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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, 2003                                                 
|           |  | 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.

(Exact name of registrant as specified in its
charter)

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

(203) 661-1100

(Registrants telephone number, including
area code)


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

|                                                 |  |                                                                                                
|------------------------------------------------ |  | -----------------------------------------------------------------------------------------------
|Title of each classCommon Stock  $.50 par value |  | Name of each exchange on
    which registeredNew York Stock Exchange
    Pacific Exchange, Inc.

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

None


(Title of Class)

Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.    Yes [X]         No [ ]

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.    [X]

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, 2003, 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 $5,773,834,953.

As of February 29, 2004, there were
165,417,655 shares of Registrants Common Stock,
$.50 par value, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Certain pages of Registrants 2004 Notice of
Annual Meeting and Proxy
Statement              Part
III



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TABLE OF CONTENTS



|                                                 |                                                                                                           |  |  |  |  |  |  | 
|------------------------------------------------ | --------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | Item 1 -- Business                                                                                       
|                                                 | Item 2 -- Properties                                                                                     
|                                                 | Item 3 -- Legal Proceedings                                                                              
|                                                 | Item 4 -- Submission of Matters to a Vote of Security Holders                                            
|PART II                                         
|                                                 | Item 5 -- Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                 | Item 6 -- Selected Financial Data                                                                        
|                                                 | Item 7 -- Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                 | Item 7A -- Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                 | Item 8 -- Financial Statements and Supplementary Data                                                    
|                                                 | Item 9 -- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|                                                 | Item 9A -- Controls and Procedures                                                                       
|PART III                                        
|                                                 | Item 10 -- Directors and Executive Officers of the Registrant                                            
|                                                 | Item 11 -- Executive Compensation                                                                        
|                                                 | Item 12 -- Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                 | Item 13 -- Certain Relationships and Related Transactions                                                
|                                                 | Item 14 -- Principal Accountant Fees and Services                                                        
|PART IV                                         
|                                                 | Item 15 -- Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURE PAGE                                  
|EXHIBIT INDEX                                   
|EX-10.8 AMEND TO THE INCENTIVE COMPENSATION PLAN
|EX-10.9 OFFICERS SUPPLEMENTAL RETIREMENT PLAN   
|EX-21 SUBSIDIARIES OF UST                       
|EX-23 CONSENT OF INDEPENDENT AUDITORS           
|EX-31.1 SECTION 302 CERTIFICATION OF CEO        
|EX-31.2 SECTION 302 CERTIFICATION OF CFO        
|EX-32 SECTION 906 CERTIFICATION                 



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FORM 10-K         TABLE
OF CONTENTS

|           |  |                                                                                                    |    |      |    | 
|---------- |  | -------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                                    |    | Page
|           |  |                                                                                                    |    |     
|PART I    
|Item 1.    |  | Business                                                                                           |    |      | 1  | 
|Item 2.    |  | Properties                                                                                         |    |      | 8  | 
|Item 3.    |  | Legal Proceedings                                                                                  |    |      | 8  | 
|Item 4.    |  | Submission of Matters to a Vote of Security
    Holders                                            |    |      | 12 | 
|PART II   
|Item 5.    |  | Market for the Registrants Common Equity
    and Related Stockholder Matters                      |    |      | 13 | 
|Item 6.    |  | Selected Financial Data                                                                            |    |      | 14 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |    |      | 16 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about
    Market Risk                                     |    |      | 32 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                                        |    |      | 33 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |    |      | 63 | 
|Item 9A.   |  | Controls and Procedures                                                                            |    |      | 63 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                                 |    |      | 63 | 
|Item 11.   |  | Executive Compensation                                                                             |    |      | 65 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |    |      | 66 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                                     |    |      | 66 | 
|Item 14.   |  | Principal Accountant Fees and Services                                                             |    |      | 67 | 
|PART IV   
|Item 15.   |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |    |      | 67 | 
|Signatures |  |                                                                                                    | 71 |     



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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. UST Inc., through its subsidiaries
(collectively Registrant or Company
unless the context otherwise requires), is engaged in
manufacturing and marketing consumer products in the following
operating segments:



| |                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Smokeless Tobacco
    Products:Registrants
    primary activities are manufacturing and marketing smokeless
    tobacco.                                                                                                  
|
| | Wine:Registrant
    produces and markets premium varietal and blended wines.                                                                                                                                               
|
| | All Other
    Operations:Registrants
    international operation which markets moist smokeless tobacco
    and its cigar operation which manufactures and markets premium
    cigars are included in all other operations.

Registrants website address is
www.ustinc.com. The Registrant 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

Registrant hereby incorporates by reference the
Consolidated Segment Information pertaining to the years 2001
through 2003 set forth herein on page 56.





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SMOKELESS TOBACCO PRODUCTS

Principal Products

Registrant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,
    ROOSTER

| |     |                     
| | --- | --------------------
| | 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. Recently, a major cigarette
manufacturer 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, Registrant 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 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
similar warnings, legislation requires the following: THIS
PRODUCT IS HIGHLY ADDICTIVE. Since the publication of the
1986 Surgeon Generals Report, there have been, to
Registrants knowledge, seventeen additional relevant
epidemiological studies published, more than 70% of which do not
report a statistically significant association between smokeless
tobacco and oral cancer. Nevertheless, 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.

In light of scientific research taken as a whole,
Registrant does not take the position that smokeless tobacco is
safe. Perhaps more importantly, however, Registrant 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 February 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
American smokeless





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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. 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. . . .


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, Registrant 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 2004.

In recent years, various state and local
governments continued the regulation of tobacco products,
including, among other things, the imposition of significantly
higher taxes, sampling and advertising bans or restrictions,
ingredient and constituent disclosure requirements, regulation
of environmental tobacco smoke and significant tobacco control
media campaigns. Additional state and local legislative and
regulatory actions will likely be considered in 2004. Registrant
is unable to assess the future effects these various actions may
have on its smokeless tobacco business.

On August 28, 1996, the Food and Drug
Administration (FDA) published regulations asserting
unprecedented jurisdiction over nicotine in tobacco as a
drug and purporting to regulate smokeless tobacco
products as a medical device. Registrant and other
smokeless tobacco manufacturers filed suit against FDA seeking a
judicial declaration that FDA has no authority to regulate
smokeless tobacco products. On April 25, 1997, a federal
district court ruled that FDA, as a matter of law, was not
precluded from regulating smokeless tobacco as medical
devices and implementing certain labeling and access
restrictions. The court, granting Registrants motion for
summary judgment, also ruled that FDA had no authority to
implement restrictions on the advertising and promotion of
smokeless tobacco products. The court issued an injunction to
prohibit most of the restrictions (labeling, access and
advertising/promotion) set for August 28, 1997 from taking
effect, pending resolution of any appeals and subsequent
proceedings; the court also certified the ruling for
interlocutory appeal on the grounds that it involved
controlling questions of law as to which there is
substantial ground for difference of opinion. On
August 14, 1998, the Fourth Circuit Court of Appeals ruled
in favor of Registrant and other tobacco product manufacturers
stating that FDA lacked jurisdiction to regulate tobacco
products and that all of the regulations published by FDA on
August 28, 1996 were invalid. On January 19, 1999, FDA
filed a petition for certiorari seeking review of the Fourth
Circuits ruling by the United States Supreme Court which
was granted on April 23,





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1999. On March 21, 2000, the United States
Supreme Court affirmed the Fourth Circuits decision
holding that FDA lacks jurisdiction to regulate tobacco products.


Proposals for comprehensive federal regulation of
tobacco products by the FDA will continue to be considered. To
date, Registrant 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. Registrant 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, Registrant 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 Registrant. The STMSA required Registrant 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 Registrants
share of the smokeless tobacco segment of the overall tobacco
market (as defined in the STMSA).

Raw Materials

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

Registrant purchased all of its leaf tobacco from
domestic suppliers in 2003. Various factors, including the level
of domestic tobacco production, can affect the amount of tobacco
purchased by Registrant from domestic sources. Tobaccos used in
the manufacture of smokeless tobacco products are processed and
aged by Registrant for a period of two to three years prior to
their use.

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

At the present time, Registrant 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





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tobacco is dependent upon a variety of factors
which cannot be predicted, including weather, changes in the
current federal tobacco program, growing conditions, disease,
local planting decisions, overall market demands and other
factors.


Working Capital

The principal portion of Registrant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

Registrant markets its moist smokeless tobacco
products throughout the United States principally to chain
stores and tobacco and grocery wholesalers. Approximately 32% of
Registrants gross sales of tobacco products are made to
four customers, one of which, McLane Co. Inc., a national
distributor, accounts for approximately 16.5% of
Registrants consolidated revenue. Registrant 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 Registrant and many smaller ones. The larger companies
concentrate on the manufacture and marketing of cigarettes.
Registrant is a well established and major factor in the
smokeless tobacco sector of the overall tobacco market.
Consequently, Registrant competes actively with both larger and
smaller companies in the marketing of its tobacco products.
Registrant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

Registrant 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 Registrant in the state of Washington and
marketed throughout the United States. Registrant also produces
and markets two California premium wines under the labels of
VILLA MT. EDEN and CONN CREEK. Approximately 41% of
Registrants wine sales are made to two distributors,
neither of which accounts for more than 27% of total wine sales.
Substantially all wines are sold through state-licensed
distributors with whom Registrant 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 Registrant. 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 2004. Also in recent years, increased regulation
of alcohol beverages by various states included, but not limited
to, the imposition of higher taxes, the requirement of health
warning notices and the regulation of advertising and packaging.
Additional state and local legislative and regulatory actions
affecting the marketing of alcohol beverages will likely be
considered during 2004. Registrant is unable to assess the
future effects these regulatory and other actions may have on
the sale of its wines.

Registrant 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 2003 is adequate to meet expected demand.

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





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ALL OTHER OPERATIONS

All other operations consist of the international
operation which markets moist smokeless tobacco in select
markets and the cigar operation which manufactures and markets
the premium cigar brands DON TOMÁS, ASTRAL and HELIX. None
of the above, singly, constitutes a material portion of
Registrants operations.

While some scientific studies have reported a
statistical association between cigar smoking and disease, other
scientific studies have not found such an association.
Registrant has a de minimis share of the cigar segment of
the overall tobacco market. On July 25, 1997, a public
health group filed a petition with FDA requesting that the
agency initiate proceedings to assert jurisdiction over cigars
as nicotine delivery systems. Notwithstanding the
United States Supreme Courts ruling that FDA has no
jurisdiction over cigarettes and smokeless tobacco products, if
FDA attempts to assert jurisdiction over cigars and promulgates
regulations, and the regulations survive a judicial challenge,
those regulations would impose severe restrictions on the
advertising, marketing and promotion of cigar products and would
require Registrant to comply with a wide range of labeling,
reporting and other requirements with respect to its cigar
products. Also, in recent years, other proposals have been made
at the federal level for additional regulation of tobacco
products including, but not limited to, the requirement of
warning notices on cigar products, ingredient and constituent
disclosure, the disallowance of advertising and promotion
expenses as deductions under federal tax law, a significant
increase in federal excise taxes, 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. The federal excise tax on cigars was last increased in
1993. Substantially similar proposals will likely be considered
in 2004. In recent years, various state and local governments
continued the regulation of tobacco products including, but not
limited to, additional proposed warning notices on cigar
products, the imposition of significantly higher taxes,
advertising bans and restrictions, ingredient and constituent
disclosure requirements, regulation of environmental tobacco
smoke and anti-tobacco advertising campaigns. Additional state
and local legislative and regulatory actions will likely be
considered in 2004. Registrant is unable to assess the future
effects these various actions may have on its cigar business.

In connection with the agreement recently entered
into by Registrant to resolve an action brought under the
antitrust laws by a smokeless tobacco competitor, Registrant
will transfer its cigar operation to such competitor during
2004. See Antitrust Litigation in Item 3 
Legal Proceedings, below.

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 Registrant.

Number of Employees

Registrants average number of employees
during 2003 was 5,212.





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Trademarks

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

Seasonal Business

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

Orders

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






Item 2  Properties


Smokeless Tobacco Products

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

Wine

Registrant 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.

Other Operations

Registrant owns and operates a warehouse and
cigar distribution center in Tampa, Florida and a cigar
manufacturing facility in Danli, Honduras, C.A. and a cigar
manufacturing facility in Santiago, Dominican Republic.

In connection with the agreement recently entered
into by Registrant to resolve an action brought under the
antitrust laws by a smokeless tobacco competitor, Registrant
will transfer its cigar operation to such competitor during
2004. See Antitrust Litigation in
Item 3  Legal Proceedings, below.

All of such principal properties in
Registrants operations were utilized only in connection
with Registrants business operations. Registrant believes
that the above properties at December 31, 2003 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 Registrant.






Item 3  Legal
Proceedings


Registrant 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.

Registrant believes that these pending litigation
matters will not result in any material liability for a number
of reasons, including the fact that Registrant has had only
limited involvement with cigarettes and Registrants
current percentage of total tobacco industry sales is relatively
small. Prior





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to 1986, Registrant manufactured some cigarette
products which had a de minimis market share. From
May 1, 1982 to August 1, 1994, Registrant distributed
a small volume of imported cigarettes and is indemnified against
claims relating to those products.


Smokeless Tobacco Litigation

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
Registrant by individual plaintiffs, purports to state a class
action on behalf of themselves and all other persons
similarly situated alleging that Registrant
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 Registrants smokeless tobacco products and
certain other relief. The purported class excludes all persons
who claim any personal injury as a result of using
Registrants smokeless tobacco products.

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 Registrant by
six individuals on behalf of themselves and all others
similarly situated against various smokeless tobacco
manufacturers including Registrant 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.

Registrant 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
Registrant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.

Registrant 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 Registrant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 Swedish Match North America, Inc. v. U.S.
Smokeless Tobacco Company, et al.,United States District
Court for the Western District of Kentucky at Owensboro (Case
No. 4:02CV-141-M), plaintiff Swedish Match North America,
Inc. and Registrant have reached an agreement to resolve this
action whereby Registrant would pay $200 million and
transfer its cigar operation to plaintiff and plaintiff would
dismiss this action with prejudice. A letter agreement was
executed by the parties on March 12, 2004. On
March 16, 2004, the court entered a Stipulation of
Dismissal, thereby dismissing this action with prejudice. The
$200 million payment was made on March 16, 2004.

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 Registrants smokeless tobacco
products alleging that Registrant engaged in conduct that
violates the federal antitrust laws, Registrant has reached a
settlement with more than 550 of its direct purchasing customers
(wholesalers and distributors) who are potential class members
in this





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putative class action and who represent more than
88% of Registrants sales volume based on 2002 sales
revenue. For those direct purchasing customers who agreed to
settle the lawsuit and release all claims against Registrant,
Registrant 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 Registrants consolidated financial results.


In January 2004, Registrant began making a second
settlement offer to those direct purchasers that chose not to
settle the litigation in 2003. Although it is early in the
settlement process with respect to this offer, indications are
that the offer is being received favorably, and, to date, direct
purchasers that have settled now represent over 90% of
Registrants sales based on 2002 sales revenues.

Registrant has entered into a Memorandum of
Understanding, reaching a proposed settlement to resolve,
subject to court approval, previously disclosed actions brought
on behalf of indirect purchasers of Registrants smokeless
tobacco products in 11 states (Arizona, Florida, Hawaii,
Iowa, New Mexico, North Carolina, North Dakota, South Dakota,
Tennessee, Vermont and West Virginia) and in the District of
Columbia. The proposed settlement will be submitted to the
Circuit Court of Jefferson County, Tennessee for approval.

Pursuant to the proposed 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 also intends to pursue
settlement of other indirect purchaser actions not covered by
the agreement on substantially similar terms. The Company has
recorded a charge of $40 million in 2003, which represents the
best estimate of the total costs to resolve indirect purchaser
actions.

Registrant also is named as a defendant in a
number of purported class actions in the states of
Massachusetts, Wisconsin, and in certain actions in Arizona and
Iowa which are not included in the Memorandum of Understanding
described above. In addition, Registrant is named in a class
action in the state of Kansas. Each of these actions are brought
by indirect purchasers (consumers and retailers) of
Registrants smokeless tobacco products during various
periods of time ranging from January 1990 to the date of
potential certification of the proposed class. In addition,
Registrant has been named as a defendant in an action brought by
an individual plaintiff as an indirect purchaser in the state of
Mississippi during an unspecified period of time. Plaintiffs in
those actions allege that individually, individually and on
behalf of putative class members in a particular state or
individually and on behalf of class members in the state of
Kansas, Registrant violated the antitrust laws, unfair and
deceptive trade practices statutes and/or common law of those
states. The Mississippi action also asserts a claim for civil
conspiracy. 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 Smokeless Tobacco Cases I-IV(formerly
the Hart, Garcia, Saucier, Piculell, Beede, Gerencser, Abels,
Budd, and Trulikactions coordinated on
October 15, 2002 and the Kellyaction coordinated on
October 22, 2002), Superior Court of California, City and
County of San Francisco (J. C. C. P. Nos. 4250, 4258, 4259 and
4262), one of the actions brought on behalf of indirect
purchasers, the Court, on December 9, 2003, granted
plaintiffs motion for class certification, thereby
certifying a class of indirect purchasers of Registrants
moist smokeless tobacco products in the State of California for
the period January 1, 1990 to the present.

In addition to the actions discussed above,
Registrant has recently been named in the following
five (5) indirect purchaser actions:

In Charles Brown, et al. v. U.S.
Smokeless Tobacco Company, et al., Circuit Court of
Tennessee, Hamilton County (No. 04C222), an individual
plaintiff brought an action against Registrant on behalf of
himself and a purported class of indirect purchasers of
Registrants smokeless tobacco products





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in the State of Tennessee during the period
January 1, 1990 to the present, alleging that Registrant
violated the Tennessee statutes on unfair and deceptive trade
practices, consumer protection and restraint of trade.
Plaintiffs seek unspecified compensatory and statutory damages
in an amount not to exceed $75,000 per putative class member and
other relief. This action is not specifically named in the
Memorandum of Understanding described above.


In Shawn Gavin, et al. v. U.S. Smokeless
Tobacco Company, et al., Superior Court of Massachusetts,
Suffolk Division (No. 03-5038), an individual plaintiff
brought an action against Registrant on behalf of himself and a
purported class of indirect purchasers of Registrants
smokeless tobacco products in the Commonwealth of Massachusetts
during the period January 1, 1990 to the present, alleging
that Registrant violated the Consumer Protection Act of
Massachusetts. Plaintiffs seek unspecified compensatory and
statutory damages in an amount not to exceed $75,000 per
putative class member and other relief.

In Aaron Hill, et al. v. U. S. Smokeless
Tobacco Company, et al., Superior Court of Maine, York
County (No. CV-04-006), an individual plaintiff brought an
action against Registrant on behalf of himself and a purported
class of indirect purchasers of Registrants smokeless
tobacco products in the State of Maine during the period
January 1, 1990 to the present, alleging that Registrant
violated the Maine Unfair Trade Practices Act. Plaintiffs seek
unspecified compensatory and statutory damages in an amount not
to exceed $75,000 per putative class member and other relief.

In James Joseph LaChance, et al. v. United
States Tobacco Company, et al.,Superior Court of New
Hampshire, Strafford County (No. 03-C-279), two individual
plaintiffs brought an action against Registrant on behalf of
themselves and a purported class of indirect purchasers of
Registrants smokeless tobacco products in the State of New
Hampshire during the period January 1, 1990 to the present,
alleging that Registrant violated the New Hampshire consumer
protection laws. Plaintiffs seek unspecified compensatory and
statutory damages in an amount not to exceed $75,000 per
putative class member and other relief.

In Jon Ren, et al. v. United States Tobacco
Company, et al., Circuit Court of Michigan, Wayne County
(No. 04-406325 CZ), an individual plaintiff brought an
action against Registrant on behalf of himself and a purported
class of indirect purchasers of Registrants smokeless
tobacco products in the state of Michigan during the period 1990
to the present, alleging that Registrant violated the Michigan
antitrust and consumer protection laws. Plaintiffs seek
unspecified compensatory and statutory damages in an amount not
to exceed $75,000 per putative class member and other relief.

Each of the foregoing actions is derived directly
from the previous antitrust action brought against Registrant 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. Registrant believes, and has been so
advised by counsel handling these cases, that it has meritorious
defenses in all such cases. Except as to Registrants
willingness to consider alternative solutions for resolving such
cases, all such cases are, and will continue to be, vigorously
defended. Registrant intends to pursue settlement of these
indirect purchaser actions on substantially similar terms as set
forth in the Memorandum of Understanding described above.

Other Litigation

In Miami Cigar & Company v. UST Inc. et
al.,Circuit Court of the 11th
Judicial District, Miami-Dade County, Florida, (Case
No. 99-16881), this action involves a commercial dispute
alleging breach of contract and other claims in conjunction with
the supply of cigars. On February 14, 2002, a jury rendered
a verdict against U.S. Cigar Sales, Inc. and other
affiliated companies of Registrant, awarding $43 million in
compensatory and punitive damages to the plaintiff, a former
distributor. On





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April 26, 2002, the court ruled on certain
post-trial motions, thereby reducing the award to
$7.4 million. On August 30, 2002, the court granted
Registrants motion for set-off reducing the award to
approximately $3.6 million (including prejudgment interest
and costs), and entered final judgment. Registrant and plaintiff
have each filed a notice of appeal to the Third District Court
of Appeal.


Registrant believes, and has been so advised by
counsel handling the case, that its appeal is well-founded and
the trial courts ruling on the post-trial motions that
reduced the jurys verdict and granted a set-off are
supported by existing law and, as a result, believes that, while
there can be no assurances, its appeal should ultimately be
granted and the ruling on those post-trial motions should
ultimately be affirmed on appeal.






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


Not applicable.





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PART II







Item 5  Market for
Registrants Common Equity and Related Stockholder
Matters

Registrant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, 2004, there were approximately 7,242
stockholders of record of Registrant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 2003 and
2002.

|               |  |      |       |      |  |           |       |      |  |     |      |           |  |   |       |  |  |   |       |  |  |   |      | 
|-------------- |  | ---- | ----- | ---- |  | --------- | ----- | ---- |  | --- | ---- | --------- |  | - | ----- |  |  | - | ----- |  |  | - | ---- | 
|               |  |      |       |     
|               |  | 2003 |       | 2002
|               |  |      |       |     
|               |  |      |       | Cash |  |           |       | Cash
|               |  | High |       | Low  |  | Dividends |       | High |  | Low |      | Dividends
|               |  |      |       |     
|               |  |      |       |     
|First Quarter  |  | $    | 34.82 |      |  | $         | 26.73 |      |  | $   | .50  |           |  | $ | 39.00 |  |  | $ | 32.97 |  |  | $ | .48  | 
|Second Quarter |  |      | 37.79 |      |  |           | 26.90 |      |  |     | .50  |           |  |   | 41.35 |  |  |   | 33.40 |  |  |   | .48  | 
|Third Quarter  |  |      | 36.64 |      |  |           | 31.62 |      |  |     | .50  |           |  |   | 35.10 |  |  |   | 25.77 |  |  |   | .48  | 
|Fourth Quarter |  |      | 36.52 |      |  |           | 33.54 |      |  |     | .50  |           |  |   | 34.01 |  |  |   | 25.30 |  |  |   | .48  | 
|               |  |      |       |      |  |           |       |      |  |     |      |           |  |   |       |  |  |   |       |  |  |   |      | 
|Year           |  | $    | 37.79 |      |  | $         | 26.73 |      |  | $   | 2.00 |           |  | $ | 41.35 |  |  | $ | 25.30 |  |  | $ | 1.92 | 
|               |  |      |       |      |  |           |       |      |  |     |      |           |  |   |       |  |  |   |       |  |  |   |      | 





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Item 6  Selected Financial
Data


UST

CONSOLIDATED SELECTED FINANCIAL DATA  ELEVEN
YEARS


(Dollars in thousands, except per share amounts)


|                                                         |                                                                                      |                                  |         |           |        |      |         |           |        |      |         |           |        |   |         |           |        |   |         |           |        | 
|-------------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------- | ------- | --------- | ------ | ---- | ------- | --------- | ------ | ---- | ------- | --------- | ------ | - | ------- | --------- | ------ | - | ------- | --------- | ------ | 
|                                                         |                                                                                      |                                 
|                                                         |                                                                                      |                                 
|                                                         |                                                                                      | 2003                             |         | 2002      |        | 2001 |         | 2000      |        | 1999
|                                                         |                                                                                      |                                 
|                                                         |                                                                                      |                                 
|Summary of Operations for the year ended
    December 31 |                                                                                      |                                  |         |           |        |      |         |           |        |      |         |           |        |   |         |           |        |   |         |          
|                                                         | Net sales                                                                            |                                  | $       | 1,742,629 |        |      | $       | 1,682,877 |        |      | $       | 1,626,015 |        |   | $       | 1,507,757 |        |   | $       | 1,479,603 |       
|                                                         | Cost of products sold (includes excise taxes)                                        |                                  |         | 392,742   |        |      |         | 365,077   |        |      |         | 349,581   |        |   |         | 330,079   |        |   |         | 304,275   |       
|                                                         | Selling, advertising and administrative expenses                                     |                                  |         | 478,310   |        |      |         | 455,513   |        |      |         | 443,406   |        |   |         | 424,955   |        |   |         | 398,850   |       
|                                                         | Litigation loss                                                                      |                                  |         | 280,000   |        |      |         | 1,260,510 |        |      |         |          |        |   |         |          |        |   |         |          |       
|                                                         |                                                                                      |                                 
|                                                         | Operating income (loss)                                                              |                                  |         | 591,577   |        |      |         | (398,223  | )      |      |         | 833,028   |        |   |         | 752,723   |        |   |         | 776,478   |       
|                                                         | Other expense (income):                                                              |                                  |         |           |        |      |         |           |        |      |         |           |        |   |         |           |        |   |         |           |       
|                                                         |                                                                                      | Interest, net                    |         |           | 76,902 |      |         |           | 46,140 |      |         |           | 33,760 |   |         |           | 34,288 |   |         |           | 13,535 | 
|                                                         |                                                                                      | Gain on disposal of product line |         |           |       |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       | 
|                                                         |                                                                                      |                                 
|                                                         | Earnings (loss) before income taxes and
    cumulative effect of accounting changes  |                                  |         | 514,675   |        |      |         | (444,363  | )      |      |         | 799,268   |        |   |         | 718,435   |        |   |         | 762,943   |       
|                                                         |                                                                                      |                                 
|                                                         | Income tax expense (benefit)                                                         |                                  |         | 195,886   |        |      |         | (172,894  | )      |      |         | 307,666   |        |   |         | 276,549   |        |   |         | 293,650   |       
|                                                         |                                                                                      |                                 
|                                                         | Earnings (loss) before cumulative effect of
    accounting changes                   |                                  |         | 318,789   |        |      |         | (271,469  | )      |      |         | 491,602   |        |   |         | 441,886   |        |   |         | 469,293   |       
|                                                         | Cumulative effect of accounting changes (net of
    income tax benefit)              |                                  |         |          |        |      |         |          |        |      |         |          |        |   |         |          |        |   |         |          |       
|                                                         |                                                                                      |                                 
|                                                         | Net earnings (loss)                                                                  |                                  | $       | 318,789   |        |      | $       | (271,469  | )      |      | $       | 491,602   |        |   | $       | 441,886   |        |   | $       | 469,293   |       
|                                                         |                                                                                      |                                 
|Per Share Data                                           |                                                                                      |                                  |         |           |        |      |         |           |        |      |         |           |        |   |         |           |        |   |         |          
|                                                         | Basic earnings (loss) per share before
    cumulative effect of accounting changes   |                                  | $       | 1.91      |        |      | $       | (1.61     | )      |      | $       | 2.99      |        |   | $       | 2.71      |        |   | $       | 2.69      |       
|                                                         | Basic earnings (loss) per share                                                      |                                  |         | 1.91      |        |      |         | (1.61     | )      |      |         | 2.99      |        |   |         | 2.71      |        |   |         | 2.69      |       
|                                                         | Diluted earnings (loss) per share before
    cumulative effect of accounting changes |                                  |         | 1.90      |        |      |         | (1.61     | )      |      |         | 2.97      |        |   |         | 2.70      |        |   |         | 2.68      |       
|                                                         | Diluted earnings (loss) per share                                                    |                                  |         | 1.90      |        |      |         | (1.61     | )      |      |         | 2.97      |        |   |         | 2.70      |        |   |         | 2.68      |       
|                                                         | Dividends per share                                                                  |                                  |         | 2.00      |        |      |         | 1.92      |        |      |         | 1.84      |        |   |         | 1.76      |        |   |         | 1.68      |       
|                                                         | Market price per share:                                                              |                                  |         |           |        |      |         |           |        |      |         |           |        |   |         |           |        |   |         |           |       
|                                                         |                                                                                      | High                             |         |           | 37.79  |      |         |           | 41.35  |      |         |           | 36.00  |   |         |           | 28.88  |   |         |           | 34.94  | 
|                                                         |                                                                                      | Low                              |         |           | 26.73  |      |         |           | 25.30  |      |         |           | 23.38  |   |         |           | 13.88  |   |         |           | 24.06  | 
|Financial Condition at
    December 31                   |                                                                                      |                                  |         |           |        |      |         |           |        |      |         |           |        |   |         |           |        |   |         |          
|                                                         | Current assets                                                                       |                                  | $       | 1,247,966 |        |      | $       | 2,291,267 |        |      | $       | 891,959   |        |   | $       | 691,405   |        |   | $       | 580,024   |       
|                                                         | Current liabilities                                                                  |                                  |         | 521,093   |        |      |         | 1,462,442 |        |      |         | 222,462   |        |   |         | 172,872   |        |   |         | 261,327   |       
|                                                         | Working capital                                                                      |                                  |         | 726,873   |        |      |         | 828,825   |        |      |         | 669,497   |        |   |         | 518,533   |        |   |         | 318,697   |       
|                                                         | Ratio of current assets to current liabilities                                       |                                  |         | 2.4:1     |        |      |         | 1.6:1     |        |      |         | 4:1       |        |   |         | 4:1       |        |   |         | 2.2:1     |       
|                                                         | Total assets                                                                         |                                  |         | 1,726,494 |        |      |         | 2,765,275 |        |      |         | 2,011,702 |        |   |         | 1,646,399 |        |   |         | 1,015,648 |       
|                                                         | Long-term debt                                                                       |                                  |         | 1,140,000 |        |      |         | 1,140,000 |        |      |         | 862,575   |        |   |         | 865,875   |        |   |         | 411,000   |       
|                                                         | Total debt                                                                           |                                  |         | 1,140,000 |        |      |         | 1,140,000 |        |      |         | 865,875   |        |   |         | 869,175   |        |   |         | 481,965   |       
|                                                         | Stockholders (deficit) equity                                                       |                                  |         | (115,187  | )      |      |         | (46,990   | )      |      |         | 581,062   |        |   |         | 270,572   |        |   |         | 200,804   |       
|Other Data                                               |                                                                                      |                                  |         |           |        |      |         |           |        |      |         |           |        |   |         |           |        |   |         |          
|Stock repurchased                                        |                                                                                      | $                                | 150,095 |           |        | $    | 50,262  |           |        | $    |        |           |        | $ | 97,470  |           |        | $ | 465,966 |          
|Dividends paid                                           |                                                                                      | $                                | 332,986 |           |        | $    | 324,233 |           |        | $    | 303,277 |           |        | $ | 287,009 |           |        | $ | 291,966 |          
|Dividends paid as a percentage of net earnings           |                                                                                      |                                  | 104.5%  |           |        |      | N/M     |           |        |      | 61.7%   |           |        |   | 65.0%   |           |        |   | 62.2%   |          
|Return on net sales                                      |                                                                                      |                                  | 18.3%   |           |        |      | N/M     |           |        |      | 30.2%   |           |        |   | 29.3%   |           |        |   | 31.7%   |          
|Return on average assets                                 |                                                                                      |                                  | 14.2%   |           |        |      | N/M     |           |        |      | 26.9%   |           |        |   | 33.2%   |           |        |   | 48.7%   |          
|Return on average stockholders equity                   |                                                                                      |                                  | N/M     |           |        |      | N/M     |           |        |      | 115.4%  |           |        |   | 187.5%  |           |        |   | 140.3%  |          
|Average number of shares (in
    thousands)  basic      |                                                                                      |                                  | 166,572 |           |        |      | 168,786 |           |        |      | 164,250 |           |        |   | 163,181 |           |        |   | 174,355 |          
|Average number of shares (in
    thousands)  diluted    |                                                                                      |                                  | 167,376 |           |        |      | 168,786 |           |        |      | 165,682 |           |        |   | 163,506 |           |        |   | 175,114 |          

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.





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##### Table of Contents



UST

CONSOLIDATED SELECTED FINANCIAL DATA  ELEVEN YEARS
(continued)


(Dollars in thousands, except per share amounts)


|                                                         |                                                                                      |                                  |         |           |        |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       |   |         |           |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------ | -------------------------------- | ------- | --------- | ------ | ---- | ------- | --------- | ----- | ---- | ------- | --------- | ----- | - | ------- | --------- | ----- | - | ------- | --------- | ----- | - | ------- | --------- | ------- | -
|                                                         |                                                                                      |                                 
|                                                         |                                                                                      |                                 
|                                                         |                                                                                      | 1998                             |         | 1997      |        | 1996 |         | 1995      |       | 1994 |         | 1993     
|                                                         |                                                                                      |                                 
|                                                         |                                                                                      |                                 
|Summary of Operations for the year ended
    December 31 |                                                                                      |                                  |         |           |        |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       |   |         |          
|                                                         | Net sales                                                                            |                                  | $       | 1,415,639 |        |      | $       | 1,401,718 |       |      | $       | 1,371,705 |       |   | $       | 1,305,796 |       |   | $       | 1,203,951 |       |   | $       | 1,097,533 |        
|                                                         | Cost of products sold (includes excise taxes)                                        |                                  |         | 283,516   |        |      |         | 291,942   |       |      |         | 272,756   |       |   |         | 262,203   |       |   |         | 251,944   |       |   |         | 246,445   |        
|                                                         | Selling, advertising and administrative expenses                                     |                                  |         | 399,845   |        |      |         | 398,468   |       |      |         | 348,059   |       |   |         | 335,824   |       |   |         | 311,279   |       |   |         | 286,336   |        
|                                                         | Litigation loss                                                                      |                                  |         |          |        |      |         |          |       |      |         |          |       |   |         |          |       |   |         |          |       |   |         |          |        
|                                                         |                                                                                      |                                 
|                                                         | Operating income (loss)                                                              |                                  |         | 732,278   |        |      |         | 711,308   |       |      |         | 750,890   |       |   |         | 707,769   |       |   |         | 640,728   |       |   |         | 564,752   |        
|                                                         | Other expense (income):                                                              |                                  |         |           |        |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       |   |         |           |        
|                                                         |                                                                                      | Interest, net                    |         |           | (2,187 | )    |         |           | 7,451 |      |         |           | 6,364 |   |         |           | 3,179 |   |         |           | 92    |   |         |           | (2,004  | )
|                                                         |                                                                                      | Gain on disposal of product line |         |           |       |      |         |           |      |      |         |           |      |   |         |           |      |   |         |           |      |   |         |           | (35,029 | )
|                                                         |                                                                                      |                                 
|                                                         | Earnings (loss) before income taxes and
    cumulative effect of accounting changes  |                                  |         | 734,465   |        |      |         | 703,857   |       |      |         | 744,526   |       |   |         | 704,590   |       |   |         | 640,636   |       |   |         | 601,785   |        
|                                                         |                                                                                      |                                 
|                                                         | Income tax expense (benefit)                                                         |                                  |         | 279,186   |        |      |         | 264,719   |       |      |         | 280,527   |       |   |         | 274,830   |       |   |         | 253,110   |       |   |         | 232,893   |        
|                                                         |                                                                                      |                                 
|                                                         | Earnings (loss) before cumulative effect of
    accounting changes                   |                                  |         | 455,279   |        |      |         | 439,138   |       |      |         | 463,999   |       |   |         | 429,760   |       |   |         | 387,526   |       |   |         | 368,892   |        
|                                                         | Cumulative effect of accounting changes (net of
    income tax benefit)              |                                  |         |          |        |      |         |          |       |      |         |          |       |   |         |          |       |   |         |          |       |   |         | 19,846    |        
|                                                         |                                                                                      |                                 
|                                                         | Net earnings (loss)                                                                  |                                  | $       | 455,279   |        |      | $       | 439,138   |       |      | $       | 463,999   |       |   | $       | 429,760   |       |   | $       | 387,526   |       |   | $       | 349,046   |        
|                                                         |                                                                                      |                                 
|                                                         |                                                                                      |                                 
|Per Share Data                                           |                                                                                      |                                  |         |           |        |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       |   |         |          
|                                                         | Basic earnings (loss) per share before cumulative
    effect of accounting changes   |                                  | $       | 2.45      |        |      | $       | 2.39      |       |      | $       | 2.48      |       |   | $       | 2.21      |       |   | $       | 1.92      |       |   | $       | 1.77      |        
|                                                         | Basic earnings (loss) per share                                                      |                                  |         | 2.45      |        |      |         | 2.39      |       |      |         | 2.48      |       |   |         | 2.21      |       |   |         | 1.92      |       |   |         | 1.67      |        
|                                                         | Diluted earnings (loss) per share before
    cumulative effect of accounting changes |                                  |         | 2.44      |        |      |         | 2.37      |       |      |         | 2.44      |       |   |         | 2.17      |       |   |         | 1.88      |       |   |         | 1.73      |        
|                                                         | Diluted earnings (loss) per share                                                    |                                  |         | 2.44      |        |      |         | 2.37      |       |      |         | 2.44      |       |   |         | 2.17      |       |   |         | 1.88      |       |   |         | 1.64      |        
|                                                         | Dividends per share                                                                  |                                  |         | 1.62      |        |      |         | 1.62      |       |      |         | 1.48      |       |   |         | 1.30      |       |   |         | 1.12      |       |   |         | .96       |        
|                                                         | Market price per share:                                                              |                                  |         |           |        |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       |   |         |           |        
|                                                         |                                                                                      | High                             |         |           | 36.88  |      |         |           | 36.94 |      |         |           | 35.88 |   |         |           | 36.00 |   |         |           | 31.50 |   |         |           | 32.75   |  
|                                                         |                                                                                      | Low                              |         |           | 24.56  |      |         |           | 25.50 |      |         |           | 28.25 |   |         |           | 26.63 |   |         |           | 23.63 |   |         |           | 24.38   |  
|Financial Condition at
    December 31                   |                                                                                      |                                  |         |           |        |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       |   |         |          
|                                                         | Current assets                                                                       |                                  | $       | 507,213   |        |      | $       | 441,844   |       |      | $       | 450,570   |       |   | $       | 425,555   |       |   | $       | 381,937   |       |   | $       | 334,996   |        
|                                                         | Current liabilities                                                                  |                                  |         | 197,316   |        |      |         | 166,519   |       |      |         | 306,553   |       |   |         | 280,723   |       |   |         | 160,755   |       |   |         | 106,642   |        
|                                                         | Working capital                                                                      |                                  |         | 309,897   |        |      |         | 275,325   |       |      |         | 144,017   |       |   |         | 144,832   |       |   |         | 221,182   |       |   |         | 228,354   |        
|                                                         | Ratio of current assets to current liabilities                                       |                                  |         | 2.6:1     |        |      |         | 2.7:1     |       |      |         | 1.5:1     |       |   |         | 1.5:1     |       |   |         | 2.4:1     |       |   |         | 3.1:1     |        
|                                                         | Total assets                                                                         |                                  |         | 913,319   |        |      |         | 826,363   |       |      |         | 806,577   |       |   |         | 783,976   |       |   |         | 741,236   |       |   |         | 706,195   |        
|                                                         | Long-term debt                                                                       |                                  |         | 100,000   |        |      |         | 100,000   |       |      |         | 100,000   |       |   |         | 100,000   |       |   |         | 125,000   |       |   |         | 40,000    |        
|                                                         | Total debt                                                                           |                                  |         | 100,000   |        |      |         | 110,000   |       |      |         | 250,000   |       |   |         | 200,000   |       |   |         | 125,000   |       |   |         | 40,000    |        
|                                                         | Stockholders (deficit) equity                                                       |                                  |         | 468,293   |        |      |         | 436,795   |       |      |         | 281,206   |       |   |         | 292,781   |       |   |         | 361,669   |       |   |         | 462,972   |        
|Other Data                                               |                                                                                      |                                  |         |           |        |      |         |           |       |      |         |           |       |   |         |           |       |   |         |           |       |   |         |          
|Stock repurchased                                        |                                                                                      | $                                | 151,617 |           |        | $    | 45,719  |           |       | $    | 237,759 |           |       | $ | 274,783 |           |       | $ | 298,843 |           |       | $ | 236,704 |          
|Dividends paid                                           |                                                                                      | $                                | 301,145 |           |        | $    | 298,059 |           |       | $    | 277,302 |           |       | $ | 252,388 |           |       | $ | 225,715 |           |       | $ | 199,725 |          
|Dividends paid as a percentage of net earnings           |                                                                                      |                                  | 66.1%   |           |        |      | 67.9%   |           |       |      | 59.8%   |           |       |   | 58.7%   |           |       |   | 58.2%   |           |       |   | 57.2%   |          
|Return on net sales                                      |                                                                                      |                                  | 32.2%   |           |        |      | 31.3%   |           |       |      | 33.8%   |           |       |   | 32.9%   |           |       |   | 32.2%   |           |       |   | 31.8%   |          
|Return on average assets                                 |                                                                                      |                                  | 52.3%   |           |        |      | 53.8%   |           |       |      | 58.3%   |           |       |   | 56.4%   |           |       |   | 53.5%   |           |       |   | 50.6%   |          
|Return on average stockholders equity                   |                                                                                      |                                  | 100.6%  |           |        |      | 122.3%  |           |       |      | 161.7%  |           |       |   | 131.3%  |           |       |   | 94.0%   |           |       |   | 71.3%   |          
|Average number of shares
    (in thousands)  basic      |                                                                                      |                                  | 185,544 |           |        |      | 183,931 |           |       |      | 187,386 |           |       |   | 194,374 |           |       |   | 201,995 |           |       |   | 208,469 |          
|Average number of shares
    (in thousands)  diluted    |                                                                                      |                                  | 186,880 |           |        |      | 185,602 |           |       |      | 190,067 |           |       |   | 197,613 |           |       |   | 205,699 |           |       |   | 213,412 |          

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





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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 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 31.

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 producer and marketer of moist smokeless
tobacco products including brands such as Copenhagen, Skoal, Red
Seal and Rooster. Through International Wine & Spirits
Ltd., the Company manufactures and markets premium wines sold
nationally under the Chateau Ste. Michelle, Columbia Crest, Conn
Creek and Villa Mt. Eden labels, and sparkling wine under the
Domaine Ste. Michelle label. The Company also manufactures and
markets premium cigars including Astral, Don Tomás and
Helix brands.

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 international and cigar operations, which are not
significant, are not included in these two segments and are
reported under Other Operations.

In connection with the agreement recently entered
into by the Company to resolve an action brought under the
antitrust laws by a smokeless tobacco competitor, the Company
will transfer its cigar operation to such competitor during 2004.

For the year ended December 31, 2003, the
Company achieved record sales, despite increased competitive
pressures and a difficult economic environment for its
businesses.

Results of Operations

CONSOLIDATED RESULTS

|                                  |  |                                               |           |      |  |      |           |   |  |   |           | 
|--------------------------------- |  | --------------------------------------------- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | 
|                                  |  |                                              
|                                  |  | (Dollars in thousands, except per share data)
|                                  |  |                                              
|                                  |  | 2003                                          |           | 2002 |  | 2001
|                                  |  |                                              
|                                  |  |                                              
|Net sales                         |  | $                                             | 1,742,629 |      |  | $    | 1,682,877 |   |  | $ | 1,626,015 | 
|Net earnings (loss)               |  |                                               | 318,789   |      |  |      | (271,469  | ) |  |   | 491,602   | 
|Basic earnings (loss) per share   |  |                                               | 1.91      |      |  |      | (1.61     | ) |  |   | 2.99      | 
|Diluted earnings (loss) per share |  |                                               | 1.90      |      |  |      | (1.61     | ) |  |   | 2.97      | 

Comparative
Information

The most significant difference between
consolidated results for the years 2003 and 2002 was the
$1.261 billion pretax charge recorded in 2002, resulting
from a judgment against the Company in an antitrust case. The
charge was recorded, due to the exhaustion of the Companys
appeal





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remedies, when the United States Supreme Court
declined to hear the Companys appeal. Due to this
significant charge, the Company reported a net loss of
$271.5 million or $1.61 per share for the year ended
December 31, 2002. The effective tax rates for 2002 were
favorably affected due to the impact of the litigation loss on
state income taxes.

Results for 2003 included a $280 million pretax
charge 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 11 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
requires the Company to pay $200 million and transfer its cigar
operation to Swedish Match during 2004. Included in the
$280 million above is a charge of $40 million
reflecting the fair value of the cigar operation, which
approximates its book value. The proposed settlement of the
indirect purchaser actions covered by the subject agreement
requires 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. In addition, the Company intends to pursue
settlement of other indirect purchaser actions not covered by
this agreement on substantially similar terms. Included in the
$280 million above, the Company recorded a charge of $40
million, which represents the best estimate of the total costs
to resolve indirect purchaser actions.

Also included in 2003 results is a charge of
$15.9 million resulting from an internal review following a
change in management at F.W. Rickard Seeds, Inc., a
second-tier subsidiary within the Smokeless Tobacco segment,
which represents less than 1 percent of segment revenues.
This charge was primarily the result of an inventory write down
of $11.7 million, which was included in cost of products
sold, and $4.2 million in other charges included in
selling, advertising and administrative (SA&A) expenses. Due
to a circumvention of controls and procedures and a lack of
management oversight at F.W. Rickard Seeds, Inc., the
Company was not able to ascertain which prior period or periods
gave rise to the aforementioned charge with any degree of
certainty. As such, the entire charge was recorded in 2003 as a
reduction to current net earnings. Included in the total
F.W. Rickard Seeds charge is a $5.5 million charge
recorded in the fourth quarter, which was primarily a result of
a write-down of inventory due to a change in market conditions
for certain types of seed, exacerbated by a lack of effective
inventory control by prior management. The entire
$15.9 million charge was completely offset by a
corresponding reduction in the Companys incentive
compensation (bonus) fund, also included in SA&A
expenses.

Moist smokeless tobacco products are shipped to
arrive and sales revenue is recognized once a week on billing
days, which occur each Monday. As a result, there are instances
when the same number of billing days have not occurred within
comparative periods, as was the case in 2002 versus 2001. The
comparisons between these periods were impacted by the
significance of one less billing day in 2002. While the
Companys GAAP financial results reflect the actual number
of billing days in the respective periods, the trend information
may not be comparable due to the significance of one billing
days impact on a reporting periods results. Fiscal
2003 and 2002 had the same number of billing days, and the
impact of unequal billing days on comparative results will not
recur for several years due to the timing of such billing days
in future periods.

As of January 1, 2002, the Company adopted
Emerging Issues Task Force Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or Reseller of
Vendors Products.This Issue required that costs
associated with certain Company sales incentives be reclassified
from SA&A expenses to a reduction in net sales for all
periods presented on the Companys Consolidated Statement
of Operations. The reclassifications required by this Issue had
no effect on the Companys previously reported consolidated
operating income or net earnings. As a result of adopting this
Issue,





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Managements Discussion and Analysis
(continued)


the Company reclassified approximately
$44.3 million in 2001 sales incentive costs from SA&A
expenses to a reduction in net sales in order to conform to the
2002 presentation.



| |                        
| | -----------------------
| | 2003 compared with 2002

In 2003, consolidated net sales increased
3.6 percent to $1.743 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. 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 and cigar operations, partially
offset by lower sales for wine products.

The consolidated gross margin percentage
decreased slightly in 2003 to 77.5 percent, primarily as a
result of the F.W. 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 higher moist
smokeless tobacco product selling prices, including promotional
units, and improved trends in the Companys international
and cigar operations.

Consolidated SA&A expenses increased
5 percent to $478.3 million in 2003, primarily as a
result of higher salaries and related costs, principally pension
expense, the absence of the 2002 reversal of a benefit accrual
of $5.6 million, higher Smokeless Tobacco segment direct
selling and advertising spending, a $4.4 million charge
related to the bankruptcy filing of a significant wholesale
customer and the non-inventory portion of the F.W. Rickard
Seeds charge. 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
F.W. Rickard Seeds charge.

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, 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 a consistently low
number of claims, the distinctly different science related to
smokeless tobacco and the legal and regulatory environment
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.

The Company reported operating income of
$591.6 million in 2003, representing approximately
34 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 rate on such debt.

The Company recorded income tax expense of
$195.9 million in 2003 at an effective tax rate of
38.1 percent versus an income tax benefit of
$172.9 million, due to the net loss, at an effective tax
rate of 38.9 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.





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##### Table of Contents







| |                        
| | -----------------------
| | 2002 compared with 2001

For the year ended December 31, 2002
consolidated net sales increased 3.5 percent to
$1.683 billion and the Company posted a net loss of
$271.5 million and basic and diluted loss per share of
$1.61. In 2001, the Company reported net earnings of
$491.6 million and basic and diluted earnings per share of
$2.99 and $2.97, respectively. The net loss in 2002 was due to
the Companys recognition of the aforementioned antitrust
litigation loss.

The consolidated net sales increase was primarily
a result of higher selling prices, partially offset by lower
unit volume for moist smokeless tobacco products and higher
premium case sales for wine products. Higher Smokeless Tobacco
segment sales contributed 71.5 percent of the consolidated
net sales increase in 2002.

The consolidated gross profit percentage
decreased slightly in 2002.

Consolidated SA&A expenses increased in 2002
primarily due to prepayment penalties associated with the
termination of a $1 billion credit facility, a
$3.4 million reduction to the residual value of a matured
long-term investment and higher amortization of capitalized debt
costs, partially offset by the favorable effects of a
$5.6 million one-time adjustment due to a change in the
Companys vacation policy. The charge recorded in
connection with a reduction in an investments residual
value was related to the Companys investment (as limited
partner) in a partnership that owned and leased a cogeneration
facility, and it represented the Companys share of an
other-than-temporary reduction in the residual value of the
lease, as determined at the partnership level. 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, 2002 and
2001, outside legal fees and other internal and external costs
incurred in connection with administering and litigating product
liability claims, included within SA&A expenses, were
$22.9 million and $13.9 million, respectively. These
costs were affected by a number of factors, including a
consistently low number of claims, the distinctly different
science related to smokeless tobacco and the legal and
regulatory environment affecting the Companys products.

The Company reported an operating loss of
$398.2 million in 2002.

Net interest expense increased significantly
mainly due to lower income generated from accumulated cash,
which was attributable to the decline in short-term interest
rates and higher average debt outstanding in 2002, partially
offset by lower weighted-average interest rates on outstanding
debt.

As a result of the net loss for 2002, the Company
recorded a tax benefit at an effective tax rate of
38.9 percent as compared to a tax expense at an effective
tax rate of 38.5 percent on 2001 net earnings.

Financial results for 2002 included the
aforementioned effect of one less billing day in the Smokeless
Tobacco segment as compared to 2001. The impact of the billing
day difference on net sales, net earnings (loss) and diluted
earnings (loss) per share was approximately $27 million,
$13.8 million and 8 cents, respectively, which reflects the
actual amounts recorded in week 53 of 2001.





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##### Table of Contents



Managements Discussion and Analysis
(continued)


Smokeless Tobacco Segment

|                        |  |                        |           |      |  |      |           |   |  |   |           | 
|----------------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | 
|                        |  |                       
|                        |  | (Dollars in thousands)
|                        |  |                       
|                        |  | 2003                   |           | 2002 |  | 2001
|                        |  |                       
|                        |  |                       
|Net sales               |  | $                      | 1,504,893 |      |  | $    | 1,447,093 |   |  | $ | 1,406,414 | 
|Operating profit (loss) |  |                        | 585,910   |      |  |      | (408,675  | ) |  |   | 833,185   | 



| |                        
| | -----------------------
| | 2003 compared with 2002

Net sales for the Smokeless Tobacco segment
increased 4 percent to $1.505 billion and accounted
for 86.4 percent of 2003 consolidated net sales as higher
selling prices for moist smokeless tobacco products and higher
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 unit volume for
the year was stable at 636.1 million cans, while it
increased 1.5 percent in the fourth quarter to
157.3 million cans. A decline in full-year unit volume for
premium moist smokeless tobacco products was offset by increased
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 unit volume
held steady, 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 smokeless 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 was approximately 32.7 million cans
or 5.1 percent of total net can sales, of which
approximately 3 million were promotional 15-gram 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 now represents
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 associated with
Skoal Winterblend, which was a seasonal flavor sold
promotionally in the fourth quarter of 2002.

The Companys Retail Activity Data Share
& Volume Tracking System (RAD-SVT), which measures shipments
from wholesalers to retailers, indicated that for the
year-to-date period ended December 27, 2003, on a
can-volume basis, total category shipments increased
1.9 percent over the corresponding 2002 period. The premium
segment declined 4.7 percent and the price value segment
increased 27.1 percent during the same period. The
Companys total share declined 3.3 percentage points
to 73 percent versus 2002. RAD-SVT information is provided
as an indication of current domestic moist smokeless tobacco
industry trends based on shipments from wholesalers to retailers
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 shipments to wholesalers, while RAD-SVT measures
shipments from wholesalers to retailers. 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. 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.





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Cost of products sold increased 11.9 percent
in 2003, primarily as a result of the $11.7 million charge
taken in connection with F.W. Rickard Seeds, Inc., 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 the vacation accrual and the non-inventory portion
of the 2003 F.W. 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
11 states and the District of Columbia, and the decision to
settle other indirect purchaser antitrust actions not covered by
the agreement on substantially similar terms.

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 the litigation loss.



| |                        
| | -----------------------
| | 2002 compared with 2001

Net sales for the Smokeless Tobacco segment
increased 2.9 percent to $1.447 billion and accounted
for 86 percent of consolidated net sales in 2002.

The net sales increase was due to higher selling
prices, partially offset by lower unit volume and higher sales
incentives for moist smokeless tobacco products. Moist smokeless
tobacco product unit volume decreased 2 percent for the
year to 635.8 million cans and decreased 8.1 percent
to 154.9 million cans in the fourth quarter.

Smokeless Tobacco segment net sales and unit
volume results for both the full year and fourth quarter of 2002
include the effect of one less billing day as compared to 2001.
The impact of the billing day difference on net sales and unit
volume was approximately $27 million and 11.8 million
cans, respectively.

Unit volume for premium moist smokeless tobacco
products decreased in 2002, partially offset by an increase in
non-premium products. Unit volume for premium products was
affected by higher state excise taxes, a competitive price value
product introduced at a deep discount and a weak economic
environment. During 2002, the Company introduced three new
premium products, Skoal Long Cut Berry Blend, Copenhagen Pouches
and Skoal Wintergreen Pouches. Net can sales for 2002 included
approximately 13.6 million cans associated with these new
products. Unit volume for





21




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##### Table of Contents



Managements Discussion and Analysis
(continued)


Red Seal, the Companys non-premium product,
increased 12.8 percent in 2002 and represented
7.8 percent of the Companys total moist smokeless
tobacco unit volume.

RAD-SVT indicated that, for the year-to-date
period ending December 28, 2002, total moist smokeless
tobacco category shipments to retailers grew 1.8 percent
over the corresponding 2001 period, on a can-volume basis. The
premium segment declined 2.2 percent and the price value
segment increased 19.2 percent to 21.4 share points during
the same period. Shipments of the Companys products to
retailers, per RAD-SVT, decreased .2 percent, with an
overall share decline of 1.5 percentage points to
76 percent.

Cost of products sold increased 3.2 percent
in 2002 as compared with the prior year. The increase was
primarily due to higher unit cost for moist smokeless tobacco,
which included a federal excise tax rate increase and higher
leaf tobacco costs, partially offset by lower moist smokeless
tobacco unit volume.

Gross profit increased 2.8 percent in 2002
due to higher selling prices, partially offset by lower unit
volume for premium products and higher unit cost for moist
smokeless tobacco products. The gross profit percentage
decreased slightly due to increased sales of lower margin
non-premium products.

Selling and advertising expenses increased in
2002 primarily due to spending on print media for new product
introductions and higher planned promotional spending. Indirect
selling expenses increased in 2002, due to higher salaries and
related expenses for the Companys field sales force.
Administrative and other expenses increased in 2002, primarily
due to higher legal and related costs, continued tobacco
settlement-related charges and accelerated amortization of
capitalized debt costs of $4.3 million due to the early
termination of the Companys $1 billion credit
facility. These increases were partially offset by the
segments $4.4 million portion of the reversal of the
vacation accrual due to a change in the Companys benefit
policy and lower compensation expense due to the litigation loss.

The operating loss for the Smokeless Tobacco
segment was $408.7 million, which includes the effects of
the litigation loss and one less billing day.

Wine Segment

|                 |  |                        |         |      |  |      |         |  |  |   |         | 
|---------------- |  | ---------------------- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|                 |  |                       
|                 |  | (Dollars in thousands)
|                 |  |                       
|                 |  |                       
|                 |  | 2003                   |         | 2002 |  | 2001
|                 |  |                       
|                 |  |                       
|Net sales        |  | $                      | 194,905 |      |  | $    | 203,541 |  |  | $ | 188,858 | 
|Operating profit |  |                        | 24,341  |      |  |      | 30,111  |  |  |   | 21,212  | 



| |                        
| | -----------------------
| | 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 .4 percent from the
prior year. The net sales and case volume results in 2003 were
adversely affected by a combination of factors in the
marketplace, including increased price competition caused by the
oversupply of grapes, cheaper imported wines and a relatively
weak economy. 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





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##### Table of Contents





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
Spectator gave 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, which is expected
to continue in 2004, is 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 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.



| |                        
| | -----------------------
| | 2002 compared with 2001

Wine segment net sales increased 7.8 percent
to $203.5 million and represented 12.1 percent of
consolidated net sales in 2002. Case volume for premium wine
increased 7.5 percent and was the main driver for the net
sales increase. The Companys two leading brands, Chateau
Ste. Michelle and Columbia Crest, had increased case volume of
14.4 percent and 1.8 percent, respectively, and
together comprised 78.5 percent of the Companys total
case volume.

In 2002, the Company reaffirmed its status as one
of the worlds leading wine companies by placing five of
its wines on Wine Spectatormagazines list of
Top 100 Wines of 2002. Columbia Crest Grand Estates
Chardonnay achieved the Companys highest ranking at 16 on
this prestigious list.

Cost of products sold increased for the Wine
segment in 2002 mainly due to higher case sales, partially
offset by lower unit costs. The overall gross profit percentage
increased in 2002 and was attributable to the Companys
long-range plan, implemented in 2002, to reduce product costs
over the next several years.

Selling, advertising and administrative expenses
for the Wine segment decreased in 2002. Selling and advertising
spending remained stable as compared to 2001. Indirect selling
expenses increased due to higher salaries and related costs.
Administrative and other spending was favorable in 2002, mainly
due to the aforementioned $1 million gain and lower
compensation expense.

The Wine segment reported an operating profit
increase of 42 percent to $30.1 million in 2002.





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##### Table of Contents



Managements Discussion and Analysis
(continued)


All Other Operations

|                        |  |                        |        |      |  |      |        |   |  |   |        |  
|----------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                        |  |                       
|                        |  | (Dollars in thousands)
|                        |  |                       
|                        |  |                       
|                        |  | 2003                   |        | 2002 |  | 2001
|                        |  |                       
|                        |  |                       
|Net sales               |  | $                      | 42,831 |      |  | $    | 32,243 |   |  | $ | 30,743 |  
|Operating profit (loss) |  |                        | 2,904  |      |  |      | (3,695 | ) |  |   | (8,907 | )



| |                        
| | -----------------------
| | 2003 compared with 2002

Net sales for all other operations increased
32.8 percent to $42.8 million and accounted for
2.4 percent of consolidated net sales in 2003. Both the
Companys international and cigar operations contributed to
the 2003 sales growth. The international increase was mainly
driven by higher Canadian smokeless tobacco sales 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. The portion of the increase attributed to
the cigar operations was primarily the result of higher unit
volume, partially offset by a shift in product mix and lower
selling prices on selected brands. All other operations reported
an operating profit of $2.9 million in 2003 compared to an
operating loss of $3.7 million in the corresponding 2002
period. The improved operating results are primarily due to
increased sales partially offset by higher spending on
cigar-related litigation.



| |                        
| | -----------------------
| | 2002 compared with 2001

Net sales for all other operations increased
4.9 percent to $32.2 million and accounted for
1.9 percent of consolidated net sales in 2002. The increase
in net sales was attributable to higher cigar volume, partially
offset by slightly lower sales by the international operations.
All other operations reported a $3.7 million operating loss
as compared to an $8.9 million operating loss in 2001. The
decrease in operating loss in 2002 was mainly due to the effects
of lower legal spending on cigar-related litigation and lower
selling, advertising and administrative spending.

Outlook

The Companys objective is to continue to
grow the smokeless tobacco category by building category
awareness and social acceptability of smokeless tobacco
products. In 2004, the Company expects to expand 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. Even though the short-term earnings
growth rate is expected to be negatively impacted by
approximately 3 percent as a result of the higher spending
on category building, the Company still expects increased sales
and earnings in 2004, as well as accelerated growth in 2005 and
beyond.

The Company is encouraged by improvement in moist
smokeless category trends, and has begun implementing the
aforementioned incremental category growth initiatives. As most
of this spending is related to the expansion of the sales and
marketing program infrastructure, the impact it will have on the
category, in terms of attracting new adult consumers, primarily
adult smokers, is not expected to be immediate. The Company has
begun increasing its one-on-one marketing teams, which will
allow it to increase the number of samples it delivers in 2004
and effectively double the number of events where it will
communicate its category advantages to adult consumers. In
addition, the first quarter of 2004 will include the
Companys first broad scale direct mail coupon campaign to
adult smokers. Media advertising support is expected to remain
level compared to 2003 investment levels, with an estimated
433 million impressions. In addition, new product support
will continue to feature Skoal Long Cut Vanilla, introduced late
in 2003, and a 70th Anniversary Edition of Skoal Fine





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##### Table of Contents





Cut Wintergreen, to be introduced nationally in
its original fiberboard can and vintage packaging. A final
initiative to drive category growth is the Companys STEPS
Rewards program, which is expected to be rolled out in the first
quarter of 2004. This new program is focused on enhancing
discounts for customers that aid the growth of the smokeless
tobacco category.

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 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 markets in the wine
category, the Company finished the year with a solid performance
in the fourth quarter. The combination of a global oversupply of
wine and grapes, an emerging extreme value category, an influx
of inexpensive Australian imports, and a relatively weak economy
during the year, all combined to make 2003 one of the most
difficult sales years in recent years. Despite improved
indicators in the fourth quarter of 2003, prospects in the wine
category will be dependent upon several key factors, including
the global supply of wine, a weak U.S. dollar helping to
increase prices of imported competitors wines and an
overall improvement in the U.S. economy. The Company plans
to grow its wine business through continued expansion of its
sales force and broadening its distribution in the domestic
market.

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

In connection with the agreement recently entered
into by the Company to resolve an action brought under the
antitrust laws by a smokeless tobacco competitor, the Company
will transfer its cigar operation to such competitor during 2004.

Despite the planned incremental spending in the
smokeless tobacco and wine businesses, the Company presently
anticipates increased diluted earnings per share in 2004 of
$2.99 to $3.09.

The Companys financial forecast for 2004
and beyond may be affected by the Companys ability to
address the factors described above affecting each of its
business segments, as well as the matters described under
Cautionary Statements Regarding Forward-Looking
Statements.

Financial Condition

Liquidity

|                          |  |                        |           |      |  |      |           |  |  |   |         | 
|------------------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                          |  |                       
|                          |  | (Dollars in thousands)
|                          |  |                       
|                          |  |                       
|                          |  | 2003                   |           | 2002 |  | 2001
|                          |  |                       
|                          |  |                       
|Cash and cash equivalents |  | $                      | 438,040   |      |  | $    | 382,003   |  |  | $ | 271,969 | 
|Restricted deposits       |  |                        |          |      |  |      | 1,242,431 |  |  |   | 659,897 | 
|Total debt                |  |                        | 1,140,000 |      |  |      | 1,140,000 |  |  |   | 865,875 | 

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 and capital expenditures. The
Companys cash equivalent investments are generally liquid,
investment grade short-term securities.





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##### Table of Contents



Managements Discussion and Analysis
(continued)


The Companys cash and cash equivalents
totaled $438 million at December 31, 2003, an increase
of $56 million over 2002. The major source of cash in 2003
was net earnings generated mainly by the Smokeless Tobacco
segment. The major uses of cash were for dividend payments, the
repurchase of Company stock and purchases of property, plant and
equipment.

In 2003, the litigation liability associated with
the 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 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 Company does not expect the payment of the judgment to have
a material adverse effect on the Companys dividend policy
or its ability to implement its strategic business plans.

|                                |  |                        |          |      |  |      |          |   |  |   |          |  
|------------------------------- |  | ---------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                |  |                       
|                                |  | (Dollars in thousands)
|                                |  |                       
|                                |  |                       
|                                |  | 2003                   |          | 2002 |  | 2001
|                                |  |                       
|                                |  |                       
|Net cash (used in) provided by: |  |                        |          |      |  |      |          |   |  |   |          |  
|Operating activities            |  | $                      | (708,909 | )    |  | $    | 796,624  |   |  | $ | 566,088  |  
|Investing activities            |  |                        | (42,807  | )    |  |      | (54,067  | ) |  |   | (45,987  | )
|Financing activities            |  |                        | 807,753  |      |  |      | (632,523 | ) |  |   | (344,166 | )



| |                     
| | --------------------
| | Operating Activities

In 2003, the Consolidated Statement of Cash Flows
includes 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
$553 million, resulting in net cash used in operating
activities of approximately $708.9 million. The primary
sources of cash from operations 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. In 2001, net cash from
operating activities was positively impacted by additional net
earnings due to the effect of an additional billing day and an
income tax refund.

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, a
relatively weak economy 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 $249 million. Total costs of grapes
harvested and purchased and purchases of bulk wine were $87.6
million in 2003 and $249.4 million over the last three years.





26




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##### Table of Contents







| |                     
| | --------------------
| | Investing Activities

The 2003 decrease in net cash used in investing
activities was due to lower purchases of property, plant and
equipment compared to 2002. Over the last three years, capital
expenditures for property, plant and equipment have averaged
$50 million per year.

Major areas of capital spending from 2001 through
2003 by segment were:



| |                          
| | -------------------------
| | Smokeless Tobacco segment



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



| |             
| | ------------
| | Wine segment



| |   |                                                   
| | - | --------------------------------------------------
| |  | Wine barrels and storage tanks                    
|
| |  | Building and facilities expansion and improvements
|
| |  | Wine making and processing equipment              

Over the past three years capital expenditures
for the Smokeless Tobacco segment accounted for
60.4 percent of the consolidated total, while the Wine
segment accounted for 38.2 percent and all other operations
and corporate accounted for 1.4 percent. Capital
expenditures for equipment in the Smokeless Tobacco segment over
the past three years were primarily related to increasing
manufacturing capacity, process-related enhancements and new
product and product line extension capabilities. Wine segment
capital expenditures during that period were mainly focused on
increasing capacity.



| |                     
| | --------------------
| | Financing Activities

The Company had net cash provided by financing
activities of $807.8 million in 2003 compared to net cash
used in financing activities of $632.5 million in 2002. The
2003 amount 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. Cash dividends paid in 2003
were higher than in those in 2002 due to a 4.2 percent
increase in the dividend rate approved by the Board of
Directors, partially offset by lower common shares outstanding.
Payments for the repurchase of Company common stock were
significantly higher than those made in 2002 as the
Companys share repurchase plan, which had been suspended
in connection with the antitrust judgment, was not resumed until
August 2002, compared to 2003, in which a full year of
repurchases were made. Proceeds from the issuance of common
stock were less than those received in 2002 primarily as a
result of the lower average exercise price of stock options
exercised during 2003.





27




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##### Table of Contents



Managements Discussion and Analysis
(continued)


Capital Resources

|                |  |                        |           |      |  |      |           |  |  |   |         | 
|--------------- |  | ---------------------- | --------- | ---- |  | ---- | --------- |  |  | - | ------- | 
|                |  |                       
|                |  | (Dollars in thousands)
|                |  |                       
|                |  | 2003                   |           | 2002 |  | 2001
|                |  |                       
|                |  |                       
|Working capital |  | $                      | 726,873   |      |  | $    | 828,825   |  |  | $ | 669,497 | 
|Total debt      |  |                        | 1,140,000 |      |  |      | 1,140,000 |  |  |   | 865,875 | 

The Company has a $300 million unsecured
line of credit with various financial institutions (the
Credit Facility). In July 2003, the Company
renewed the $150 million, 364-day portion of this Credit
Facility. The remaining $150 million portion of the Credit
Facility is a three-year agreement entered into in
July 2002. The credit agreements were entered into
primarily to support commercial paper borrowings. There were no
borrowings under the Credit Facility during 2003 or 2002.

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 and 2001, the Company made scheduled
quarterly principal payments under the terms of the loan
facility of $.8 million per quarter. In July 2002, amounts
outstanding under this loan facility were repaid.

The Companys working capital decreased to
$726.9 million at December 31, 2003 as compared to
$828.8 million at December 31, 2002. The working
capital decrease in 2003 was mainly attributable to the 2003
accrual related to the agreement to resolve antitrust actions
partially offset by the litigation loss net of restricted
deposits in 2002, as well as the increased cash and cash
equivalents in 2003. The ratio of current assets to current
liabilities (current ratio) increased to 2.4 to 1 from 1.6 to 1.

In January 2003, the Company paid the judgment
resulting from its 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 2003, the Board of Directors
increased the Companys first quarter 2004 dividend to
stockholders to 52 cents per share with an indicated annual rate
of $2.08 per share. This represents a 4 percent increase
over 2003.

During 2003, the Company spent
$150.1 million under its share repurchase program for the
repurchase of Company common stock. In August 2002, the Company
resumed this program as the balance of funds required to satisfy
the then pending judgment were deposited with the court. Once
resumed, the Company spent $50.3 million under this program
in 2002 to repurchase its shares. The Company expects to spend
$150 million in each of the next two years 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
2004 for tobacco leaf purchases for moist smokeless tobacco
products will approximate amounts expended in 2003, while grape
and bulk wine purchases for wine products will be slightly lower
than amounts in the corresponding 2003 period.





28




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##### Table of Contents





In 2004, expenditures under the Companys
capital program are expected to be approximately
$70 million.

The Companys cash requirements in 2004 will
primarily be for the payment of dividends, satisfaction of
litigation settlement liabilities accrued during 2003,
repurchase of common stock, purchases of inventory and capital
expenditures. Cash requirements beyond 2004 are expected
primarily to be for the payment of dividends, repurchase of
common stock, repayment of borrowings, 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.

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 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 $33.1 million,
$20.3 million and $13.4 million for the years ended
December 31, 2003, 2002 and 2001, respectively. On average,
over the past three years, approximately 85.8 percent
of pension expense was reflected in selling, advertising and
administrative expenses, while the remainder was included in
cost of products sold. The increase in pension expense for 2003
was primarily a result of a change in the discount rate from
7.25 percent to





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Managements Discussion and Analysis
(continued)


6.5 percent and a decrease in expected
return on plan assets from 9.25 percent to 8 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 6.25 percent to
calculate its pension liabilities at December 31, 2003.
This rate approximates the current rate at which current pension
liabilities could effectively be settled. At December 31,
2003 unrecognized actuarial losses, associated with pension plan
asset performance, were approximately $119 million. These
losses will be amortized over the applicable remaining service
period which is approximately 11 years. During 2003, the
Company made discretionary cash contributions to its qualified
pension plans, totaling approximately $61 million. These
contributions, along with higher than expected actual returns on
plan assets, partially offset by a decreased discount rate, are
expected to result in lower pension expense for 2004. The
following provides a sensitivity analysis, which demonstrates
the effects that adverse changes in actuarial assumptions would
have on 2004 pension expense. A 50 basis point decrease in the
expected long-term rate of return on plan assets would increase
pension expense by approximately $.9 million, while the
same basis point decrease in the discount rate would result in
an increase of approximately $3.4 million.

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 returns are based on
historical experience and current sales trends, and there has
not been a significant fluctuation between assumptions and
actual return activity on a historical basis. Actual sales
returns have averaged approximately 3.6 percent of moist
smokeless tobacco can sales over the last three years.
However, significant changes in moist smokeless tobacco can
sales, promotional activities, consumer acceptance of new
products, product quality issues and competition could affect
net sales amounts in the future.

The Company is subject to various threatened and
pending litigation claims and for those matters in which the
probability of an adverse outcome is other than remote,
discloses such items in the financial statement footnotes. 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 notes to consolidated financial
statements for disclosure of the Companys assessment
related to pending litigation matters (see Contingencies note).

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.

Management exercises judgment when evaluating the
use of assumptions and estimates, which 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.





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Aggregate Contractual Obligations

(Dollars in thousands)


|                                   |  |                        |           |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |           | 
|---------------------------------- |  | ---------------------- | --------- | --------- |  | --------- | ------ | --------- |  | ------- | ------- |  |  | - | ------ |  |  | - | --------- | 
|                                   |  |                       
|                                   |  | Payments Due by Period
|                                   |  |                       
|                                   |  |                       
|                                   |  |                        |           | Less Than |  |           |        | More Than
|                                   |  | Total                  |           | 1 Year    |  | 1-3 Years |        | 3-5 Years |  | 5 Years
|Contractual Obligations            |  |                        |           |           |  |           |        |           |  |         |         |  |  |   |        |  |  |   |           | 
|Long-term debt                     |  | $                      | 1,140,000 |           |  | $         |       |           |  | $       | 300,000 |  |  | $ |       |  |  | $ | 840,000   | 
|Operating leases                   |  |                        | 39,426    |           |  |           | 9,609  |           |  |         | 11,463  |  |  |   | 4,340  |  |  |   | 14,014    | 
|Unconditional purchase obligations |  |                        | 446,816   |           |  |           | 88,767 |           |  |         | 114,574 |  |  |   | 92,058 |  |  |   | 151,417   | 
|                                   |  |                       
|Total contractual obligations      |  | $                      | 1,626,242 |           |  | $         | 98,376 |           |  | $       | 426,037 |  |  | $ | 96,398 |  |  | $ | 1,005,431 | 
|                                   |  |                       

The above table represents the Companys
total contractual obligations as of December 31, 2003.
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. On March 16, 2004, the
Company paid $200 million of its antitrust litigation
liability, which is not reflected in the above table.

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 the Form 8-Ks and in the quarterly
Form 10-Qs), 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.





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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, 2003 and 2002, 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, 2003
and 2002 were comprised of $600 million with an interest
rate of 6.625 percent, $300 million at
8.8 percent and $200 million at 7.25 percent. 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, 2003, the fair value of the Companys
fixed rate senior notes would decrease by approximately
$55.9 million. Conversely, a 100 basis point decrease in
that rate would increase the fair value of these notes by
$61.2 million.

Taking into account the Companys floating
rate senior notes payable and interest rate swap outstanding at
December 31, 2003, 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.

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.

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,
2003 or 2002.

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, 2003, the Company had approximately
$425.2 million invested in short-term instruments.





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Item 8  Financial Statements
and Supplementary Data


REPORT OF ERNST & YOUNG LLP, INDEPENDENT
AUDITORS

To the Directors and Stockholders

UST Inc.


We have audited the accompanying consolidated
statement of financial position of UST Inc. as of
December 31, 2003 and 2002, and the related consolidated
statements of operations, changes in stockholders
(deficit) equity, and cash flows for each of the
three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule in Item
15(a). 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
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit 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 consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of UST Inc. at
December 31, 2003 and 2002, and the consolidated results of
its operations and its cash flows for each of the
three years in the period ended December 31, 2003, 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.



| |                             
| | ----------------------------
| | (-s- Ernst & Young LLP)

Stamford, Connecticut

February 6, 2004,


except for the first paragraph of the


Other Matters note, as to which the
date is


March 17, 2004






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UST

CONSOLIDATED STATEMENT OF OPERATIONS


(In thousands, except per share amounts)


|                                    |                                         |                         |           |           |  |      |           |           |   |   |           |         | 
|----------------------------------- | --------------------------------------- | ----------------------- | --------- | --------- |  | ---- | --------- | --------- | - | - | --------- | ------- | 
|                                    |                                         |                        
|                                    |                                         | Year Ended December 31,
|                                    |                                         |                        
|                                    |                                         |                        
|                                    |                                         | 2003                    |           | 2002      |  | 2001
|                                    |                                         |                        
|                                    |                                         |                        
|Net Sales                           |                                         | $                       | 1,742,629 |           |  | $    | 1,682,877 |           |   | $ | 1,626,015 |        
|Costs and Expenses                  |                                         |                         |           |           |  |      |           |           |   |   |           |        
|                                    | Cost of products sold                   |                         |           | 348,387   |  |      |           | 321,533   |   |   |           | 312,304 | 
|                                    | Excise taxes                            |                         |           | 44,355    |  |      |           | 43,544    |   |   |           | 37,277  | 
|                                    | Selling, advertising and administrative |                         |           | 478,310   |  |      |           | 455,513   |   |   |           | 443,406 | 
|                                    | Litigation losses                       |                         |           | 280,000   |  |      |           | 1,260,510 |   |   |           |        | 
|                                    |                                         |                        
|                                    | Total Costs and Expenses                |                         |           | 1,151,052 |  |      |           | 2,081,100 |   |   |           | 792,987 | 
|                                    |                                         |                        
|Operating Income (Loss)             |                                         |                         | 591,577   |           |  |      | (398,223  | )         |   |   | 833,028   |        
|                                    |                                         |                        
|Interest, net                       |                                         |                         | 76,902    |           |  |      | 46,140    |           |   |   | 33,760    |        
|                                    |                                         |                        
|Earnings (Loss) Before Income Taxes |                                         |                         | 514,675   |           |  |      | (444,363  | )         |   |   | 799,268   |        
|                                    |                                         |                        
|Income Tax Expense (Benefit)        |                                         |                         | 195,886   |           |  |      | (172,894  | )         |   |   | 307,666   |        
|                                    |                                         |                        
|Net Earnings (Loss)                 |                                         |                         | 318,789   |           |  | $    | (271,469  | )         |   | $ | 491,602   |        
|                                    |                                         |                        
|                                    |                                         |                        
|Net Earnings (Loss) Per Share       |                                         |                         |           |           |  |      |           |           |   |   |           |        
|                                    | Basic                                   |                         | $         | 1.91      |  |      | $         | (1.61     | ) |   | $         | 2.99    | 
|                                    | Diluted                                 |                         | $         | 1.90      |  |      | $         | (1.61     | ) |   | $         | 2.97    | 
|Average Number of Shares            |                                         |                         |           |           |  |      |           |           |   |   |           |        
|                                    | Basic                                   |                         |           | 166,572   |  |      |           | 168,786   |   |   |           | 164,250 | 
|                                    | Diluted                                 |                         |           | 167,376   |  |      |           | 168,786   |   |   |           | 165,682 | 

The accompanying notes are integral to the
Consolidated Financial Statements.





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UST

CONSOLIDATED STATEMENT OF FINANCIAL POSITION


(In thousands)


|                                                |                                           |                                                 |           |           |           |   |           |           |           |  
|----------------------------------------------- | ----------------------------------------- | ----------------------------------------------- | --------- | --------- | --------- | - | --------- | --------- | --------- | -
|                                                |                                           |                                                
|                                                |                                           | December 31                                    
|                                                |                                           |                                                
|                                                |                                           |                                                
|                                                |                                           | 2003                                            |           | 2002     
|                                                |                                           |                                                
|                                                |                                           |                                                
|Assets                                          |                                           |                                                 |           |           |           |   |           |          
|Current assets                                  |                                           |                                                 |           |           |           |   |           |          
|                                                | Cash and cash equivalents                 |                                                 | $         | 438,040   |           |   | $         | 382,003   |          
|                                                | Accounts receivable                       |                                                 |           | 68,230    |           |   |           | 77,617    |          
|                                                | Inventories                               |                                                 |           | 573,334   |           |   |           | 535,704   |          
|                                                | Deferred income taxes                     |                                                 |           | 127,064   |           |   |           | 29,181    |          
|                                                | Restricted deposits                       |                                                 |           |          |           |   |           | 1,242,431 |          
|                                                | Assets held for sale                      |                                                 |           | 18,825    |           |   |           |          |          
|                                                | Prepaid expenses and other current assets |                                                 |           | 22,473    |           |   |           | 24,331    |          
|                                                |                                           |                                                
|                                                |                                           | Total current assets                            |           |           | 1,247,966 |   |           |           | 2,291,267 |  
|                                                |                                           |                                                
|Property, plant and equipment, net              |                                           |                                                 | 377,933   |           |           |   | 389,866   |          
|Deferred income taxes                           |                                           |                                                 |          |           |           |   | 35,186    |          
|Other assets                                    |                                           |                                                 | 100,595   |           |           |   | 48,956    |          
|                                                |                                           |                                                
|                                                |                                           | Total assets                                    |           | $         | 1,726,494 |   |           | $         | 2,765,275 |  
|                                                |                                           |                                                
|                                                |                                           |                                                
|Liabilities and Stockholders
    Deficit       |                                           |                                                 |           |           |           |   |           |          
|Current liabilities                             |                                           |                                                 |           |           |           |   |           |          
|                                                | Accounts payable and accrued expenses     |                                                 | $         | 185,938   |           |   | $         | 183,647   |          
|                                                | Income taxes payable                      |                                                 |           | 55,155    |           |   |           | 18,285    |          
|                                                | Litigation liability                      |                                                 |           | 280,000   |           |   |           | 1,260,510 |          
|                                                |                                           |                                                
|                                                |                                           | Total current liabilities                       |           |           | 521,093   |   |           |           | 1,462,442 |  
|                                                |                                           |                                                
|Long-term debt                                  |                                           |                                                 | 1,140,000 |           |           |   | 1,140,000 |          
|Postretirement benefits other than
    pensions |                                           |                                                 | 80,507    |           |           |   | 81,467    |          
|Pensions                                        |                                           |                                                 | 89,592    |           |           |   | 120,900   |          
|Deferred income taxes                           |                                           |                                                 | 4,435     |           |           |   |          |          
|Other liabilities                               |                                           |                                                 | 6,054     |           |           |   | 7,456     |          
|Contingencies (see note)                        |                                           |                                                 |          |           |           |   |          |          
|                                                |                                           |                                                
|                                                |                                           | Total liabilities                               |           |           | 1,841,681 |   |           |           | 2,812,265 |  
|                                                |                                           |                                                
|Stockholders deficit                           |                                           |                                                 |           |           |           |   |           |          
|                                                | Capital stock(1)                          |                                                 |           | 103,750   |           |   |           | 102,720   |          
|                                                | Additional paid-in capital                |                                                 |           | 752,549   |           |   |           | 696,905   |          
|                                                | Retained earnings                         |                                                 |           | 306,091   |           |   |           | 320,288   |          
|                                                | Accumulated other comprehensive loss      |                                                 |           | (23,458   | )         |   |           | (62,879   | )        
|                                                |                                           |                                                
|                                                |                                           |                                                 | 1,138,932 |           |           |   | 1,057,034 |          
|                                                | Less treasury stock(2)                    |                                                 |           | 1,254,119 |           |   |           | 1,104,024 |          
|                                                |                                           |                                                
|                                                |                                           | Total stockholders deficit                     |           |           | (115,187  | ) |           |           | (46,990   | )
|                                                |                                           |                                                
|                                                |                                           | Total liabilities and stockholders
    deficit |           | $         | 1,726,494 |   |           | $         | 2,765,275 |  
|                                                |                                           |                                                
|                                                |                                           |                                                



|    |                                                                                                                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Common Stock par value $.50 per share:
    Authorized  600 million shares; Issued 
    207,500,386 shares in 2003 and 205,439,046 shares in 2002.
    Preferred Stock par value $.10 per share: Authorized 
    10 million shares; Issued  None.
|   
|(2) | 42,008,611 shares in 2003 and 37,419,861
    shares in 2002.                                                                                                                                                                                        

The accompanying notes are integral to the
Consolidated Financial Statements.





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UST

CONSOLIDATED STATEMENT OF CASH FLOWS


(In thousands)


|                                                     |                                                                                                              |                                              |                                                                        |                                                         |         |          |          |          |          |           |          |          |         |         |          |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | -------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------- | ------- | -------- | -------- | -------- | -------- | --------- | -------- | -------- | ------- | ------- | -------- | -
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              | Year Ended December 31                      
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              | 2003                                         |                                                                        | 2002                                                    |         | 2001    
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                             
|Operating Activities                                 |                                                                                                              |                                              |                                                                        |                                                         |         |          |          |          |          |           |          |         
|                                                     | Net earnings (loss)                                                                                          |                                              | $                                                                      | 318,789                                                 |         |          | $        | (271,469 | )        |           | $        | 491,602  |        
|                                                     | Adjustments to reconcile net earnings
    (loss) to net cash (used in) provided by operating
    activities: |                                              |                                                                        |                                                         |         |          |          |          |          |           |          |          |        
|                                                     |                                                                                                              | Depreciation and amortization                |                                                                        |                                                         | 41,583  |          |          |          | 49,653   |           |          |          | 43,196  |        
|                                                     |                                                                                                              | Deferred income taxes                        |                                                                        |                                                         | (79,490 | )        |          |          | (207,008 | )         |          |          | (7,478  | )      
|                                                     |                                                                                                              | Changes in operating assets and liabilities: |                                                                        |                                                         |         |          |          |          |          |           |          |          |         |        
|                                                     |                                                                                                              |                                              | Accounts receivable                                                    |                                                         |         | 9,387    |          |          |          | 7,806     |          |          |         | (2,725  | )       
|                                                     |                                                                                                              |                                              | Inventories                                                            |                                                         |         | (37,630  | )        |          |          | (41,884   | )        |          |         | (44,536 | )       
|                                                     |                                                                                                              |                                              | Prepaid expenses and other assets                                      |                                                         |         | (56,055  | )        |          |          | 8,448     |          |          |         | (7,184  | )       
|                                                     |                                                                                                              |                                              | Accounts payable, accrued expenses, pensions and
    other liabilities |                                                         |         | 29,612   |          |          |          | 14,389    |          |          |         | 20,877  |         
|                                                     |                                                                                                              |                                              | Tax benefits from the exercise of stock options                        |                                                         |         | 8,535    |          |          |          | 5,446     |          |          |         | 10,262  |         
|                                                     |                                                                                                              |                                              | Income taxes                                                           |                                                         |         | 36,870   |          |          |          | (29,267   | )        |          |         | 62,074  |         
|                                                     |                                                                                                              |                                              | Litigation liability                                                   |                                                         |         | (980,510 | )        |          |          | 1,260,510 |          |          |         |        |         
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                              |                                                                        | Net cash (used in) provided by operating
    activities |         |          | (708,909 | )        |          |           | 796,624  |          |         |         | 566,088  |  
|                                                     |                                                                                                              |                                             
|Investing Activities                                 |                                                                                                              |                                              |                                                                        |                                                         |         |          |          |          |          |           |          |         
|                                                     | Purchases of property, plant and equipment                                                                   |                                              |                                                                        | (45,080                                                 | )       |          |          | (57,214  | )        |           |          | (47,230  | )      
|                                                     | Dispositions of property, plant and equipment                                                                |                                              |                                                                        | 2,273                                                   |         |          |          | 3,147    |          |           |          | 1,243    |        
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                              |                                                                        | Net cash used in investing
    activities               |         |          | (42,807  | )        |          |           | (54,067  | )        |         |         | (45,987  | )
|                                                     |                                                                                                              |                                             
|Financing Activities                                 |                                                                                                              |                                              |                                                                        |                                                         |         |          |          |          |          |           |          |         
|                                                     | Proceeds from debt                                                                                           |                                              |                                                                        |                                                        |         |          |          | 593,292  |          |           |          |         |        
|                                                     | Repayment of debt                                                                                            |                                              |                                                                        |                                                        |         |          |          | (325,875 | )        |           |          | (3,300   | )      
|                                                     | Withdrawals from (deposits into) restricted
    deposits                                                     |                                              |                                                                        | 1,242,431                                               |         |          |          | (582,534 | )        |           |          | (154,142 | )      
|                                                     | Proceeds from the issuance of stock                                                                          |                                              |                                                                        | 48,403                                                  |         |          |          | 57,089   |          |           |          | 116,553  |        
|                                                     | Dividends paid                                                                                               |                                              |                                                                        | (332,986                                                | )       |          |          | (324,233 | )        |           |          | (303,277 | )      
|                                                     | Stock repurchased                                                                                            |                                              |                                                                        | (150,095                                                | )       |          |          | (50,262  | )        |           |          |         |        
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                              |                                                                        | Net cash provided by (used in) financing
    activities |         |          | 807,753  |          |          |           | (632,523 | )        |         |         | (344,166 | )
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                              |                                                                        | Increase in cash and cash
    equivalents               |         |          | 56,037   |          |          |           | 110,034  |          |         |         | 175,935  |  
|                                                     |                                                                                                              |                                              |                                                                        | Cash and cash equivalents at beginning of
    year      |         |          | 382,003  |          |          |           | 271,969  |          |         |         | 96,034   |  
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                              |                                                                        | Cash and cash equivalents at end of
    year            |         | $        | 438,040  |          |          | $         | 382,003  |          |         | $       | 271,969  |  
|                                                     |                                                                                                              |                                             
|                                                     |                                                                                                              |                                             
|Supplemental disclosure of cash flow
    information |                                                                                                              |                                              |                                                                        |                                                         |         |          |          |          |          |           |          |         
|                                                     | Cash paid during the year for:                                                                               |                                              |                                                                        |                                                         |         |          |          |          |          |           |          |          |        
|                                                     |                                                                                                              | Income taxes                                 |                                                                        | $                                                       | 255,043 |          |          | $        | 67,733   |           |          | $        | 284,822 |        
|                                                     |                                                                                                              | Interest                                     |                                                                        |                                                         | 83,553  |          |          |          | 52,280   |           |          |          | 68,189  |        

The accompanying notes are integral to the
Consolidated Financial Statements.





36




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##### Table of Contents



UST

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
(DEFICIT) EQUITY


(Dollars in thousands, except per share amounts)


|                                                                                                 |                                       |                                         |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |           |          |        |  
|------------------------------------------------------------------------------------------------ | ------------------------------------- | --------------------------------------- | ---------------------------------------------------------- | ----------- | - | -------- | ------- | ------- | - | -------- | -------- | --------- | ------- | ------- | ------- | - | ------- | ------ | ---------- | - | - | - | -------- | -------- | ------- | ------ | - | --------- | -------- | ------ | -
|                                                                                                 |                                       |                                        
|                                                                                                 |                                       |                                        
|                                                                                                 |                                       |                                         |                                                            | Accumulated |   |          |         | Total   |   |         
|                                                                                                 |                                       |                                         |                                                            | Other       |   |          |         | Stock-  |   | Compre- 
|                                                                                                 |                                       |                                         |                                                            | Additional  |   |          |         | Compre- |   |          |          | holders  |         | hensive
|                                                                                                 |                                       | Common                                  |                                                            | Paid-in     |   | Retained |         | hensive |   | Treasury |          | (Deficit) |         | Income 
|                                                                                                 |                                       | Stock                                   |                                                            | Capital     |   | Earnings |         | Loss    |   | Stock    |          | Equity    |         | (Loss) 
|                                                                                                 |                                       |                                        
|                                                                                                 |                                       |                                        
|Balance at December 31, 2000                                                                     |                                       | $                                       | 102,372                                                    |             |   | $        | 526,996 |         |   | $        | 885,074  |           |         | $       | (13,606 | ) |         | $      | (1,230,264 | ) |   |   | $270,572 |          |         |        |   |          
|Comprehensive income:                                                                            |                                       |                                         |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |          
|                                                                                                 |                                       | Net earnings                            |                                                            |             |  |          |         |         |  |          |          |           | 491,602 |         |         |   |        |        |            |   |  |   |          |          | 491,602 |        |   |           | $491,602 |       
|                                                                                                 |                                       | Other comprehensive loss, net of tax:   |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |           |          |       
|                                                                                                 |                                       |                                         | Cumulative effect of accounting
    change  SFAS No. 133. |             |   |         |         |         |   |         |          |           |         |        |         |   |         | (374   | )          |   |   |  |          |          |         | (374   | ) |           |          | (374   | )
|                                                                                                 |                                       |                                         | Net deferred loss on cash flow hedges                      |             |   |         |         |         |   |         |          |           |         |        |         |   |         | (1,000 | )          |   |   |  |          |          |         | (1,000 | ) |           |          | (1,000 | )
|                                                                                                 |                                       |                                         | Foreign currency translation adjustment                    |             |   |         |         |         |   |         |          |           |         |        |         |   |         | (933   | )          |   |   |  |          |          |         | (933   | ) |           |          | (933   | )
|                                                                                                 |                                       |                                         | Minimum pension liability adjustment                       |             |   |         |         |         |   |         |          |           |         |        |         |   |         | (2,343 | )          |   |   |  |          |          |         | (2,343 | ) |           |          | (2,343 | )
|                                                                                                 |                                       |                                         |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |          
|                                                                                                 |                                       | Other comprehensive loss                |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |           | (4,650   | )     
|                                                                                                 |                                       |                                         |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |          
|                                                                                                 |                                       | Comprehensive income                    |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |           | $486,952 |       
|                                                                                                 |                                       |                                         |                                                            |             |   |          |         |         |   |          |          |           |         |         |         |   |         |        |            |   |   |   |          |          |         |        |   |          
|Cash dividends  $1.84 per share                                                                 |                                       |                                         |                                                           |             |   |          |        |         |   |          | (303,277 | )         |         |         |        |   |         |        |           |   |   |   | (303,277 | )        |         |        |   |          
|Exercise of stock options  4,671,800
    shares and issuance of restricted stock  5,470 shares |                                       |                                         | 2,338                                                      |             |   |          | 123,486 |         |   |          |         |           |         |         |        |   |         |        |           |   |   |   | 125,824  |          |         |        |   |          
|Income tax benefits, net of increase in
    receivables from exercise of stock options           |                                       |                                         |                                                           |             |   |          | 991     |         |   |          |         |           |         |         |        |   |         |        |           |   |   |   | 991      |          |         |        |   |          
|Retirement of treasury stock 
    6,000,000 shares                                              |                                       |                                         | (3,000                                                     | )           |   |          | (16,093 | )       |   |          | (157,409 | )         |         |         |        |   |         |        | 176,502    |   |   |   |         |          |         |        |   |          
|                                                                                                 |                                       |                                         |                                                            |             |   |         
|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 | )        |         |        |   |          





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UST


CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
(DEFICIT) EQUITY  (Continued)


(Dollars in thousands, except per share amounts)


|                                                                                                  |                                         |                                         |         |             |   |          |         |         |   |          |          |           |   |         |         |   |        |   |            |   |   |  |           |         |        |  |  |          |        | 
|------------------------------------------------------------------------------------------------- | --------------------------------------- | --------------------------------------- | ------- | ----------- | - | -------- | ------- | ------- | - | -------- | -------- | --------- | - | ------- | ------- | - | ------ | - | ---------- | - | - |  | --------- | ------- | ------ |  |  | -------- | ------ | 
|                                                                                                  |                                         |                                        
|                                                                                                  |                                         |                                        
|                                                                                                  |                                         |                                         |         | Accumulated |   |          |         | Total   |   |         
|                                                                                                  |                                         |                                         |         | Other       |   |          |         | Stock-  |   | Compre- 
|                                                                                                  |                                         |                                         |         | Additional  |   |          |         | Compre- |   |          |          | holders  |   | hensive
|                                                                                                  |                                         | Common                                  |         | Paid-in     |   | Retained |         | hensive |   | Treasury |          | (Deficit) |   | Income 
|                                                                                                  |                                         | Stock                                   |         | Capital     |   | Earnings |         | Loss    |   | Stock    |          | Equity    |   | (Loss) 
|                                                                                                  |                                         |                                        
|                                                                                                  |                                         |                                        
|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 | )       |        |  |  |         
|                                                                                                  |                                         |                                         |         |             |   |         
|                                                                                                  |                                         |                                         |         |             |   |         

The accompanying notes are integral to the
Consolidated Financial Statements.





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##### Table of Contents



UST

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

(Dollars in thousands, except per share amounts or where
otherwise noted)


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.

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).



| |                    
| | -------------------
| | Revenue Recognition

The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred, the
amount is fixed or determinable and collectability is reasonably
assured. The Companys revenues are derived principally
from the sale of moist smokeless tobacco products and premium
wines with immaterial sales from other products. 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 the shipments at the
customers location. 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.

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 good 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 by the last-in, first-out (LIFO) method. The
cost of the remaining inventories is determined by 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.





39




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




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. Improvements are
capitalized if they extend the useful lives of the related
assets, while repairs and maintenance 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 how
unlikely it is 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.



| |                         
| | ------------------------
| | Stock-Based Compensation

At December 31, 2003, the Company maintained
three stock-based employee compensation plans (see Stock-Based
Compensation note). The Company accounts for these employee
stock compensation plans in accordance with the intrinsic
value-based method prescribed by Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to
Employees. No stock-based employee 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 2003 as a result of restricted
stock granted to employees and nonemployee directors.

Consistent with the method described in Statement
of Financial Accounting Standards (SFAS or Statement)
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





40




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##### Table of Contents








Summary of Significant Accounting Policies (continued)




Stock
Based Compensation (continued)


its plans, net earnings (loss) and earnings
(loss) per share would have been reduced
(increased) to the pro forma amounts indicated below:

|                                                                                                                                         |  |      |         |      |  |      |          |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                                                                                                         |  |     
|                                                                                                                                         |  |     
|                                                                                                                                         |  | 2003 |         | 2002 |  | 2001
|                                                                                                                                         |  |     
|                                                                                                                                         |  |     
|Net earnings (loss):                                                                                                                     |  |      |         |      |  |      |          |   |  |   |         |  
|As reported                                                                                                                              |  | $    | 318,789 |      |  | $    | (271,469 | ) |  | $ | 491,602 |  
|Total stock-based employee compensation expense
    included in reported net income, net of related tax effect                           |  |      | 76      |      |  |      |         |   |  |   |        |  
|Total stock-based employee compensation expense
    determined under the fair value method for all awards, net of
    related tax effect |  |      | (3,848  | )    |  |      | (4,422   | ) |  |   | (4,896  | )
|                                                                                                                                         |  |     
|Pro forma                                                                                                                                |  | $    | 315,017 |      |  | $    | (275,891 | ) |  | $ | 486,706 |  
|                                                                                                                                         |  |     
|Basic earnings (loss) per share:                                                                                                         |  |      |         |      |  |      |          |   |  |   |         |  
|As reported                                                                                                                              |  | $    | 1.91    |      |  | $    | (1.61    | ) |  | $ | 2.99    |  
|Pro forma                                                                                                                                |  | $    | 1.89    |      |  | $    | (1.63    | ) |  | $ | 2.96    |  
|Diluted earnings (loss) per share:                                                                                                       |  |      |         |      |  |      |          |   |  |   |         |  
|As reported                                                                                                                              |  | $    | 1.90    |      |  | $    | (1.61    | ) |  | $ | 2.97    |  
|Pro forma                                                                                                                                |  | $    | 1.88    |      |  | $    | (1.63    | ) |  | $ | 2.95    |  



| |                             
| | ----------------------------
| | 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 per share computation includes the
effect of shares which would be issuable upon the exercise of
outstanding stock options, 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.



| |                          
| | -------------------------
| | Accounting Pronouncements

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 interim periods of defined benefit
pension plans and other





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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Summary of Significant Accounting Policies (continued)




Accounting
Pronouncements (continued)


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 year ended
December 31, 2003.

As of January 1, 2002, the Company adopted
Emerging Issues Task Force Issue No. 01-9, Accounting
for Consideration Given by a Vendor to a Customer or Reseller of
Vendors Products.This Issue required that costs
associated with certain Company sales incentives be reclassified
from SA&A expenses to a reduction in net sales for all
periods presented on the Companys Consolidated Statement
of Operations. The reclassifications required by this Issue had
no effect on the Companys previously reported consolidated
operating income or net earnings. As a result of adopting this
Issue, the Company reclassified approximately $44.3 million
in 2001 sales incentive costs from SA&A expenses to a
reduction in net sales in order to conform to the 2002
presentation.

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

|                             |  |             |         |      |  |   |         | 
|---------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                             |  |            
|                             |  | December 31
|                             |  |            
|                             |  | 2003        |         | 2002
|                             |  |            
|                             |  |            
|Leaf tobacco                 |  | $           | 216,073 |      |  | $ | 214,142 | 
|Products in process          |  |             | 200,696 |      |  |   | 210,851 | 
|Finished goods               |  |             | 137,287 |      |  |   | 92,126  | 
|Other materials and supplies |  |             | 19,278  |      |  |   | 18,585  | 
|                             |  |            
|                             |  | $           | 573,334 |      |  | $ | 535,704 | 
|                             |  |            

At December 31, 2003 and 2002,
$219.9 million and $213.9 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 $66.9 million and
$63.9 million, respectively.

Assets Held for Sale

In March 2003, management, having proper
authority, initiated the first of several planned disposals of
selected California assets in connection with the overall
strategic objectives of the Companys winery operations. In
December 2003, the remaining disposals of California winery
assets under this plan were formally initiated. Each of these
assets is being actively marketed for sale and meets the
criteria to be considered held for sale under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. As each propertys net carrying value was lower
than the corresponding estimated fair value less costs to sell,
there was no impairment charge recorded upon the decision to
dispose of the properties. Accordingly, the net carrying value
of each property was reclassified from property, plant and
equipment to assets held for sale on the
Consolidated Statement of Financial Position and depreciation
has ceased.





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Property, Plant and Equipment, Net

|                                 |  |             |         |      |  |   |         | 
|-------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                                 |  |            
|                                 |  | December 31
|                                 |  |            
|                                 |  |            
|                                 |  | 2003        |         | 2002
|                                 |  |            
|                                 |  |            
|Land                             |  | $           | 19,703  |      |  | $ | 22,715  | 
|Buildings                        |  |             | 259,933 |      |  |   | 272,328 | 
|Machinery and equipment          |  |             | 460,685 |      |  |   | 441,051 | 
|                                 |  |            
|                                 |  |             | 740,321 |      |  |   | 736,094 | 
|Less allowances for depreciation |  |             | 362,388 |      |  |   | 346,228 | 
|                                 |  |            
|                                 |  | $           | 377,933 |      |  | $ | 389,866 | 
|                                 |  |            

Depreciation expense was $35.9 million for
2003, $35.2 million for 2002 and $35 million for 2001.

Commitments



| |                    
| | -------------------
| | Purchase Agreements

At December 31, 2003, 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 $29.7 million for leaf
tobacco to be used in the production of moist smokeless tobacco
products.

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:

|                  |  |      |        |      |  |      |        |      |  |      |        |            |  |       |        |  |  |   |        |  |  |   |         |  |  |   |         | 
|----------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ------ |  |  | - | ------ |  |  | - | ------- |  |  | - | ------- | 
|                  |  |     
|                  |  |     
|                  |  | 2004 |        | 2005 |  | 2006 |        | 2007 |  | 2008 |        | Thereafter |  | Total
|                  |  |     
|                  |  |     
|Grape commitments |  | $    | 58,627 |      |  | $    | 58,812 |      |  | $    | 55,324 |            |  | $     | 46,320 |  |  | $ | 45,739 |  |  | $ | 151,417 |  |  | $ | 416,239 | 

In addition, the Company has a commitment to
spend a minimum of approximately $.4 million in each of the
next two years 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, 2003:

|                  |  |      |       |      |  |      |       |      |  |      |       |            |  |       |       |  |  |   |       |  |  |   |        |  |  |   |        | 
|----------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | ---- | ----- | ---------- |  | ----- | ----- |  |  | - | ----- |  |  | - | ------ |  |  | - | ------ | 
|                  |  |     
|                  |  |     
|                  |  | 2004 |       | 2005 |  | 2006 |       | 2007 |  | 2008 |       | Thereafter |  | Total
|                  |  |     
|                  |  |     
|Lease commitments |  | $    | 9,063 |      |  | $    | 6,663 |      |  | $    | 4,800 |            |  | $     | 2,695 |  |  | $ | 1,645 |  |  | $ | 14,014 |  |  | $ | 38,880 | 

Rent expense for the years 2003, 2002 and 2001
was $12.9 million, $12.8 million and
$13.6 million, respectively.

Restricted Deposits

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





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Restricted Deposits (continued)


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

|                       |  |             |         |      |  |   |        | 
|---------------------- |  | ----------- | ------- | ---- |  | - | ------ | 
|                       |  |            
|                       |  | December 31
|                       |  |            
|                       |  |            
|                       |  | 2003        |         | 2002
|                       |  |            
|                       |  |            
|Prepaid pension costs  |  | $           | 61,276  |      |  | $ |       | 
|Capitalized debt costs |  |             | 6,730   |      |  |   | 9,041  | 
|Goodwill               |  |             | 4,710   |      |  |   | 4,393  | 
|Other                  |  |             | 27,879  |      |  |   | 35,522 | 
|                       |  |            
|                       |  | $           | 100,595 |      |  | $ | 48,956 | 
|                       |  |            

Capitalized debt costs as of December 31,
2003 and 2002 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).

Accounts Payable and Accrued Expenses

|                                             |  |             |         |      |  |   |         | 
|-------------------------------------------- |  | ----------- | ------- | ---- |  | - | ------- | 
|                                             |  |            
|                                             |  | December 31
|                                             |  |            
|                                             |  |            
|                                             |  | 2003        |         | 2002
|                                             |  |            
|                                             |  |            
|Trade accounts payable                       |  | $           | 67,361  |      |  | $ | 62,348  | 
|Employee compensation and benefits           |  |             | 41,013  |      |  |   | 47,743  | 
|Interest payable on long-term debt           |  |             | 27,369  |      |  |   | 27,371  | 
|Smokeless tobacco settlement-related charges |  |             | 12,758  |      |  |   | 11,798  | 
|Other accrued expenses                       |  |             | 37,437  |      |  |   | 34,387  | 
|                                             |  |            
|                                             |  | $           | 185,938 |      |  | $ | 183,647 | 
|                                             |  |            

Borrowing Arrangements

Long-term debt consisted of the following:

|                                 |  |             |           |          |  |          |           |          |  |   |           |  |  |   |           | 
|-------------------------------- |  | ----------- | --------- | -------- |  | -------- | --------- | -------- |  | - | --------- |  |  | - | --------- | 
|                                 |  |            
|                                 |  | December 31
|                                 |  |            
|                                 |  |            
|                                 |  |             |           |         
|                                 |  | 2003        |           | 2002    
|                                 |  | Carrying    |           | Fair     |  | Carrying |           | Fair    
|                                 |  | Value       |           | Value(1) |  | Value    |           | Value(1)
|                                 |  |            
|                                 |  |            
|Senior notes, due March 15, 2005 |  | $           | 300,000   |          |  | $        | 322,710   |          |  | $ | 300,000   |  |  | $ | 333,576   | 
|Senior notes, due June 1, 2009   |  |             | 240,000   |          |  |          | 271,040   |          |  |   | 240,000   |  |  |   | 261,083   | 
|Senior notes, due July 15, 2012  |  |             | 600,000   |          |  |          | 668,760   |          |  |   | 600,000   |  |  |   | 641,753   | 
|                                 |  |            
|                                 |  | $           | 1,140,000 |          |  | $        | 1,262,510 |          |  | $ | 1,140,000 |  |  | $ | 1,236,412 | 
|                                 |  |            



|    |                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

The Company has a $300 million unsecured
line of credit with various financial institutions (the
Credit Facility). In July 2003, the Company
renewed the $150 million, 364-day portion of this Credit
Facility. The remaining $150 million portion of the Credit
Facility is a three-year agreement entered into in
July 2002. These credit agreements were executed primarily
to support commercial paper borrowings. The Company had no
direct borrowings under the Credit Facility or commercial paper
borrowings at December 31, 2003 or 2002. Costs of
approximately $2.7 million associated with the





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Borrowing Arrangements (continued)


Credit Facility were capitalized in 2002 and are
being amortized over their applicable terms. Approximately
$1.2 million of these costs have been recognized for the
year-ended December 31, 2003. The Credit Facility requires
the maintenance of certain financial ratios and the payment of
commitment and administrative fees. Commitment fees for the
364-day and the three-year credit agreements are
..25 percent and .375 percent of the unused portion per
annum, respectively. Commitment fees incurred for the Credit
Facility approximated $.9 million for the year-ended
December 31, 2003 and were immaterial for the year-ended
December 31, 2002. As of December 31, 2003, the
Company is in compliance with all covenants under the terms of
the 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 semiannual interest payments. 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 $.5 million of these costs have
been recognized for the year-ended December 31, 2003. The
Company used a portion of the net proceeds from the
$600 million senior notes to repay 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. In July
2002, the Previous Credit Facility was terminated and the
$7.3 million in related unamortized debt costs were
expensed.

The Previous Credit Facility, which was entered
into in 2000 with various financial institutions, was comprised
of a $300 million 364-day credit facility, a
$370 million three-year term loan facility and a
$330 million four and one-third year term loan facility.
The Company had borrowed the $330 million term loan in 2000
and deposited it with the U.S. District Court to satisfy the
bonding requirement for the antitrust litigation (see Restricted
Deposits note). During the years ended December 31, 2002
and 2001, the Company made scheduled principal payments totaling
$1.7 million (prior to termination) and $3.3 million,
respectively. At December 31, 2001, the effective annual
interest rate on the outstanding balance was 4.375 percent.
Commitment fees associated with the Credit Facility were based
upon unused capacity and were calculated as follows:
..5 percent per annum on the 364-day revolving credit
facility and .875 percent per annum on the three-year term
loan. Commitment fees incurred were $2.6 million and
$4.8 million for the years ended December 31, 2002 and
2001, respectively.

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, to a lesser extent, 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





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Derivative Instruments and Hedging Activities (continued)


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, 2003 and 2002 was a net liability of
$5.3 million and $6.5 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, 2003 and 2002 included the
accumulated loss on the cash flow hedge (net of taxes) of
$3.4 million and $4.2 million, respectively. This
reflects $.8 million (net of taxes) of other comprehensive
income and $2.8 million (net of taxes) of other
comprehensive loss recognized for the year ended
December 31, 2003 and 2002, 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, 2003 or 2002.

There were no other derivative contracts at
December 31, 2003, 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.

Capital Stock

The Company has two classes of capital stock,
preferred stock and common stock. Preferred stock carries a par
value of $.10 and no shares have been issued. Common stock
carries a $.50 par value. Authorized preferred stock is
10 million shares and authorized common stock is
600 million shares.





46




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##### Table of Contents






Common stock issued at December 31, 2003 and
2002 was 207,500,386 shares and 205,439,046 shares,
respectively. Treasury shares held at December 31, 2003 and
2002 were 42,008,611 shares and 37,419,861 shares,
respectively.

The Company repurchased a total of
4.6 million shares and 1.6 million shares at a cost of
$150.1 million and $50.3 million, during the years
ended December 31, 2003 and 2002, respectively. During
2003, the Company repurchased .6 million shares at
prevailing market prices directly from the trust established for
the Companys defined benefit pension plans. No shares were
repurchased from the trust during 2002. 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, 2003,
13.4 million shares have been repurchased at a cost of
$363.2 million under this program.

During 2003, the Companys shareholders
approved the amendment and restatement of the 2001 Stock Option
Plan, to provide for the grant of additional types of
equity-based awards to the Companys employees (see
Stock-Based Compensation note). In connection with this
amendment, during 2003 42,200, shares of restricted stock
were issued with a grant date fair value of $33.25 per share.

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 2003, 7,640 shares
of the Companys common stock were issued under this plan
with a weighted-average grant date fair value of $32.91 per
share.

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 the 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 has been renamed the UST Inc. Amended and
Restated Stock Incentive Plan (the Plan). There are
generally five types of awards that may be granted under the
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 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 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 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, option pricing models require 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.





47




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Stock-Based Compensation (continued)


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:

|                        |  |      |           |      |  |      |           |  |  |  |           | 
|----------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                        |  |     
|                        |  |     
|                        |  | 2003 |           | 2002 |  | 2001
|                        |  |     
|                        |  |     
|Expected dividend yield |  |      | 5.0%      |      |  |      | 5.0%      |  |  |  | 6.5%      | 
|Risk-free interest rate |  |      | 3.5%      |      |  |      | 4.9%      |  |  |  | 4.5%      | 
|Expected volatility     |  |      | 34.1%     |      |  |      | 17.2%     |  |  |  | 30.3%     | 
|Expected life of option |  |      | 7.5 years |      |  |      | 7.5 years |  |  |  | 7.5 years | 

Under the UST Inc. 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, and 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, 2003, 4.6 million
shares were available for grant under the UST Inc. Amended and
Restated Stock Incentive Plan and 19,500 shares were available
for grant under the Nonemployee Directors Stock Option
Plan, while no shares were available under the 1992 Stock Option
Plan. During 2003, 42,200 shares of restricted stock were
issued with a grant date fair value of $33.25 per share in
connection with the UST Inc. Amended and Restated Stock
Incentive Plan.

Receivables from the exercise of stock options in
the amount of $18.1 million in 2003, $21.5 million in
2002 and $22.5 million in 2001 have been deducted from
stockholders equity (deficit).

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):

|                                                                   |  |           |          |           |  |           |       |           |  |           |          |           |  |   |       |  |  |  |          |   |  |   |       | 
|------------------------------------------------------------------ |  | --------- | -------- | --------- |  | --------- | ----- | --------- |  | --------- | -------- | --------- |  | - | ----- |  |  |  | -------- | - |  | - | ----- | 
|                                                                   |  |           |          |           |  |          
|                                                                   |  | 2003      |          | 2002      |  | 2001     
|                                                                   |  |           |          |           |  |          
|                                                                   |  |           |          | 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                                   |  |           | 12,825.5 |           |  | $         | 28.41 |           |  |           | 14,257.8 |           |  | $ | 27.64 |  |  |  | 17,537.4 |   |  | $ | 26.95 | 
|Granted                                                            |  |           | 1,402.1  |           |  |           | 33.24 |           |  |           | 751.1    |           |  |   | 40.93 |  |  |  | 1,563.8  |   |  |   | 32.28 | 
|Exercised                                                          |  |           | (2,011.5 | )         |  |           | 22.23 |           |  |           | (2,013.0 | )         |  |   | 27.75 |  |  |  | (4,671.8 | ) |  |   | 26.90 | 
|Forfeited                                                          |  |           | (39.4    | )         |  |           | 30.34 |           |  |           | (89.1    | )         |  |   | 22.68 |  |  |  | (149.0   | ) |  |   | 19.93 | 
|Expired                                                            |  |           | (24.1    | )         |  |           | 25.50 |           |  |           | (81.3    | )         |  |   | 30.81 |  |  |  | (22.6    | ) |  |   | 24.19 | 
|                                                                   |  |           |          |           |  |           |       |           |  |           |          |           |  |   |       |  |  |  |          |   |  |   |       | 
|Outstanding at end of year                                         |  |           | 12,152.6 |           |  | $         | 29.98 |           |  |           | 12,825.5 |           |  | $ | 28.41 |  |  |  | 14,257.8 |   |  | $ | 27.64 | 
|                                                                   |  |          
|                                                                   |  |          
|Exercisable at end of year                                         |  |           | 9,783.1  |           |  | $         | 28.83 |           |  |           | 10,169.3 |           |  | $ | 28.31 |  |  |  | 10,365.1 |   |  | $ | 29.16 | 
|Weighted-average fair value of options granted
    during the year |  |           |          |           |  | $         | 7.21  |           |  |           |          |           |  | $ | 4.90  |  |  |  |          |   |  | $ | 5.13  | 





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Stock-Based Compensation (continued)


The following table summarizes information about
stock options outstanding at December 31, 2003 (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 |                     |  |                  | 1,435.6  |          |  |            | 6.5 years |          |  | $ | 15.07 |  |  |  | 1,435.6 |  |  | $ | 15.07 | 
|                    | 25.50  35.25  |                     |  |                  | 9,976.1  |          |  |            | 4.9 years |          |  |   | 31.32 |  |  |  | 8,125.8 |  |  |   | 30.94 | 
|                    | 40.07  40.94  |                     |  |                  | 740.9    |          |  |            | 8.3 years |          |  |   | 40.93 |  |  |  | 221.7   |  |  |   | 40.90 | 
|                    |                |                     |  |                  |          |          |  |            |           |          |  |   |       |  |  |  |         |  |  |   |       | 
|                    | $15.06  40.94 |                     |  |                  | 12,152.6 |          |  |            | 5.3 years |          |  | $ | 29.98 |  |  |  | 9,783.1 |  |  | $ | 28.83 | 
|                    |                |                     |  |                  |          |          |  |            |           |          |  |   |       |  |  |  |         |  |  |   |       | 
|                    |                |                     |  |                  |          |          |  |            |           |          |  |   |       |  |  |  |         |  |  |   |       | 





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)


Accumulated Other Comprehensive Loss

The components of comprehensive (loss) income
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 (Deficit) Equity. 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.

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

|                             |                                                           |             |        |            |   |             |         |               |   |   |        |        |   |   |         |         |  
|---------------------------- | --------------------------------------------------------- | ----------- | ------ | ---------- | - | ----------- | ------- | ------------- | - | - | ------ | ------ | - | - | ------- | ------- | -
|                             |                                                           |            
|                             |                                                           |            
|                             |                                                           |             |        | Fair Value |   |            
|                             |                                                           | Foreign     |        | Minimum    |   | of          |         | Accumulated  
|                             |                                                           | Currency    |        | Pension    |   | Derivative  |         | Other        
|                             |                                                           | Translation |        | Liability  |   | Instruments |         | Comprehensive
|                             |                                                           | Adjustment  |        | Adjustment |   | Adjustment  |         | (Loss) Income
|                             |                                                           |            
|                             |                                                           |            
|Balance at December 31, 2000 |                                                           | $           | (2,547 | )          |   | $           | (11,059 | )             |   | $ |       |        |   | $ | (13,606 | )      
|                             | Cumulative effect of accounting
    change  SFAS No. 133 |             |        |           |   |             |         |              |   |   |        | (374   | ) |   |         | (374    | )
|                             | Net change for the year                                   |             |        | (933       | ) |             |         | (2,343        | ) |   |        | (1,000 | ) |   |         | (4,276  | )
|                             |                                                           |            
|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 | )      
|                             |                                                           |            
|                             |                                                           |            

The net change for the year in the foreign
currency translation adjustment is reflected net of tax
(expense) benefits of $(862), $495 and $503 in 2003, 2002 and
2001, respectively. The net change for the year in the minimum
pension liability adjustment is reflected net of tax (expense)
benefits of $(19,906), $21,810 and $1,261 in 2003, 2002 and
2001, respectively. The net change for the year in the fair
value of derivative instruments is reflected net of tax
(expense) benefits totaling $(459), $1,723 and $740 (includes
the cumulative effect of accounting change for adoption of SFAS
No. 133) in 2003, 2002 and 2001, respectively.

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.





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Employee Benefit and Compensation Plans (continued)


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:

|                                                                            |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- | ---------------------------------------------- | ------------- | - | -------------- | - | -------------- | - | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                                            |                                                |               |   |                |   |               
|                                                                            |                                                |               |   |                |   | Postretirement
|                                                                            |                                                |               |   | Benefits Other
|                                                                            |                                                | Pension Plans |   | than Pensions 
|                                                                            |                                                |               |   |               
|                                                                            |                                                |               |   |               
|                                                                            |                                                | 2003          |   | 2002           |   | 2003           |   | 2002    
|                                                                            |                                                |               |   |               
|                                                                            |                                                |               |   |               
|Change in Benefit Obligation                                                |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                            | Benefit obligation at beginning of year        |               | $ | 407,145        |   |                | $ | 361,810  |   |  | $ | 69,605  |   |  | $ | 68,829  |  
|                                                                            | Service cost                                   |               |   | 15,634         |   |                |   | 12,548   |   |  |   | 4,010   |   |  |   | 3,613   |  
|                                                                            | Interest cost                                  |               |   | 26,037         |   |                |   | 25,673   |   |  |   | 4,308   |   |  |   | 4,454   |  
|                                                                            | Plan participants contributions               |               |   |               |   |                |   |         |   |  |   | 205     |   |  |   | 42      |  
|                                                                            | Plan amendments                                |               |   |               |   |                |   | 625      |   |  |   | (198    | ) |  |   | (11,299 | )
|                                                                            | Actuarial loss                                 |               |   | 22,729         |   |                |   | 24,626   |   |  |   | 4,029   |   |  |   | 7,778   |  
|                                                                            | Benefits paid                                  |               |   | (18,464        | ) |                |   | (18,137  | ) |  |   | (4,055  | ) |  |   | (3,812  | )
|                                                                            |                                                |              
|                                                                            | Benefit obligation at end of year              |               | $ | 453,081        |   |                | $ | 407,145  |   |  | $ | 77,904  |   |  | $ | 69,605  |  
|                                                                            |                                                |              
|Change in Plan Assets                                                       |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                            | Fair value of plan assets at beginning of year |               | $ | 227,069        |   |                | $ | 260,838  |   |  |   |        |   |  |   |        |  
|                                                                            | Actual return on plan assets                   |               |   | 52,026         |   |                |   | (21,715  | ) |  |   |        |   |  |   |        |  
|                                                                            | Employer contributions                         |               |   | 68,171         |   |                |   | 7,168    |   |  |   |        |   |  |   |        |  
|                                                                            | Benefits paid                                  |               |   | (18,464        | ) |                |   | (18,137  | ) |  |   |        |   |  |   |        |  
|                                                                            | Administrative expenses                        |               |   | (1,061         | ) |                |   | (1,085   | ) |  |   |        |   |  |   |        |  
|                                                                            |                                                |              
|                                                                            | Fair value of plan assets at end of year       |               | $ | 327,741        |   |                | $ | 227,069  |   |  |   |        |   |  |   |        |  
|                                                                            |                                                |              
|Funded Status                                                               |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                            | Funded status at end of year                   |               | $ | (125,340       | ) |                | $ | (180,076 | ) |  | $ | (77,904 | ) |  | $ | (69,605 | )
|                                                                            | Unrecognized actuarial loss                    |               |   | 118,956        |   |                |   | 138,502  |   |  |   | 8,697   |   |  |   | 4,780   |  
|                                                                            | Unrecognized prior service cost                |               |   | (348           | ) |                |   | (404     | ) |  |   | (11,300 | ) |  |   | (16,642 | )
|                                                                            | Unrecognized transition obligation             |               |   | (33            | ) |                |   | 181      |   |  |   |        |   |  |   |        |  
|                                                                            |                                                |              
|                                                                            | Accrued benefit cost                           |               | $ | (6,765         | ) |                | $ | (41,797  | ) |  | $ | (80,507 | ) |  | $ | (81,467 | )
|                                                                            |                                                |              
|Amounts Recognized in the Consolidated
    Statement of Financial Position: |                                                |               |   |                |   |                |   |          |   |  |   |         |   |  |   |        
|                                                                            | Prepaid benefit cost                           |               | $ | 61,276         |   |                | $ |         |   |  | $ |        |   |  | $ |        |  
|                                                                            | Accrued benefit liability                      |               |   | (95,148        | ) |                |   | (126,386 | ) |  |   | (80,507 | ) |  |   | (81,467 | )
|                                                                            | Intangible asset                               |               |   | 1,050          |   |                |   | 1,656    |   |  |   |        |   |  |   |        |  
|                                                                            | Accumulated other comprehensive loss           |               |   | 26,057         |   |                |   | 82,933   |   |  |   |        |   |  |   |        |  
|                                                                            |                                                |              
|                                                                            | Net amount recognized                          |               | $ | (6,765         | ) |                | $ | (41,797  | ) |  | $ | (80,507 | ) |  | $ | (81,467 | )
|                                                                            |                                                |              





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Employee Benefit and Compensation Plans (continued)


Assumptions

|                                                                                 |  |               |      |                |  |                |      |      |  |  |      |   |  |  |      |  
|-------------------------------------------------------------------------------- |  | ------------- | ---- | -------------- |  | -------------- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|                                                                                 |  |               |      |                |  |               
|                                                                                 |  |               |      |                |  | Postretirement
|                                                                                 |  |               |      | Benefits Other
|                                                                                 |  | Pension Plans |      | than Pensions 
|                                                                                 |  |               |      |               
|                                                                                 |  |               |      |               
|                                                                                 |  | 2003          |      | 2002           |  | 2003           |      | 2002
|                                                                                 |  |               |      |               
|                                                                                 |  |               |      |               
|The weighted-average assumptions used to
    determine benefit obligations       |  |               |      |                |  |                |      |      |  |  |      |   |  |  |      |  
|Discount rate                                                                    |  |               | 6.25 | %              |  |                | 6.50 | %    |  |  | 6.25 | % |  |  | 6.50 | %
|Rate of compensation increase                                                    |  |               | 4.80 | %              |  |                | 4.80 | %    |  |  |     |   |  |  |     |  
|The weighted-average assumptions used to
    determine net periodic benefit cost |  |               |      |                |  |                |      |      |  |  |      |   |  |  |      |  
|Discount rate                                                                    |  |               | 6.50 | %              |  |                | 7.25 | %    |  |  | 6.50 | % |  |  | 7.25 | %
|Expected return on plan assets                                                   |  |               | 8.00 | %              |  |                | 9.25 | %    |  |  |     |   |  |  |     |  
|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 9 percent for
2004 and is assumed to decrease gradually to 4.5 percent by the
year 2008 and remain at that level thereafter.

Net periodic benefit cost for the year ended
December 31 includes the following components:

|                                                   |                           |               |         |                         |  |      |         |        |  |      |         |        |  |   |        |       |  |   |        |       |  |   |        |       | 
|-------------------------------------------------- | ------------------------- | ------------- | ------- | ----------------------- |  | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------ | ----- |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                                   |                           |               |         |                         |  |      |         |       
|                                                   |                           |               |         | Postretirement Benefits
|                                                   |                           | Pension Plans |         | Other than Pensions    
|                                                   |                           |               |         |                        
|                                                   |                           |               |         |                        
|                                                   |                           | 2003          |         | 2002                    |  | 2001 |         | 2003   |  | 2002 |         | 2001  
|                                                   |                           |               |         |                        
|                                                   |                           |               |         |                        
|Service cost                                       |                           | $             | 15,634  |                         |  | $    | 12,548  |        |  | $    | 10,935  |        |  | $ | 4,010  |       |  | $ | 3,613  |       |  | $ | 3,458  |      
|Interest cost                                      |                           |               | 26,037  |                         |  |      | 25,673  |        |  |      | 24,793  |        |  |   | 4,308  |       |  |   | 4,454  |       |  |   | 4,096  |      
|Expected return on plan assets                     |                           |               | (18,189 | )                       |  |      | (22,411 | )      |  |      | (24,751 | )      |  |   |       |       |  |   |       |       |  |   |       |      
|Amortization of unrecognized transition obligation |                           |               | 215     |                         |  |      | 215     |        |  |      | 118     |        |  |   |       |       |  |   |       |       |  |   |       |      
|Amortization of prior service cost                 |                           |               | (56     | )                       |  |      | (65     | )      |  |      | (144    | )      |  |   | (5,540 | )     |  |   | (4,478 | )     |  |   | (3,432 | )    
|Recognized actuarial loss/(gain)                   |                           |               | 9,498   |                         |  |      | 4,351   |        |  |      | 2,485   |        |  |   | 112    |       |  |   | (30    | )     |  |   | (741   | )    
|                                                   |                           |              
|                                                   | Net periodic benefit cost |               | $       | 33,139                  |  |      | $       | 20,311 |  |      | $       | 13,436 |  |   | $      | 2,890 |  |   | $      | 3,559 |  |   | $      | 3,381 | 
|                                                   |                           |              
|                                                   |                           |              

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:

|                               |  |                |         |                 |  |                |         |                 |  |  |   |  |  |   |         | 
|------------------------------ |  | -------------- | ------- | --------------- |  | -------------- | ------- | --------------- |  |  | - |  |  | - | ------- | 
|                               |  |                |         |                
|                               |  | 2003           |         | 2002           
|                               |  |                |         |                
|                               |  |                |         |                
|                               |  | 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 |  | $              | 225,553 |                 |  | $              | 163,302 |                 |  |  |  |  |  | $ | 352,962 | 
|Projected benefit obligation   |  |                | 276,174 |                 |  |                | 176,907 |                 |  |  |  |  |  |   | 407,145 | 
|Fair value of plan assets      |  |                | 259,158 |                 |  |                | 68,583  |                 |  |  |  |  |  |   | 227,069 | 

The accumulated benefit obligation for all
defined benefit pension plans was $388.9 million and
$353 million at December 31, 2003 and 2002,
respectively. The Companys unfunded plans,





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Employee Benefit and Compensation Plans (continued)


maintained to provide additional benefits for
certain employees, accounted for $84.9 million and
$96.5 million of the ABO and PBO, respectively, at
December 31, 2003.

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, 2003 by approximately $10.5 million and
increase the service and interest cost components of expense by
approximately $1.5 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, 2003 by approximately $9.2 million and
decreased the service and interest components of expense by
approximately $1.3 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, 2003 and 2002, the fund held .7 million
shares and 1.3 million shares of the Companys common
stock having a market value of $26 million and
$42.8 million, respectively. During 2003, the Company
repurchased .6 million shares 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. No shares were repurchased from
the trust during 2002. Dividends paid on shares held by the fund
were $2.1 million and $2.5 million in 2003 and 2002,
respectively.

Weighted-Average Asset Allocations by Asset
Category

|                  |       |        |        |                |  |      |     |      |  |  |     |      | 
|----------------- | ----- | ------ | ------ | -------------- |  | ---- | --- | ---- |  |  | --- | ---- | 
|                  |       |        |        |               
|                  |       |        |        | Pension       
|                  |       |        |        | Plans        
|                  |       |        |        | Allocation of 
|                  |       |        |        | Plan Assets at
|                  |       |        |        | December 31   
|                  |       |        |        |               
|                  |       | Target |        |               
|                  |       |        |        | 2003           |  | 2002
|                  |       |        |        |               
|                  |       |        |        |               
|Asset Category    |       |        |        |                |  |      |     |      |  |  |     |     
|Equity securities |       |        | 60-75% |                |  |      | 71% |      |  |  | 61% |     
|Debt securities   |       |        | 20-35% |                |  |      | 29% |      |  |  | 39% |     
|Other             |       |        | 0-5%   |                |  |      | 0%  |      |  |  | 0%  |     
|                  |       |        |        |                |  |     
|                  | Total |        |        |                |  |      |     | 100% |  |  |     | 100% | 
|                  |       |        |        |                |  |     
|                  |       |        |        |                |  |     

The Company believes that in 2004 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
variables and Plan performance within





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Employee Benefit and Compensation Plans (continued)


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

Cash Flows

During 2003, the Company made contributions
totaling $62.6 million to its qualified defined benefit
pension plans, of which $61 million was discretionary.

There is no minimum funding requirement with
respect to the Companys defined benefit pension plans,
however, the Company expects to contribute $5.6 million to
its pension plans in 2004.

Additional Information

|                                                                                                      |  |               |         |      |  |   |        | 
|----------------------------------------------------------------------------------------------------- |  | ------------- | ------- | ---- |  | - | ------ | 
|                                                                                                      |  |              
|                                                                                                      |  | Pension Plans
|                                                                                                      |  |              
|                                                                                                      |  | 2003          |         | 2002
|                                                                                                      |  |              
|                                                                                                      |  |              
|(Decrease) increase in minimum pension liability
    included in other comprehensive loss, net of tax |  | $             | (36,969 | )    |  | $ | 40,504 | 

In January 2004, the Financial Accounting
Standards Board (FASB) issued FASB Staff Position
(FSP) No. 106-1, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003, as a result of
the Act being signed into law in December 2003. As permitted by
the FSP, the Company has elected to defer accounting for the
effects of the Act on its postretirement welfare benefit plans,
as authoritative accounting guidance is currently pending. The
methods used to determine the Companys accumulated
postretirement benefit obligation and net periodic
postretirement benefit cost for the year ended December 31,
2003 do not reflect the effects of the Act. However when issued,
final accounting guidance may require the Company to amend
previously reported information with respect to its
postretirement welfare benefit plans.

The Company sponsors a defined contribution plan
(Employees Savings Plan) covering substantially all of its
employees. Employees are eligible to participate in the 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 service. The expense associated
with Company contributions was $5.9 million in 2003,
$5.3 million in 2002 and $7.5 million in 2001.

The Company has an Incentive Compensation Plan
which provides for incentive payments to designated employees
based on stated percentages of net earnings before income taxes
as defined in the plan. The plan also allows for discretionary
reductions to this calculated amount. Expenses under the plan
amounted to $25.8 million in 2003 and $41.9 million in
2001. In 2003, a charge of $15.9 million resulting from an
internal review following a management change at
F.W. Rickard Seeds, Inc., a second-tier subsidiary, was
completely offset by a reduction in the Companys Incentive
Compensation Plan. This charge was primarily the result of an
inventory write down. In 2002, no Incentive Compensation Plan
expense was generated as a result of the net loss. As a result,
the Board of Directors established a contingent merit bonus fund
since there was no incentive compensation fund established under
the current terms of the Companys Incentive Compensation
Plan with respect to the 2002 calendar year. Expenses under the
contingent merit bonus fund amounted to $33.5 million in
2002.





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Income Taxes

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

|          |                 |                |         |         |         |      |          |          |          |   |         |         |         |  
|--------- | --------------- | -------------- | ------- | ------- | ------- | ---- | -------- | -------- | -------- | - | ------- | ------- | ------- | -
|          |                 |               
|          |                 |               
|          |                 | 2003           |         | 2002    |         | 2001
|          |                 |               
|          |                 |               
|Current:  |                 |                |         |         |         |      |          |          |          |   |         |        
|          | Federal         |                | $       | 248,235 |         |      | $        | 41,544   |          |   | $       | 281,626 |        
|          | State and local |                |         | 27,141  |         |      |          | (7,430   | )        |   |         | 33,518  |        
|          |                 |               
|          |                 | Total current  |         |         | 275,376 |      |          |          | 34,114   |   |         |         | 315,144 |  
|          |                 |               
|Deferred: |                 |                |         |         |         |      |          |          |          |   |         |        
|          | Federal         |                |         | (68,396 | )       |      |          | (178,453 | )        |   |         | (6,556  | )      
|          | State and local |                |         | (11,094 | )       |      |          | (28,555  | )        |   |         | (922    | )      
|          |                 |               
|          |                 | Total deferred |         |         | (79,490 | )    |          |          | (207,008 | ) |         |         | (7,478  | )
|          |                 |               
|          |                 | $              | 195,886 |         |         | $    | (172,894 | )        |          | $ | 307,666 |        
|          |                 |               
|          |                 |               

The tax provisions do not reflect
$8.5 million, $5.4 million and $10.3 million for
2003, 2002 and 2001, 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.

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

|                          |                                             |                                |   |         |         |  |   |        |         | 
|------------------------- | ------------------------------------------- | ------------------------------ | - | ------- | ------- |  | - | ------ | ------- | 
|                          |                                             |                               
|                          |                                             |                               
|                          |                                             | 2003                           |   | 2002   
|                          |                                             |                               
|                          |                                             |                               
|Deferred tax assets:      |                                             |                                |   |         |         |  |   |       
|                          | Postretirement benefits other than pensions |                                | $ | 28,177  |         |  | $ | 28,513 |        
|                          | Accrued pension liabilities                 |                                |   | 32,349  |         |  |   | 43,167 |        
|                          | Litigation loss                             |                                |   | 107,713 |         |  |   | 14,009 |        
|                          | Other accrued liabilities                   |                                |   | 23,483  |         |  |   | 22,962 |        
|                          | All other, net                              |                                |   | 2,299   |         |  |   | 2,472  |        
|                          |                                             |                               
|                          |                                             | Total deferred tax assets      |   |         | 194,021 |  |   |        | 111,123 | 
|                          |                                             |                               
|Deferred tax liabilities: |                                             |                                |   |         |         |  |   |       
|                          | Depreciation                                |                                |   | 47,589  |         |  |   | 43,592 |        
|                          | Prepaid pension asset                       |                                |   | 21,447  |         |  |   |       |        
|                          | Capitalized debt costs                      |                                |   | 2,356   |         |  |   | 3,164  |        
|                          |                                             |                               
|                          |                                             | Total deferred tax liabilities |   |         | 71,392  |  |   |        | 46,756  | 
|                          |                                             |                               
|                          |                                             | Net deferred tax assets        |   | $       | 122,629 |  |   | $      | 64,367  | 
|                          |                                             |                               





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Income Taxes (continued)


Differences between the Companys effective
tax rate and the U.S. federal statutory income tax rate are
explained as follows:

|                                                  |  |      |      |      |  |      |       |    |  |  |      |  
|------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- | -- |  |  | ---- | -
|                                                  |  |     
|                                                  |  |     
|                                                  |  | 2003 |      | 2002 |  | 2001
|                                                  |  |     
|                                                  |  |     
|U.S. federal statutory income tax rate            |  |      | 35.0 | %    |  |      | (35.0 | )% |  |  | 35.0 | %
|State and local taxes, net of federal tax benefit |  |      | 2.0  |      |  |      | (5.2  | )  |  |  | 2.7  |  
|Other, net                                        |  |      | 1.1  |      |  |      | 1.3   |    |  |  | 0.8  |  
|                                                  |  |     
|                                                  |  |      | 38.1 | %    |  |      | (38.9 | )% |  |  | 38.5 | %
|                                                  |  |     

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

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 international operations, which market moist smokeless
tobacco products in select markets, and cigar operations, which
manufacture and market premium cigars.

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
20.1 percent of annual Smokeless Tobacco segment sales.

Over the past three years, sales to two customers
averaged approximately 40.7 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 the charges
related to write-offs at a second-tier subsidiary and in 2002,
they included the effects of the antitrust litigation loss. The
increase in Corporate expenses for 2003 was primarily due to
higher legal and other professional fees. The decrease in
Smokeless Tobacco segment assets in 2003 is primarily due to the
use of restricted deposits to satisfy the antitrust judgment.
The increase in Wine segment assets in 2003 is mainly due to
higher levels of inventories. Corporate assets consist mainly of
cash and cash equivalents, which reflect an increase in 2003.
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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Segment Information (continued)


|                                       |                    |                                         |   |           |           |      |   |           |           |   |   |           |           | 
|-------------------------------------- | ------------------ | --------------------------------------- | - | --------- | --------- | ---- | - | --------- | --------- | - | - | --------- | --------- | 
|                                       |                    |                                        
|                                       |                    | Year Ended December 31                 
|                                       |                    |                                        
|                                       |                    |                                        
|                                       |                    | 2003                                    |   | 2002      |           | 2001
|                                       |                    |                                        
|                                       |                    |                                        
|Net Sales to Unaffiliated Customers    |                    |                                         |   |           |           |      |   |           |           |   |   |          
|                                       | Smokeless Tobacco  |                                         | $ | 1,504,893 |           |      | $ | 1,447,093 |           |   | $ | 1,406,414 |          
|                                       | Wine               |                                         |   | 194,905   |           |      |   | 203,541   |           |   |   | 188,858   |          
|                                       | All other          |                                         |   | 42,831    |           |      |   | 32,243    |           |   |   | 30,743    |          
|                                       |                    |                                        
|                                       |                    | Net sales                               |   | $         | 1,742,629 |      |   | $         | 1,682,877 |   |   | $         | 1,626,015 | 
|                                       |                    |                                        
|Operating Profit (Loss)                |                    |                                         |   |           |           |      |   |           |           |   |   |          
|                                       | Smokeless Tobacco  |                                         | $ | 585,910   |           |      | $ | (408,675  | )         |   | $ | 833,185   |          
|                                       | Wine               |                                         |   | 24,341    |           |      |   | 30,111    |           |   |   | 21,212    |          
|                                       | All other          |                                         |   | 2,904     |           |      |   | (3,695    | )         |   |   | (8,907    | )        
|                                       |                    |                                        
|                                       |                    | Operating profit (loss)                 |   |           | 613,155   |      |   |           | (382,259  | ) |   |           | 845,490   | 
|                                       | Corporate expenses |                                         |   | (21,578   | )         |      |   | (15,964   | )         |   |   | (12,462   | )        
|                                       | Interest, net      |                                         |   | (76,902   | )         |      |   | (46,140   | )         |   |   | (33,760   | )        
|                                       |                    |                                        
|                                       |                    | Earnings (loss) before income
    taxes |   | $         | 514,675   |      |   | $         | (444,363  | ) |   | $         | 799,268   | 
|                                       |                    |                                        
|Identifiable Assets at
    December 31 |                    |                                         |   |           |           |      |   |           |           |   |   |          
|                                       | Smokeless Tobacco  |                                         | $ | 768,978   |           |      | $ | 1,883,529 |           |   | $ | 1,268,065 |          
|                                       | Wine               |                                         |   | 485,019   |           |      |   | 430,118   |           |   |   | 389,243   |          
|                                       | All other          |                                         |   | 60,282    |           |      |   | 58,230    |           |   |   | 60,180    |          
|                                       | Corporate          |                                         |   | 412,215   |           |      |   | 393,398   |           |   |   | 294,214   |          
|                                       |                    |                                        
|                                       |                    | Total assets                            |   | $         | 1,726,494 |      |   | $         | 2,765,275 |   |   | $         | 2,011,702 | 
|                                       |                    |                                        
|Capital Expenditures                   |                    |                                         |   |           |           |      |   |           |           |   |   |          
|                                       | Smokeless Tobacco  |                                         | $ | 27,976    |           |      | $ | 34,912    |           |   | $ | 27,364    |          
|                                       | Wine               |                                         |   | 16,304    |           |      |   | 21,537    |           |   |   | 19,336    |          
|                                       | All other          |                                         |   | 151       |           |      |   | 237       |           |   |   | 246       |          
|                                       | Corporate          |                                         |   | 649       |           |      |   | 528       |           |   |   | 284       |          
|                                       |                    |                                        
|                                       |                    | Capital expenditures                    |   | $         | 45,080    |      |   | $         | 57,214    |   |   | $         | 47,230    | 
|                                       |                    |                                        
|Depreciation                           |                    |                                         |   |           |           |      |   |           |           |   |   |          
|                                       | Smokeless Tobacco  |                                         | $ | 20,768    |           |      | $ | 19,237    |           |   | $ | 20,298    |          
|                                       | Wine               |                                         |   | 13,734    |           |      |   | 14,481    |           |   |   | 12,842    |          
|                                       | All other          |                                         |   | 674       |           |      |   | 730       |           |   |   | 914       |          
|                                       | Corporate          |                                         |   | 739       |           |      |   | 716       |           |   |   | 951       |          
|                                       |                    |                                        
|                                       |                    | Depreciation                            |   | $         | 35,915    |      |   | $         | 35,164    |   |   | $         | 35,005    | 
|                                       |                    |                                        

Advertising Costs

The Company expenses the production costs of
advertising in the period in which they are incurred.
Advertising expenses were $72.5 million in 2003,
$69.1 million in 2002 and $69.6 million in 2001. At
December 31, 2003 and 2002, $3.8 million and
$4.5 million, respectively, of advertising-related
materials are included in prepaid expenses and other current
assets.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)


Interest, Net

|                                                                  |  |      |        |      |  |      |         |   |  |  |         |  
|----------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                                                  |  |     
|                                                                  |  |     
|                                                                  |  | 2003 |        | 2002 |  | 2001
|                                                                  |  |     
|                                                                  |  |     
|Interest expense on debt                                          |  | $    | 83,884 |      |  |      | $69,963 |   |  |  | $67,141 |  
|Interest income from cash equivalents and
    restricted deposits |  |      | (5,728 | )    |  |      | (22,970 | ) |  |  | (32,469 | )
|Capitalized interest                                              |  |      | (1,254 | )    |  |      | (853    | ) |  |  | (912    | )
|                                                                  |  |     
|                                                                  |  | $    | 76,902 |      |  |      | $46,140 |   |  |  | $33,760 |  
|                                                                  |  |     

Net Earnings (Loss) per Share

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

|                                  |                                                                               |      |      |         |  |      |       |          |   |   |      |         | 
|--------------------------------- | ----------------------------------------------------------------------------- | ---- | ---- | ------- |  | ---- | ----- | -------- | - | - | ---- | ------- | 
|                                  |                                                                               |     
|                                  |                                                                               |     
|                                  |                                                                               | 2003 |      | 2002    |  | 2001
|                                  |                                                                               |     
|                                  |                                                                               |     
|Numerator:                        |                                                                               |      |      |         |  |      |       |          |   |   |      |        
|                                  | Net earnings (loss)                                                           |      | $    | 318,789 |  |      | $     | (271,469 | ) |   | $    | 491,602 | 
|                                  |                                                                               |     
|Denominator:                      |                                                                               |      |      |         |  |      |       |          |   |   |      |        
|                                  | Denominator for basic earnings (loss) per
    share  weighted-average shares |      |      | 166,572 |  |      |       | 168,786  |   |   |      | 164,250 | 
|                                  | Dilutive effect of employee stock options and
    restricted stock            |      |      | 804     |  |      |       |         |   |   |      | 1,432   | 
|                                  |                                                                               |     
|                                  | Denominator for diluted earnings (loss) per
    share                         |      |      | 167,376 |  |      |       | 168,786  |   |   |      | 165,682 | 
|                                  |                                                                               |     
|Basic earnings (loss) per share   |                                                                               | $    | 1.91 |         |  | $    | (1.61 | )        |   | $ | 2.99 |        
|                                  |                                                                               |     
|Diluted earnings (loss) per share |                                                                               | $    | 1.90 |         |  | $    | (1.61 | )        |   | $ | 2.97 |        
|                                  |                                                                               |     

Options to purchase 1 million shares and
..2 million shares of common stock, outstanding as of
December 31, 2003 and 2001, respectively, 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.

The dilutive effect of potential common shares in
2003 was reduced by approximately .3 million shares due to the
fact that the antitrust litigation charge recorded in the fourth
quarter caused a net loss, which resulted in antidilution.

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 reduce 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.

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.





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Contingencies (continued)


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.

The Company is named in an action in Illinois
brought by plaintiffs and 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 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 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 in the states of Kansas and California of its moist
smokeless tobacco products. In addition, the Company has been
named as a defendant in an action brought by an individual
plaintiff as an indirect purchaser in the State of Mississippi
during an unspecified period of time. As direct purchasers of
the Companys smokeless tobacco products during the period
January 1, 1990 to the present, plaintiffs in these
consolidated actions allege individually and on behalf of a
putative class of wholesalers and distributors that the Company





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Contingencies (continued)


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 whom 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 began making a second
settlement offer to those direct purchasers that chose not to
settle the litigation in 2003. Although it is early in the
settlement process with respect to this offer, indications are
that the offer is being received favorably, and, to date, direct
purchasers that have settled now represent over 90 percent
of the Companys sales, based on 2002 sales revenues.

As indirect purchasers of the Companys
smokeless tobacco products during various periods of time
ranging from January 1990 to the date of potential certification
of the proposed class, plaintiffs in those actions allege
individually, individually and on behalf of putative class
members in a particular state or individually and on behalf of
class members in the states of Kansas and California that the
Company has violated the antitrust laws, unfair and deceptive
trade practices statutes and/or common law of those states. The
Mississippi action also asserts a claim for civil conspiracy.
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. The Company
reached an agreement, which is subject to court approval, to
resolve a significant number of the indirect purchaser actions.
Pursuant to the proposed 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 also intends to pursue
settlement of other indirect purchaser actions not covered by
the agreement on substantially similar terms. The Company has
recorded a charge of $40 million in 2003, which represents the
best estimate of the total costs to resolve indirect purchaser
actions.

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. 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 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 Kansas and California 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. The Company
believes that the ultimate outcome of the individual case will
not have a material adverse effect on its consolidated financial
position, and even if plaintiff was to prevail, this action is
not expected to have a material impact on its consolidated
financial results for the particular reporting period in which
resolved. 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.

On February 14, 2002, in a state court
action in Miami, Florida involving a commercial dispute alleging
breach of contract and other claims in connection with the sale
of cigars, a jury rendered a





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Contingencies (continued)


verdict against U.S. Cigar Sales Inc. and
other affiliated companies of the Company, awarding
$43 million in compensatory and punitive damages to the
plaintiff, a former distributor. On April 26, 2002, the
court ruled on certain post-trial motions, thereby reducing the
award to $7.4 million. On August 30, 2002, the court
granted the Companys motion for set-off reducing the award
to $3.6 million (including prejudgment interest and costs),
and entered final judgment. Both plaintiff and the Company have
filed a notice of appeal to the Third District Court of Appeal.

The Company believes, and has been so advised by
counsel handling the case, that its appeal is well-founded and
the trial courts ruling on the post-trial motions that
reduced the jurys verdict and granted a set-off are
supported by existing law and, as a result, believes that, while
there can be no assurances, its appeal should ultimately be
granted and the rulings on those post-trial motions should
ultimately be affirmed on appeal. While the Company believes
that its appeal should ultimately be granted and the rulings on
those post-trial motions should ultimately be affirmed, if all
or part of the adverse verdict is reinstated after all appeals,
the Company believes that the satisfaction of such a judgment
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 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, a material adverse effect on its consolidated
financial position.

Other Matters

On March 15, 2004, the Company announced
significant steps to resolve antitrust actions filed against it
as a result of the Conwood Litigation (see below). In connection
with the actions, the Company recorded $280 million pretax
charge 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 11 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 requires
the Company to pay $200 million and transfer its cigar
operation to Swedish Match during 2004. Included in the
$280 million above is a charge of $40 million,
reflecting the fair value of the cigar operation, which
approximates its book value. The proposed settlement of the
indirect purchaser actions (see Contingencies note) covered by
the subject agreement requires 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. In addition, the Company intends
to pursue settlement of other indirect purchaser actions not
covered by this agreement on substantially similar terms.
Included in the $280 million above, the Company recorded a
charge of $40 million, which represents the best estimate
of the total costs to resolve indirect purchaser actions.

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.

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.





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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(continued)




Other Matters (continued)


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 Company does not expect the payments of the judgment
and settlements to 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
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 $11.6 million, $10.1 million and
$8.8 million in 2003, 2002 and 2001, respectively.

QUARTERLY FINANCIAL DATA

(Unaudited)


|                                  |  |       |         |        |  |       |         |        |  |      |         |  |  |  |          |   |  |   |           |  
|--------------------------------- |  | ----- | ------- | ------ |  | ----- | ------- | ------ |  | ---- | ------- |  |  |  | -------- | - |  | - | --------- | -
|                                  |  |      
|                                  |  |      
|                                  |  | First |         | Second |  | Third |         | Fourth |  | Year
|                                  |  |      
|                                  |  |      
|2003                              |  |       |         |        |  |       |         |        |  |      |         |  |  |  |          |   |  |   |           |  
|Net sales                         |  | $     | 420,012 |        |  | $     | 438,870 |        |  | $    | 437,577 |  |  |  | $446,170 |   |  | $ | 1,742,629 |  
|Gross profit                      |  |       | 332,422 |        |  |       | 346,684 |        |  |      | 332,805 |  |  |  | 337,976  |   |  |   | 1,349,887 |  
|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      |  
|2002                              |  |       |         |        |  |       |         |        |  |      |         |  |  |  |          |   |  |   |           |  
|Net sales                         |  | $     | 375,214 |        |  | $     | 432,306 |        |  | $    | 451,325 |  |  |  | $424,032 |   |  | $ | 1,682,877 |  
|Gross profit                      |  |       | 294,594 |        |  |       | 340,870 |        |  |      | 352,347 |  |  |  | 329,989  |   |  |   | 1,317,800 |  
|Net (loss) earnings               |  |       | 103,793 |        |  |       | 136,846 |        |  |      | 130,540 |  |  |  | (642,648 | ) |  |   | (271,469  | )
|Basic (loss) earnings per share   |  |       | .62     |        |  |       | .81     |        |  |      | .77     |  |  |  | (3.82    | ) |  |   | (1.61     | )
|Diluted (loss) earnings per share |  |       | .61     |        |  |       | .80     |        |  |      | .77     |  |  |  | (3.82    | ) |  |   | (1.61     | )

The first quarter of 2003 includes the effect
of one additional billing day in the Smokeless Tobacco segment
versus the corresponding 2002 period, resulting in an increase
of 8 cents per diluted share.

The third quarter of 2003 includes the effect
of one less billing day in the Smokeless Tobacco segment versus
the corresponding 2002 period, resulting in a decrease of 9
cents per diluted share. Also included in the quarter was a
pretax $10.4 million 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.

The fourth quarter of 2003 includes 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 fourth quarter and full year of 2002
include a charge of $775.8 million for the litigation loss,
net of the tax benefit, resulting in a decrease of $4.61 and
$4.57 per diluted share, respectively.





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


Not applicable.






Item 9A  Controls and
Procedures


Registrant, 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 of the end of the
period covered by this report. Based on such evaluation,
Registrants CEO and CFO believe, as of the date of such
evaluation, that Registrants disclosure controls and
procedures are reasonably designed to be effective for the
purposes for which they are intended.

There have not been any changes in
Registrants internal control over financial reporting
during the fiscal quarter ended December 31, 2003 that have
materially affected, or are reasonably likely to materially
affect, Registrants internal control over financial
reporting.

Following an internal investigation at F.W.
Rickard Seeds, Inc., a second-tier subsidiary that accounts for
less than 1 percent of Smokeless Tobacco segment revenues,
personnel changes have been effected to help insure the proper
implementation of controls and procedures. In addition, while
Registrant believes that the problems were limited to that
entity, Registrant has taken additional steps to improve its
internal controls, including centralization of the accounting
and financial reporting functions, increasing the number of
internal audit personnel in connection with financial and
internal control reviews of subsidiaries and enhancing the
procedures of the Disclosure Committee.

Registrant has established a Disclosure Committee
for the purpose of assisting its CEO and CFO in establishing,
maintaining, reviewing and evaluating controls and other
procedures designed to ensure that information required to be
disclosed in its periodic reports is recorded, processed, and
reported within the time period(s) specified in applicable rules
and forms, and that Registrants public disclosures,
including those made to security holders or the investment
community, are materially accurate and complete and otherwise
comply with applicable disclosures requirements.




PART III









Item 10  Directors and
Executive Officers of the Registrant


Registrant hereby incorporates by reference the
information with respect to the names, ages and business
histories of the directors of Registrant which is contained in
Table I and the accompanying text set forth under the caption
Election of Directors in its Notice of 2004 Annual
Meeting and Proxy Statement.





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Executive Officers of the Registrant

The name, present position with Registrant, age
and business experience of each executive officer of Registrant
as of January 31, 2004 is set forth below:

|                       |  |                                                                  |  |     |    | 
|---------------------- |  | ---------------------------------------------------------------- |  | --- | -- | 
|Name                   |  | Present Position                                                 |  | Age
|Vincent A. Gierer, Jr. |  | Chairman of the Board, Chief Executive Officer
    and President |  |     | 56 | 
|Richard H. Verheij     |  | Executive Vice President and General Counsel                     |  |     | 45 | 
|Robert T. DAlessandro |  | Senior Vice President and Chief Financial Officer                |  |     | 50 | 
|Richard A. Kohlberger  |  | Senior Vice President                                            |  |     | 58 | 
|Theodor P. Baseler     |  | President  International
    Wine & Spirits Ltd.                |  |     | 49 | 
|Murray S. Kessler      |  | President  U.S. Smokeless Tobacco
    Company                   |  |     | 44 | 

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

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 Registrant have
been employed continuously by it for more than five years except
for Mr. Kessler.

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 Registrant since March 16, 1978.

Mr. Verheij has served as Executive Vice
President and General Counsel since May 7, 1996. He has
been employed by Registrant since November 24, 1986.

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 Registrant since May 4, 1981.

Mr. Kohlberger has served as Senior Vice
President since October 29, 1990. He has been employed by
Registrant 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 Registrant 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 Registrant
since January 3, 2000. On January 29, 2001, Vlasic
Foods International Inc. filed for bankruptcy.





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Code of Ethics

Registrant 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 Registrants website: www.ustinc.com. A free copy
of the Code will be made available to any stockholder upon
request. Registrant 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.

Audit Committee Financial Expert

Registrant 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 2004 Annual
Meeting and Proxy Statement.






Item 11  Executive
Compensation


Registrant 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
2004 Annual Meeting and Proxy Statement.





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

Registrant 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 2004 Annual Meeting and Proxy Statement.

Registrant 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 2004 Annual Meeting and Proxy Statement.

EQUITY COMPENSATION PLAN INFORMATION

The following table summarizes the equity
compensation plans under which securities may be issued as of
December 31, 2003. The securities which may be issued
consist solely of Common Stock.

|                                                                  |  |                |            |               |  |                 |       |  |  |  |           |    
|----------------------------------------------------------------- |  | -------------- | ---------- | ------------- |  | --------------- | ----- |  |  |  | --------- | ---
|                                                                  |  |               
|                                                                  |  |               
|                                                                  |  |                |            | Number of    
|                                                                  |  |                |            | Securities   
|                                                                  |  |                |            | Remaining    
|                                                                  |  |                |            | Available for
|                                                                  |  | Number of      |            | Weighted      |  | Future Issuance
|                                                                  |  | Securities to  |            | Average       |  | Under Equity   
|                                                                  |  | be Listed      |            | Exercise      |  | Compensation   
|                                                                  |  | Upon Exercise  |            | Price of      |  | Plans          
|                                                                  |  | of Outstanding |            | Outstanding   |  | (Excluding     
|                                                                  |  | Options,       |            | Options,      |  | Securities     
|                                                                  |  | Warrants and   |            | Warrants      |  | Reflected in   
|                                                                  |  | Rights         |            | and Rights    |  | Column (a))    
|Plan Category                                                     |  | (a)            |            | (b)           |  | (c)            
|                                                                  |  |               
|                                                                  |  |               
|Equity compensation plans approved by security
    holders(1)     |  |                | 12,194,800 |               |  | $               | 30.00 |  |  |  | 4,594,000 |    
|Equity compensation plans not approved by
    security holders(2) |  |                |           |               |  |                 |      |  |  |  | 171,250   | (3)
|Total                                                             |  |                | 12,194,800 |               |  | $               | 30.00 |  |  |  | 4,765,250 |    



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes the UST Inc. 1992 Stock Option Plan,
    the UST Inc. Amended and Restated Stock Incentive Plan (formerly
    named the UST Inc. 2001 Stock Option Plan) and the Nonemployee
    Directors Stock Option Plan, all of which have been
    approved by the Companys stockholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   
|(2) | Includes Nonemployee Directors Stock
    Restricted Stock Award Plan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|(3) | Amount represents shares remaining for future
    issuance pursuant to the Nonemployee Directors Restricted
    Stock Award Plan, which was effective January 1, 1999 and
    not required, at that time, to be approved by stockholders.
    Pursuant to this plan, nonemployee directors of the Company are
    awarded 40 shares of Restricted Stock for each Board
    committee meeting they attend and 50 shares of Restricted
    Stock for each meeting of the Board of Directors they attend.
    Shares vest on the third anniversary date of grant or, it
    earlier, upon age-related mandatory retirement from service
    pursuant to the Boards retirement policy. A total of
    200,000 shares of Common Stock are authorized for issuance in
    accordance with the terms of this plan. Pursuant to
    Item 601 of Regulation S-K, a copy of the UST Inc.
    Nonemployee Directors Restricted Stock Award Plan has been
    filed and is incorporated herein by reference to
    Exhibit 10.11 to the Companys Annual Report on
    Form 10-K for the fiscal year ended December 31,
    1998.






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

Registrant 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 2004 Annual Meeting and Proxy Statement.





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

Registrant hereby incorporates by reference the
information required herein which is contained under the section
entitled Independent Auditor Fees in its Notice of
2004 Annual Meeting and Proxy Statement.






PART IV










|          |                                                                     
|--------- | --------------------------------------------------------------------
|Item 15  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K

(a) Documents filed as part of this Report:



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

For the Years 2003, 2002 and 2001


(Dollars in thousands)


|                              |                                    |           |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|----------------------------- | ---------------------------------- | --------- | - | --------- |  | ---------- | - | ------ |  |  | - | ------ | - |  | - | ----- | 
|                              |                                    |          
|                              |                                    |          
|                              |                                    | Balance   |   |          
|                              |                                    | at        |   |           |  | Balance at
|                              |                                    | beginning |   |           |  | end of    
|                              |                                    | of period |   | Additions |  | Deductions |   | period
|                              |                                    |          
|                              |                                    |          
|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 | 
|Year ended December 31, 2001: |                                    |           |   |           |  |            |   |        |  |  |   |        |   |  |   |      
|                              | Deducted from accounts receivable: |           |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                              | Allowance for doubtful accounts    |           |   | 771       |  |            |   | 94     |  |  |   | (102   | ) |  |   | 763   | 
|                              | Deducted from inventories:         |           |   |           |  |            |   |        |  |  |   |        |   |  |   |       | 
|                              | Reserve for inventory obsolescence |           |   | 7,433     |  |            |   | 1,800  |  |  |   | (2,502 | ) |  |   | 6,731 | 



| |                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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
    Registrant 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.                                                                                      
|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 Registrant 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 Registrant and Richard H.
    Verheij, an 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 Registrant 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 Registrant 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.





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|       |  |   |  |                                                                                                                                                                                                                        
|------ |  | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.7*  |  |  |  | UST Inc. Incentive Compensation Plan, as amended
    and restated as of January 1, 2003, incorporated by
    reference to Appendix I of the 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.                                                                                                                                     
|10.9*  |  |  |  | Officers Supplemental Retirement Plan, as
    amended and restated as of January 1, 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.                          
|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, incorporated by
    reference to Exhibit 10.11 to Form 10-K for the fiscal
    year ended December 31, 1998.                         
|21     |  |  |  | Subsidiaries of UST.                                                                                                                                                                                                   
|23     |  |  |  | Consent of Independent Auditors.                                                                                                                                                                                       
|31.1   |  |  |  | Section 302 Certification (CEO)                                                                                                                                                                                        
|31.2   |  |  |  | Section 302 Certification (CFO)                                                                                                                                                                                        
|32     |  |  |  | Section 906 Certification.                                                                                                                                                                                             

(b) Reports on Form 8-K

On October 17, 2003, Registrant filed a
Current Report on Form 8-K which reported the release of
its results of operations for, and its consolidated financial
condition as of the quarter ended September 30,
2003.



|  |                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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, Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.



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

Date: March 19, 2004


| |                                           
| | ------------------------------------------
| | 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 Registrant and in the capacities and on the
dates indicated.

|               |  |                                                                                                                      |  |                                                                                                        
|-------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------
|March 19, 2004 |  | Director,
    Chairman of the Board,
    Chief Executive Officer
    and President (Principal
    Executive Officer) |  | /s/ VINCENT A. GIERER, JR.
    ------------------------------------------------Vincent A. Gierer, Jr.  
|              
|March 19, 2004 |  | Senior Vice President
    and Chief Financial Officer
    (Principal Financial
    Officer)                          |  | /s/ ROBERT T. DALESSANDRO
    ------------------------------------------------Robert T. DAlessandro  
|              
|March 19, 2004 |  | Vice President and
    Controller (Principal
    Accounting Officer)                                                 |  | /s/ JAMES D. PATRACUOLLA
    ------------------------------------------------James D. Patracuolla      
|              
|March 19, 2004 |  | Director                                                                                                             |  | /s/ JOHN D. BARR
    ------------------------------------------------JOHN D. BARR                      
|              
|March 19, 2004 |  | Director                                                                                                             |  | /s/ JOHN P. CLANCEY
    ------------------------------------------------John P. Clancey                
|              
|March 19, 2004 |  | Director                                                                                                             |  | /s/ EDWARD H. DEHORITY, JR.
    ------------------------------------------------Edward H. DeHority, Jr.
|              
|March 19, 2004 |  | Director                                                                                                             |  | /s/ PATRICIA DIAZ DENNIS
    ------------------------------------------------Patricia Diaz Dennis      
|              
|March 19, 2004 |  | Director                                                                                                             |  | /s/ ELAINE J. EISENMAN
    ------------------------------------------------Elaine J. Eisenman          





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|               |  |          |  |                                                                                                      
|-------------- |  | -------- |  | -----------------------------------------------------------------------------------------------------
|March 19, 2004 |  | Director |  | /s/ EDWARD T. FOGARTY
    ------------------------------------------------Edward T. Fogarty          
|              
|March 19, 2004 |  | Director |  | /s/ JOSEPH E. HEID
    ------------------------------------------------Joseph E. Heid                
|              
|March 19, 2004 |  | Director |  | /s/ PETER J. NEFF
    ------------------------------------------------Peter J. Neff                  
|              
|March 19, 2004 |  | Director |  | /s/ LOWELL P. WEICKER, JR.
    ------------------------------------------------Lowell P. Weicker, Jr.





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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 Registrant 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 Registrant and Richard H.
    Verheij, an 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 Registrant 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 Registrant 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.



---



##### Table of Contents



|       |  |   |  |                                                                                                                                                                                                                    
|------ |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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.                                                                                                                                 
|10.9*  |  |  |  | Officers Supplemental Retirement Plan, as
    amended and restated as of January 1, 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.                      
|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.                 
|21     |  |  |  | Subsidiaries of UST.                                                                                                                                                                                               
|23     |  |  |  | Consent of Independent Auditors.                                                                                                                                                                                   
|31.1   |  |  |  | Section 302 Certification (CEO)                                                                                                                                                                                    
|31.2   |  |  |  | Section 302 Certification (CFO)                                                                                                                                                                                    
|32     |  |  |  | Section 906 Certification.                                                                                                                                                                                         



|  |                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | 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.