 31, 2004,
2003 and 2002, respectively.

The Companys primary business, moist smokeless tobacco,
sells products with freshness dates. It is the Companys
policy to accept sales returns from its customers for products
that have exceeded such dates. The Companys assumptions
regarding sales return accruals are based on historical
experience, current sales trends and other factors, and there
has not been a significant fluctuation between assumptions and
actual return activity on a historical basis. Actual sales
returns represented approximately 5 percent,
4.1 percent and 3.4 percent of annual moist smokeless
tobacco can sales for the years ended December 31, 2004,
2003 and 2002, respectively. However, significant changes in
moist smokeless tobacco can sales, promotional activities, new
product introductions, product quality issues and competition
could affect sales returns in the future.

The Company is subject to various threatened and pending
litigation claims and discloses those matters in which the
probability of an adverse outcome is other than remote, in the
notes to its consolidated financial statements. The assessment
of probability with regards to the outcome of litigation matters
is made with the consultation of external counsel. Litigation is
subject to many uncertainties, and it is possible that some of
the legal actions, proceedings or claims could ultimately be
decided against the Company. Any unfavorable outcome of such
actions could have a material adverse effect on the
Companys results of operations, cash flows or financial
position. See the Contingencies note to the consolidated
financial statements for disclosure of the Companys
assessment related to pending litigation matters.

The Companys income tax provision takes into consideration
pretax income, statutory tax rates and the Companys tax
profile in the various jurisdictions in which it operates. The
tax bases of the Companys assets and liabilities reflect
its best estimate of the future tax benefit and costs it expects
to realize when such amounts are included in its tax returns.
Quantitative and probability analysis, which incorporates
managements judgment, is required in determining the
Companys effective tax rate and in evaluating its tax
positions. Notwithstanding the fact that all of the
Companys tax filing positions are supported by the
requisite tax and legal authority, accruals are established in
accordance with SFAS No. 5, Contingencies,when
the Company believes that these positions are likely to be
subject to challenge by a tax authority. The Internal Revenue
Service and other tax authorities audit the Companys
income tax returns on a continuous basis. Depending on the tax
jurisdiction, a number of years may elapse before a particular
matter for which the



26







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##### Table of Contents








The Companys management believes that no one single item
that includes an assumption or estimate made by management will
have a material effect on the Companys financial position
or results of operations, with the exception of litigation
matters, if actual results are different from that assumption or
estimate.

The Company exercises judgment when evaluating the use of
assumptions and estimates, which may include the use of
specialists and quantitative and qualitative analysis.
Management believes that all assumptions and estimates used in
the preparation of these financial statements are reasonable
based on information currently available.

Cautionary Statement Regarding Forward-Looking Information

The Private Securities Litigation Reform Act of 1995 (the
Act) provides a safe harbor for forward-looking
information made on behalf of the Company. All statements, other
than statements of historical facts, which address activities or
actions that the Company expects or anticipates will or may
occur in the future, and growth of the Companys operations
and other such matters are forward-looking statements. To take
advantage of the safe harbor provided by the Act, the Company is
identifying certain factors that could cause actual results to
differ materially from those expressed in any forward-looking
statements made by the Company.

Any one, or a combination, of these factors could materially
affect the results of the Companys operations. These
factors include competitive pressures, changes in consumer
preferences, wholesaler ordering patterns, consumer acceptance
of new product introductions and other marketing initiatives,
uncertainties associated with ongoing and future litigation,
legal and regulatory initiatives (including those described
under Items 1 and 3 of the Companys Annual Report on
Form 10-K, in Current Reports on Form 8-K and in
Quarterly Reports on Form 10-Q), and conditions in the
capital markets. Forward-looking statements made by the Company
are based on knowledge of its business and the environment in
which it operates, but because of the factors listed above, as
well as other factors beyond the control of the Company, actual
results may differ from those in the forward-looking statements.
The forward-looking statements speak only as to the date when
they are made.



27







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##### Table of Contents



MANAGEMENTS DISCUSSION AND ANALYSIS (Continued)




Item 7A  Quantitative and
Qualitative Disclosures About Market Risk

Market Risk Disclosures

In the normal course of business, the Company is exposed to
market risk, primarily in the form of interest rate risk. The
Company routinely monitors this risk, and has instituted
policies and procedures to minimize the adverse effects of
changes in interest rates on its net earnings and cash flows. To
manage borrowing costs, the Company uses fixed rate debt and
derivative instruments, primarily interest rate swaps and
treasury locks. All derivative contracts are for non-trading
purposes, and are entered into with major reputable financial
institutions with investment grade credit ratings, thereby
minimizing counterparty risk.

At December 31, 2004 and 2003, respectively, the Company
had $1.1 billion in fixed rate senior notes and
$40 million in floating rate senior notes outstanding. The
fixed rate senior notes outstanding at December 31, 2004
and 2003 were comprised of long-term notes of $600 million
with an interest rate of 6.625 percent and
$200 million at 7.25 percent, and notes of
$300 million at 8.8 percent designated as short-term
as of December 31, 2004 on the Consolidated Statement of
Financial Position. In order to hedge the interest rate risk on
the $40 million floating rate senior notes, the Company
entered into an interest rate swap to pay a fixed rate of
interest (7.25 percent) and receive a floating rate of
interest on the notional amount of $40 million. This swap
fixes the interest rate on the $40 million in long-term
floating rate senior notes at 7.25 percent.

The following provides a sensitivity analysis of interest rate
risk and the effects of hypothetical sudden changes in the
applicable market conditions on the succeeding years
earnings, based upon year-end positions. Computations of the
potential effects of the hypothetical market changes are based
upon various assumptions, involving interest rate levels and
other variables. The fair values of the Companys fixed
rate senior notes payable are sensitive to changes in interest
rates. Based upon an immediate 100 basis point increase in
the applicable interest rate at December 31, 2004, the fair
value of the Companys fixed rate senior notes would
decrease by approximately $48 million. Conversely, a
100 basis point decrease in that rate would increase the
fair value of these notes by $51.5 million.

These hypothetical changes and assumptions may be different from
what actually takes place in the future, and the computations do
not take into account managements possible actions if such
changes actually occurred over time. Considering these
limitations, actual effects on future earnings could differ from
those calculated above.

Taking into account the Companys floating rate senior
notes payable and interest rate swap outstanding at
December 31, 2004, each 100 basis point increase or
decrease in the applicable market rates of interest, with all
other variables held constant, would not have any effect on
interest expense. This is due to the full correlation of the
terms of the notes with those of the swap, which results in
interest rates on all debt outstanding being fixed at
December 31, 2004.

In addition, from time to time, the Company enters into foreign
currency forward contracts to hedge the risk of variability in
cash flows associated with foreign currency payments. Such
payments are primarily made in connection with purchases of
barrels for the Companys wine operations. There were no
such contracts outstanding at December 31, 2004 or 2003.

The Company routinely invests portions of its cash in short-term
instruments. It is the Companys policy to ensure that
these instruments are comprised of only investment grade
securities (as determined by a third-party rating agency) which
mature in three months or less. These factors, along with
continual monitoring of the credit status of the investee
companies and securities, reduce the Companys exposure to
investment risk associated with these securities. At
December 31, 2004, the Company had approximately
$435.5 million invested in short-term instruments.



28







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##### Table of Contents









Item 8  Financial Statements
and Supplementary Data

REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of UST Inc.:

We have audited the accompanying consolidated statement of
financial position of UST Inc. as of December 31, 2004 and
2003, and the related consolidated statements of operations,
cash flows and changes in stockholders equity (deficit)
for each of the three years in the period ended
December 31, 2004. Our audits also included the financial
statement schedule listed on Schedule II in Item 15.
These financial statements and schedule are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of UST Inc. at December 31, 2004 and
2003, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion,
the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set
forth therein.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of UST Inc.s internal control over financial
reporting as of December 31, 2004, based on criteria
established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 3, 2005
expressed an unqualified opinion thereon.

LOGO

Stamford, Connecticut





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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of UST Inc.:

We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that UST Inc. maintained effective internal
control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the COSO criteria). UST Inc.s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the
companys internal control over financial reporting based
on our audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.

A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.

In our opinion, managements assessment that UST Inc.
maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, UST
Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2004
based on the COSO criteria.

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated statement of financial position of UST Inc. as of
December 31, 2004 and 2003 and the related consolidated
statements of operations, cash flows and changes in
stockholders equity (deficit) for each of the three
years in the period ended December 31, 2004 of UST Inc. and
our report dated March 3, 2005 expressed an unqualified
opinion thereon.



| |     
| | ----
| | LOGO

Stamford, Connecticut





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UST

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share amounts)

|                                                                    |                                            |                          |           |         |         |      |           |         |           |   |           |           |           | 
|------------------------------------------------------------------- | ------------------------------------------ | ------------------------ | --------- | ------- | ------- | ---- | --------- | ------- | --------- | - | --------- | --------- | --------- | 
|                                                                    |                                            |                         
|                                                                    |                                            | Year Ended December 31  
|                                                                    |                                            |                         
|                                                                    |                                            | 2004                     |           | 2003    |         | 2002
|                                                                    |                                            |                          |           |         |         |     
|                                                                    |                                            |                         
|                                                                    |                                            |                         
|Net Sales                                                           |                                            | $                        | 1,838,238 |         |         | $    | 1,731,862 |         |           | $ | 1,674,403 |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Costs and Expenses                                                  |                                            |                          |           |         |         |      |           |         |           |   |           |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Cost of products sold                      |                          |           | 363,357 |         |      |           | 340,654 |           |   |           | 315,713   |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Excise taxes                               |                          |           | 49,284  |         |      |           | 43,833  |           |   |           | 43,218    |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Selling, advertising and administrative    |                          |           | 513,570 |         |      |           | 470,740 |           |   |           | 447,709   |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Antitrust litigation                       |                          |           | (582    | )       |      |           | 280,000 |           |   |           | 1,260,510 |          
|                                                                    |                                            |                         
|                                                                    |                                            | Total Costs and Expenses |           |         | 925,629 |      |           |         | 1,135,227 |   |           |           | 2,067,150 | 
|                                                                    |                                            |                         
|Operating Income (Loss)                                             |                                            |                          | 912,609   |         |         |      | 596,635   |         |           |   | (392,747  | )        
|                                                                    |                                            |                         
|Interest, net                                                       |                                            |                          | 75,019    |         |         |      | 76,905    |         |           |   | 46,146    |          
|                                                                    |                                            |                         
|Earnings (Loss) from Continuing Operations
    Before Income Taxes  |                                            |                          | 837,590   |         |         |      | 519,730   |         |           |   | (438,893  | )        
|                                                                    |                                            |                         
|Income Tax Expense (Benefit)                                        |                                            |                          | 299,538   |         |         |      | 197,681   |         |           |   | (170,980  | )        
|                                                                    |                                            |                         
|Earnings (Loss) from Continuing
    Operations                      |                                            |                          | 538,052   |         |         |      | 322,049   |         |           |   | (267,913  | )        
|                                                                    |                                            |                         
|Loss from Discontinued Operations (including
    income tax effect) |                                            |                          | (7,215    | )       |         |      | (3,260    | )       |           |   | (3,556    | )        
|                                                                    |                                            |                         
|Net Earnings (Loss)                                                 |                                            | $                        | 530,837   |         |         | $    | 318,789   |         |           | $ | (271,469  | )        
|                                                                    |                                            |                         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Net Earnings (Loss) Per Basic Share:                                |                                            |                          |           |         |         |      |           |         |           |   |           |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Earnings (loss) from continuing operations |                          | $         | 3.26    |         |      | $         | 1.93    |           |   | $         | (1.59     | )        
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Loss from discontinued operations          |                          |           | (.05    | )       |      |           | (.02    | )         |   |           | (.02      | )        
|                                                                    |                                            |                         
|Net Earnings (Loss) Per Basic Share                                 |                                            | $                        | 3.21      |         |         | $    | 1.91      |         |           | $ | (1.61     | )        
|                                                                    |                                            |                         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Net Earnings (Loss) Per Diluted
    Share:                          |                                            |                          |           |         |         |      |           |         |           |   |           |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Earnings (loss) from continuing operations |                          | $         | 3.23    |         |      | $         | 1.92    |           |   | $         | (1.59     | )        
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Loss from discontinued operations          |                          |           | (.04    | )       |      |           | (.02    | )         |   |           | (.02      | )        
|                                                                    |                                            |                         
|Net Earnings (Loss) Per Diluted
    Share                           |                                            | $                        | 3.19      |         |         | $    | 1.90      |         |           | $ | (1.61     | )        
|                                                                    |                                            |                         
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Average Number of Shares                                            |                                            |                          |           |         |         |      |           |         |           |   |           |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Basic                                      |                          |           | 165,164 |         |      |           | 166,572 |           |   |           | 168,786   |          
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Diluted                                    |                          |           | 166,622 |         |      |           | 167,376 |           |   |           | 168,786   |          

The accompanying notes are integral to the Consolidated
Financial Statements.



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UST

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

(In thousands)

|                                                   |                                           |                                                          |           |           |           |  |           |           |           |  
|-------------------------------------------------- | ----------------------------------------- | -------------------------------------------------------- | --------- | --------- | --------- |  | --------- | --------- | --------- | -
|                                                   |                                           |                                                         
|                                                   |                                           | December 31                                             
|                                                   |                                           |                                                         
|                                                   |                                           | 2004                                                     |           | 2003     
|                                                   |                                           |                                                          |           |          
|                                                   |                                           |                                                         
|                                                   |                                           |                                                         
|Assets                                             |                                           |                                                          |           |           |           |  |           |          
|                                                  
|                                                  
|                                                  
|                                                  
|Current assets                                     |                                           |                                                          |           |           |           |  |           |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash and cash equivalents                 |                                                          | $         | 510,202   |           |  | $         | 438,040   |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accounts receivable                       |                                                          |           | 41,462    |           |  |           | 68,230    |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Inventories                               |                                                          |           | 567,160   |           |  |           | 573,334   |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Deferred income taxes                     |                                                          |           | 29,597    |           |  |           | 127,064   |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Assets held for sale                      |                                                          |           |          |           |  |           | 18,825    |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Prepaid expenses and other current assets |                                                          |           | 24,712    |           |  |           | 22,473    |          
|                                                   |                                           |                                                         
|                                                   |                                           | Total current assets                                     |           |           | 1,173,133 |  |           |           | 1,247,966 |  
|                                                   |                                           |                                                         
|Property, plant and equipment, net                 |                                           |                                                          | 421,848   |           |           |  | 396,873   |          
|                                                  
|                                                  
|                                                  
|                                                  
|Other assets                                       |                                           |                                                          | 64,502    |           |           |  | 81,655    |          
|                                                   |                                           |                                                         
|                                                   |                                           | Total assets                                             |           | $         | 1,659,483 |  |           | $         | 1,726,494 |  
|                                                   |                                           |                                                         
|                                                  
|Liabilities and Stockholders Equity
    (Deficit)
|                                                  
|                                                  
|                                                  
|                                                  
|Current liabilities                                |                                           |                                                          |           |           |           |  |           |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Current portion of long-term debt         |                                                          | $         | 300,000   |           |  | $         |          |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accounts payable and accrued expenses     |                                                          |           | 226,281   |           |  |           | 185,938   |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Income taxes payable                      |                                                          |           | 66,003    |           |  |           | 55,155    |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Litigation liability                      |                                                          |           | 26,589    |           |  |           | 280,000   |          
|                                                   |                                           |                                                         
|                                                   |                                           | Total current liabilities                                |           |           | 618,873   |  |           |           | 521,093   |  
|                                                   |                                           |                                                         
|Long-term debt                                     |                                           |                                                          | 840,000   |           |           |  | 1,140,000 |          
|                                                  
|                                                  
|                                                  
|                                                  
|Postretirement benefits other than
    pensions    |                                           |                                                          | 81,874    |           |           |  | 80,507    |          
|                                                  
|                                                  
|                                                  
|                                                  
|Pensions                                           |                                           |                                                          | 95,052    |           |           |  | 89,592    |          
|                                                  
|                                                  
|                                                  
|                                                  
|Deferred income taxes                              |                                           |                                                          | 9,645     |           |           |  | 4,435     |          
|                                                  
|                                                  
|                                                  
|                                                  
|Other liabilities                                  |                                           |                                                          | 4,474     |           |           |  | 6,054     |          
|                                                  
|                                                  
|                                                  
|                                                  
|Contingencies (see note)                           |                                           |                                                          |          |           |           |  |          |          
|                                                   |                                           |                                                         
|                                                   |                                           | Total liabilities                                        |           |           | 1,649,918 |  |           |           | 1,841,681 |  
|                                                   |                                           |                                                         
|                                                  
|                                                  
|                                                  
|                                                  
|Stockholders equity (deficit)                     |                                           |                                                          |           |           |           |  |           |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Capital stock(1)                          |                                                          |           | 105,777   |           |  |           | 103,750   |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Additional paid-in capital                |                                                          |           | 885,049   |           |  |           | 752,549   |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Retained earnings                         |                                                          |           | 492,800   |           |  |           | 306,091   |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Accumulated other comprehensive loss      |                                                          |           | (19,911   | )         |  |           | (23,458   | )        
|                                                   |                                           |                                                         
|                                                   |                                           |                                                          | 1,463,715 |           |           |  | 1,138,932 |          
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Less treasury stock(2)                    |                                                          |           | 1,454,150 |           |  |           | 1,254,119 |          
|                                                   |                                           |                                                         
|                                                   |                                           | Total stockholders equity
    (deficit)                 |           |           | 9,565     |  |           |           | (115,187  | )
|                                                   |                                           |                                                         
|                                                   |                                           | Total liabilities and stockholders
    equity (deficit) |           | $         | 1,659,483 |  |           | $         | 1,726,494 |  
|                                                   |                                           |                                                         



|    |                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Common Stock par value $.50 per share:
    Authorized  600 million shares;
    Issued  211,554,946 shares in 2004 and
    207,500,386 shares in 2003. Preferred Stock par value
    $.10 per share: Authorized  10 million
    shares; Issued  None.
|   
|(2) | 46,948,011 shares and 42,008,611 shares of treasury
    stock at December 31, 2004 and December 31, 2003,
    respectively.                                                                                                                             

The accompanying notes are integral to the Consolidated
Financial Statements.



32







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##### Table of Contents






UST

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

|                                                     |                                                                                                          |                                              |                                                                        |                                                         |         |          |          |           |         |          |          |          |          |           |          |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------- | ------- | -------- | -------- | --------- | ------- | -------- | -------- | -------- | -------- | --------- | -------- | -
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          | Year Ended December 31                      
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          | 2004                                         |                                                                        | 2003                                                    |         | 2002    
|                                                     |                                                                                                          |                                              |                                                                        |                                                         |         |         
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          |                                             
|Operating Activities                                 |                                                                                                          |                                              |                                                                        |                                                         |         |          |          |           |         |          |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net earnings (loss)                                                                                      |                                              | $                                                                      | 530,837                                                 |         |          | $        | 318,789   |         |          | $        | (271,469 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net earnings (loss) to
    net cash provided by (used in) operating activities: |                                              |                                                                        |                                                         |         |          |          |           |         |          |          |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          | Depreciation and amortization                |                                                                        |                                                         | 47,647  |          |          |           | 41,583  |          |          |          | 49,653   |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          | Stock-based compensation expense             |                                                                        |                                                         | 3,181   |          |          |           | 117     |          |          |          |         |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          | Deferred income taxes                        |                                                                        |                                                         | 100,767 |          |          |           | (79,490 | )        |          |          | (207,008 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          | Changes in operating assets and liabilities: |                                                                        |                                                         |         |          |          |           |         |          |          |          |          |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              | Accounts receivable                                                    |                                                         |         | 25,951   |          |           |         | 9,387    |          |          |          | 7,806     |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              | Inventories                                                            |                                                         |         | (22,780  | )        |           |         | (37,630  | )        |          |          | (41,884   | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              | Prepaid expenses and other assets                                      |                                                         |         | 13,573   |          |           |         | (52,191  | )        |          |          | 13,948    |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              | Accounts payable, accrued expenses, pensions and
    other liabilities |                                                         |         | 51,172   |          |           |         | 29,612   |          |          |          | 14,389    |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              | Tax benefits from the exercise of stock options                        |                                                         |         | 17,070   |          |           |         | 8,535    |          |          |          | 5,446     |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              | Income taxes                                                           |                                                         |         | 10,848   |          |           |         | 36,870   |          |          |          | (29,267   | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              | Litigation liability                                                   |                                                         |         | (215,797 | )        |           |         | (980,510 | )        |          |          | 1,260,510 |         
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          |                                              |                                                                        | Net cash provided by (used in) operating
    activities |         |          | 562,469  |           |         |          | (704,928 | )        |          |           | 802,124  |  
|                                                     |                                                                                                          |                                             
|                                                    
|                                                    
|                                                    
|                                                    
|Investing Activities                                 |                                                                                                          |                                              |                                                                        |                                                         |         |          |          |           |         |          |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchases of property, plant and equipment                                                               |                                              |                                                                        | (70,326                                                 | )       |          |          | (48,944   | )       |          |          | (62,714  | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Dispositions of property, plant and equipment                                                            |                                              |                                                                        | 9,902                                                   |         |          |          | 2,273     |         |          |          | 3,147    |         
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          |                                              |                                                                        | Net cash used in investing
    activities               |         |          | (60,424  | )         |         |          | (46,671  | )        |          |           | (59,567  | )
|                                                     |                                                                                                          |                                             
|                                                    
|                                                    
|                                                    
|                                                    
|Financing Activities                                 |                                                                                                          |                                              |                                                                        |                                                         |         |          |          |           |         |          |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from debt                                                                                       |                                              |                                                                        |                                                        |         |          |          |          |         |          |          | 593,292  |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayment of debt                                                                                        |                                              |                                                                        |                                                        |         |          |          |          |         |          |          | (325,875 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Withdrawals from (deposits into) restricted
    deposits                                                 |                                              |                                                                        |                                                        |         |          |          | 1,242,431 |         |          |          | (582,534 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from the issuance of stock                                                                      |                                              |                                                                        | 114,276                                                 |         |          |          | 48,286    |         |          |          | 57,089   |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Dividends paid                                                                                           |                                              |                                                                        | (344,128                                                | )       |          |          | (332,986  | )       |          |          | (324,233 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Stock repurchased                                                                                        |                                              |                                                                        | (200,031                                                | )       |          |          | (150,095  | )       |          |          | (50,262  | )       
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          |                                              |                                                                        | Net cash (used in) provided by financing
    activities |         |          | (429,883 | )         |         |          | 807,636  |          |          |           | (632,523 | )
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          |                                              |                                                                        | Increase in cash and cash
    equivalents               |         |          | 72,162   |           |         |          | 56,037   |          |          |           | 110,034  |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          |                                              |                                                                        | Cash and cash equivalents at beginning of
    year      |         |          | 438,040  |           |         |          | 382,003  |          |          |           | 271,969  |  
|                                                     |                                                                                                          |                                             
|                                                     |                                                                                                          |                                              |                                                                        | Cash and cash equivalents at end of
    year            |         | $        | 510,202  |           |         | $        | 438,040  |          |          | $         | 382,003  |  
|                                                     |                                                                                                          |                                             
|                                                    
|                                                    
|                                                    
|                                                    
|Supplemental disclosure of cash flow
    information |                                                                                                          |                                              |                                                                        |                                                         |         |          |          |           |         |          |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid during the year for:                                                                           |                                              |                                                                        |                                                         |         |          |          |           |         |          |          |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          | Income taxes                                 |                                                                        | $                                                       | 175,972 |          |          | $         | 255,043 |          |          | $        | 67,733   |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                                          | Interest                                     |                                                                        |                                                         | 83,551  |          |          |           | 83,553  |          |          |          | 52,280   |          

The accompanying notes are integral to the Consolidated
Financial Statements.



33







---



##### Table of Contents



UST

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
EQUITY (DEFICIT)

(Dollars in thousands, except per share amounts)

|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |          |         |  
|------------------------------------------------------------------------------------------------------ | --------------------------------------- | --------------------------------------- | -------- | ---------- | - | -------- | -------- | ------------ | - | -------- | -------- | --------------- | - | ------- | -------- | - | ------- | - | ----------- | - | - | - | -------- | -------- | ------- | - | - | -------- | ------- | -
|                                                                                                       |                                         |                                         |          |            |   |          |          | Accumulated  |   |          |          |                 |   | Compre-
|                                                                                                       |                                         |                                         |          | Additional |   |          |          | Other        |   |          |          | Total Stock-    |   | hensive
|                                                                                                       |                                         | Common                                  |          | Paid-In    |   | Retained |          | Compre-      |   | Treasury |          | holders Equity |   | Income 
|                                                                                                       |                                         | Stock                                   |          | Capital    |   | Earnings |          | hensive Loss |   | Stock    |          | (Deficit)       |   | (Loss) 
|                                                                                                       |                                         |                                        
|                                                                                                       |                                         |                                        
|Balance at December 31, 2001                                                                           |                                         |                                         | $101,710 |            |   |          | $635,380 |              |   |          | $915,990 |                 |   |         | $(18,256 | ) |         |   | $(1,053,762 | ) |   |   | $581,062 |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Comprehensive loss:                                                                                    |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       | Net loss                                |                                         |          |           |   |          |          |             |   |          |          | (271,469        | ) |         |          |  |         |   |             |  |   |   |          | (271,469 | )       |   | $ | (271,469 | )      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       | Other comprehensive loss, net of tax:   |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |          |        
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Net deferred loss on cash flow hedges   |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | (3,199  | ) |             |   |  |   |          |          | (3,199  | ) |   |          | (3,199  | )
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Foreign currency translation adjustment |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | (920    | ) |             |   |  |   |          |          | (920    | ) |   |          | (920    | )
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Minimum pension liability adjustment    |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | (40,504 | ) |             |   |  |   |          |          | (40,504 | ) |   |          | (40,504 | )
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                       | Other comprehensive loss                |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   | (44,623  | )      
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                       | Comprehensive loss                      |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   | $ | (316,092 | )      
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|Cash dividends  $1.92 per share                                                                       |                                         |                                         |         |            |   |          |         |              |   |          | (324,233 | )               |   |         |         |   |         |   |            |   |   |   | (324,233 | )        |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Exercise of stock options 
    2,013,000 shares and issuance of restricted
    stock  5,540 shares   |                                         |                                         | 1,010    |            |   |          | 55,037   |              |   |          |         |                 |   |         |         |   |         |   |            |   |   |   | 56,047   |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Income tax benefits and decrease in receivables
    from exercise of stock options                     |                                         |                                         |         |            |   |          | 6,488    |              |   |          |         |                 |   |         |         |   |         |   |            |   |   |   | 6,488    |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Stock repurchased 
    1,598,261 shares                                                               |                                         |                                         |         |            |   |          |         |              |   |          |         |                 |   |         |         |   |         |   | (50,262     | ) |   |   | (50,262  | )        |         |   |   |         
|                                                                                                       |                                         |                                         |          |            |   |         
|Balance at December 31, 2002                                                                           |                                         |                                         | 102,720  |            |   |          | 696,905  |              |   |          | 320,288  |                 |   |         | (62,879  | ) |         |   | (1,104,024  | ) |   |   | (46,990  | )        |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Comprehensive income:                                                                                  |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       | Net earnings                            |                                         |          |           |   |          |          |             |   |          |          | 318,789         |   |         |          |  |         |   |             |  |   |   |          | 318,789  |         |   | $ | 318,789  |        
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       | Other comprehensive income, net of tax: |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |          |        
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Net deferred gain on cash flow hedges   |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | 853     |   |             |   |  |   |          |          | 853     |   |   |          | 853     |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Foreign currency translation adjustment |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | 1,599   |   |             |   |  |   |          |          | 1,599   |   |   |          | 1,599   |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Minimum pension liability adjustment    |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | 36,969  |   |             |   |  |   |          |          | 36,969  |   |   |          | 36,969  |  
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                       | Other comprehensive income              |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   | 39,421   |        
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                       | Comprehensive income                    |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   | $ | 358,210  |        
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|Cash dividends  $2.00 per share                                                                       |                                         |                                         |         |            |   |          |         |              |   |          | (332,986 | )               |   |         |         |   |         |   |            |   |   |   | (332,986 | )        |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Exercise of stock options 
    2,011,500 shares and issuance of restricted
    stock  49,840 shares  |                                         |                                         | 1,030    |            |   |          | 43,734   |              |   |          |         |                 |   |         |         |   |         |   |            |   |   |   | 44,764   |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Income tax benefits and decrease in receivables
    from exercise of stock options                     |                                         |                                         |         |            |   |          | 11,910   |              |   |          |         |                 |   |         |         |   |         |   |            |   |   |   | 11,910   |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Stock repurchased 
    4,588,750 shares                                                               |                                         |                                         |         |            |   |          |         |              |   |          |         |                 |   |         |         |   |         |   | (150,095    | ) |   |   | (150,095 | )        |         |   |   |         
|                                                                                                       |                                         |                                         |          |            |   |         
|Balance at December 31, 2003                                                                           |                                         |                                         | 103,750  |            |   |          | 752,549  |              |   |          | 306,091  |                 |   |         | (23,458  | ) |         |   | (1,254,119  | ) |   |   | (115,187 | )        |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Comprehensive income:                                                                                  |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       | Net earnings                            |                                         |          |           |   |          |          |             |   |          |          | 530,837         |   |         |          |  |         |   |             |  |   |   |          | 530,837  |         |   | $ | 530,837  |        
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       | Other comprehensive income, net of tax: |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |          |        
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Net deferred gain on cash flow hedges   |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | 837     |   |             |   |  |   |          |          | 837     |   |   |          | 837     |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Foreign currency translation adjustment |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | 1,751   |   |             |   |  |   |          |          | 1,751   |   |   |          | 1,751   |  
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                       |                                         | Minimum pension liability adjustment    |          |            |  |          |          |              |  |          |          |                 |  |         |          |   | 959     |   |             |   |  |   |          |          | 959     |   |   |          | 959     |  
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                       | Other comprehensive income              |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   | 3,547    |        
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|                                                                                                       | Comprehensive income                    |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   | $ | 534,384  |        
|                                                                                                       |                                         |                                         |          |            |   |          |          |              |   |          |          |                 |   |         |          |   |         |   |             |   |   |   |          |          |         |   |   |         
|Cash dividends  $2.08 per share                                                                       |                                         |                                         |         |            |   |          |         |              |   |          | (344,128 | )               |   |         |         |   |         |   |            |   |   |   | (344,128 | )        |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Exercise of stock options 
    3,849,000 shares and issuance of restricted
    stock  205,560 shares |                                         |                                         | 2,027    |            |   |          | 109,191  |              |   |          |         |                 |   |         |         |   |         |   |            |   |   |   | 111,218  |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Income tax benefits and decrease in receivables
    from exercise of stock options                     |                                         |                                         |         |            |   |          | 23,309   |              |   |          |         |                 |   |         |         |   |         |   |            |   |   |   | 23,309   |          |         |   |   |         
|                                                                                                      
|                                                                                                      
|                                                                                                      
|                                                                                                      
|Stock repurchased 
    4,939,400 shares                                                               |                                         |                                         |         |            |   |          |         |              |   |          |         |                 |   |         |         |   |         |   | (200,031    | ) |   |   | (200,031 | )        |         |   |   |         
|                                                                                                       |                                         |                                         |          |            |   |         
|Balance at December 31, 2004                                                                           |                                         | $                                       | 105,777  |            |   | $        | 885,049  |              |   | $        | 492,800  |                 |   | $       | (19,911  | ) |         | $ | (1,454,150  | ) |   | $ | 9,565    |          |         |   |   |         
|                                                                                                       |                                         |                                         |          |            |   |         

The accompanying notes are integral to the Consolidated
Financial Statements.



34







---



##### Table of Contents






UST

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Summary of Significant Accounting Policies

Basis
of Presentation

The consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the
United States and, as such, include amounts based on judgments
and estimates made by management. Management believes that the
judgments and estimates used in the preparation of the
consolidated financial statements are appropriate, however,
actual results may differ from these estimates. The consolidated
financial statements include the accounts of the Company and all
of its subsidiaries after the elimination of intercompany
accounts and transactions. Certain prior year amounts have been
reclassified to conform to the 2004 financial statement
presentation.

The estimated fair values of amounts reported in the
consolidated financial statements have been determined by using
available market information or appropriate valuation
methodologies. All current assets and current liabilities are
carried at their fair values, which approximate market value,
because of their short-term nature. The fair values of long-term
assets and long-term liabilities approximate their carrying
values, with the exception of the Companys senior notes
(see Borrowing Arrangements note).

As a result of the transfer of the Companys cigar
operation pursuant to an agreement to resolve an antitrust
action, the results of this operation are presented as
Discontinued Operations for all periods presented (see
Discontinued Operations note).

Revenue
Recognition

Revenue from the sale of moist smokeless tobacco products is
recognized, net of any discounts or rebates granted, when title
passes, which corresponds with the arrival of such products at
the customer locations. Revenue from the sale of wine is
recognized, net of allowances, at the time products are shipped
to customers. Revenue from the sale of all other products is
predominantly recognized when title passes, which occurs at the
time of shipment to customers.

The Company records an accrual for estimated future sales
returns of smokeless tobacco products based upon historical
experience, current sales trends and other factors, in the
period in which the related products are shipped.

Costs associated with the Companys sales incentives are
recorded as a reduction to net sales.

Shipping and handling costs incurred by the Company in
connection with products sold are included in cost of
products sold on the Consolidated Statement of Operations.

Cash
and Cash Equivalents

Cash equivalents are amounts invested in investment grade
instruments with maturities of three months or less when
acquired.

Inventories

Inventories are stated at lower of cost or market. Elements of
cost included in products in process and finished goods
inventories include raw materials, comprised primarily of leaf
tobacco and grapes, direct labor and manufacturing overhead. The
major portion of leaf tobacco costs is determined using the
last-in, first-out (LIFO) method. The cost of the remaining
inventories is determined using the first-in, first-out
(FIFO) and average cost methods. Leaf tobacco and wine
inventories are included in current assets as a standard
industry practice, notwithstanding the fact that such
inventories are carried for several years for the purpose of
curing and aging.



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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Summary of Significant Accounting Policies (continued)

Property,
Plant and Equipment

Property, plant and equipment are carried at cost, less
accumulated depreciation. Depreciation is computed by the
straight-line method based on estimated salvage values, where
applicable, and the estimated useful lives of the assets, which
range from 5 to 40 years. Depreciation is not adjusted when
operations are temporarily idled. Improvements are capitalized
if they extend the useful lives of the related assets, while
repairs and maintenance costs are expensed when incurred.
Long-lived assets are reviewed for impairment whenever facts and
circumstances indicate that the carrying amount may not be fully
recoverable.

Assets
Held for Sale

Long-lived assets are classified as held for sale when certain
criteria are met, which include: managements commitment to
a plan to sell the assets; the availability of the assets for
immediate sale in their present condition; an active program to
locate buyers and other actions to sell the assets has been
initiated; the sale of the assets is probable and their transfer
is expected to qualify for recognition as a completed sale
within one year; the assets are being marketed at reasonable
prices in relation to their fair value; and it is unlikely that
significant changes will be made to the plan to sell the assets.
The Company measures long-lived assets to be disposed of by sale
at the lower of carrying amount or fair value, less cost to sell.

Income
Taxes

Income taxes are provided on all revenue and expense items
included in the Consolidated Statement of Operations, regardless
of the period in which such items are recognized for income tax
purposes, adjusted for items representing permanent differences
between pretax accounting income and taxable income. Deferred
income taxes result from the future tax consequences associated
with temporary differences between the carrying amounts of
assets and liabilities for tax and financial reporting purposes.

The Companys income tax provision takes into consideration
pretax income, statutory tax rates and the Companys tax
profile in the various jurisdictions in which it operates. The
tax bases of the Companys assets and liabilities reflect
its best estimate of the future tax benefit and costs it expects
to realize when such amounts are included in its tax returns.
Quantitative and probability analysis, which incorporates
managements judgment, is required in determining the
Companys effective tax rate and in evaluating its tax
positions. Notwithstanding the fact that all of the
Companys tax filing positions are supported by the
requisite tax and legal authority, accruals are established in
accordance with Statement of Financial Accounting Standards
(SFAS or Statement) No. 5,
Contingencies, when the Company believes that these
positions are likely to be subject to challenge by a tax
authority.

The Internal Revenue Service and other tax authorities audit the
Companys income tax returns on a continuous basis.
Depending on the tax jurisdiction, a number of years may elapse
before a particular matter for which the Company has established
an accrual is audited and ultimately resolved.

While it is often difficult to predict the timing of tax audits
and their final outcome, the Company believes that its accruals
reflect the probable outcome of known tax contingencies.
However, the final resolution of any such tax audit could result
in either a reduction in the Companys accruals or an
increase in its income tax provision, both of which could have a
significant impact on the results of operations in any given
period. The Company continually and regularly evaluates,
assesses and adjusts these accruals in light of changing facts
and circumstances, which could cause the effective tax rate to
fluctuate from period to period.

Stock-Based
Compensation

At December 31, 2004, the Company maintained a total of
three stock-based compensation plans for its employees and
nonemployee directors (see Stock-Based Compensation note). The
Company accounts for



36







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Stock-Based
Compensation (continued)


these stock compensation plans in accordance with the intrinsic
value-based method prescribed by Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees(APB Opinion No. 25).
No stock-based compensation expense is reflected in net earnings
(loss) as a result of stock option grants, as all options
granted under these plans had an exercise price equal to the
fair market value of the underlying common stock on the date of
grant. Compensation expense has been recognized in net earnings
during 2004 as a result of restricted stock granted to employees
and nonemployee directors and restricted stock units granted to
employees, and during 2003 as a result of restricted stock
granted to employees and nonemployee directors.

Consistent with the method described in SFAS No. 123,
Accounting for Stock Based Compensation, if compensation
expense for the Companys plans had been determined based
on the fair value at the grant dates for awards under its plans,
net earnings (loss) and earnings (loss) per share would have
been reduced (increased) to the pro forma amounts indicated
below:

|                                                                                                                                               |             |      |         |       |  |      |         |       |  |   |          |        |  
|---------------------------------------------------------------------------------------------------------------------------------------------- | ----------- | ---- | ------- | ----- |  | ---- | ------- | ----- |  | - | -------- | ------ | -
|                                                                                                                                               |             |     
|                                                                                                                                               |             |     
|                                                                                                                                               |             | 2004 |         | 2003  |  | 2002
|                                                                                                                                               |             |     
|                                                                                                                                               |             |     
|Net earnings (loss):                                                                                                                           |             |      |         |       |  |      |         |       |  |   |          |       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|As reported                                                                                                                                    |             | $    | 530,837 |       |  | $    | 318,789 |       |  | $ | (271,469 | )     
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Add: Total stock-based employee compensation
    expense included in reported net income, net of related tax
    effect                        |             |      | 2,138   |       |  |      | 76      |       |  |   |         |       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Less: Total stock-based employee compensation
    expense determined under the fair value method for all awards,
    net of related tax effect |             |      | (5,258  | )     |  |      | (3,848  | )     |  |   | (4,422   | )     
|                                                                                                                                               |             |     
|Pro forma                                                                                                                                      |             | $    | 527,717 |       |  | $    | 315,017 |       |  | $ | (275,891 | )     
|                                                                                                                                               |             |     
|Basic earnings (loss) per share:                                                                                                               |             |      |         |       |  |      |         |       |  |   |          |       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                               | As reported |      |         | $3.21 |  |      |         | $1.91 |  |   |          | $(1.61 | )
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                               | Pro forma   |      |         | $3.20 |  |      |         | $1.89 |  |   |          | $(1.63 | )
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|Diluted earnings (loss) per share:                                                                                                             |             |      |         |       |  |      |         |       |  |   |          |       
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                               | As reported |      |         | $3.19 |  |      |         | $1.90 |  |   |          | $(1.61 | )
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                              
|                                                                                                                                               | Pro forma   |      |         | $3.18 |  |      |         | $1.88 |  |   |          | $(1.63 | )

Foreign
Currency Translation

In connection with foreign operations with functional currencies
other than the U.S. dollar, assets and liabilities are
translated at current exchange rates, while income and expenses
are translated at the average rates for the period. The
resulting translation adjustments are reported as a component of
accumulated other comprehensive loss.

Earnings
(Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net
earnings (loss) by the weighted-average number of common shares
outstanding during the period. The diluted earnings (loss) per
share computation includes the effect of shares which would be
issuable upon the exercise of outstanding stock options or
restricted stock, reduced by the number of shares which are
assumed to be purchased by the Company from the resulting
proceeds at the average market price during the period.
Additionally, as the Company recognized a fourth quarter loss in
2003 due to the litigation settlement charge, certain potential
common shares were excluded from the full-year 2003 diluted
earnings per share as they were antidilutive. The diluted loss
per share computation for the year ended December 31, 2002
excludes all potential common shares, as the effect of their
issuance is antidilutive.



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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Summary of Significant Accounting Policies (continued)

Accounting
Pronouncements

On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued Statement No. 123 (Revised
2004), or Statement 123(R), Share-Based Payment,
which is a revision of Statement No. 123, Accounting for
Stock-Based Compensation. Statement 123(R) supersedes
APB Opinion No. 25, Accounting for Stock Issued to
Employees, and amends Statement No. 95,
Statement of Cash Flows. The approach in
Statement 123(R) is similar to the approach described in
Statement 123; however, Statement 123(R) requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on
their fair values. Pro forma disclosure, as allowed under
Statement No. 123, will no longer be an alternative.

Statement 123(R) permits public companies to adopt its
requirements using one of two methods: a modified
prospective method in which compensation cost is
recognized beginning with the effective date based on the
requirements of Statement 123(R) for all share-based
payments granted after the effective date, and based on the
requirements of Statement 123 for all awards granted to
employees prior to the effective date of Statement 123(R)
that remain unvested on the effective date; or a modified
retrospective method which includes the requirements of
the modified prospective method described above, but also
permits entities to restate, based on the amounts previously
recognized under Statement 123 for purposes of pro forma
disclosures, either all prior periods presented or prior interim
periods of the year of adoption. At the present time, the
Company plans to adopt Statement 123(R) for the period
beginning July 1, 2005 using the modified prospective
method.

As permitted by Statement 123, the Company currently
accounts for share-based payments to employees and nonemployee
directors using the intrinsic value method prescribed in APB
Opinion No. 25. The Company grants stock options with
exercise prices equal to the respective grant dates fair
market value and, as such, recognizes no compensation cost for
such stock options. The impact of adoption of
Statement 123(R) cannot be predicted at this time because
it will depend on levels of share-based payments granted in the
future. However, had the Company adopted Statement 123(R)
in prior periods, the impact of that standard would have
approximated the impact of Statement 123 as described in
the disclosure of pro forma net income and earnings per share in
the Stock-Based Compensationsection of the Summary of
Significant Accounting Policies note. Statement 123(R) also
requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption. The Company is currently evaluating the impact that
the adoption of Statement 123(R) will have on its
consolidated results of operations, financial position and cash
flows.

In December 2004, the FASB issued Staff Position
(FSP) 109-1, Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax
Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004(the Jobs Creation
Act) and FSP 109-2, Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004. FSP 109-1
requires that the tax deduction provided under the Jobs Creation
Act for income attributable to domestic production activities be
accounted for as a special deduction under Statement 109.
This special deduction is recognized under Statement 109 as
it is earned. FSP 109-2 provides that additional time
beyond the financial reporting period of enactment should be
allowed to evaluate the effect of the Jobs Creation Act on a
companys plan for repatriation or reinvestment of foreign
earnings, unless the company has recognized a deferred tax
liability for some or all of its unremitted foreign earnings.
The Company is currently evaluating the impact of the new law
(see Income Taxes note).

The Company adopted the revised disclosure provisions outlined
in SFAS No. 132, Employers Disclosures about
Pensions and Other Postretirement Benefits (Revised 2003)in
2003. This Statement requires additional disclosures to those
included in the original Statement 132 about the assets,
benefit obligations, cash flows, investment policies and
strategies and components of net periodic benefit cost
recognized during



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Accounting
Pronouncements (continued)


interim periods of defined benefit pension plans and other
postretirement benefit plans. As this Statement does not address
measurement or recognition requirements, there was no impact on
the Companys consolidated results of operations, financial
position or cash flows for the years ended December 31,
2004 and 2003, respectively.

There were no other recently issued accounting pronouncements
with delayed effective dates that would currently have a
material impact on the consolidated financial statements of the
Company.

Inventories

Inventories at December 31, 2004 and 2003, respectively,
were as follows:

|                             |  |             |         |      |  |   |         | 
|---------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                             |  |            
|                             |  | December 31
|                             |  |            
|                             |  | 2004        |         | 2003
|                             |  |            
|                             |  |            
|Leaf tobacco                 |  | $           | 205,646 |      |  | $ | 216,073 | 
|                            
|                            
|                            
|                            
|Products in process          |  |             | 208,935 |      |  |   | 200,696 | 
|                            
|                            
|                            
|                            
|Finished goods               |  |             | 134,662 |      |  |   | 137,287 | 
|                            
|                            
|                            
|                            
|Other materials and supplies |  |             | 17,917  |      |  |   | 19,278  | 
|                             |  |            
|                             |  | $           | 567,160 |      |  | $ | 573,334 | 
|                             |  |            

At December 31, 2004 and 2003, $225.1 million and
$219.9 million, respectively, of leaf tobacco inventories
were valued using the LIFO method. The average costs of these
inventories were greater than the amounts at which these
inventories were carried in the Consolidated Statement of
Financial Position by $70.4 million and $66.9 million,
respectively.

Assets Held for Sale

At December 31, 2004, the Company had no assets classified
as held for sale, as each of the properties that were held for
sale at December 31, 2003 were either sold or reclassified
back into property, plant and equipment during 2004. The
property that was sold in 2004 included certain California
winery assets, which represented approximately $7.8 million
of the December 31, 2003 balance in assets held for
sale. During 2004, the Company recorded a charge of
approximately $1 million within SA&A expenses to adjust
the carrying value of these California assets to reflect their
fair value, less estimated costs to sell. Also in December 2004,
the remaining properties reflected in the December 31, 2003
assets held for sale balance were reclassified to
property, plant and equipment as the Company was
unable to dispose of them within the twelve-month period allowed
under SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. In connection with this
reclassification, the Company recorded the cumulative
retroactive depreciation that each of the properties would have
recognized over the preceding twelve-month period had they been
included in property, plant and equipment.

The Company had $18.8 million classified as assets
held for sale at December 31, 2003, which consisted
of selected California winery assets. Management, having proper
authority, initiated the disposal of these properties in
connection with the overall strategic objectives of the
Companys winery operation. Each of these assets met the
criteria to be considered held for sale under SFAS No. 144.
As each propertys net carrying value was lower than its
respective estimated fair value less costs to sell, there was no
impairment charge recorded in 2003, upon managements
decision to dispose of the properties.



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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Property, Plant and Equipment, Net

Property, plant and equipment are reported at cost less
accumulated depreciation. Property, plant and equipment at
December 31, 2004 and 2003, respectively, are as follows:

|                              |  |             |         |      |  |   |         | 
|----------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                              |  |            
|                              |  | December 31
|                              |  |            
|                              |  | 2004        |         | 2003
|                              |  |            
|                              |  |            
|Land                          |  | $           | 18,745  |      |  | $ | 19,703  | 
|                             
|                             
|                             
|                             
|Buildings                     |  |             | 266,992 |      |  |   | 259,933 | 
|                             
|                             
|                             
|                             
|Machinery and equipment       |  |             | 515,094 |      |  |   | 487,655 | 
|                              |  |            
|                              |  |             | 800,831 |      |  |   | 767,291 | 
|                             
|                             
|                             
|                             
|Less accumulated depreciation |  |             | 378,983 |      |  |   | 370,418 | 
|                              |  |            
|                              |  | $           | 421,848 |      |  | $ | 396,873 | 
|                              |  |            

Depreciation expense was $45.4 million for 2004,
$39.1 million for 2003 and $37.4 million for 2002.

Commitments

Purchase
Agreements

At December 31, 2004, the Company had entered into
unconditional purchase obligations in the form of contractual
commitments. Unconditional purchase obligations are commitments
that are noncancelable or cancelable only under certain
predefined conditions.

The Company is obligated to make payments in the upcoming year
of approximately $21.6 million for leaf tobacco to be used
in the production of moist smokeless tobacco products.

Purchase commitments under contracts to purchase grapes for
periods beyond one year are subject to variability resulting
from potential changes in market price indices. The Company is
obligated to make future payments for purchases and processing
of grapes for use in the production of wine, based upon
estimated yields and market conditions, as follows:

|                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |        |  |  |   |         |  |  |   |         | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|                  |  |     
|                  |  |     
|                  |  | 2005 |        | 2006 |  | 2007 |        | 2008 |  | 2009 |        | Thereafter |  | Total
|                  |  |     
|                  |  |     
|Grape commitments |  | $    | 60,001 |      |  | $    | 55,331 |      |  | $    | 46,926 |            |  | $     | 46,161 |  |  | $ | 44,115 |  |  | $ | 106,084 |  |  | $ | 358,618 | 

In addition, the Company has a commitment to spend a minimum of
approximately $0.4 million in the next year under an
advertising-related contract.

Operating
Leases

The Company leases certain property and equipment under various
operating lease arrangements. The following is a schedule of
future minimum lease payments for operating leases as of
December 31, 2004:

|                  |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |        |  |  |   |        | 
|----------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ |  |  | - | ------ | 
|                  |  |     
|                  |  |     
|                  |  | 2005 |       | 2006 |  | 2007 |       | 2008 |  | 2009 |       | Thereafter |  | Total
|                  |  |     
|                  |  |     
|Lease commitments |  | $    | 9,679 |      |  | $    | 7,115 |      |  | $    | 4,935 |            |  | $     | 3,417 |  |  | $ | 2,022 |  |  | $ | 12,678 |  |  | $ | 39,846 | 

Rent expense was $13.8 million for 2004, $12.9 million
for 2003 and $12.8 million for 2002.



40







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In January 2003, restricted deposits held in a qualified
settlement fund with the U.S. District Court in connection
with the antitrust litigation involving the Companys
smokeless tobacco subsidiary, along with additional cash of
$19.7 million, were utilized to pay the antitrust judgment
(see Other Matters note).

At December 31, 2002, the Company had $1.242 billion
on deposit in the qualified settlement fund. During 2002,
$572.1 million of additional funds were added to the
restricted deposits, in addition to the interest income earned
on the invested amounts, net of taxes paid. The Company utilized
a portion of its net proceeds from its senior notes issued on
July 15, 2002 (see Borrowing Arrangements note) and cash
from operations for these deposits.

Other Assets

Other assets at December 31, 2004 and 2003, respectively,
consisted of the following:

|                       |  |             |        |      |  |   |        | 
|---------------------- |  | ----------- | ------ | ---- |  | - | ------ | 
|                       |  |            
|                       |  | December 31
|                       |  |            
|                       |  | 2004        |        | 2003
|                       |  |            
|                       |  |            
|Prepaid pension costs  |  | $           | 46,295 |      |  | $ | 61,276 | 
|                      
|                      
|                      
|                      
|Capitalized debt costs |  |             | 5,440  |      |  |   | 6,730  | 
|                      
|                      
|                      
|                      
|Goodwill               |  |             | 4,944  |      |  |   | 4,710  | 
|                      
|                      
|                      
|                      
|Other                  |  |             | 7,823  |      |  |   | 8,939  | 
|                       |  |            
|                       |  | $           | 64,502 |      |  | $ | 81,655 | 
|                       |  |            

Capitalized debt costs as of December 31, 2004 and 2003
included applicable fees incurred in connection with the
Companys senior notes and credit facilities outstanding as
of such dates. These costs are being amortized over their
applicable terms (see Borrowing Arrangements note).

The Company accounts for its goodwill in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets. As
the estimated fair values of the applicable reporting units
exceeded their respective net book values, including goodwill,
no impairment charges were recognized in 2004, 2003 or 2002.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses at December 31, 2004
and 2003, respectively, consisted of the following:

|                                             |  |             |         |      |  |   |         | 
|-------------------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                                             |  |            
|                                             |  | December 31
|                                             |  |            
|                                             |  | 2004        |         | 2003
|                                             |  |            
|                                             |  |            
|Trade accounts payable                       |  | $           | 71,529  |      |  | $ | 65,636  | 
|                                            
|                                            
|                                            
|                                            
|Employee compensation and benefits           |  |             | 64,688  |      |  |   | 41,013  | 
|                                            
|                                            
|                                            
|                                            
|Interest payable on debt                     |  |             | 27,369  |      |  |   | 27,369  | 
|                                            
|                                            
|                                            
|                                            
|Smokeless tobacco settlement-related charges |  |             | 13,555  |      |  |   | 12,758  | 
|                                            
|                                            
|                                            
|                                            
|Other accrued expenses                       |  |             | 49,140  |      |  |   | 39,162  | 
|                                             |  |            
|                                             |  | $           | 226,281 |      |  | $ | 185,938 | 
|                                             |  |            



41







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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Borrowing Arrangements

Outstanding debt consisted of the following:

|                                   |  |             |           |          |  |          |           |          |  |   |           |  |  |   |           | 
|---------------------------------- |  | ----------- | --------- | -------- |  | -------- | --------- | -------- |  | - | --------- |  |  | - | --------- | 
|                                   |  |            
|                                   |  | December 31
|                                   |  |            
|                                   |  |             |           |         
|                                   |  | 2004        |           | 2003    
|                                   |  | Carrying    |           | Fair     |  | Carrying |           | Fair    
|                                   |  | Value       |           | Value(1) |  | Value    |           | Value(1)
|                                   |  |            
|                                   |  |            
|Current portion of long-term debt: |  |             |           |          |  |          |           |          |  |   |           |  |  |   |           | 
|                                  
|                                  
|                                  
|                                  
|Senior notes, due March 15, 2005   |  | $           | 300,000   |          |  | $        | 303,510   |          |  | $ |          |  |  | $ |          | 
|                                   |  |            
|                                  
|Long-term debt:                    |  |             |           |          |  |          |           |          |  |   |           |  |  |   |           | 
|                                  
|                                  
|                                  
|                                  
|Senior notes, due March 15, 2005   |  |             |          |          |  |          |          |          |  |   | 300,000   |  |  |   | 322,710   | 
|                                  
|                                  
|                                  
|                                  
|Senior notes, due June 1, 2009     |  |             | 240,000   |          |  |          | 264,220   |          |  |   | 240,000   |  |  |   | 271,040   | 
|                                  
|                                  
|                                  
|                                  
|Senior notes, due July 15, 2012    |  |             | 600,000   |          |  |          | 673,800   |          |  |   | 600,000   |  |  |   | 668,760   | 
|                                   |  |            
|                                   |  |             | 840,000   |          |  |          | 938,020   |          |  |   | 1,140,000 |  |  |   | 1,262,510 | 
|                                   |  |            
|                                   |  | $           | 1,140,000 |          |  | $        | 1,241,530 |          |  | $ | 1,140,000 |  |  | $ | 1,262,510 | 
|                                   |  |            



|    |                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Represents amount at which liability could
    effectively be settled as of the respective year-end date.
    Calculation of this value is based upon present value of future
    cash flows.

On July 9, 2004, the Company replaced its $300 million
unsecured line of credit with various financial institutions,
(the Credit Facility), comprised of a
$150 million, 364-day credit agreement and a
$150 million, three-year credit agreement, with a new
$300 million three-year credit facility (the New
Credit Facility). The New Credit Facility and the Credit
Facility were executed primarily to support commercial paper
borrowings. The Company had no direct borrowings under either
credit facility nor did it have any commercial paper borrowings
at December 31, 2004 or 2003. Costs of approximately
$0.9 million associated with the establishment of the New
Credit Facility were capitalized in 2004 and are being amortized
over the applicable term. Approximately $0.2 million of
these costs have been recognized for the year-ended
December 31, 2004. Approximately $0.7 million
remaining of the $2.7 million capitalized in 2002
associated with the Credit Facility was recognized for the
year-ended December 31, 2004. The New Credit Facility
requires the maintenance of certain financial ratios, the
payment of commitment and administrative fees and includes
affirmative and negative covenants customary for facilities of
this type. The commitment fee payable on the unused portion of
the New Credit Facility is determined based on an interest rate,
within a range of rates, dependent upon the Companys
senior unsecured debt rating. The commitment fee currently
payable is .15 percent per annum. Commitment fees incurred
for the New Credit Facility approximated $0.2 million for
the year-ended December 31, 2004. Commitment fees incurred
for the Credit Facility approximated $0.9 million for the
year-ended December 31, 2003. As of December 31, 2004,
the Company is in compliance with all covenants under the terms
of the New Credit Facility.

In July 2002, the Company issued $600 million aggregate
principal amount of 6.625 percent senior notes at a price
of 99.53 percent of the principal amount. These notes
mature on July 15, 2012, with interest payable
semiannually. Approximately $4.8 million of the costs
associated with the issuance of the notes were capitalized and
are being amortized over the term of the notes. Approximately
$0.5 million of these costs have been recognized in each of
the years ended December 31, 2004 and 2003. The Company
used a portion of the net proceeds from the $600 million
senior notes to pay the remaining principal, fees and prepayment
penalties associated with the $1 billion financing
arrangement (the Previous Credit Facility) in the
amount of $325.8 million, which was deposited with the
U.S. District Court to satisfy the bonding requirement for
certain antitrust litigation (see Other Matters note). In July
2002, the Previous Credit Facility was terminated and the
$7.3 million in related unamortized debt costs were
expensed. During the year ended December 31, 2002, the



42







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##### Table of Contents










Company made scheduled principal payments totaling
$1.7 million prior to termination. Commitment fees incurred
on the Previous Credit Facility were $2.6 million for the
year ended December 31, 2002.

In March 2000, the Company issued $300 million aggregate
principal amount of 8.8 percent fixed rate senior notes.
These notes mature on March 15, 2005, with interest payable
semiannually.

In May 1999, the Company issued $240 million aggregate
principal amount of senior notes, of which $200 million is
7.25 percent fixed rate debt and $40 million is
floating rate debt, which bears interest at the three-month
LIBOR plus 90 basis points. These notes mature on
June 1, 2009, with interest payable semiannually and
quarterly on the fixed and floating rate notes, respectively. To
hedge the interest rate risk on the $40 million floating
rate debt, the Company executed an interest rate swap,
effectively fixing the rate at 7.25 percent (see Derivative
Instruments and Hedging Activities note).

Derivative Instruments and Hedging Activities

The Company monitors and manages risk associated with changes in
interest rates and foreign currency exchange rates. The purpose
of the Companys risk management policy is to maintain the
Companys financial flexibility by reducing or transferring
risk exposure at appropriate costs. The Company does so, from
time to time, by entering into derivative financial instruments
to hedge against exposure to these risks. The Company has
implemented risk management controls and limits to monitor its
risk position and ensure that hedging performance is in line
with Company objectives.

The Companys risk management policy does not permit the
use of complex multifaceted derivative instruments or compound
derivative instruments without the approval of the Board of
Directors. In addition, the policy does not permit the use of
leveraged financial instruments. The Company does not use
derivatives for trading or speculative purposes. The Company
mitigates the risk of nonperformance by a counterparty by using
only major reputable financial institutions with investment
grade credit ratings.

All derivatives are recognized as either assets or liabilities
in the Consolidated Statement of Financial Position with
measurement at fair value, and changes in the fair values of
derivative instruments are reported in either net earnings or
other comprehensive income depending on the designated use of
the derivative and whether it meets the criteria for hedge
accounting. The accounting for gains and losses associated with
changes in the fair value of derivatives and the related effects
on the consolidated financial statements is subject to their
hedge designation and whether they meet effectiveness standards.

The Company has hedged the interest rate risk on its
$40 million aggregate principal amount of floating rate
senior notes with a ten-year interest rate swap having a
notional amount of $40 million and quarterly settlement
dates over the term of the contract. The Company pays a fixed
rate of 7.25 percent and receives a floating rate of
three-month LIBOR plus 90 basis points on the notional
amount. This interest rate swap has been designated as a cash
flow hedge, and changes in the cash flows from the swap
perfectly offset the changes in the cash flows associated with
the floating rate of interest on the $40 million debt
principal (see Borrowing Arrangements note). The fair value of
the swap at December 31, 2004 and 2003 was a net liability
of $4 million and $5.3 million, respectively, based on
dealer quotes, considering current market rates and was included
in other liabilities on the Consolidated Statement
of Financial Position. Accumulated other comprehensive loss at
December 31, 2004 and 2003 included the accumulated loss on
the cash flow hedge (net of taxes) of $2.6 million and
$3.4 million, respectively. This reflects $0.8 million
(net of taxes) of other comprehensive income recognized for the
year ended December 31, 2004 and 2003, respectively, in
connection with the change in fair value of the swap.

In addition, from time to time, the Company has entered into
foreign currency forward contracts, designated as cash flow
hedges, in order to hedge the risk of variability in cash flows
associated with foreign currency payments required in connection
with firm commitments to purchase oak barrels for its wine
operations. There were no such contracts outstanding at
December 31, 2004 or 2003.

There were no other derivative contracts at December 31,
2004, with the exception of forward contracts to purchase leaf
tobacco for use in manufacturing smokeless tobacco products and
grapes and bulk wine for use in wine production. These forward
contracts meet the normal purchases exception, exempting them
from SFAS No. 133 accounting and reporting.



43







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##### Table of Contents



UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Capital Stock

The Company has two classes of capital stock: preferred stock,
with a par value of $.10 per share, and common stock, with
a par value of $.50 per share. Authorized preferred stock
is 10 million shares and authorized common stock is
600 million shares. There have been no shares issued of the
Companys preferred stock.

Common stock issued at December 31, 2004 and 2003 was
211,554,946 shares and 207,500,386 shares,
respectively. Treasury shares held at December 31, 2004 and
2003 were 46,948,011 shares and 42,008,611 shares,
respectively.

The Company repurchased a total of 4.9 million shares and
4.6 million shares at a cost of $200 million and
$150.1 million during 2004 and 2003, respectively. Of these
totals, the Company repurchased 0.3 million shares and
0.6 million shares in 2004 and 2003, respectively, at
prevailing market prices directly from the trust established for
the Companys defined benefit pension plans. Share
repurchases were made pursuant to authorization by the Board of
Directors to repurchase the Companys common stock up to a
maximum of 20 million shares. As of December 31, 2004,
18.3 million shares have been repurchased at a cost of
$563.2 million under this program. In December 2004, the
Companys Board of Directors authorized a new program under
which the Company may repurchase up to 20 million shares of
its outstanding common stock. Repurchases under this new program
will commence when repurchases under the existing program have
been completed.

Events causing changes in the issued and outstanding shares are
described in the Consolidated Statement of Changes in
Stockholders Equity (Deficit).

Stock-Based Compensation

Effective February 20, 2003, the Board of Directors
authorized an amendment and restatement of the 2001 Stock Option
Plan, to provide for the grant of additional types of
equity-based awards, as well as options, to the Companys
employees. As a result of the amendment, the 2001 Stock Option
Plan was renamed the UST Inc. Amended and Restated Stock
Incentive Plan (the Amended and Restated Stock Incentive
Plan). There are generally five types of awards that may
be granted under the Amended and Restated Stock Incentive Plan:
stock options, stock appreciation rights, restricted stock
awards, performance stock awards and stock unit awards. The
total number of shares of common stock reserved for issuance
under the Amended and Restated Stock Incentive Plan consists of
6 million shares previously approved under the 2001 Stock
Option Plan. Of this total, no more than 1 million shares
of common stock are authorized for issuance of awards other than
options and stock appreciation rights over the term of the
Amended and Restated Stock Incentive Plan. The Company also
maintains two additional stock option plans, the 1992 Stock
Option Plan and a Nonemployee Directors Stock Option Plan.
Under the Companys current plans, options may be granted
at not less than the fair market value on the date of grant and
therefore, in accordance with the intrinsic value-based method
prescribed by APB Opinion No. 25, no compensation expense
is recognized for the stock options granted.

The Black-Scholes option pricing model was developed for use in
estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
such an option pricing model requires the input of highly
subjective assumptions including the expected stock price
volatility. Because the Companys employee stock options
have characteristics significantly different from those of
traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, in
managements opinion, the existing models do not
necessarily provide a reliable single measure of the fair value
of its stock options.



44







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##### Table of Contents










The fair value of each option grant, for pro forma disclosure
purposes, was estimated on the date of grant using the modified
Black-Scholes option pricing model with the following
weighted-average assumptions:

|                        |  |      |            |      |  |      |            |  |  |  |            | 
|----------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- |  |  |  | ---------- | 
|                        |  |     
|                        |  |     
|                        |  | 2004 |            | 2003 |  | 2002
|                        |  |      |            |      |  |      |            |  |  |  |            | 
|Expected dividend yield |  |      | 5.0%       |      |  |      | 5.0%       |  |  |  | 5.0%       | 
|                       
|                       
|                       
|                       
|Risk-free interest rate |  |      | 3.9%       |      |  |      | 3.5%       |  |  |  | 4.9%       | 
|                       
|                       
|                       
|                       
|Expected volatility     |  |      | 13.2%      |      |  |      | 34.1%      |  |  |  | 17.2%      | 
|                       
|                       
|                       
|                       
|Expected life of option |  |      | 7.5  years |      |  |      | 7.5  years |  |  |  | 7.5  years | 

The following table presents a summary of the Companys
stock option activity and related information for the years
ended December 31 (options in thousands):

|                                                                   |  |           |          |           |  |           |       |           |  |           |          |           |  |   |       |  |  |  |          |   |  |   |       | 
|------------------------------------------------------------------ |  | --------- | -------- | --------- |  | --------- | ----- | --------- |  | --------- | -------- | --------- |  | - | ----- |  |  |  | -------- | - |  | - | ----- | 
|                                                                   |  |           |          |           |  |          
|                                                                   |  | 2004      |          | 2003      |  | 2002     
|                                                                   |  |          
|                                                                   |  |          
|                                                                   |  |           |          | Weighted- |  |           |       | Weighted- |  |           |          | Weighted-
|                                                                   |  |           |          | Average   |  |           |       | Average   |  |           |          | Average  
|                                                                   |  | Number of |          | Exercise  |  | Number of |       | Exercise  |  | Number of |          | Exercise 
|                                                                   |  | Options   |          | Price     |  | Options   |       | Price     |  | Options   |          | Price    
|                                                                   |  |          
|                                                                   |  |          
|Outstanding at beginning of year                                   |  |           | 12,152.6 |           |  | $         | 29.98 |           |  |           | 12,825.5 |           |  | $ | 28.41 |  |  |  | 14,257.8 |   |  | $ | 27.64 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Granted                                                            |  |           | 879.3    |           |  |           | 39.29 |           |  |           | 1,402.1  |           |  |   | 33.24 |  |  |  | 751.1    |   |  |   | 40.93 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Exercised                                                          |  |           | (3,849.0 | )         |  |           | 28.07 |           |  |           | (2,011.5 | )         |  |   | 22.23 |  |  |  | (2,013.0 | ) |  |   | 27.75 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Forfeited                                                          |  |           | (43.8    | )         |  |           | 33.50 |           |  |           | (39.4    | )         |  |   | 30.34 |  |  |  | (89.1    | ) |  |   | 22.68 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Expired                                                            |  |           | (18.8    | )         |  |           | 27.81 |           |  |           | (24.1    | )         |  |   | 25.50 |  |  |  | (81.3    | ) |  |   | 30.81 | 
|                                                                   |  |           |          |           |  |           |       |           |  |           |          |           |  |   |       |  |  |  |          |   |  |   |       | 
|Outstanding at end of year                                         |  |           | 9,120.3  |           |  | $         | 31.68 |           |  |           | 12,152.6 |           |  | $ | 29.98 |  |  |  | 12,825.5 |   |  | $ | 28.41 | 
|                                                                   |  |           |          |           |  |           |       |           |  |           |          |           |  |   |       |  |  |  |          |   |  |   |       | 
|Exercisable at end of year                                         |  |           | 7,083.8  |           |  | $         | 30.11 |           |  |           | 9,783.1  |           |  | $ | 28.83 |  |  |  | 10,169.3 |   |  | $ | 28.31 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Weighted-average fair value of options granted
    during the year |  |           |          |           |  | $         | 2.76  |           |  |           |          |           |  | $ | 7.21  |  |  |  |          |   |  | $ | 4.90  | 

The following table summarizes information about stock options
outstanding at December 31, 2004 (options in thousands):

|                    |  |                     |         |                  |  |          |           |            |  |          |       |  |  |  |         |  |  |   |       | 
|------------------- |  | ------------------- | ------- | ---------------- |  | -------- | --------- | ---------- |  | -------- | ----- |  |  |  | ------- |  |  | - | ----- | 
|                    |  |                    
|Options Outstanding |  | Options Exercisable
|                    |  | Weighted-           |         | Weighted-        |  |          |           | Weighted- 
|                    |  | Average             |         | Average          |  |          |           | Average   
|Range of            |  | Number              |         | Remaining        |  | Exercise |           | Number     |  | Exercise
|Exercise Prices     |  | of Options          |         | Contractual Life |  | Price    |           | of Options |  | Price   
|                    |  |                    
|                    |  |                    
|$15.06  15.53      |  |                     | 817.3   |                  |  |          | 5.5 years |            |  | $        | 15.07 |  |  |  | 817.3   |  |  | $ | 15.07 | 
|                   
|                   
|                   
|                   
|27.69  40.94       |  |                     | 8,303.0 |                  |  |          | 5.4 years |            |  |          | 33.31 |  |  |  | 6,266.5 |  |  |   | 32.07 | 
|                    |  |                     |         |                  |  |          |           |            |  |          |       |  |  |  |         |  |  |   |       | 
|$15.06  40.94      |  |                     | 9,120.3 |                  |  |          | 5.4 years |            |  | $        | 31.68 |  |  |  | 7,083.8 |  |  | $ | 30.11 | 
|                    |  |                     |         |                  |  |          |           |            |  |          |       |  |  |  |         |  |  |   |       | 



45







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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







Under the Amended and Restated Stock Incentive Plan and 1992
Stock Option Plan, 6 million and 10.4 million shares,
respectively, were originally authorized for grant and options
first become exercisable, in ratable installments or otherwise,
over a period of one to five years from the date of grant and
may be exercised up to a maximum of ten years from the date of
grant using various payment methods. In May 2000, the
Companys stockholders approved an amendment to the 1992
Stock Option Plan, increasing the number of shares authorized
for grant by 5 million, to be issued over the plans
remaining term. Under the Nonemployee Directors Stock
Option Plan, 200,000 shares were authorized for grant.
These options first become exercisable six months from the date
of grant, may be exercisable up to a maximum of ten years from
the date of grant and must be paid in full at the time of the
exercise.

At December 31, 2004, 3.4 million shares were
available for grant under the Amended and Restated Stock
Incentive Plan and 9,000 shares were available for grant
under the Nonemployee Directors Stock Option Plan. No
shares were available at December 31, 2004 under the 1992
Stock Option Plan. During 2004 and 2003, 199,000 shares and
42,200 shares of restricted stock were issued with a
weighted-average grant date fair value of $39.77 and
$33.25 per share, respectively, in connection with the
Amended and Restated Stock Incentive Plan. A total of 147,400
restricted shares awarded in 2004 are subject to certain
performance-based criteria related to the Companys
earnings per share. During 2004, the Company also issued 103,780
restricted stock units with a grant date fair value of $39.31 to
eligible employees under the UST Inc. Amended and Restated Stock
Incentive Plan.

In connection with the Nonemployee Directors Restricted
Stock Award Plan, up to 200,000 shares of the
Companys common stock may be granted to nonemployee
directors. During 2004 and 2003, 8,620 shares and
7,640 shares of the Companys common stock were issued
under this plan with a weighted-average grant date fair value of
$41.79 and $32.91 per share, respectively. During 2004,
2,060 shares were forfeited under this plan.

Receivables from the exercise of stock options in the amount of
$11.9 million in 2004, $18.1 million in 2003 and
$21.5 million in 2002 have been deducted from
stockholders equity (deficit).

Accumulated Other Comprehensive Loss

The components of comprehensive income (loss) that relate to the
Company are net earnings (loss), foreign currency translation
adjustments, minimum pension liability adjustments and the
change in the fair value of derivatives designated as effective
cash flow hedges, all of which are presented in the Consolidated
Statement of Changes in Stockholders Equity (Deficit).
Changes in accumulated other comprehensive (loss) income are
recorded directly to stockholders equity
(deficit) and do not affect the net earnings (loss) or cash
flows of the Company.



46







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##### Table of Contents










Accumulated other comprehensive loss consists of the following
components, net of taxes:

|                             |                         |             |        |            |   |               |         |               |   |   |        |        |   |   |         |         |  
|---------------------------- | ----------------------- | ----------- | ------ | ---------- | - | ------------- | ------- | ------------- | - | - | ------ | ------ | - | - | ------- | ------- | -
|                             |                         |            
|                             |                         |            
|                             |                         | Foreign     |        | Minimum    |   | Fair Value of |         | Accumulated  
|                             |                         | Currency    |        | Pension    |   | Derivative    |         | Other        
|                             |                         | Translation |        | Liability  |   | Instruments   |         | Comprehensive
|                             |                         | Adjustment  |        | Adjustment |   | Adjustment    |         | (Loss) Income
|                             |                         |            
|                             |                         |            
|Balance at December 31, 2001 |                         | $           | (3,480 | )          |   | $             | (13,402 | )             |   | $ | (1,374 | )      |   | $ | (18,256 | )      
|                            
|                            
|                            
|                            
|                             | Net change for the year |             |        | (920       | ) |               |         | (40,504       | ) |   |        | (3,199 | ) |   |         | (44,623 | )
|                             |                         |            
|Balance at December 31, 2002 |                         |             | (4,400 | )          |   |               | (53,906 | )             |   |   | (4,573 | )      |   |   | (62,879 | )      
|                            
|                            
|                            
|                            
|                             | Net change for the year |             |        | 1,599      |   |               |         | 36,969        |   |   |        | 853    |   |   |         | 39,421  |  
|                             |                         |            
|Balance at December 31, 2003 |                         |             | (2,801 | )          |   |               | (16,937 | )             |   |   | (3,720 | )      |   |   | (23,458 | )      
|                            
|                            
|                            
|                            
|                             | Net change for the year |             |        | 1,751      |   |               |         | 959           |   |   |        | 837    |   |   |         | 3,547   |  
|                             |                         |            
|Balance at December 31, 2004 |                         | $           | (1,050 | )          |   | $             | (15,978 | )             |   | $ | (2,883 | )      |   | $ | (19,911 | )      
|                             |                         |            

The net change for the years ended December 31, 2004, 2003
and 2002, respectively, for the following components of
accumulated other comprehensive loss, is reflected net of tax
(expense) benefit of:

|                                                |  |      |        |      |  |      |         |   |  |   |        | 
|----------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------ | 
|                                                |  |     
|                                                |  |     
|                                                |  | 2004 |        | 2003 |  | 2002
|                                                |  |      |        |      |  |      |         |   |  |   |        | 
|Foreign currency translation adjustment         |  | $    | (943   | )    |  | $    | (862    | ) |  | $ | 495    | 
|                                               
|                                               
|                                               
|                                               
|Minimum pension liability adjustment            |  |      | (516   | )    |  |      | (19,906 | ) |  |   | 21,810 | 
|                                               
|                                               
|                                               
|                                               
|Fair value of derivative instruments adjustment |  |      | (451   | )    |  |      | (459    | ) |  |   | 1,723  | 
|                                                |  |     
|                                                |  | $    | (1,910 | )    |  | $    | (21,227 | ) |  | $ | 24,028 | 
|                                                |  |     

Employee Benefit and Compensation Plans

The Company and its subsidiaries maintain a number of
noncontributory defined benefit pension plans covering
substantially all employees over age 21 with at least one
year of service. The Companys funded plan for salaried
employees provides pension benefits based on their highest
three-year average compensation. All other funded plans base
benefits on the employees compensation in each year of
employment. The Companys funding policy for its funded
plans is to contribute an amount sufficient to meet or exceed
Employee Retirement Income Security Act of 1974
(ERISA) minimum requirements. The Company also maintains
unfunded plans providing pension and additional benefits for
certain employees.

The Company and certain of its subsidiaries also maintain a
number of postretirement welfare benefit plans which provide
certain medical and life insurance benefits to substantially all
full-time employees who have attained certain age and service
requirements upon retirement. The health care benefits are
subject to deductibles, co-insurance and in some cases flat
dollar contributions which vary by plan, age and service at
retirement. All life insurance coverage is noncontributory.



47







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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







The Company uses a December 31 measurement date for all of
its plans. The following table represents a reconciliation of
the plans at December 31, 2004 and 2003, respectively:

|                                                                           |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------- | ---------------------------------------------- | ------------- | - | -------------- | - | -------------- | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                           |                                                |               |   |                |   |               
|                                                                           |                                                |               |   |                |   | Postretirement
|                                                                           |                                                |               |   | Benefits Other
|                                                                           |                                                | Pension Plans |   | than Pensions 
|                                                                           |                                                |              
|                                                                           |                                                |              
|                                                                           |                                                | 2004          |   | 2003           |   | 2004           |   | 2003    
|                                                                           |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|Change in Benefit Obligation                                               |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Benefit obligation at beginning of year        |               | $ | 453,081        |   |                | $ | 407,145  |   |  | $ | 77,904  |   |  | $ | 69,605  |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Service cost                                   |               |   | 16,688         |   |                |   | 15,634   |   |  |   | 4,734   |   |  |   | 4,010   |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Interest cost                                  |               |   | 27,493         |   |                |   | 26,037   |   |  |   | 4,854   |   |  |   | 4,308   |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Plan participants contributions               |               |   |               |   |                |   |         |   |  |   | 313     |   |  |   | 205     |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Plan amendments                                |               |   |               |   |                |   |         |   |  |   |        |   |  |   | (198    | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Actuarial loss                                 |               |   | 15,532         |   |                |   | 22,729   |   |  |   | 13,425  |   |  |   | 4,029   |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Medicare Part D, including subsidy             |               |   |               |   |                |   |         |   |  |   | (4,100  | ) |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Benefits paid                                  |               |   | (19,460        | ) |                |   | (18,464  | ) |  |   | (4,499  | ) |  |   | (4,055  | )
|                                                                           |                                                |              
|                                                                           | Benefit obligation at end of year              |               | $ | 493,334        |   |                | $ | 453,081  |   |  | $ | 92,631  |   |  | $ | 77,904  |  
|                                                                           |                                                |              
|Change in Plan Assets                                                      |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Fair value of plan assets at beginning of year |               | $ | 327,741        |   |                | $ | 227,069  |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Actual return on plan assets                   |               |   | 43,048         |   |                |   | 52,026   |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Employer contributions                         |               |   | 5,680          |   |                |   | 68,171   |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Benefits paid                                  |               |   | (19,460        | ) |                |   | (18,464  | ) |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Administrative expenses                        |               |   | (1,118         | ) |                |   | (1,061   | ) |  |   |        |   |  |   |        |  
|                                                                           |                                                |              
|                                                                           | Fair value of plan assets at end of
    year   |               | $ | 355,891        |   |                | $ | 327,741  |   |  |   |        |   |  |   |        |  
|                                                                           |                                                |              
|Funded Status                                                              |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Funded status at end of year                   |               | $ | (137,443       | ) |                | $ | (125,340 | ) |  | $ | (92,631 | ) |  | $ | (77,904 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Unrecognized actuarial loss                    |               |   | 108,905        |   |                |   | 118,956  |   |  |   | 17,683  |   |  |   | 8,697   |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Unrecognized prior service cost                |               |   | (305           | ) |                |   | (348     | ) |  |   | (6,926  | ) |  |   | (11,300 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Unrecognized transition obligation             |               |   | (25            | ) |                |   | (33      | ) |  |   |        |   |  |   |        |  
|                                                                           |                                                |              
|                                                                           | Accrued benefit cost                           |               | $ | (28,868        | ) |                | $ | (6,765   | ) |  | $ | (81,874 | ) |  | $ | (80,507 | )
|                                                                           |                                                |              
|Amounts Recognized in the Consolidated
    Statement of Financial Position |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Prepaid benefit cost                           |               | $ | 46,295         |   |                | $ | 61,276   |   |  | $ |        |   |  | $ |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Accrued benefit liability                      |               |   | (100,670       | ) |                |   | (95,148  | ) |  |   | (81,874 | ) |  |   | (80,507 | )
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Intangible asset                               |               |   | 925            |   |                |   | 1,050    |   |  |   |        |   |  |   |        |  
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|                                                                           | Accumulated other comprehensive loss           |               |   | 24,582         |   |                |   | 26,057   |   |  |   |        |   |  |   |        |  
|                                                                           |                                                |              
|                                                                           | Net amount recognized                          |               | $ | (28,868        | ) |                | $ | (6,765   | ) |  | $ | (81,874 | ) |  | $ | (80,507 | )
|                                                                           |                                                |              



48







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##### Table of Contents










Assumptions

|                                                                                 |  |               |      |            |  |                |      |      |  |  |      |   |  |  |      |  
|-------------------------------------------------------------------------------- |  | ------------- | ---- | ---------- |  | -------------- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                                                 |  |               |      |            |  |               
|                                                                                 |  |               |      |            |  | Postretirement
|                                                                                 |  |               |      |            |  | Benefits      
|                                                                                 |  |               |      | Other than
|                                                                                 |  | Pension Plans |      | Pensions  
|                                                                                 |  |              
|                                                                                 |  |              
|                                                                                 |  | 2004          |      | 2003       |  | 2004           |      | 2003
|                                                                                 |  |              
|                                                                                 |  |              
|The weighted-average assumptions used to
    determine benefit obligations       |  |               |      |            |  |                |      |      |  |  |      |   |  |  |      |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Discount rate                                                                    |  |               | 6.00 | %          |  |                | 6.25 | %    |  |  | 6.00 | % |  |  | 6.25 | %
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Rate of compensation increase                                                    |  |               | 4.80 | %          |  |                | 4.80 | %    |  |  |     |   |  |  |     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|The weighted-average assumptions used to
    determine net periodic benefit cost |  |               |      |            |  |                |      |      |  |  |      |   |  |  |      |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Discount rate                                                                    |  |               | 6.25 | %          |  |                | 6.50 | %    |  |  | 6.25 | % |  |  | 6.50 | %
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Expected return on plan assets                                                   |  |               | 7.50 | %          |  |                | 8.00 | %    |  |  |     |   |  |  |     |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Rate of compensation increase                                                    |  |               | 4.80 | %          |  |                | 4.80 | %    |  |  |     |   |  |  |     |  

The rate of increase in per capita costs of covered health care
benefits is assumed to be 10 percent for 2005 and is
assumed to decrease gradually to 4.5 percent by the year
2011 and remain at that level thereafter.

Net periodic benefit cost for the years ended December 31,
2004, 2003 and 2002, respectively, includes the following
components:

|                                                   |                           |               |         |                         |  |      |         |        |  |      |         |        |  |   |        |       |  |   |        |       |  |   |        |       | 
|-------------------------------------------------- | ------------------------- | ------------- | ------- | ----------------------- |  | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                   |                           |               |         |                         |  |      |         |       
|                                                   |                           |               |         | Postretirement Benefits
|                                                   |                           | Pension Plans |         | Other than Pensions    
|                                                   |                           |              
|                                                   |                           |              
|                                                   |                           | 2004          |         | 2003                    |  | 2002 |         | 2004   |  | 2003 |         | 2002  
|                                                   |                           |              
|                                                   |                           |              
|Service cost                                       |                           | $             | 16,688  |                         |  | $    | 15,634  |        |  | $    | 12,548  |        |  | $ | 4,734  |       |  | $ | 4,010  |       |  | $ | 3,613  |      
|                                                  
|                                                  
|                                                  
|                                                  
|Interest cost                                      |                           |               | 27,493  |                         |  |      | 26,037  |        |  |      | 25,673  |        |  |   | 4,854  |       |  |   | 4,308  |       |  |   | 4,454  |      
|                                                  
|                                                  
|                                                  
|                                                  
|Expected return on plan assets                     |                           |               | (23,282 | )                       |  |      | (18,189 | )      |  |      | (22,411 | )      |  |   |       |       |  |   |       |       |  |   |       |      
|                                                  
|                                                  
|                                                  
|                                                  
|Amortization of unrecognized transition obligation |                           |               | (8      | )                       |  |      | 215     |        |  |      | 215     |        |  |   |       |       |  |   |       |       |  |   |       |      
|                                                  
|                                                  
|                                                  
|                                                  
|Amortization of prior service cost                 |                           |               | (43     | )                       |  |      | (56     | )      |  |      | (65     | )      |  |   | (4,374 | )     |  |   | (5,540 | )     |  |   | (4,478 | )    
|                                                  
|                                                  
|                                                  
|                                                  
|Recognized actuarial loss/(gain)                   |                           |               | 6,935   |                         |  |      | 9,498   |        |  |      | 4,351   |        |  |   | 339    |       |  |   | 112    |       |  |   | (30    | )    
|                                                   |                           |              
|                                                   | Net periodic benefit cost |               | $       | 27,783                  |  |      | $       | 33,139 |  |      | $       | 20,311 |  |   | $      | 5,553 |  |   | $      | 2,890 |  |   | $      | 3,559 | 
|                                                   |                           |              

A plans projected benefit obligation (PBO) represents
the present value of the pension obligation assuming salary
increases. A plans accumulated benefit obligation
(ABO) represents this obligation based upon current salary
levels.

The ABO, PBO and fair value of plan assets for all plans as of
December 31 are as follows:

|                               |  |                |         |                 |  |                |         |                 |  |   |         |  |  |   |         | 
|------------------------------ |  | -------------- | ------- | --------------- |  | -------------- | ------- | --------------- |  | - | ------- |  |  | - | ------- | 
|                               |  |                |         |                
|                               |  | 2004           |         | 2003           
|                               |  |               
|                               |  |               
|                               |  | Plans in Which |         | Plans in Which  |  | Plans in Which |         | Plans in Which 
|                               |  | Assets Exceed  |         | Accumulated     |  | Assets Exceed  |         | Accumulated    
|                               |  | Accumulated    |         | Benefits Exceed |  | Accumulated    |         | Benefits Exceed
|                               |  | Benefits       |         | Assets          |  | Benefits       |         | Assets         
|                               |  |               
|                               |  |               
|Accumulated benefit obligation |  | $              | 251,551 |                 |  | $              | 173,318 |                 |  | $ | 225,553 |  |  | $ | 163,302 | 
|                              
|                              
|                              
|                              
|Projected benefit obligation   |  |                | 305,252 |                 |  |                | 188,082 |                 |  |   | 276,174 |  |  |   | 176,907 | 
|                              
|                              
|                              
|                              
|Fair value of plan assets      |  |                | 282,904 |                 |  |                | 72,987  |                 |  |   | 259,158 |  |  |   | 68,583  | 



49







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##### Table of Contents



UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







The accumulated benefit obligation for all defined benefit
pension plans was $424.9 million and $388.9 million at
December 31, 2004 and 2003, respectively. The
Companys unfunded plans, maintained to provide additional
benefits for certain employees, accounted for $87.4 million
and $100.3 million of the ABO and PBO, respectively, at
December 31, 2004.

The assumed health care cost trend rates have a significant
effect on the amounts reported for the health care plans. To
illustrate, a one-percentage point increase in the assumed
health care cost trend rate would increase the accumulated
postretirement benefit obligation as of December 31, 2004
by approximately $12.5 million and increase the service and
interest cost components of expense by approximately
$1.7 million. A one-percentage point decrease in the
assumed health care cost trend rate would have decreased the
accumulated postretirement benefit obligation at
December 31, 2004 by approximately $10.9 million and
decreased the service and interest components of expense by
approximately $1.5 million.

Plan assets of the Companys pension plans include
marketable equity securities, including common stock of the
Company, and corporate and government debt securities. At
December 31, 2004 and 2003, the fund held 0.4 million
shares and 0.7 million shares of the Companys common
stock having a market value of $22.1 million and
$26 million, respectively. During 2004 and 2003, the
Company repurchased 0.3 million shares and 0.6 million
shares, respectively, at prevailing market prices directly from
the trust established for the Companys defined benefit
pension plans. These repurchases were made in connection with
the Companys objective to diversify the investments held
by the Trust. Dividends paid on shares held by the fund were
$1.1 million and $2.1 million in 2004 and 2003,
respectively.

Weighted-Average
Asset Allocations by Asset Category

|                  |  |            |       |                 |  |      |     |   |  |  |     |  
|----------------- |  | ---------- | ----- | --------------- |  | ---- | --- | - |  |  | --- | -
|                  |  |            |       |                
|                  |  |            |       | Pension Plans 
|                  |  |            |       | Allocation of  
|                  |  |            |       | Plan Assets at 
|                  |  |            |       | December 31    
|                  |  | Target     |       |                
|                  |  | Allocation |       | 2004            |  | 2003
|                  |  |           
|                  |  |           
|Asset Category    |  |            |       |                 |  |      |     |   |  |  |     |  
|                 
|                 
|                 
|                 
|Equity securities |  |            | 60-75 | %               |  |      | 76  | % |  |  | 71  | %
|                 
|                 
|                 
|                 
|Debt securities   |  |            | 20-35 | %               |  |      | 24  | % |  |  | 29  | %
|                 
|                 
|                 
|                 
|Other             |  |            | 0-5   | %               |  |      | 0   | % |  |  | 0   | %
|                  |  |            |       |                 |  |     
|                  |  |            |       |                 |  |      | 100 | % |  |  | 100 | %
|                  |  |            |       |                 |  |     

The Company believes that in 2005 and beyond, its pension
investments will earn a nominal return of 7.50 percent over
the long term. The Company bases this belief upon the results of
analyses that it has made of the asset categories in which it
has pension investments and their weight in the overall pension
investment portfolio. The primary analysis conducted by the
Company estimates the expected long-term rate of return from a
review of historical returns, using the longest return data
available for each asset class. Minor modifications to the
long-term return data are made to reflect reversion to the mean,
and for fixed-income investments, the current yield curve.

The overall objective of the Companys pension investment
program is to achieve a rate of return on plan assets that, over
the long term, will fund retirement liabilities and provide for
required Plan benefits in a manner that satisfies the fiduciary
requirements of ERISA. The Company believes that over the
long-term, asset allocation is the key determinant of the
returns generated by the Plan and the associated volatility of
returns. In determining its investment strategies for Plan
assets, the Company considers a number of specific factors that
may affect its allocation of investments in different asset
categories. The Company monitors these



50







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##### Table of Contents










variables and Plan performance within targeted asset allocation
ranges, and may periodically reallocate assets consistent with
its long-term objectives to reflect changing conditions.

Cash
Flows

No contributions were made by the Company during 2004 to its
qualified defined benefit pension plans. During 2003, the
Company made contributions totaling $62.6 million to its
qualified defined benefit pension plans, of which
$61 million was discretionary.

During 2004 and 2003, the Company made contributions of
$5.7 million and $5.6 million, respectively, to its
non-qualified defined benefit pension plans. The Company expects
to contribute $6.1 million to its non-qualified defined
benefit pension plans in 2005.

The following table illustrates estimated future benefit
payments to be made in each of the next five fiscal years and in
the aggregate for the five fiscal years thereafter for the
Companys defined benefit pension plans and postretirement
welfare benefit plans. These results have been calculated using
the same assumptions used to measure the Companys benefit
obligation and are based upon expected future service.

|                                                                             |  |      |        |      |  |      |        |      |  |      |        |           |  |   |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | --------- |  | - | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                                                             |  |     
|                                                                             |  |     
|                                                                             |  | 2005 |        | 2006 |  | 2007 |        | 2008 |  | 2009 |        | 2010-2014
|                                                                             |  |     
|                                                                             |  |     
|Pension plans                                                                |  | $    | 21,904 |      |  | $    | 23,326 |      |  | $    | 24,504 |           |  | $ | 25,700 |   |  | $ | 26,966 |   |  | $ | 157,249 |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Postretirement benefits other than pensions
    (without subsidy)            |  | $    | 5,111  |      |  | $    | 5,564  |      |  | $    | 5,923  |           |  | $ | 6,230  |   |  | $ | 6,479  |   |  | $ | 37,405  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Postretirement benefits other than pensions
    (estimated subsidy receipts) |  |      |       |      |  |      |       |      |  | $    | (238   | )         |  | $ | (246   | ) |  | $ | (257   | ) |  | $ | (1,519  | )

Additional
Information

|                                                                                           |  |               |      |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------- | ---- | ---- |  | - | ------- | -
|                                                                                           |  |              
|                                                                                           |  | Pension Plans
|                                                                                           |  |              
|                                                                                           |  | 2004          |      | 2003
|                                                                                           |  |              
|                                                                                           |  |              
|Decrease in minimum pension liability included in
    other comprehensive loss, net of tax |  | $             | (959 | )    |  | $ | (36,969 | )

Effective July 1, 2004, the Company adopted FSP
No. 106-2, Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003the (Act), as
required, in connection with its postretirement welfare benefit
plans (the Plans), on a prospective basis. The Act
provides for a federal subsidy equal to 28 percent of
certain prescription drug claims for sponsors of retiree health
care plans with drug benefits that are at least actuarially
equivalent to those to be offered under Medicare Part D.
FSP 106-2 provides authoritative guidance on accounting and
disclosure for the federal subsidy specified in the Act. The
Company along with the Plans actuary has concluded that
the prescription drug benefits provided under its Plans are at
least actuarially equivalent to the prescription drug benefits
offered under Medicare Part D. As such, a remeasurement of
the accumulated plan benefit obligation (APBO),
including the effects of the subsidy, was made as of
July 1, 2004. This remeasurement was based on the
provisions of the plans in place on the measurement date and
incorporated the most current actuarial assumptions and discount
rates. In accordance with FSP 106-2, the effect on the
Companys APBO as a result of the subsidy has been
accounted for as an actuarial experience gain, to be amortized
as a component of net periodic postretirement benefit cost. The
expected subsidy reduced the Companys APBO by
approximately $4.1 million as of July 1, 2004, related
primarily to benefits attributed to past service. The adoption
of FSP 106-2 also affects service and interest costs associated
with the Plans and reduced the net periodic postretirement
benefit cost by approximately $0.4 million for the year
ended December 31, 2004.

The Company sponsors a defined contribution plan (the
Employees Savings Plan) covering substantially
all of its employees. Employees are eligible to participate in
the Employees Savings Plan from the commencement of their
employment provided they are scheduled to work at least
1,000 hours per year. Company contributions are based upon
participant contributions and begin upon completion of one year
of



51







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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







service. The expense associated with Company contributions was
$5.9 million in both 2004 and 2003 and $5.3 million in
2002.

The Company has an Incentive Compensation Plan (ICP)
which provides for bonus payments to designated employees based
on stated percentages of net earnings before income taxes as
defined in the ICP. The ICP also allows for discretionary
reductions to this calculated amount. Expenses under the ICP
amounted to $43.6 million in 2004 and $25.8 million in
2003. In 2003, a charge of $15.9 million related to Rickard
Seeds was completely offset by a reduction in the Companys
ICP. In 2002, no ICP expense was generated as a result of the
consolidated net loss, in accordance with the terms of the ICP.
As a result, the Board of Directors established a contingent
merit bonus fund with respect to the 2002 calendar year.
Expenses under the contingent merit bonus fund amounted to
$33.5 million in 2002.

Income Taxes

The income tax provision (benefit) consists of the following:

|          |                 |                |         |         |         |      |         |         |         |   |          |          |          |  
|--------- | --------------- | -------------- | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | -------- | -------- | -------- | -
|          |                 |               
|          |                 |               
|          |                 | 2004           |         | 2003    |         | 2002
|          |                 |               
|          |                 |               
|Current:  |                 |                |         |         |         |      |         |         |         |   |          |         
|         
|         
|         
|         
|          | Federal         |                | $       | 193,073 |         |      | $       | 250,030 |         |   | $        | 43,458   |         
|         
|         
|         
|         
|          | State and local |                |         | 5,698   |         |      |         | 27,141  |         |   |          | (7,430   | )       
|          |                 |               
|          |                 | Total current  |         |         | 198,771 |      |         |         | 277,171 |   |          |          | 36,028   |  
|          |                 |               
|Deferred: |                 |                |         |         |         |      |         |         |         |   |          |         
|         
|         
|         
|         
|          | Federal         |                |         | 86,686  |         |      |         | (68,396 | )       |   |          | (178,453 | )       
|         
|         
|         
|         
|          | State and local |                |         | 14,081  |         |      |         | (11,094 | )       |   |          | (28,555  | )       
|          |                 |               
|          |                 | Total deferred |         |         | 100,767 |      |         |         | (79,490 | ) |          |          | (207,008 | )
|          |                 |               
|          |                 | $              | 299,538 |         |         | $    | 197,681 |         |         | $ | (170,980 | )       
|          |                 |               

The tax provisions do not reflect $17.1 million,
$8.5 million and $5.4 million for 2004, 2003 and 2002,
respectively, of tax benefits arising from the exercise of stock
options. These amounts were credited directly to additional
paid-in capital.

The deferred tax provision (benefit) amounts do not reflect the
tax effects resulting from changes in accumulated other
comprehensive loss (see Accumulated Other Comprehensive Loss
note).

Deferred income taxes arise from temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.



52







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##### Table of Contents










Components of deferred tax assets and liabilities as of
December 31 are as follows:

|                          |                                             |                                |   |        |        |  |   |         |         | 
|------------------------- | ------------------------------------------- | ------------------------------ | - | ------ | ------ |  | - | ------- | ------- | 
|                          |                                             |                               
|                          |                                             |                               
|                          |                                             | 2004                           |   | 2003  
|                          |                                             |                               
|                          |                                             |                               
|Deferred tax assets:      |                                             |                                |   |        |        |  |   |        
|                         
|                         
|                         
|                         
|                          | Postretirement benefits other than pensions |                                | $ | 28,386 |        |  | $ | 28,177  |        
|                         
|                         
|                         
|                         
|                          | Accrued pension liabilities                 |                                |   | 34,431 |        |  |   | 32,349  |        
|                         
|                         
|                         
|                         
|                          | Litigation loss                             |                                |   | 10,236 |        |  |   | 107,713 |        
|                         
|                         
|                         
|                         
|                          | Other accrued liabilities                   |                                |   | 23,763 |        |  |   | 23,483  |        
|                         
|                         
|                         
|                         
|                          | All other, net                              |                                |   | 2,771  |        |  |   | 2,299   |        
|                          |                                             |                               
|                          |                                             | Total deferred tax assets      |   |        | 99,587 |  |   |         | 194,021 | 
|                          |                                             |                               
|Deferred tax liabilities: |                                             |                                |   |        |        |  |   |        
|                         
|                         
|                         
|                         
|                          | Depreciation                                |                                |   | 61,528 |        |  |   | 47,589  |        
|                         
|                         
|                         
|                         
|                          | Prepaid pension asset                       |                                |   | 16,203 |        |  |   | 21,447  |        
|                         
|                         
|                         
|                         
|                          | Capitalized debt costs                      |                                |   | 1,904  |        |  |   | 2,356   |        
|                          |                                             |                               
|                          |                                             | Total deferred tax liabilities |   |        | 79,635 |  |   |         | 71,392  | 
|                          |                                             |                               
|                          |                                             | Net deferred tax assets        |   | $      | 19,952 |  |   | $       | 122,629 | 
|                          |                                             |                               

Other accrued liabilities includes state tax operating loss and
tax credit carryforwards totaling $10 million and
$0.8 million, respectively, which the Company expects to
utilize prior to their expiration between 2005 and 2020.

|                                                                                                                                      |  |      |      |      |  |      |      |   |  |  |       |   
|------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  |  | ----- | --
|                                                                                                                                      |  |     
|                                                                                                                                      |  |     
|                                                                                                                                      |  | 2004 |      | 2003 |  | 2002
|                                                                                                                                      |  |     
|                                                                                                                                      |  |     
|Differences between the Companys effective
    tax rate and the U.S. federal statutory income tax rate are
    explained as follows: |  |      |      |      |  |      |      |   |  |  |       |   
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|U.S. federal statutory income tax rate                                                                                                |  |      | 35.0 | %    |  |      | 35.0 | % |  |  | (35.0 | )%
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|State and local taxes, net of federal tax benefit                                                                                     |  |      | 2.6  |      |  |      | 2.0  |   |  |  | (5.3  | ) 
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|Income tax settlements                                                                                                                |  |      | (2.3 | )    |  |      |     |   |  |  |      |   
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|                                                                                                                                     
|Other, net                                                                                                                            |  |      | 0.5  |      |  |      | 1.0  |   |  |  | 1.4   |   
|                                                                                                                                      |  |     
|                                                                                                                                      |  |      | 35.8 | %    |  |      | 38.0 | % |  |  | (38.9 | )%
|                                                                                                                                      |  |     

The Companys effective income tax rate was lower in 2004
due to the reversal of $20 million of federal and state
income tax accruals, net of federal tax benefit, primarily as a
result of recently completed income tax audits.

State and local taxes, net of federal tax benefit, were
favorably affected by the litigation losses in 2003 and 2002.

In accordance with APB Opinion No. 23, the Company has not
provided for any residual U.S. income taxes on unremitted
earnings of foreign subsidiaries since essentially such earnings
are intended to be indefinitely reinvested overseas. At
December 31, 2004 and 2003, the Company had not provided
federal income taxes on earnings of approximately
$16.7 million and $13.1 million, respectively, from
its international subsidiaries. Should these earnings be
distributed in the form of dividends or otherwise, the Company
would be subject to both U.S. income and foreign
withholding taxes.

The American Jobs Creation Act of 2004 enacted on
October 22, 2004, provides a temporary incentive for
U.S. multinational companies, to repatriate accumulated
income earned outside the U.S., and most significantly, provides
a new deduction for qualifying domestic production activities.
The impact of this latter change made by such Act cannot be
quantified at this time. The effect of the repatriation
incentive is currently under evaluation by the Company. Amounts
of unremitted earnings under evaluation range from zero to
$16.6 million, with a related potential range of income tax
expense of zero to $1.7 million.



53







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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Segment Information

The Companys reportable segments are Smokeless Tobacco and
Wine. Through its subsidiaries, the Company operates
predominantly in the tobacco industry as a manufacturer and
marketer of moist smokeless tobacco products and also produces
and markets premium wines. Those business units that do not meet
quantitative reportable thresholds are included in the All Other
category. This category is comprised of the Companys
international operations, which market moist smokeless tobacco
products in select markets.

Smokeless Tobacco segment sales are principally to a large
number of wholesalers and chain stores which are widely
dispersed throughout the United States. Over the past three
years, sales to one customer averaged approximately
18.6 percent of annual Smokeless Tobacco segment sales.

Over the past three years, sales to two customers averaged
approximately 41.5 percent of annual Wine segment sales.

The Company operates primarily in the United States. Foreign
operations and export sales are not significant. Net sales and
operating profit are reflected net of intersegment sales and
profits.

Operating profit (loss) is net sales less operating expenses and
an allocation of corporate expenses. Operating results for the
Smokeless Tobacco segment in 2003 included the effects of the
charges associated with the antitrust actions (see Other Matters
note) and in 2002 included the effects of the antitrust
litigation loss. The increase in Corporate expenses for 2004 was
primarily due to higher professional fees and other
administrative spending.

The decrease in identifiable assets in All Other Operations in
2004 was primarily due to the transfer of the Companys
cigar operation. See the Discontinued Operations note for more
details. The decrease in Smokeless Tobacco segment assets in
2003 was primarily due to the use of restricted deposits to
satisfy the antitrust judgment. The increase in Wine segment
assets in 2003 was mainly due to higher levels of inventories.
Corporate assets consist mainly of cash and cash equivalents,
which reflect an increase in 2004. Corporate capital
expenditures and depreciation expense are net of amounts which
have been allocated to each reportable segment and all other
operations for purposes of reporting operating profit (loss) and
identifiable assets. Interest, net and income taxes are not
reported by segment since they are excluded from the measure of
segment performance reviewed by management.



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|                                       |                    |                                     |   |           |           |      |   |           |           |  |   |           |           |  
|-------------------------------------- | ------------------ | ----------------------------------- | - | --------- | --------- | ---- | - | --------- | --------- |  | - | --------- | --------- | -
|                                       |                    |                                    
|                                       |                    | Year Ended December 31             
|                                       |                    |                                    
|                                       |                    | 2004                                |   | 2003      |           | 2002
|                                       |                    |                                    
|                                       |                    |                                    
|Net Sales to Unaffiliated Customers    |                    |                                     |   |           |           |      |   |           |           |  |   |          
|                                      
|                                      
|                                      
|                                      
|                                       | Smokeless Tobacco  |                                     | $ | 1,575,254 |           |      | $ | 1,504,893 |           |  | $ | 1,447,093 |          
|                                      
|                                      
|                                      
|                                      
|                                       | Wine               |                                     |   | 226,650   |           |      |   | 194,905   |           |  |   | 203,541   |          
|                                      
|                                      
|                                      
|                                      
|                                       | All Other          |                                     |   | 36,334    |           |      |   | 32,064    |           |  |   | 23,769    |          
|                                       |                    |                                    
|                                       |                    | Net sales                           |   | $         | 1,838,238 |      |   | $         | 1,731,862 |  |   | $         | 1,674,403 |  
|                                       |                    |                                    
|                                      
|                                      
|                                      
|                                      
|Operating Profit (Loss)                |                    |                                     |   |           |           |      |   |           |           |  |   |          
|                                      
|                                      
|                                      
|                                      
|                                       | Smokeless Tobacco  |                                     | $ | 897,991   |           |      | $ | 585,910   |           |  | $ | (408,675  | )        
|                                      
|                                      
|                                      
|                                      
|                                       | Wine               |                                     |   | 32,382    |           |      |   | 24,341    |           |  |   | 30,111    |          
|                                      
|                                      
|                                      
|                                      
|                                       | All Other          |                                     |   | 10,266    |           |      |   | 7,962     |           |  |   | 1,781     |          
|                                       |                    |                                    
|                                       |                    | Operating profit (loss)             |   |           | 940,639   |      |   |           | 618,213   |  |   |           | (376,783  | )
|                                      
|                                      
|                                      
|                                      
|                                       | Corporate expenses |                                     |   | (28,030   | )         |      |   | (21,578   | )         |  |   | (15,964   | )        
|                                      
|                                      
|                                      
|                                      
|                                       | Interest, net      |                                     |   | (75,019   | )         |      |   | (76,905   | )         |  |   | (46,146   | )        
|                                       |                    |                                    
|                                       |                    | Earnings (loss) before income taxes |   | $         | 837,590   |      |   | $         | 519,730   |  |   | $         | (438,893  | )
|                                       |                    |                                    
|                                      
|                                      
|                                      
|                                      
|Identifiable Assets at
    December 31 |                    |                                     |   |           |           |      |   |           |           |  |   |          
|                                      
|                                      
|                                      
|                                      
|                                       | Smokeless Tobacco  |                                     | $ | 631,531   |           |      | $ | 768,978   |           |  | $ | 1,883,529 |          
|                                      
|                                      
|                                      
|                                      
|                                       | Wine               |                                     |   | 488,904   |           |      |   | 485,019   |           |  |   | 430,118   |          
|                                      
|                                      
|                                      
|                                      
|                                       | All Other          |                                     |   | 25,819    |           |      |   | 60,282    |           |  |   | 58,230    |          
|                                      
|                                      
|                                      
|                                      
|                                       | Corporate          |                                     |   | 513,229   |           |      |   | 412,215   |           |  |   | 393,398   |          
|                                       |                    |                                    
|                                       |                    | Total assets                        |   | $         | 1,659,483 |      |   | $         | 1,726,494 |  |   | $         | 2,765,275 |  
|                                       |                    |                                    
|                                      
|                                      
|                                      
|                                      
|Capital Expenditures                   |                    |                                     |   |           |           |      |   |           |           |  |   |          
|                                      
|                                      
|                                      
|                                      
|                                       | Smokeless Tobacco  |                                     | $ | 60,047    |           |      | $ | 31,840    |           |  | $ | 40,412    |          
|                                      
|                                      
|                                      
|                                      
|                                       | Wine               |                                     |   | 9,283     |           |      |   | 16,304    |           |  |   | 21,537    |          
|                                      
|                                      
|                                      
|                                      
|                                       | All Other          |                                     |   | 358       |           |      |   | 151       |           |  |   | 237       |          
|                                      
|                                      
|                                      
|                                      
|                                       | Corporate          |                                     |   | 638       |           |      |   | 649       |           |  |   | 528       |          
|                                       |                    |                                    
|                                       |                    | Capital expenditures                |   | $         | 70,326    |      |   | $         | 48,944    |  |   | $         | 62,714    |  
|                                       |                    |                                    
|                                      
|                                      
|                                      
|                                      
|Depreciation                           |                    |                                     |   |           |           |      |   |           |           |  |   |          
|                                      
|                                      
|                                      
|                                      
|                                       | Smokeless Tobacco  |                                     | $ | 31,108    |           |      | $ | 23,923    |           |  | $ | 21,482    |          
|                                      
|                                      
|                                      
|                                      
|                                       | Wine               |                                     |   | 13,205    |           |      |   | 13,734    |           |  |   | 14,481    |          
|                                      
|                                      
|                                      
|                                      
|                                       | All Other          |                                     |   | 389       |           |      |   | 674       |           |  |   | 730       |          
|                                      
|                                      
|                                      
|                                      
|                                       | Corporate          |                                     |   | 731       |           |      |   | 739       |           |  |   | 716       |          
|                                       |                    |                                    
|                                       |                    | Depreciation                        |   | $         | 45,433    |      |   | $         | 39,070    |  |   | $         | 37,409    |  
|                                       |                    |                                    

Advertising Costs

The Company expenses the production costs of advertising in the
period in which they are incurred. Advertising expenses, which
include print and point of sale advertising and certain trade
and marketing promotions, were $79.4 million in 2004,
$72.5 million in 2003 and $69.1 million in 2002. At
December 31, 2004 and 2003, $4.3 million and
$3.8 million, respectively, of advertising-related
materials are included in prepaid expenses and other current
assets.



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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Interest, net

The components of net interest expense on the Companys
Consolidated Statement of Operations for the respective years
presented are as follows:

|                                      |  |      |        |      |  |      |        |   |  |   |         |  
|------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                      |  |     
|                                      |  |     
|                                      |  | 2004 |        | 2003 |  | 2002
|                                      |  |     
|                                      |  |     
|Interest expense on debt              |  | $    | 83,884 |      |  | $    | 83,884 |   |  | $ | 69,963  |  
|                                     
|                                     
|                                     
|                                     
|Interest income from cash equivalents |  |      | (7,859 | )    |  |      | (5,725 | ) |  |   | (22,964 | )
|                                     
|                                     
|                                     
|                                     
|Capitalized interest                  |  |      | (1,006 | )    |  |      | (1,254 | ) |  |   | (853    | )
|                                      |  |     
|                                      |  | $    | 75,019 |      |  | $    | 76,905 |   |  | $ | 46,146  |  
|                                      |  |     

Interest income from cash equivalents in 2002 includes interest
income derived from restricted deposits. See the Restricted
Deposits note to the consolidated financial statements for more
details.

Net Earnings (Loss) per Share

The following table presents the computation of basic and
diluted earnings (loss) per share:

|                                           |                                                                               |                                                       |   |         |         |      |   |         |         |  |   |          |          |  
|------------------------------------------ | ----------------------------------------------------------------------------- | ----------------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | -------- | -------- | -
|                                           |                                                                               |                                                      
|                                           |                                                                               |                                                      
|                                           |                                                                               | 2004                                                  |   | 2003    |         | 2002
|                                           |                                                                               |                                                      
|                                           |                                                                               |                                                      
|Numerator:                                 |                                                                               |                                                       |   |         |         |      |   |         |         |  |   |         
|                                          
|                                          
|                                          
|                                          
|                                           | Earnings (loss) from continuing operations                                    |                                                       | $ | 538,052 |         |      | $ | 322,049 |         |  | $ | (267,913 | )       
|                                          
|                                          
|                                          
|                                          
|                                           | Loss from discontinued operations, net                                        |                                                       |   | (7,215  | )       |      |   | (3,260  | )       |  |   | (3,556   | )       
|                                           |                                                                               |                                                      
|                                           |                                                                               | Net earnings (loss)                                   |   | $       | 530,837 |      |   | $       | 318,789 |  |   | $        | (271,469 | )
|                                           |                                                                               |                                                      
|                                          
|                                          
|                                          
|                                          
|Denominator:                               |                                                                               |                                                       |   |         |         |      |   |         |         |  |   |         
|                                          
|                                          
|                                          
|                                          
|                                           | Denominator for basic earnings (loss) per
    share  weighted-average shares |                                                       |   | 165,164 |         |      |   | 166,572 |         |  |   | 168,786  |         
|                                          
|                                          
|                                          
|                                          
|                                           | Dilutive effect of potential common shares                                    |                                                       |   | 1,458   |         |      |   | 804     |         |  |   |         |         
|                                           |                                                                               |                                                      
|                                           |                                                                               | Denominator for diluted earnings (loss) per
    share |   |         | 166,622 |      |   |         | 167,376 |  |   |          | 168,786  |  
|                                           |                                                                               |                                                      
|                                          
|                                          
|                                          
|                                          
|Net earnings (loss) per basic share:       |                                                                               |                                                       |   |         |         |      |   |         |         |  |   |         
|                                          
|                                          
|                                          
|                                          
|                                           | Earnings (loss) from continuing operations                                    |                                                       |   | $3.26   |         |      |   | $1.93   |         |  |   | $(1.59   | )       
|                                          
|                                          
|                                          
|                                          
|                                           | Loss from discontinued operations                                             |                                                       |   | (.05    | )       |      |   | (.02    | )       |  |   | (.02     | )       
|                                           |                                                                               |                                                      
|                                           |                                                                               | Net earnings (loss) per basic share                   |   |         | $3.21   |      |   |         | $1.91   |  |   |          | $(1.61   | )
|                                           |                                                                               |                                                      
|                                          
|                                          
|                                          
|                                          
|Net earnings (loss) per diluted
    share: |                                                                               |                                                       |   |         |         |      |   |         |         |  |   |         
|                                          
|                                          
|                                          
|                                          
|                                           | Earnings (loss) from continuing operations                                    |                                                       |   | $3.23   |         |      |   | $1.92   |         |  |   | $(1.59   | )       
|                                          
|                                          
|                                          
|                                          
|                                           | Loss from discontinued operations                                             |                                                       |   | (.04    | )       |      |   | (.02    | )       |  |   | (.02     | )       
|                                           |                                                                               |                                                      
|                                           |                                                                               | Net earnings (loss) per diluted
    share             |   |         | $3.19   |      |   |         | $1.90   |  |   |          | $(1.61   | )
|                                           |                                                                               |                                                      

As of December 31, 2004, no options outstanding were
antidilutive as their exercise prices were lower than the
average market price of Company common shares. Options to
purchase 1 million shares of common stock, outstanding
as of December 31, 2003, were not included in the
computation of diluted earnings per share because their exercise
prices were greater than the average market price of Company
common shares and, therefore, would be antidilutive.



56







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The dilutive effect of potential common shares in 2003 was
reduced by approximately 0.3 million shares due to the fact
that the antitrust litigation charge recorded in the fourth
quarter caused a net loss, which was antidilutive.

As the Company recorded a net loss for the year ended
December 31, 2002, diluted loss per share was equal to
basic loss per share, due to the exclusion of all potential
common shares, which would have reduced the net loss per share.
There were 12.8 million employee stock options outstanding
at December 31, 2002, including 8.4 million which had
exercise prices lower than the average market price of Company
common shares.

Discontinued Operations

On June 18, 2004, the Company completed the transfer of its
cigar operation to a smokeless tobacco competitor, in connection
with the resolution of an antitrust action (see Other Matters
note). This transfer was completed to satisfy the Companys
obligation under a litigation settlement, and therefore no cash
consideration was received from the smokeless tobacco
competitor. Pursuant to the transaction, the Company transferred
to the smokeless tobacco competitor substantially all the assets
of its cigar operation and agreed to indemnify the smokeless
tobacco competitor against all pre-closing liabilities
(contingent or otherwise). The terms of the transaction included
a minor adjustment based on the level of working capital of the
cigar operation at closing. Prior to the transfer, the cigar
operation had been included within All Other Operations for
segment reporting purposes. As a result of the transfer, the
results of this operation are presented within loss from
discontinued operations for all periods presented on the
Consolidated Statement of Operations. No loss on disposal was
recorded in 2004, as a charge for the fair value of the cigar
operation was previously recorded in 2003 as a component of the
antitrust litigation loss.

The operating results of the cigar operation, for the respective
years ended December 31, were as follows:

|                                  |  |      |        |      |  |      |        |   |  |   |        |  
|--------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                  |  |     
|                                  |  |     
|                                  |  | 2004 |        | 2003 |  | 2002
|                                  |  |     
|                                  |  |     
|Net sales                         |  | $    | 4,215  |      |  | $    | 10,767 |   |  | $ | 8,474  |  
|                                  |  |     
|                                 
|                                 
|                                 
|                                 
|Loss before income taxes          |  |      | (4,899 | )    |  |      | (5,055 | ) |  |   | (5,470 | )
|                                 
|                                 
|                                 
|                                 
|Income tax (expense) benefit      |  |      | (2,316 | )    |  |      | 1,795  |   |  |   | 1,914  |  
|                                  |  |     
|Loss from discontinued operations |  | $    | (7,215 | )    |  | $    | (3,260 | ) |  | $ | (3,556 | )
|                                  |  |     

Results for the year ended December 31, 2004 included a
loss from the cigar operations and the recognition of expenses,
including a $3.9 million accrual for income tax
contingencies, as well as severance and transaction costs,
partially offset by the recognition of the difference between
the fair value charge recorded in 2003 and the book value of the
entity transferred on June 18, 2004.

Contingencies

The Company has been named in certain health care cost
reimbursement/third party recoupment/class action litigation
against the major domestic cigarette companies and others
seeking damages and other relief. The complaints in these cases
on their face predominantly relate to the usage of cigarettes;
within that context, certain complaints contain a few
allegations relating specifically to smokeless tobacco products.
These actions are in varying stages of pretrial activities. The
Company believes these pending litigation matters will not
result in any material liability for a number of reasons,
including the fact that the Company has had only limited
involvement with cigarettes and the Companys current
percentage of total tobacco industry sales is relatively small.
Prior to 1986, the Company manufactured some cigarette products
which had a de minimismarket share. From May 1,
1982 to August 1, 1994, the Company distributed a small
volume of imported cigarettes and is indemnified against claims
relating to those products.



57







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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS







The Company is named in an action in Illinois brought by
plaintiffs purporting to state a class action on behalf of
themselves and all other persons similarly situated
alleging that the Company manipulates the nicotine levels
and absorption rates in its smokeless tobacco products and
seeking to recover monetary damages in an amount not less
than the purchase price of the Companys smokeless
tobacco products and certain other relief. The purported class
excludes all persons who claim any personal injury as a result
of using the Companys smokeless tobacco products.

The Company is also named in certain actions in West Virginia
brought on behalf of individual plaintiffs against cigarette
manufacturers, smokeless tobacco manufacturers, and other
organizations seeking damages and other relief in connection
with injuries allegedly sustained as a result of tobacco usage,
including smokeless tobacco products. Included among the
plaintiffs are six individuals alleging use of the
Companys smokeless tobacco products and alleging the types
of injuries claimed to be associated with the use of smokeless
tobacco products; five of the six individuals also allege the
use of other tobacco products.

The Company is named in a purported class action in Florida
brought by six plaintiffs on behalf of themselves and all
others similarly situated against various smokeless
tobacco manufacturers including the Company and other
organizations for personal injuries, including cancers of the
mouth and larynx, oral lesions, leukoplakia, facial
disfigurement, gum and tooth loss, fear of cancer, death and
depression and other injuries allegedly resulting from the use
of the Companys smokeless tobacco products. Plaintiffs
also claim nicotine addiction and seek unspecified
compensatory damages and certain equitable and other relief,
including but not limited to, medical monitoring.

The Company is named in an action in Idaho brought on behalf of
a minor child alleging that his father died of cancer of
the throat as a result of his use of the Companys
smokeless tobacco product. Plaintiff also alleges
addiction to nicotine and seeks unspecified
compensatory damages and other relief.

The Company has been named in an action in Connecticut brought
by a plaintiff individually, as executrix and fiduciary of her
deceased husbands estate and on behalf of their minor
children for injuries, including squamous cell carcinoma
of the tongue, allegedly sustained by decedent as a result
of his use of the Companys smokeless tobacco products. The
Complaint also alleges addiction to smokeless
tobacco. The Complaint seeks compensatory and punitive damages
in excess of $15,000 and other relief.

The Company believes, and has been so advised by counsel
handling these cases, that it has a number of meritorious
defenses to all such pending litigation. Except as to the
Companys willingness to consider alternative solutions for
resolving certain regulatory and litigation issues, all such
cases are, and will continue to be, vigorously defended. The
Company believes that the ultimate outcome of such pending
litigation will not have a material adverse effect on its
consolidated financial results or its consolidated financial
position, although if plaintiffs were to prevail, the effect of
any judgment or settlement could have a material adverse impact
on its consolidated financial results in the particular
reporting period in which resolved and, depending on the size of
any such judgment or settlement, a material adverse effect on
its consolidated financial position. Notwithstanding the
Companys assessment of the potential financial impact of
these cases, the Company is not able to estimate with any
certainty the amount of loss, if any, which would be associated
with an adverse resolution.

The Company has been named as a defendant in a number of
purported class actions brought by direct purchasers
(wholesalers and distributors), and indirect purchasers
(consumers and retailers) and class actions brought by indirect
purchasers of its moist smokeless tobacco products in the states
of California, Kansas and Massachusetts.

As direct purchasers of the Companys smokeless tobacco
products during the period January 1, 1990 to the present,
plaintiffs in those consolidated actions allege individually and
on behalf of a putative class of



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wholesalers and distributors that the Company violated the
federal antitrust laws and has engaged in this conduct
unilaterally and in concert with its
co-conspirators. Plaintiffs seek to recover unspecified
statutory damages, before trebling, and certain equitable and
other relief. The Company has reached a settlement with more
than 550 of its direct purchasing customers (wholesalers and
distributors) who are potential class members in this putative
class action who represent more than 88 percent of the
Companys sales volume based on 2002 sales revenue. For
those direct purchasing customers who agreed to settle the
lawsuit and release all claims against the Company, the Company
agreed to delay a planned reduction of its prompt-payment
discount terms. The effect of this settlement delayed cost
savings planned for 2003 and had no material adverse effect on
the Companys consolidated financial results. In January
2004, the Company made a second settlement offer to those direct
purchasers that chose not to settle the litigation in 2003.
Direct purchasers that have settled the first and second
settlement offers represented over 93 percent of the
Companys sales volume, based on 2002 sales revenues. In
November 2004, the Company entered into a Settlement Agreement
with the remaining direct purchasers. The Settlement Agreement
has been preliminarily approved by the U.S. District Court
for the District of Columbia.

As indirect purchasers of the Companys smokeless tobacco
products during various periods of time ranging from January
1990 to the date of certification or potential certification of
the proposed class, plaintiffs in those actions allege,
individually and on behalf of putative class members in a
particular state or individually and on behalf of class members
in the states of California, Kansas and Massachusetts, that the
Company has violated the antitrust laws, unfair and deceptive
trade practices statutes and/or common law of those states.
Plaintiffs seek to recover compensatory and statutory damages in
an amount not to exceed $75,000 per class member or per
putative class member, and certain other relief. The indirect
purchaser actions are similar in all material respects. The
Company reached a settlement (Settlement), which has
been approved by the court, to resolve a significant number of
the indirect purchaser actions. The jurisdictions covered by the
settlement are identified in Part I, Item 3 Legal
Proceedings on page 7. Pursuant to the approved
Settlement, adult consumers will receive coupons redeemable on
future purchases of the Companys moist smokeless tobacco
products. The Company will pay all administrative costs of the
Settlement and plaintiffs attorneys fees. The
Company also intends to pursue settlement of other indirect
purchaser actions not covered by the Settlement on substantially
similar terms. In this regard, the Company continues to make
progress. The Company has resolved indirect purchaser actions in
approximately 70 percent of the states in which they were
filed. The Company recorded a charge of $40 million in
2003, which represented its best estimate of the total costs to
resolve indirect purchaser actions. In 2004, certain
states actions were resolved more favorably than
originally estimated.

As a result of the indirect purchaser resolutions, the Company
recognized a favorable pretax adjustment in 2004. Also in 2004,
in connection with the November direct purchaser Settlement
Agreement, the Company recorded a pretax charge for the
remainder of the direct purchaser antitrust actions. The net
impact of these adjustments is reported in antitrust
litigation on the Consolidated Statement of Operations.
These adjustments, along with the payment of plaintiffs
attorneys fees, actual coupon redemption and other
administrative costs resulted in a net reduction in the
litigation liability on the Consolidated Statement
of Financial Position to $26.6 million at December 31,
2004.

Each of the foregoing actions is derived directly from the
Conwood litigation (see Other Matters note). For the plaintiffs
in the putative class actions to prevail, they will have to
obtain class certification. The plaintiffs in the above actions
also will have to obtain favorable determinations on issues
relating to liability, causation and damages. The Company
believes, and has been so advised by counsel handling these
cases, that it has meritorious defenses in this regard, and they
are and will continue to be vigorously defended. The Company
believes that the ultimate outcome of these purported class
actions and the California, Kansas and Massachusetts class
actions will not have a material adverse effect on its
consolidated financial results or its consolidated financial
position, although if plaintiffs were to prevail, beyond the
amounts accrued, the effect of any judgment or settlement could
have a material adverse impact on its consolidated financial
results in the particular reporting period in which resolved
and, depending on the size of any such judgment or settlement, a
material adverse effect on its consolidated financial position.
Notwithstanding the Companys assessment of the financial
impact of these actions, management is not able to estimate the
amount of loss, if any, beyond the amounts accrued, which could
be associated with an adverse resolution.



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UST


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



Other Matters

On October 22, 2004, the Fair and Equitable Tobacco
Reform Act of 2004 (the Tobacco Reform Act)
was enacted in connection with a comprehensive federal corporate
reform and jobs creation bill. The Tobacco Reform Act
effectively repeals all aspects of the U.S. federal
governments tobacco farmer support program, including
marketing quotas and nonrecourse loans. As a result of the
Tobacco Reform Act, the Secretary of Agriculture will impose
quarterly assessments on tobacco manufacturers and importers,
not to exceed a total of $10.1 billion over a ten-year
period from the date of enactment. Amounts assessed by the
Secretary will be impacted by a number of allocation factors, as
defined in the Tobacco Reform Act. These quarterly assessments
will be used to fund a trust to compensate, or buy
out, tobacco quota farmers, in lieu of the repealed
federal support program. The Company does not believe that the
assessments imposed under the Tobacco Reform Act will have a
material adverse impact on its consolidated financial position,
results of operations or cash flows in any reporting period. In
2004, the Company recognized a charge of approximately
$1 million associated with the first quarterly assessment
required by the Tobacco Reform Act.

On April 16, 2004, the Company resolved the action brought
by Miami Cigar & Company, whereby the Company agreed to
pay the plaintiff $7 million, for which charges were
recorded in prior periods. A Stipulation for Dismissal with
Prejudice was filed.

On March 15, 2004, the Company announced significant steps
to resolve antitrust actions filed against it as a result of the
Conwood litigation. In connection with these actions, the
Company recorded a $280 million pretax charge in 2003
associated with the following: (1) the resolution of an
antitrust action brought by a smokeless tobacco competitor,
Swedish Match North America Inc. (2) an agreement for a
proposed resolution of antitrust actions, subject to court
approval, by indirect purchasers in certain states and the
District of Columbia, and (3) the decision to settle other
indirect purchaser actions not covered by such agreement. The
settlement agreement in the smokeless tobacco competitor action
required the Company to pay $200 million, which was paid on
March 16, 2004, and transfer its cigar operation to Swedish
Match North America Inc., which occurred on June 18, 2004.
Included in the 2003 charge of $280 million was a charge of
$40 million, reflecting the fair value of the cigar
operation, which approximated its book value at that time. Also
included in the 2003 charge was $40 million, which
represented the Companys best estimate of the total costs
to resolve all indirect purchaser actions. See the Contingencies
note for further details.

In March 2000, a Kentucky jury rendered a verdict against the
Company, awarding $350 million in compensatory damages to
Conwood Company, L.P., for its claims under federal antitrust
laws that the Company had engaged in exclusionary and
anticompetitive conduct in the marketing and promotion of moist
smokeless tobacco products. The verdict, when entered as a
judgment, was subject to trebling under federal antitrust laws
to $1.05 billion plus interest and other costs. On
January 13, 2003, the Supreme Court of the United States
declined to hear the Companys appeal and let stand the
$1.05 billion antitrust award, plus interest and other
costs, against the Company. As a result, the Company included a
$1.261 billion pretax charge in its net loss for 2002. Also
in January 2003, the Company paid the antitrust award in the
amount of $1.262 billion, which included additional
interest charges for 2003. The Company utilized funds held in
restricted deposits in the amount of $1.242 billion and
$19.7 million of additional cash in satisfaction of the
award.

Given the size of the award in the Conwood litigation in 2002
and the antitrust settlement charges recorded in 2003, the
Company recognizes that these matters had a material adverse
effect on its consolidated financial position in the respective
years. However, in light of the Companys ability to
satisfy these matters primarily with accumulated funds, the
payments of the judgment and settlements did not have a material
adverse effect on the Companys dividend policy or its
ability to implement its strategic business plans.

In November 1998, the Company entered into the Smokeless Tobacco
Master Settlement Agreement (the STMSA) with the
attorneys general of various states and U.S. territories to
resolve the remaining health care



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cost reimbursement cases initiated against the Company. The
STMSA required the Company to adopt various marketing and
advertising restrictions and make payments potentially totaling
$100 million, subject to a minimum 3 percent
inflationary adjustment per annum, over a minimum of
10 years for programs to reduce youth usage of tobacco and
combat youth substance abuse and for enforcement purposes. The
period over which the payments are to be made is subject to
various indefinite deferral provisions based upon the
Companys share of the smokeless tobacco segment of the
overall tobacco market (as defined in the STMSA). As a result of
these provisions, the Company cannot reasonably estimate the
value of the total remaining payments, given that these
provisions require annual determination of the Companys
segment share. As such, the balance of the future potential
payments, based on these segment share determinations, will be
charged to expense in the period that the related shipments
occur, with disbursements made in the following year. The total
charges recorded by the Company in connection with the STMSA
were $13.2 million, $11.6 million and
$10.1 million in 2004, 2003 and 2002, respectively.

QUARTERLY FINANCIAL DATA



|                                  |  |       |          |        |  |       |          |        |  |      |          |  |  |   |          |   |  |   |            | 
|--------------------------------- |  | ----- | -------- | ------ |  | ----- | -------- | ------ |  | ---- | -------- |  |  | - | -------- | - |  | - | ---------- | 
|                                  |  |      
|                                  |  |      
|                                  |  | First |          | Second |  | Third |          | Fourth |  | Year
|                                  |  |      
|                                  |  |      
|2004                              |  |       |          |        |  |       |          |        |  |      |          |  |  |   |          |   |  |   |            | 
|                                 
|                                 
|                                 
|                                 
|Net sales                         |  | $     | 433,317  |        |  | $     | 464,652  |        |  | $    | 462,023  |  |  | $ | 478,246  |   |  | $ | 1,838,238  | 
|                                 
|                                 
|                                 
|                                 
|Gross profit                      |  |       | 340,063  |        |  |       | 365,996  |        |  |      | 357,334  |  |  |   | 362,204  |   |  |   | 1,425,597  | 
|                                 
|                                 
|                                 
|                                 
|Net earnings                      |  |       | 121,689  |        |  |       | 147,893  |        |  |      | 133,052  |  |  |   | 128,203  |   |  |   | 530,837    | 
|                                 
|                                 
|                                 
|                                 
|Basic earnings per share          |  |       | .74      |        |  |       | .89      |        |  |      | .81      |  |  |   | .78      |   |  |   | 3.21       | 
|                                 
|                                 
|                                 
|                                 
|Diluted earnings per share        |  |       | .73      |        |  |       | .89      |        |  |      | .80      |  |  |   | .77      |   |  |   | 3.19       | 
|                                 
|                                 
|                                 
|                                 
|2003                              |  |       |          |        |  |       |          |        |  |      |          |  |  |   |          |   |  |   |            | 
|                                 
|                                 
|                                 
|                                 
|Net sales                         |  |       | $417,601 |        |  |       | $436,224 |        |  |      | $434,672 |  |  |   | $443,365 |   |  |   | $1,731,862 | 
|                                 
|                                 
|                                 
|                                 
|Gross profit                      |  |       | 331,773  |        |  |       | 346,255  |        |  |      | 331,984  |  |  |   | 337,363  |   |  |   | 1,347,375  | 
|                                 
|                                 
|                                 
|                                 
|Net earnings (loss)               |  |       | 110,843  |        |  |       | 128,986  |        |  |      | 124,049  |  |  |   | (45,089  | ) |  |   | 318,789    | 
|                                 
|                                 
|                                 
|                                 
|Basic earnings (loss) per share   |  |       | .66      |        |  |       | .77      |        |  |      | .75      |  |  |   | (.27     | ) |  |   | 1.91       | 
|                                 
|                                 
|                                 
|                                 
|Diluted earnings (loss) per share |  |       | .66      |        |  |       | .77      |        |  |      | .74      |  |  |   | (.27     | ) |  |   | 1.90       | 

Results for 2004 include the effects of reporting
the Companys cigar operations as discontinued operations.
Net sales and gross profit results for 2003 include the effects
of a reclassification of the Companys cigar operations to
discontinued operations.

The second quarter of 2004 included the reversal
of $15.8 million of tax accruals attributable to completed
income tax audits and the expiration of certain statutes of
limitations, as well as a loss of $6 million from
discontinued operations associated with the transfer of the
Companys cigar operation to a smokeless tobacco competitor
on June 18, 2004.

The fourth quarter of 2003 included a
$280 million pretax charge recorded in connection with
antitrust claims against the Company, and an additional pretax
charge of $5.5 million related to F.W. Rickard Seeds,
Inc., of which approximately $5 million was included in
cost of products sold. The F.W. Rickard Seeds charge was
completely offset by a corresponding reduction to the
Companys incentive compensation (bonus) fund.

The third quarter of 2003 included a
$10.4 million pretax charge associated with
F.W. Rickard Seeds, Inc., of which $6.7 million was
included in cost of products sold. The F.W. Rickard Seeds
charge was completely offset by a corresponding reduction to the
Companys incentive compensation (bonus) fund.



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Item 9  Changes in and
Disagreements with Accountants on Accounting and Financial
Disclosure

Not applicable.




Item 9A  Controls and
Procedures

Evaluation of Disclosure Controls and Procedures

The Company, under the direction of the Chief Executive Officer
(CEO) and Chief Financial Officer (CFO),
has reviewed and evaluated the effectiveness of its disclosure
controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the Exchange Act)) as of
the end of the period covered by this report. Based on such
evaluation, the Companys CEO and CFO believe, as of the
end of such period, that the Companys disclosure controls
and procedures are effective.

Report of Management on Internal Control over Financial
Reporting

The Companys management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f). Under the supervision and
with the participation of management, including the
Companys Chief Executive Officer and Chief Financial
Officer, the Company conducted an evaluation of the
effectiveness of the Companys internal control over
financial reporting as of December 31, 2004 based on the
framework in Internal Control  Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on that evaluation, management
concluded that the Companys internal control over
financial reporting was effective as of December 31, 2004.

Internal control systems, no matter how well designed, may have
inherent limitations. As such, internal control policies and
procedures over financial reporting established by the Company
may not prevent or detect misstatements. Therefore, even those
systems designed to be effective can provide only reasonable
assurance with respect to the reliability of financial statement
preparation, presentation and reporting.

Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report included in Part II, Item 8
Financial Statements and Supplementary Data, on
page 30.

Changes in Internal Control over Financial Reporting

There have not been any changes in the Companys internal
control over financial reporting (as such term is defined in
Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act)
during the fiscal quarter ended December 31, 2004 that have
materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial
reporting.



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PART III







Item 10  Directors and
Executive Officers of the Registrant

The Company hereby incorporates by reference the disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K
which is contained under the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance in its Notice of 2005 Annual Meeting and Proxy
Statement.

The Company hereby incorporates by reference the information
with respect to the names, ages and business histories of the
directors of the Company which is contained in Table I and the
accompanying text set forth under the caption Election of
Directors in its Notice of 2005 Annual Meeting and Proxy
Statement.

Executive Officers of the Registrant

The name, present position with the Company, age and business
experience of each executive officer of the Company as of
January 31, 2005 is set forth below:

|                       |  |                                                                  |  |     |    | 
|---------------------- |  | ---------------------------------------------------------------- |  | --- | -- | 
|Name                   |  | Present Position                                                 |  | Age
|                      
|                      
|                      
|                      
|Vincent A. Gierer, Jr. |  | Chairman of the Board, Chief Executive Officer
    and President |  |     | 57 | 
|                      
|                      
|                      
|                      
|Robert T. DAlessandro |  | Senior Vice President and Chief Financial Officer                |  |     | 51 | 
|                      
|                      
|                      
|                      
|Richard A. Kohlberger  |  | Senior Vice President, General Counsel and
    Secretary         |  |     | 59 | 
|                      
|                      
|                      
|                      
|Theodor P. Baseler     |  | President  International
    Wine & Spirits Ltd.                |  |     | 50 | 
|                      
|                      
|                      
|                      
|Murray S. Kessler      |  | President  U.S. Smokeless Tobacco
    Company                   |  |     | 45 | 

None of the executive officers of the Company has any family
relationship to any other executive officer or director of the
Company.

After election, all executive officers serve until the next
annual organization meeting of the Board of Directors and until
their successors are elected and qualified. All of the executive
officers of the Company have been employed continuously by it
for more than five years.

Mr. Gierer has served as Chairman of the Board and Chief
Executive Officer since December 1, 1993 and has served as
President since September 27, 1990. He has been employed by
the Company since March 16, 1978.

Mr. DAlessandro has served as Senior Vice President
and Chief Financial Officer since January 3, 2000. He
served as Senior Vice President and Controller from
January 1, 1996 until January 2, 2000. He has been
employed by the Company since May 4, 1981.

Mr. Kohlberger has served as Senior Vice President, General
Counsel and Secretary since January 10, 2005. He served as
Senior Vice President from October 29, 1990 to
January 9, 2005. He has been employed by the Company since
October 9, 1978.

Mr. Baseler has served as President of International
Wine & Spirits Ltd. since January 1, 2001. He
served as Executive Vice President and Chief Operating Officer
of International Wine & Spirits Ltd. from July 28,
2000 to December 31, 2000 and as Senior Vice President from
January 1, 1996 to July 27, 2000. He has been employed
by the Company since August 30, 1984.

Mr. Kessler has served as President of U.S. Smokeless
Tobacco Company since April 6, 2000. He served as Senior
Vice President from January 3, 2000 to April 5, 2000.
From March 1998 to December 1999, Mr. Kessler served as
Vice President of Vlasic Foods International Inc. and President,
Swanson Frozen Foods Division. From October 1997 to March 1998,
he served as General Manager of the Swanson Division of Campbell
Soup Company. He has been employed by the Company since
January 3, 2000. On January 29, 2001, Vlasic Foods
International Inc. filed for bankruptcy.

Code of Ethics

The Company has adopted a Code of Ethics for senior officers,
(the Code) that applies to its principal executive
officer, principal financial officer and principal accounting
officer (Controller). The Code is available on the
Companys website: www.ustinc.com under the heading
Investors/Corporate Governance. A free copy of the
Code will be made available to any stockholder upon request. The
Company will post promptly on its website any amendment to the
Code or waiver of a provision thereunder rather than filing any
such amendment or waiver as part of a Current Report on
Form 8-K.



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Audit Committee Financial Expert

The Company hereby incorporates by reference the information
with respect to the Audit Committee Financial Expert
which is contained under the caption Committees of the
Board in its Notice of 2005 Annual Meeting and Proxy
Statement.






|          |                       
|--------- | ----------------------
|Item 11  | Executive Compensation

The Company hereby incorporates by reference the information
with respect to executive compensation which is contained in
Tables II through V (including the notes thereto) and the
accompanying text set forth under the caption Compensation
of Executive Officers in its Notice of 2005 Annual Meeting
and Proxy Statement.






|          |                                                                   
|--------- | ------------------------------------------------------------------
|Item 12  | Security Ownership of Certain Beneficial
    Owners and Management

The Company hereby incorporates by reference the information
with respect to the security ownership of management which is
contained in Table I and the accompanying text set forth under
the caption Election of Directors in its Notice of
2005 Annual Meeting and Proxy Statement.

In addition, the Company hereby incorporates by reference the
information with respect to the equity compensation plans under
which securities may be issued as of December 31, 2004,
which is contained under the caption Equity Compensation
Plan Information in its Notice of 2005 Annual Meeting and
Proxy Statement.

The Company hereby incorporates by reference the information
with respect to the security ownership of persons known to the
Company to beneficially own more than 5% of the Companys
outstanding stock, which is contained under the caption
Beneficial Ownership of Common Stock in its Notice
of 2005 Annual Meeting and Proxy Statement.






|          |                                                   
|--------- | --------------------------------------------------
|Item 13  | Certain Relationships and Related
    Transactions

The Company hereby incorporates by reference information with
respect to indebtedness of management which is contained in
Table VI and the accompanying text set forth under the caption
Indebtedness of Management in its Notice of 2005
Annual Meeting and Proxy Statement.






|          |                                           
|--------- | ------------------------------------------
|Item 14  | Principal Accountant Fees and
    Services

The Company hereby incorporates by reference the information
required herein which is contained under the section entitled
Independent Auditor Fees in its Notice of 2005
Annual Meeting and Proxy Statement.



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PART IV







Item 15  Exhibits and
Financial Statement Schedules

(a) Documents filed as part of this Report:



| |     |                                                        
| | --- | -------------------------------------------------------
| | (1) | UST Schedule II  Valuation and Qualifying
    Accounts





|                              |                                    |            |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|----------------------------- | ---------------------------------- | ---------- | - | --------- |  | ---------- | - | ------ |  |  | - | ------ | - |  | - | ----- | 
|                              |                                    |           
|                              |                                    |           
|                              |                                    | Balance at |   |           |  | Balance at
|                              |                                    | Beginning  |   |           |  | End of    
|                              |                                    | of Period  |   | Additions |  | Deductions |   | Period
|                              |                                    |           
|                              |                                    |           
|Year ended December 31, 2004: |                                    |            |   |           |  |            |   |        |  |  |   |        |   |  |   |      
|                             
|                             
|                             
|                             
|                              | Deducted from accounts receivable: |            |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Allowance for doubtful accounts    |            | $ | 1,375     |  |            | $ | 7      |  |  | $ | (869   | ) |  | $ | 513   | 
|                             
|                             
|                             
|                             
|                              | Deducted from inventories:         |            |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Reserve for inventory obsolescence |            |   | 7,190     |  |            |   | 4,089  |  |  |   | (8,855 | ) |  |   | 2,424 | 
|                             
|                             
|                             
|                             
|Year ended December 31, 2003: |                                    |            |   |           |  |            |   |        |  |  |   |        |   |  |   |      
|                             
|                             
|                             
|                             
|                              | Deducted from accounts receivable: |            |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Allowance for doubtful accounts    |            |   | 834       |  |            |   | 590    |  |  |   | (49    | ) |  |   | 1,375 | 
|                             
|                             
|                             
|                             
|                              | Deducted from inventories:         |            |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Reserve for inventory obsolescence |            |   | 3,033     |  |            |   | 5,662  |  |  |   | (1,505 | ) |  |   | 7,190 | 
|                             
|                             
|                             
|                             
|Year ended December 31, 2002: |                                    |            |   |           |  |            |   |        |  |  |   |        |   |  |   |      
|                             
|                             
|                             
|                             
|                              | Deducted from accounts receivable: |            |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Allowance for doubtful accounts    |            |   | 763       |  |            |   | 259    |  |  |   | (188   | ) |  |   | 834   | 
|                             
|                             
|                             
|                             
|                              | Deducted from inventories:         |            |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                             
|                             
|                             
|                             
|                              | Reserve for inventory obsolescence |            |   | 6,731     |  |            |   | 450    |  |  |   | (4,148 | ) |  |   | 3,033 | 



| |     |                                                                                                                                                                                                                                                    
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | All other schedules for which provision is made in the
    applicable accounting regulation of the Securities and Exchange
    Commission are not required under the related instructions or
    are inapplicable, and therefore have been omitted.



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(3) The following exhibits are filed by the Company
pursuant to Item 601 of Regulation S-K:

3.1      Restated Certificate of
Incorporation dated May 5, 1992, incorporated by reference
to Exhibit 3.1 to Form 10-Q for the quarter ended
March 31, 1992.

















































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|  |                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Management contract or compensatory plan or arrangement required
    to be filed as an exhibit pursuant to Item 15(c) of the
    rules governing the preparation of this Report.



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SIGNATURE PAGE

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.



| |         
| | --------
| | UST Inc.



| |     |                           
| | --- | --------------------------
| | By: | /s/ VINCENT A. GIERER, JR.

| |                                       
| | --------------------------------------
| |                                       
| | Vincent A. Gierer, Jr.                
| | Chairman of the Board, Chief Executive
| | Officer and President                 

Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Company and in the capacities and on the dates
indicated.

|              |  |                                                                                                                       |  |                                                                                                          
|------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------
|March 4, 2005 |  | Director,
     Chairman of the Board,
    Chief Executive Officer
    and President (Principal
    Executive Officer) |  | /s/ VINCENT A. GIERER, JR.
    ---------------------------------------------
    Vincent A. Gierer, Jr.  
|             
|March 4, 2005 |  | Senior Vice President
    and Chief Financial Officer
    (Principal Financial Officer)                               |  | /s/ ROBERT T. DALESSANDRO
    ---------------------------------------------
    Robert T. DAlessandro  
|             
|March 4, 2005 |  | Vice President and
    Controller (Principal
    Accounting Officer)                                                  |  | /s/ JAMES D. PATRACUOLLA
    ---------------------------------------------
    James D. Patracuolla      
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ JOHN D. BARR
    ---------------------------------------------
    John D. Barr                      
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ JOHN P. CLANCEY
    ---------------------------------------------
    John P. Clancey                
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ EDWARD H. DEHORITY, JR.
    ---------------------------------------------
    Edward H. DeHority, Jr.
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ PATRICIA DIAZ DENNIS
    ---------------------------------------------
    Patricia Diaz Dennis      
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ ELAINE J. EISENMAN
    ---------------------------------------------
    Elaine J. Eisenman          
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ JOSEPH E. HEID
    ---------------------------------------------
    Joseph E. Heid                  
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ PETER J. NEFF
    ---------------------------------------------
    Peter J. Neff                    
|             
|             
|March 4, 2005 |  | Director                                                                                                              |  | /s/ RONALD J. ROSSI
    ---------------------------------------------
    Ronald J. Rossi                



68







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##### Table of Contents



EXHIBIT INDEX

3.1      Restated Certificate of
Incorporation dated May 5, 1992, incorporated by reference
to Exhibit 3.1 to Form 10-Q for the quarter ended
March 31, 1992.

3.2      By-Laws adopted on
December 23, 1986, and amended and restated effective
October 22, 1998, incorporated by Reference to
Exhibit 3.2 to Form 10-Q for the quarter ended
September 30, 1998.

4.1      Indenture dated as of
May 27, 1999, between UST Inc. and State Street Bank and
Trust Company, incorporated by Reference to Exhibit 4
to Form 10-Q for the quarter ended June 30, 1999.

4.2      Form of certificate of
7.25% Senior Note, incorporated by Reference to
Exhibit 4.2 to Form S-4 Registration Statement Filed
on August 16, 1999.

4.3      Form of certificate of
Floating Rate Senior Note, incorporated by reference to
Exhibit 4.3 to Form S-4 Registration Statement filed
on August 16, 1999.

4.4      Form of certificate of
8.80% Senior Note, incorporated by Reference to
Exhibit 4.3 to Form S-4 Registration Statement Filed
on May 12, 2000.

4.5      Form of certificate of
6.625% Senior Note, incorporated by Reference to
Exhibit 4.2 to Form S-4 Registration Statement Filed
on November 6, 2002.

10.1*      Employment Agreement
entered into on July 23, 1987 between the Company and
Vincent A. Gierer, Jr., an Executive Officer, incorporated
by reference to Exhibit 10.1 to Form  10-Q for
the quarter ended September 30, 1986.

10.2*      Employment Agreement
entered into on December 14, 2000 between the Company and
Richard H. Verheij, a former Executive Officer, incorporated by
reference to Exhibit 10.2 to Form 10-K for the fiscal
year ended December 31, 2000.

10.3*      Employment Agreement
entered into on June 30, 2000 between the Company and
Richard A. Kohlberger, an Executive Officer, incorporated by
reference to Exhibit 10.3 to Form  10-K for the
fiscal year ended December 31, 2000.

10.4*      Form of Severance
Agreement dated October 27, 1986 between the Company and
certain officers, incorporated by reference to Exhibit 10.2
to Form 10-Q for the quarter ended September 30, 1986.

10.5*      1992 Stock Option
Plan, as amended and restated as of December 9, 1999, and
incorporated by reference to Exhibit A to 2000 Notice of
Annual Meeting and Proxy Statement dated March 20, 2000.

10.6*      2001 Stock Option
Plan, as amended and restated and renamed the Stock Incentive
Plan, as of February 20, 2003, incorporated by reference to
Appendix II to 2003 Notice of Annual Meeting and Proxy
Statement dated March 27, 2003.

10.7*      UST Inc. Incentive
Compensation Plan, as amended and restated as of January 1,
2003, incorporated by reference to Appendix I to 2003
Notice of Annual Meeting and Proxy Statement dated
March 27, 2003.

10.8*      Amendment to UST Inc.
Incentive Compensation Plan adopted on October 15, 2003,
incorporated by reference to Exhibit 10.8 to Form 10-K
for the fiscal year ended December 31, 2003.

10.9*      Officers
Supplemental Retirement Plan, as amended and restated as of
January 1, 2003, incorporated by reference to
Exhibit 10.9 to Form 10-K for the fiscal year ended
December 31, 2003.

10.10*      Nonemployee
Directors Retirement Plan, as amended and restated as of
January 1, 2002, incorporated by reference to
Exhibit 10.10 to Form 10-K for the fiscal year ended
December 31, 2001.

10.11*      Directors
Supplemental Medical Plan, as amended and restated as of
February 16, 1995, incorporated by reference to
Exhibit 10.10 to Form 10-K for the fiscal year ended
December 31, 1994.

10.12*      Nonemployee
Directors Stock Option Plan effective May 2, 1995,
incorporated by reference to Exhibit A to 1995 Notice of
Annual Meeting and Proxy Statement dated March 24, 1995.










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##### Table of Contents



10.13*      Amendment to
Nonemployee Directors Stock Option Plan, effective
June 30, 2000, incorporated by reference to
Exhibit 10.13 to Form 10-K for the fiscal year ended
December 31, 2000.

10.14*      Nonemployee
Directors Restricted Stock Award Plan effective
January 1, 1999, and incorporated by reference to
Exhibit 10.11 to Form 10-K for the fiscal year ended
December 31, 1998.

10.15*      Form of Notice of
Grant and Nonstatutory Stock Option Agreement between the
Company and certain officers, incorporated by reference to
Exhibit 10.1 to Form 8-K filed September 16, 2004.

10.16*      Restricted Stock
Agreement, by and between UST Inc. and Murray S. Kessler,
as amended and restated effective September 13, 2004,
incorporated by reference to Exhibit 10.2 to Form 8-K
filed September 16, 2004.

10.17*      Severance Agreement,
dated September 13, 2004, by and between UST Inc.,
U.S. Smokeless Tobacco Company and Murray S. Kessler,
incorporated by reference to Exhibit 10.3 to Form 8-K
filed September 16, 2004.

10.18*      Form of Notice of
Grant and Restricted Stock Agreement between the Company and
certain officers dated October 27, 2004, incorporated by
reference to Exhibit 10.1 to Form 8-K filed
November 2, 2004.

10.19*      Form of Notice of
Grant and Restricted Stock Agreement between the Company and
Murray S. Kessler dated January 3, 2005, incorporated
by reference to Exhibit 10.1 to Form 8-K filed
January 7, 2005.

10.20*      Subsequent Agreement,
dated February 8, 2005, by and between UST Inc. and
Richard H. Verheij, a former Executive Officer,
incorporated by reference to Exhibit 10.1 to Form 8-K
filed February 9, 2005.

10.21*      Summary of
Nonemployee Director Compensation, dated February 17, 2005,
incorporated by reference to Exhibit 10.1 to Form 8-K
filed February 22, 2005.

10.22*      Form of Nonemployee
Director Stock Option Agreement dated February 16, 2005,
incorporated by reference to Exhibit 10.2 to Form 8-K
filed February 22, 2005.

21      Subsidiaries of UST Inc.

23      Consent of Independent
Registered Public Accounting Firm.

31.1      Certification of Chief
Executive Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.

31.2      Certification of Chief
Financial Officer pursuant to Rule 13a-14(a) and
Rule 15d-14(a) of the Securities Exchange Act, as amended.

32      Certification of Chief
Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.



|  |                                                                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Management contract or compensatory plan or arrangement required
    to be filed as an exhibit pursuant to Item 15(c) of the
    rules governing the preparation of this Report.